Regulatory Story
Go to market news section View chart   Print
RNS
Connect Group PLC  -  CNCT   

Unaudited Interim Results 6 mths ended 28 Feb 2017

Released 07:00 25-Apr-2017

RNS Number : 1857D
Connect Group PLC
25 April 2017
 

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.

 

Continuing Adjusted results(1)

Six months to

28 Feb 2017

Six months to

29 Feb 2016

Change

Revenue

£911.8m

£916.8m

-0.6%

Operating profit

£26.6m

£27.8m

-4.4%

Profit before tax

£23.3m

£24.5m

-4.8%

Earnings per share

7.6p

8.0p

-5.3%

Statutory results




Revenue

£940.5m

£948.4m

-0.8%

Operating profit

£28.3m

£30.6m

-7.5%

Profit before tax

£18.1m

£19.2m

-5.3%

Earnings per share

5.9p

6.3p

-6.3%

Interim dividend per share

3.1p

3.0p

3.3%

Free cash flow

£12.4m

£18.0m

-31.2%

Net debt

£149.9m

£160.9m


 

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:

 

Connect Group PLC

Mark Cashmore, Group Chief Executive

David Bauernfeind, Chief Financial Officer

 

Today: 020 7466 5000

Thereafter: 01793 563641

www.connectgroupplc.com

 


Buchanan

Richard Oldworth / Jamie Hooper / Madeleine Seacombe / Sophie McNulty

www.buchanan.uk.com

 

020 7466 5000

 

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

 

£m



Continuing -restated




6 months to

Feb 2017

6 months to

Feb 2016

 

Change

Revenue


911.8

916.8

-0.6%

Gross profit


111.2

111.8

-0.5%

Operating costs


(84.6)

(84.0)

-0.7%

Adjusted operating profit


26.6

27.8

-4.4%

Net finance costs


(3.3)

(3.3)

1.5%

Adjusted profit before tax


23.3

24.5

-4.8%

Taxation


(4.8)

(5.1)

6.6%

Tax rate


20.6%

21%

1.9%

Adjusted profit after tax


18.5

19.4

-4.3%

 

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

 


Adjusted

Statutory


 

Continuing

6 months to

Feb 2017

Continuing - restated

6 months to

Feb 2016

 

 

6 months to

Feb 2017

 

 

6 months to

Feb 2016

Profit after tax (£m)

18.5

19.4

14.3

15.3

Basic number of shares (millions)

245.0

242.6

245.0

242.6

Basic EPS

7.6p

8.0p

5.9p

6.3p

Diluted number of shares (millions)

248.6

249.1

248.6

249.1

Diluted EPS

7.4p

7.8p

5.8p

6.1p

Dividend per share

3.1p

3.0p

3.1p

3.0p

 

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

 

£m








6 months to

Feb 2017

6 months to

Feb 2016

 

Change


Revenue


692.5

717.7

(3.5%)


Gross profit


55.9

60.2

(7.1%)


Operating costs


(36.3)

(40.3)

9.9%


Adjusted operating profit


19.6

19.9

(1.7%)








Gross margin


8.1%

8.4%

(30 bps)


Cost ratio


(5.1%)

(5.6%)

50 bps


Operating margin


3.0%

2.8%

20 bps


 

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

 

£m








6 months to

Feb 2017

6 months to

Feb 2016

 

Change


Revenue


14.2

13.2

6.9%


Gross profit


7.3

6.7

8.7%


Operating costs


(6.2)

(5.7)

(11.8%)


Adjusted operating profit


1.1

1.0

5.9%








Gross margin


51.3%

50.6%

70 bps


Cost ratio


(43.8%)

(43.0%)

(80 bps)


Operating margin


7.5%

7.6%

(10 bps)


 

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

 

£m








6 months to

Feb 2017

6 months to

Feb 2016

 

Change


Revenue


86.6

82.4

5.1%


Gross profit


26.6

25.8

3.0%


Operating costs


(22.3)

(20.8)

(7.2%)


Adjusted operating profit


4.3

5.0

(13.9%)








Gross margin


30.6%

31.3%

(70bps)


Cost ratio


(25.7%)

(25.3%)

(40bps)


Operating margin


4.9%

6.0%

(110bps)








 

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

 

£m








6 months to

Feb 2017

6 months to

Feb 2016

 

Change


Revenue


118.5

103.5

14.4%


Gross profit


21.9

19.9

10.0%


Operating costs


(20.3)

(18.0)

(12.7%)


Adjusted operating profit


1.6

1.9

(13.5%)








Gross margin


18.5%

19.2%

(70 bps)


Cost ratio


(17.1%)

(17.4%)

30 bps


Operating margin


1.4%

1.8%

(40 bps)


 

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

 

£m








6 months to

Feb 2017

6 months to

Feb 2016

 

Change


Revenue


28.7

31.6

(9.1%)


Gross profit


12.7

13.7

(7.6%)


Operating costs


(11.0)

(10.9)

(0.9%)


Adjusted operating profit


1.7

2.8

(38.8%)








Gross margin


44.1%

43.5%

60 bps


Cost ratio


(38.2%)

(34.8%)

(340 bps)


Operating margin


5.9%

8.7%

(280 bps)


 

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

 

£m







6 months to

Feb 2017

6 months to

Feb 2016


Network and reorganisation costs


(1.4)

(0.5)


Acquisition and disposal costs


(0.9)

(1.8)


Pension past service credit


0.7

-


Amortisation of acquired intangibles


(4.1)

(4.4)


Total loss before tax- continuing


(5.7)

(6.7)


Total loss before tax- discontinued


(1.2)

(1.3)


Total loss before tax


(6.9)

(8.0)


Taxation - continued


1.2

1.4


Taxation - discontinued


0.2

0.4


Taxation


1.4

1.8


Total loss after tax - continued


(4.5)

(5.3)


Total loss after tax - discontinued


(1.0)

(0.9)


Total loss after tax


(5.5)

(6.2)


 

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

 

£m






Continuing and discontinued operations



6 months to

Feb 2017

6 months to

Feb 2016


Adjusted Operating profit - continuing



26.6

27.8


Adjusted Operating profit - discontinued



1.7

2.8


Adjusted profit before interest and tax



28.3

30.6


Depreciation & amortisation



6.9

6.6


Adjusted EBITDA



35.2

37.2


Working capital



(4.1)

(6.1)


Capital expenditure



(9.4)

(5.7)


Net interest paid



(2.3)

(2.5)


Taxation



(5.3)

(3.1)


Pension funding



(2.6)

(2.6)


Other movements



0.9

0.8


Free cash flow



12.4

18.0


Exceptional items



(4.2)

(6.9)


Free cash flow after Exceptional items



8.2

11.1


 

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

 

£m





As at

Feb 2017

As at

Feb 2016

As at

Aug 2016

Opening net debt

(141.7)

(153.4)

(153.4)

Free cash flow after Exceptional items

8.2

11.1

38.8

Dividend paid

(15.9)

(15.3)

(22.7)

Other

(0.5)

(3.3)

(4.4)

Closing net debt

(149.9)

(160.9)

(141.7)

 

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.

 

Principal risks

Potential impact

Mitigating actions and assurance

Health & Safety - The risk of failing to provide employees with appropriate training and a safe environment results in serious injury to employees and/or the public. Combined with the risk that the Group fails to comply with relevant Health and Safety legislation.

The impact of a Health and Safety failure negatively impacts operations, profitability and/or Company reputation.

Safety is a key priority of the Group. Health and Safety performance is reviewed at Board Meetings, Audit Committee, Group Executive and Divisional Operating Board level.

 

Dedicated Health and Safety teams exist throughout the business, who are executing improvement programs and promoting a safety culture. Significant continued investment in Health and Safety improvements ongoing across the Group in FY2017.

Non-Adherence to Operator Licence Conditions - The risk of failing to adhere to external laws and regulations by employees, sub-contractors and third parties resulting in a breach of our Operator Licence conditions.

The impact of poor adherence to Operator licence conditions results in sanctions which curtail our ability to operate and/or increase operating costs.

The Group maintains a comprehensive governance framework. Dedicated Transport Compliance teams exist within the divisions specifically focused on transport related compliance. The Group also executes improvement programs to ensure continued legal compliance, operational efficiencies and to minimise mistakes. Applicable legislation is diligently tracked and monitored and any changes reflected in policies and controls within required timeframes.

Changing Consumer Behaviour - The risk of new technologies and demographics drive change in customer behaviour and/or supply chain dynamics that result in structural market changes being deeper and quicker than predicted, including migration from print to digital, reducing demand for our services.

Sales decline in newspapers and magazines are worse than expected (forecasted expectation of a -3% to -5% range)  and there may be a 'tipping point' where some titles cease to publish rather than slowly decline.

The Books market is impacted resulting in lower profit and negative market sentiment related to printed media.

Historic price increases in newspapers and magazines have consistently offset a large part of the impact of falling volumes. Major publishers continue to commit to print distribution, given the superior advertising revenue from print over digital (lack of intermediaries) and the slow take up of digital paid subscriptions. Management continues to identify efficiencies to compensate for market declines.

 

The Parcel Freight division is a significant financial contributor toward the Group's overall results, mitigating market declines for newspapers, magazines and books. The Group's organic strategy, including Pass My Parcel, seeks to further protect the Group from over exposure to individual market risks, and diversify the Group's service offerings.

Optimising Contract Renewals and Tendering - The risk of failing to retain major contracts at acceptable rates and /or win new contracts in competitive markets affected by aggressive pricing strategies impacts current and projected business performance.

Impact on supply of product or route to market may erode margin and/or increase cost to serve.

In News & Media, publishers typically award five year contracts supporting the market structure. The Books, Education & Care and Parcel Freight divisions operate in fragmented markets with fewer key significant suppliers or customers. Strong relationships across the supply chain help the Group to understand and demonstrate its strengths for the benefit of its suppliers and customers.

Increased Labour Costs - The risk of legislative changes or interpretation impact the engagement of employees and delivery contractors resulting in an increase in the number of employees and/or liabilities and cost.

In the event of any legal claim as to worker status by consultants, sub-contractors or agency workers the Group could be liable for increased costs (national insurance contributions) and liabilities (such as employee rights). The inability to pass on such statutory increases to our customers could impact profitability, and affect the cost of future efficiency programmes.

The Group puts appropriate contractual and operational arrangements in place.

 

Self-employed delivery contractors have clearly articulated agreements defining tasks they are contracted to provide to News & Media with annually set commercial terms.  The introduction of the National Living Wage (and future anticipated increases) impacts only a limited proportion of employees, when assessed across the Group as a whole.

 

The Group continues to monitor legal developments to ensure that it maintains compliance with legislation and best practice.

Network and IT Robustness - The risk of Network and IT disruptions in key infrastructure facilities leads to an inability to deliver according to customer expectations and contractual obligations.

Any material failure resulting from systems outages, location access or employee/contractor disputes may lead to an adverse impact on operations, financial performance and reputational impact.

Disaster recovery and Business Continuity plans exist and are reviewed periodically. Investment is made to provide disaster recovery capability across the Group for all essential systems. Protections are in place to defend IT systems against attacks.

Failure to execute strategy - The risk of failing to deliver business plans and/or financial returns in line with the planned strategic evolution of the group, impacts external confidence and shareholder perception, bringing into question the future strategic direction of the Group and confidence in its delivery.

Sales and/or profit expected from acquisitions / organic growth may not be met and/or the Group's reputation and support for future acquisitions are challenged. Cultural change required for diversification / restructuring results in reduced performance and financial returns.

Financial and operational metrics are considered along with risk assessments and impact on management before decisions are made. Performance to plans are reviewed monthly with post investment analysis producing a more thorough review of each acquisition within 12 months after deal completion. Detailed integration process, governance and support framework ensures effective and timely adoption of standards and process into acquisitions and restructuring activity.

Failure to execute restructuring or other change management programmes - The risk of failing to re-engineer the business to create a platform for future growth combined with excessive demands on new and existing staff results in loss of key people, lack of engagement and loss of in-depth knowledge and specialist skills impacting both current and future business prospects.

The impact of the inability of warehousing / operational / IT and support systems to meet growth expectations of the Group, creates poor customer experience, increased investment costs and reduced profitability.

 

Management's focus on current business operations and performance is distracted by organisational change and new initiatives. Management leave the Group taking valuable skills and knowledge with them.

The annual business and strategic planning process ensures appropriate investment is budgeted to ensure growth targets are achieved. Organisational and cultural change is a key imperative, leading to investment in resources and skills that are required to deliver the successful integration and development of new businesses and business critical initiatives, including investment in expert skills in change management and project management.

Deterioration of the Macro Economic Environment - The risk of volatility and/or prolonged economic downturn causing a decline in demand for our services including the uncertainty associated with Brexit, impacts current and/or projected business performance above that included in the business planning and review process.

Reductions in discretionary spending may impact sales of newspapers, magazines or books and/or see a reduction in parcel volumes. Uncertainty from Brexit may affect the Group in both the short and medium term on trade arrangements, future capital investment strategies and resourcing costs.

Annual budgets and quarterly forecasts take into account potential macro market and competitive impacts when setting expectations internally and externally, allowing for or changing objectives to meet short and medium term financial targets.

 

Connect Group PLC

 

Condensed Consolidated Income Statement (Unaudited)

For the 6 months to 28 February 2017

 



6 months to Feb 2017

Restated 6 months to Feb 2016

Restated 12 months to Aug 2016

£m

Note



Adjusted

Adjustments

Total

Adjusted

Adjustments

Total

Adjusted

Adjustments

Total

Continuing operations










Revenue

3

911.8

-

911.8

916.8

-

916.8

1,841.7

-

1,841.7

Operating profit

3

26.6

(5.7)

20.9

27.8

(6.7)

21.1

59.9

(17.7)

42.2

Finance costs


(3.3)

-

(3.3)

(3.3)

-

(3.3)

(6.9)

-

(6.9)

Profit before tax

3

23.3

(5.7)

17.6

24.5

(6.7)

17.8

53.0

(17.7)

35.3

Income tax expense

6

(4.8)

1.2

(3.6)

(5.1)

1.4

(3.7)

(10.9)

3.7

(7.2)

Profit for the period from continuing operations


18.5

(4.5)

14.0

19.4

(5.3)

14.1

42.1

(14.0)

28.1

Discontinued operations










Profit for the period from discontinued operations

9

1.3

(1.0)

0.3

2.1

(0.9)

1.2

6.2

(0.9)

5.3












Profit attributable to equity shareholders continuing and discontinued operations


19.8

(5.5)

14.3

21.5

(6.2)

15.3

48.3

(14.9)

33.4












Earnings per share from continuing operations









Basic

8

7.6p


5.7p

8.0p


5.8p

17.3p


11.5p

Diluted

8

7.4p


5.6p

7.8p


5.7p

17.0p


11.4p










Earnings per share from continuing and discontinued operations









Basic

8

8.1p


5.9p

8.9p


6.3p

19.8p


13.7p

Diluted

8

8.0p


5.8p

8.6p


6.1p

19.5p


13.5p












Equity dividends per share

7



3.1p



3.0p



9.5p

 

Condensed Consolidated Statement of Comprehensive Income (Unaudited)

For the 6 months to 28 February 2017

 

£m

 

Note

6 months to

Feb 2017

6 months to

Feb 2016

12 months to

 Aug 2016






Items that will not be reclassified to the Group Income Statement:





Actuarial (losses) /gains on defined benefit pension scheme

5

(14.9)

0.8

(2.0)

Effect of asset limit on defined benefit pension scheme

5

13.0

0.4

(6.5)

Tax relating to components of other comprehensive income that will not be reclassified


0.1

-

1.7



(1.8)

1.2

(6.8)

Items that may be reclassified to the Group Income Statement:





Gain/ (loss) on cash flow hedges


0.4

(0.9)

(1.2)

Currency translation differences


-

0.3

0.6

Tax relating to components of other comprehensive income


(0.2)

(0.1)

(0.3)

Other comprehensive income


0.2

(0.7)

(0.9)






Other comprehensive income for the period


(1.6)

0.5

(7.7)

Profit for the period


14.3

15.3

33.4

Total comprehensive income for the period


12.7

15.8

25.7






Total comprehensive income for the period attributable to shareholders:





Continuing


12.1

14.0

24.9

Discontinued


0.6

1.8

0.8

 

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

 

£m

 

Note

As at

Feb 2017

As at

Feb 2016

As at

Aug 2016

Non-current assets





Intangible assets

12

133.0

168.8

164.8

Property, plant and equipment


44.7

45.1

50.3

Interest in joint venture and associate


4.4

4.5

4.1

Retirement benefit assets

5

-

0.4

0.3

Deferred tax assets


5.9

7.1

7.7



188.0

225.9

227.2

Current assets





Inventories


42.8

41.9

42.3

Trade and other receivables


153.7

135.3

139.2

Derivative financial instruments

14

-

0.1

0.1

Cash and cash equivalents

13

10.3

4.6

9.1

Assets classified as held for sale

9

55.4

-

-



262.2

181.9

190.7

Total assets


450.2

407.8

417.9

Current liabilities





Trade and other payables


(212.5)

(183.9)

(198.8)

Current tax liabilities


(5.9)

(7.2)

(6.9)

Obligations under finance leases


(1.8)

(2.6)

(3.0)

Bank overdrafts and other borrowings

13

(87.0)

(66.6)

(61.0)

Derivative financial instruments

14

(0.3)

-

-

Provisions

15

(6.3)

(5.2)

(4.1)

Retirement benefits obligation

5

(4.1)

(4.1)

(8.5)

Liabilities classified as held for sale

9

(17.1)

-

-



(335.0)

(269.6)

(282.3)

Non-current liabilities





Bank loans and other borrowings

13

(69.4)

(88.7)

(79.1)

Retirement benefit obligation

5

(8.8)

(11.1)

(17.4)

Deferred tax liabilities


(9.3)

(12.2)

(10.9)

Non current provisions

15

(6.6)

(6.0)

(4.9)

Obligations under finance leases


(7.7)

(7.6)

(7.7)

Derivative financial instruments

14

(0.8)

(1.3)

(1.5)

Other non-current liabilities


(1.0)

(0.9)

(1.1)



(103.6)

(127.8)

(122.6)

Total liabilities


(438.6)

(397.4)

(404.9)

Total net assets


11.6

10.4

13.0

 

Equity





Called up share capital

16

12.4

12.3

12.3

Share premium account

16

60.4

59.1

59.2

Other reserves


(283.7)

(285.1)

(284.7)

Retained earnings


222.5

224.1

226.2

Total shareholders' equity


11.6

10.4

13.0

 

Condensed Consolidated Statement of Changes in Equity (Unaudited)

For the 6 months to 28 February 2017

 

£m

 

Note

 

Share Capital

Share Premium Account

Other Reserves

Retained Earnings

 

Total equity

Balance at 31 August 2015


12.2

55.2

(284.7)

226.5

9.2

Profit for the period


-

-

-

15.3

15.3

Loss on cash flow hedges


-

-

(0.9)

-

(0.9)

Currency translation differences


-

-

0.3

-

0.3

Actuarial gain on defined benefit pension scheme


-

-

-

0.8

0.8

Impact of IFRIC 14 on defined benefit pension scheme


-

-

-

0.4

0.4

Tax relating to components of other comprehensive income


-

-

-

(0.1)

(0.1)

Total comprehensive income for the period


-

-

(0.6)

16.4

15.8

Issue of share capital

16

0.1

3.9

-

-

4.0

Dividends paid


-

-

-

(15.4)

(15.4)

Purchase of own shares


-

-

(1.3)

-

(1.3)

Employee share schemes


-

-

1.5

(1.5)

-

Recognition of share based payments


-

-

-

(1.9)

(1.9)

Balance at 28 February 2016


12.3

59.1

(285.1)

224.1

10.4

Profit for the period


-

-

-

18.1

18.1

Loss on cash flow hedges


-

-

(0.3)

-

(0.3)

Actuarial gain on defined benefit pension scheme


-

-

-

(2.8)

(2.8)

Impact of IFRIC 14 on defined benefit pension scheme


-

-

-

(6.9)

(6.9)

Currency translation differences


-

-

0.3

-

0.3

Tax relating to components of other comprehensive income


-

-

-

1.5

1.5

Total comprehensive income for the period


-

-

-

9.9

9.9

Issue of share capital


-

0.1

-

-

0.1

Purchase of own shares


-

-

0.2

-

0.2

Dividends paid


-

-

-

(7.3)

(7.3)

Employee share schemes


-

-

0.2

(0.2)

-

Recognition of share based payments net of tax


-

-

-

(0.3)

(0.3)

Balance at 31 August 2016


12.3

59.2

(284.7)

226.2

13.0

Profit for the period


-

-

-

14.3

14.3

Gain on cash flow hedges


-

-

0.4

-

0.4

Actuarial loss on defined benefit pension scheme


-

-

-

(14.9)

(14.9)

Impact of IFRIC 14 on defined benefit pension scheme


-

-

-

13.0

13.0

Tax relating to components of other comprehensive income


-

-

-

(0.1)

(0.1)

Total comprehensive income for the period


-

-

0.4

12.3

12.7

Issue of share capital

16

0.1

1.2

-

-

1.3

Dividends paid

7


-

-

(15.9)

(15.9)

Employee share schemes


-

-

0.6

(0.6)

-

Recognition of share based payments





0.5

0.5

Balance at 28 February 2017


12.4

60.4

(283.7)

222.5

11.6

 

Condensed Consolidated Group Cash Flow Statement (Unaudited)

For the 6 months to 28 February 2017

 

£m

 

Note

6 months to

Feb 2017

6 months to

Feb 2016

12 months to

Aug 2016

Net cash from operating activities

10

19.8

19.7

58.2

Investing activities





Dividends from associates


0.1

-

0.7

Purchase of property, plant and equipment


(7.0)

(4.9)

(9.1)

Purchase of intangible assets


(2.4)

(0.8)

(4.8)

Net cash used in investing activities


(9.3)

(5.7)

(13.2)

Financing activities





Interest paid


(2.3)

(2.5)

(4.9)

Dividends paid

7

(15.9)

(15.3)

(22.7)

Repayments of obligations under finance leases


(2.2)

(1.7)

(3.5)

Proceeds on issue of shares


0.6

0.3

0.4

Purchase of shares for Employee Benefit Trust


-

(1.3)

(1.1)

Increase/ (decrease) in short term borrowings


16.0

-

(15.5)

Net cash from financing activities


(3.8)

(20.5)

(47.3)


 




Net decrease in cash and cash equivalents


6.7

(6.5)

(2.3)

Effect of foreign exchange rate changes


0.2

0.2

0.5



6.9

(6.3)

(1.8)

Opening net cash and cash equivalents


9.1

10.9

10.9

Closing net cash and cash equivalents


16.0

4.6

9.1






 

Analysis of net debt

 

 



As at

As at

As at

£m

Note

Feb 2017

Feb 2016

Aug 2016

Cash and cash equivalents

13

16.0

4.6

9.1

Current borrowings

13

(87.0)

(66.6)

(61.0)

Non-current borrowings

13

(69.4)

(88.7)

(79.1)

Finance lease liabilities


(9.5)

(10.2)

(10.7)

Net debt


(149.9)

(160.9)

(141.7)






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:

 

Connect News & Media: News distribution (referred to as Smiths News)

 

The UK market leading distributor of newspapers and magazines to 30,000 retailers across England and Wales.

Connect News & Media: Media

(referred to as DMD)

 

A supplier of newspaper and magazines to airlines and an emerging player in inflight entertainment.

Connect Books

(referred to as Bertrams, Dawson Books and Wordery)

 

A leading UK distributor of physical and digital books to high street and on-line retailers, public libraries, academic institutions and direct to consumers with a strong international presence, supplying 101 countries.

Connect Parcel Freight

(referred to as Tuffnells)

 

A leading provider of next day B2B delivery of mixed parcel freight consignments.

 

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:

 



Revenue

Operating profit

£m


6 months to Feb 2017

6 months to Feb 2016

12 months to Aug 2016

6 months to Feb 2017

6 months to Feb 2016

12 months to Aug 2016

Connect News & Media: News distribution


692.5

717.7

1,443.8

19.6

19.9

40.0

Connect News & Media: Media


14.2

13.2

27.6

1.1

1.0

2.4

Connect Books


118.5

103.5

195.9

1.6

1.9

2.5

Connect Parcel Freight


86.6

82.4

174.4

4.3

5.0

15.0

Continuing operations - adjusted


911.8

916.8

1,841.7

26.6

27.8

59.9

Revenue - Discontinued operations


28.7

31.6

64.8




Revenue - continuing and discontinued operations


940.5

948.4

1,906.5




Continuing operations -Exceptional items



-


(5.7)

(6.7)

(17.7)

Total continuing operations





20.9

21.1

42.2

Net finance expense





(3.3)

(3.3)

(6.9)

Profit before taxation - continuing operations





17.6

17.8

35.3

Profit before taxation - discontinued operations





0.5

1.4

6.6

Profit before taxation - continuing operations and discontinued operations





18.1

19.2

41.9

 

Segment assets and liabilities

 


Assets

Liabilities

Net (liabilities) /assets

£m

HY

2017

HY

2016

FY

2016

HY

2017

HY

2016

FY

2016

HY

2017

HY

2016

FY

2016

Connect News & Media: News distribution

122.0

79.3

89.4

(317.7)

(265.6)

(280.4)

(195.7)

(186.3)

(191.0)

Connect News & Media: Media

20.6

22.4

20.5

(7.2)

(9.8)

13.4

12.6

12.9

Connect Books

78.6

82.8

74.7

(50.6)

(65.7)

28.0

17.1

27.2

Connect Parcel Freight

173.6

165.8

175.9

(46.0)

(39.1)

127.6

126.7

126.9

Discontinued operations

55.4

57.5

57.4

(17.1)

(17.2)

(20.4)

38.3

40.3

37.0

Consolidated assets/ (liabilities)

450.2

407.8

417.9

(438.6)

(397.4)

(404.9)

11.6

10.4

13.0

 

Segment depreciation, amortisation and non-current asset additions

 


Depreciation

Amortisation

Additions to non-current assets

£m

HY

2017

HY

2016

FY

2016

HY

2017

HY

2016

FY

2016

HY

2017

HY

2016

FY

2016

Connect News & Media: News distribution

(2.1)

(2.2)

(4.5)

(1.3)

(1.1)

(2.3)

3.6

1.8

5.2

Connect News & Media: Media

(0.1)

(0.1)

(0.1)

(0.2)

(0.2)

(0.4)

3.3

0.1

0.3

Connect Books

(0.3)

(0.3)

(3.3)

(1.1)

(1.3)

(7.1)

0.6

0.6

11.1

Connect Parcel Freight

(1.9)

(1.5)

(0.6)

(3.5)

(3.5)

(2.7)

2.1

2.0

1.2

Total - continuing operations

(4.4)

(4.1)

(8.5)

(6.1)

(6.1)

(12.5)

9.6

4.5

17.8

Discontinued operations

(0.2)

(0.3)

(0.4)

(1.0)

(1.1)

(2.2)

-

0.3

1.5

Consolidated total

(4.6)

(4.4)

(8.9)

(7.1)

(7.2)

(14.7)

9.6

4.8

19.3

 

Geographical analysis

 


Revenue by destination

Non-current assets by

location of operation

£m

6 months to Feb 2017

6 months to Feb 2016

12 months to Aug 2016

6 months to Feb 2017

6 months to Feb 2016

12 months to Aug  2016

United Kingdom

857.5

874.4

1,759.8

181.8

184.3

185.3

Europe

32.3

26.6

47.4

0.3

0.4

0.3

Rest of World

22.0

15.8

34.5

-

-

-

Consolidated total  - continuing operations

911.8

916.8

1,841.7

182.1

184.7

185.6

Discontinued operations

28.7

31.6

64.8

-

33.7

33.6

Total continuing and discontinued operations

940.5

948.4

1,906.5

182.1

218.4

219.2

 

4   Exceptional Items

 

£m


6 months to Feb 2017

6 months to Feb 2016

12 months to Aug 2016

Continuing operations





Network and re-organisation costs


(1.4)

(0.5)

(3.7)

Acquisition and disposal costs


(0.9)

(1.8)

(3.8)

Amortisation of acquired intangibles


(4.1)

(4.4)

(8.7)

Pension


0.7

-

-

Legal provision


-

-

(1.5)

Total before tax


(5.7)

(6.7)

(17.7)

Taxation


1.2

1.4

3.7

Total after taxation


(4.5)

(5.3)

(14.0)






Discontinued operations





Acquisition and disposal costs


(0.6)

-

-

Network and re-organisation costs


-

(0.6)

(0.7)

Pension


-

-

1.1

Amortisation of acquired intangibles


(0.6)

(0.7)

(1.5)

Total before tax


(1.2)

(1.3)

(1.1)

Taxation


0.2

0.4

0.2

Total after taxation


(1.0)

(0.9)

(0.9)






Continuing and discontinued operations





Total before tax


(6.9)

(8.0)

(18.8)

Taxation


1.4

1.8

3.9

Total after taxation


(5.5)

(6.2)

(14.9)

 

Exceptional items on a continuing basis for the period totalled £4.5m after tax for the period, compared to £5.3m in the prior year.

 

Network and re-organisation costs

 

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 8,000 customers and become the regional 'hub' for London and the Thames Valley; corporate restructuring of £0.5m relating of FMD Limited (one of the Group's joint ventures), and back-office re-organisation costs of £0.3m.

 

Acquisition and disposal costs

 

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.

 

Amortisation of acquired intangibles

 

Amortisation of continuing intangibles for acquisitions, for which there is no associated cash cost, was £4.1m.

 

Pension

 

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

 

5   Retirement Benefit Obligation

 

Defined benefit pension schemes

 

The Group operates four defined benefit schemes, of which the WH Smith Pension Trust represents 93% of the total obligation at 28 February 2017 (29 February 2016: 93%). On 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 Group acquired the assets and liabilities of Tuffnells Parcels Express Pension Scheme on its acquisition of The Big Green Parcel Holding Company Limited on 19 December 2014.

 

The amounts recognised in the balance sheet are as follows:

 

£m

As at Feb 2017

As at Feb 2016

As at Aug 2016

Present value of defined benefit obligation

(509.7)

(403.8)

(531.5)

Fair value of assets

639.8

540.8

671.9

Net surplus

130.1

137.0

140.4

Amounts not recognised due to asset limit

(139.6)

(139.9)

(151.3)

Additional liability recognised due to minimum funding requirements

(10.6)

(11.9)

(10.3)

Held for sale

7.2

-

-

Pension liability

(12.9)

(15.2)

(21.5)

Pension asset

-

0.4

0.3

 

The primary defined benefit pension scheme (the Smiths News Section of the WH Smith Pension Trust) has an IAS 19 surplus of £139.6m at 28 February 2017 (FY2016: £151.3m surplus) which the Group does not recognise in the accounts as the investment policy adopted means that the amount available on a reduction of future contributions is expected to be £nil (FY2016: £nil). The valuation of the defined benefit schemes for the IAS 19 (revised) 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 actuarial valuation for funding purposes produces a scheme deficit due to different assumptions and calculation methodologies used compared to those under IAS 19, most notably the use of a discount rate that reflects the actual investment strategy, rather than corporate bond yields as required under IAS 19.

 

The triennial valuation as at 31 March 2015 was completed in November 2016. The actuarial valuation of the Smiths News section of the WH Smith Pension Trust at 31 March 2015 was a deficit of £17.5m. Future cash contributions by the Group to address the deficit will be £4.1m per annum to March 2018 and thereafter at £3.3m per annum until March 2020. The Group recognises the present value of these agreed contributions as a pension liability of £10.6m (FY2016: £10.3m).

 

Other defined benefit schemes

 

The actuarial valuation for funding purposes of the Consortium CARE scheme as at 31 December 2013 was a scheme deficit of £1.5m. The Platinum scheme's 31 December 2013 funding valuation showed no deficit. The triennial actuarial valuation of the Tuffnells Parcels Express scheme as at 1 April 2015 was a scheme deficit of £4.1m. Guaranteed Minimum Pension ("GMP") equalisation is expected to lead to an increase in scheme liabilities at some future date for the Consortium Care and Tuffnells Parcels Express Schemes.

 

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

 

% p.a.

6 months to Feb 2017

6 months to Feb 2016

12 months to Aug 2016

Discount rate

2.60%

3.80%

2.00%

Inflation assumptions - CPI

2.50%

2.00%

2.00%

Inflation assumptions - RPI

3.50%

3.00%

3.00%

 

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:

 

£m

Fair value of scheme assets

Defined benefit obligation

Impact of IFRIC 14 on defined benefit pension schemes

Total

At 31 August 2015

563.3

(432.0)

(149.4)

(18.1)

Current service cost

(0.1)

(0.1)

-

(0.2)

Interest cost

10.5

(8.0)

(2.8)

(0.3)

Total amount recognised in income statement

10.4

(8.1)

(2.8)

(0.5)

Return on plan assets excluding amounts included in net interest

(14.1)

-

-

(14.1)

Actuarial gains on scheme liabilities

-

14.9

-

14.9

Change in surplus not recognised

-

-

0.4

0.4

Amount recognised in other comprehensive income

(14.1)

14.9

0.4

1.2

Employer contributions

2.6

-

-

2.6

Employee contributions

-

-

-

-

Benefit payments

(21.4)

21.4

-

-

Amounts included in cash flow statement

(18.8)

21.4

-

2.6

At 29 February 2016

540.8

(403.8)

(151.8)

(14.8)

Current service cost

0.1

(0.2)


(0.1)

Interest cost

10.4

(7.8)

(2.9)

(0.3)

Administration expenses

(0.1)

-

-

(0.1)

Past service credits

-

1.1

-

1.1

Total amount recognised in income statement

10.4

(6.9)

(2.9)

0.6

Return on plan assets excluding amounts included in net interest

129.5

-

-

129.5

Actuarial losses on scheme liabilities

-

(132.3)

-

(132.3)

Change in surplus not recognised excluding amounts recognised in net interest

-

-

(6.9)

(6.9)

Amount recognised in other comprehensive income

129.5

(132.3)

(6.9)

(9.7)

Employer contributions

2.7

-

-

2.7

Employee contributions

0.1

(0.1)

-

-

Benefit payments

(11.6)

11.6

-

-

Amounts included in cash flow statement

(8.8)

11.5

-

2.7

At 31 August 2016

671.9

(531.5)

(161.6)

(21.2)

 

£m

Fair value of scheme assets

Defined benefit obligation

Surplus not recognised

Total

At 31 August 2016

671.9

(531.5)

(161.6)

(21.2)

Current service cost


(0.1)

-

(0.1)

Interest cost

6.5

(5.1)

(1.6)

(0.2)

Administrative expenses


(0.1)

-

(0.1)

Past service cost/(credit)

(3.4)

4.2

-

0.8

Total amount recognised in income statement

3.1

(1.1)

(1.6)

0.4

Return on plan assets excluding amounts included in net interest

(24.1)

-

-

(24.1)

Actuarial gains on scheme liabilities

-

9.2

-

9.2

Change in surplus not recognised

-

-

13.0

13.0

Amount recognised in other comprehensive income

(24.1)

9.2

13.0

(1.9)

Employer contributions

2.5

0.1

-

2.6

Benefit payments

(13.6)

13.6

-

-

Amounts included in cash flow statement

(11.1)

13.7

-

2.6

Reclassified as held for sale

(17.6)

24.8

-

7.2

At 28 February 2017

622.2

(484.9)

(150.2)

(12.9)

Included within Current liabilities




(4.1)

Included within Non-current liabilities




(8.8)

 

The pension asset / liability at 28 February 2017 in respect of the Education & Care division is presented within assets / liabilities held for sale in the balance sheet in accordance with IFRS 5 "Non Current Assets Held for Sale and Discontinued Operations" (see note 9).

 

6   Income Tax Expense

 

£m

6 months to Feb 2017

6 months to Feb 2016

12 months to Aug 2016

Continuing operations

Adjusted

Exceptional items

Total

Adjusted

Exceptional items

Total

Adjusted

Exceptional items

Total

Current tax

4.8

(0.5)

4.3

5.3

(0.2)

5.1

11.6

(1.2)

10.4

Adjustment in respect of prior years

-

-

-

(0.2)

-

(0.2)

(0.6)

(0.1)

(0.7)

Total current tax charge

4.8

(0.5)

4.3

5.1

(0.2)

4.9

11.0

(1.3)

9.7

Deferred tax - current period

-

(0.6)

(0.6)

(0.2)

(0.6)

(0.8)

(0.3)

(1.5)

(1.8)

Deferred tax - prior year

-

-

-

-

-

-

(0.1)

(0.1)

(0.2)

Deferred tax - impact of rate change

-

(0.1)

(0.1)

0.2

(0.6)

(0.4)

0.3

(0.8)

(0.5)

Total deferred tax charge

-

(0.7)

(0.7)

-

(1.2)

(1.2)

(0.1)

(2.4)

(2.5)

Total tax charge relating to continuing operations

4.8

(1.2)

3.6

5.1

(1.4)

3.7

10.9

(3.7)

7.2

Effective tax rate

20.6%


20.6%

21.0%


20.8%

20.5%


20.7%

 

The effective income tax rate on adjusted profit before tax relating to continuing operations for the period was 20.6% (Feb 2016: 21.0%).

 

The effective income tax rate on statutory profit before tax relating to continuing operations for the period was 20.6% (Feb 2016: 20.8%).

 

Reconciliation of the tax charge

 

£m

6 months to Feb 2017

6 months to Feb 2016

12 months to Aug 2016

Profit before tax - continuing operations

17.6

17.8

35.4

Tax on profit at the standard rate of UK corporation tax 19.6% (Aug 2016: 20.0%, Feb 2016: 20.0%)

3.5

3.8

7.1

Effect of non-tax deductible expenses

0.2

0.6

1.4

Effect of change in deferred tax rate

(0.1)

(0.4)

(0.5)

Effect of higher/(lower) overseas tax rates

-

0.1

0.1

Adjustment in respect of prior years

-

(0.2)

(0.9)

Total tax charge recognised in the income statement relating to continuing operations

3.6

3.7

7.2

 

Tax charge/ (credit) to other comprehensive income

 

£m

Continuing operations

6 months to Feb 2017

6 months to Feb 2016

12 months to Aug 2016

Current tax relating to the defined benefit pension scheme

(0.2)

(0.4)

(0.8)

Current tax relating to share based payments

-

-

(0.1)

Deferred tax relating to impact of change in tax rate

0.2

-

0.4

Deferred tax relating to derivative financial instruments

-

-

(0.3)

Deferred tax relating to share based payments

-

0.1

0.3

Deferred tax related to retirement benefit obligations

-

0.4

0.2

Tax charge/(credit) recognised in other comprehensive income and directly in equity relating to continuing operations

-

0.1

(0.3)

 

7   Dividends

 

Proposed dividends for the period

6 months to Feb 2017

6 months to Feb 2016

12 months to Aug 2016

6 months to Feb 2017

6 months to Feb 2016

12 months to Aug 2016


Per share

Per share

Per share

£m

£m

£m

Final dividend

-

-

6.5p

-

-

15.9

Interim dividend

3.1p

3.0p

3.0p

7.6

7.3

7.3


3.1p

3.0p

9.5p

7.6

7.3

23.2








Recognised dividends for the period








Per share

Per share

Per share

£m

£m

£m

Final dividend - prior year

6.5p

6.3p

6.3p

15.9

15.4

15.4

Interim dividend - current year

-

-

3.0p

-

-

7.3


6.5p

6.3p

9.3p

15.9

15.4

22.7

 

During the six month period to 28 February 2017, the final dividend for the year ended 31 August 2016 of 6.5p (Feb 2016: 6.3p) per ordinary share was paid to shareholders. In addition the directors have approved an interim dividend in respect of the period ended 28 February 2017 of 3.1p per ordinary share (Feb 2016: 3.0p). This has not been included as a liability in these condensed financial statements. This will be paid on 7 July 2017 to shareholders on the Register at the close of business on 9 June 2017.

 

8   Earnings per share

 


6 months to Feb 2017

6 months to Feb 2016

12 months to Aug 2016


Earnings (£m)

Weighted average number of shares million

Pence per share

Earnings (£m)

Weighted average number of shares million

 Pence per share

Earnings (£m)

Weighted average number of shares million

 Pence per share

Weighted average number of shares in issue


247.2



245.2



245.9


Shares held by the ESOP (weighted)


(2.2)



(2.6)



(2.5)


Basic earnings per share (EPS)


245.0



242.6



243.4


Continuing










Adjusted earnings attributable to ordinary shareholders

18.5

245.0

7.6p

19.4

242.6

8.0p

42.1

243.4

17.3p

Exceptional items

(4.5)



(5.3)



(14.0)



Earnings attributable to ordinary shareholders

14.0

245.0

5.7p

14.1

242.6

5.8p

28.1

243.4

11.5p

Total - continuing and discontinued operations










Adjusted earnings attributable to ordinary shareholders

19.8

245.0

8.1p

21.5

242.6

8.9p

48.3

243.4

19.8p

Exceptional items

(5.5)



(6.2)



(14.9)



Earnings attributable to ordinary shareholders

14.3

245.0

5.9p

15.3

242.6

6.3p

33.4

243.4

13.7p

Diluted earnings per share (EPS)










Effect of dilutive securities


3.6



6.5



3.8


Continuing










Diluted adjusted EPS

18.5

248.6

7.4p

19.4

249.1

7.8p

42.1

247.2

17.0p

Diluted EPS

14.0

248.6

5.6p

14.1

249.1

5.7p

28.1

247.2

11.4p

Total - continuing and discontinued operations










Diluted adjusted EPS

19.8

248.6

8.0p

21.5

249.1

8.6p

48.3

247.2

19.5p

Diluted EPS

14.3

248.6

5.8p

15.3

249.1

6.1p

33.4

247.2

13.5p

 

Dilutive shares increased the basic number of shares at February 2017 by 3.6m to 248.6m (Feb 2016: 249.1m) and resulted in a diluted adjusted EPS of 7.4p, a decrease of 0.4p or 5.1% on prior year.

 

The calculation of diluted EPS reflects the potential dilutive effect of employee incentive schemes of 2.1m dilutive shares (Feb 2016: 2.1m) and a weighted 1.5m shares being the time apportioned share capital relating to the deferred consideration for the acquisition of The Big Green Parcel Holding Company Limited.

 

9   Discontinued Operations

 

In February 2017 the Group entered into an agreement in principle to sell the Connect Education & Care division with completion subject to approval by the Competition & Markets Authority. Consequently, the activities of the division have been disclosed as discontinued in accordance with IFRS 5 "Non Current Assets Held for Sale and Discontinued Operations".

 

The results of discontinued operations, which have been included within the consolidated income statement are as follows:

 



6 months to Feb 2017

6 months to Feb 2016

12 months to Aug 2016

£m




Adjusted

Adjustments

Total

Adjusted

Adjustments

Total

Adjusted

Adjustments

Total

Revenue


28.7

-

28.7

31.6

-

31.6

64.8

-

64.8

Expenses


(27.0)

(1.2)

(28.2)

(28.8)

(1.3)

(30.1)

(57.0)

(1.1)

(58.1)

Operating profit


1.7

(1.2)

0.5

2.8

(1.3)

1.5

7.8

(1.1)

6.7

Finance costs


-

-

-

(0.1)

-

(0.1)

(0.1)

-

(0.1)

Profit before tax


1.7

(1.2)

0.5

2.7

(1.3)

1.4

7.7

(1.1)

6.6

Income tax expense


(0.4)

0.2

(0.2)

(0.6)

0.4

(0.2)

(1.5)

0.2

(1.3)

Profit from discontinued operations


1.3

(1.0)

0.3

2.1

(0.9)

1.2

6.2

(0.9)

5.3

 

During the period, discontinued operations contributed £3.4m (Feb 2016: £1.9m) (Aug 2016: £4.0m) to the Group's net operating cash flows.

 

The major classes of assets and liabilities comprising the operations classified as held for sale are as follows:

 




Period ending 28 February 2017

Goodwill



20.9

Intangible assets



6.3

Property, plant and equipment



5.6

Pension asset



0.3

Inventories



7.2

Trade and other receivables



7.9

Cash and bank balances



5.7

Deferred tax asset



1.5

Total assets classified as held for sale



55.4

Trade and other payables



(8.7)

Current tax liabilities



(0.2)

Deferred tax liabilities



(0.7)

Pension liability



(7.5)

Total liabilities classified as held for sale



(17.1)





Net assets of disposal group



38.3

 

10 Net Cash Inflow from Operating Activities

 



6 months to

6 months to

12 months to

£m


Feb 2017

Feb 2016

Aug 2016

Adjusted continuing operating profit


26.6

27.8

59.9

Adjusted discontinued operating profit


1.7

2.8

7.8

Exceptional items before tax


(6.9)

(8.0)

(18.8)

Operating profit


21.4

22.6

48.9

Share of profits of jointly controlled entities


(0.2)

(0.1)

(0.3)

Pension funding


(2.6)

(2.6)

(5.3)

Depreciation of property, plant and equipment


4.6

4.4

8.9

Amortisation and impairment of intangible assets


7.1

7.2

14.7

Share based payments


1.2

1.9

1.6

(Increase)/ decrease in inventories


(7.8)

0.2

(0.3)

(Increase)/ decrease in receivables


(23.1)

13.0

9.7

Increase/ (decrease) in payables


25.6

(18.3)

(7.2)

Non cash pension and admin costs


(0.6)

-

(0.6)

Income tax paid


(5.3)

(3.1)

(8.5)

(Decrease) in provisions


(0.5)

(5.5)

(3.4)

Net cash inflow from operating activities


19.8

19.7

58.2

 

During the period, discontinued operations contributed £3.4m (Feb 2016: £1.9m) (Aug 2016: £4.0m) to the Group's net operating cash flows.

 

11 Contingent Liabilities

 

The Group has a potential liability that 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 Demerger Agreement from WH Smith PLC in 2006, any such contingent liability, which becomes an actual liability will be apportioned between Connect Group PLC and WH Smith PLC in the ratio 35:65 (the actual liability of Connect Group PLC in any 12 month period is limited to £5m). The Group's share of such liability has an estimated future cumulative gross rental commitment at 28 February 2017 of £2.4m (31 August 2016: £2.8m).

 

12 Intangible Assets

 

Acquired intangible assets are written off over their expected useful life. Goodwill is not amortised, but tested annually for impairment with the recoverable amount being determined from value in use calculations. The Group prepares cash flow forecasts derived from the most recent budgets and forecasts for the following 3 years and extrapolates these cash flows on an estimated growth rate of 1% into perpetuity. At 31 August 2016, the rate used to discount the forecast cash flows range from 12.0% to 16.5%, being the Group's risk Adjusted pre-tax WACC, specific for each cash generating unit. The calculation of value in use is sensitive to the discount rate and growth rates used. The Group conducted sensitivity analysis on the impairment test of each CGU. The sensitised value in use exceeded the carrying value for all the CGUs, except the Books CGU. The Books CGU had headroom on its carrying value of £2.6m prior to any sensitivities. An increase in the risk adjusted post tax WACC from 12% to 13% for the Books CGU or a reduction in operating profits by 5% would cause the carrying value to equal the recoverable amount.

 


Goodwill

Acquired Intangibles

Total

£m

On

acquisition

HY

2017

HY

2016

FY

2016

On

acquisition

HY

2017

HY

2016

FY

2016

On

acquisition

HY

2017

HY

2016

FY

2016

Connect Books

17.6

17.6

17.6

17.6

12.7

2.3

3.5

2.9

30.3

19.9

21.1

20.5

Connect Media

5.7

5.7

5.7

5.7

0.6

1.0

0.8

8.3

6.3

6.7

6.5

Connect News

-

-

-

-

0.1

0.2

0.1

0.2

0.1

0.2

0.1

Connect Parcel Freight

52.1

52.1

52.1

52.1

43.2

50.1

46.7

110.2

95.3

102.2

98.8

Connect Education and care

20.9

20.9

20.9

20.9

4.1

5.4

4.7

31.3

25.0

26.3

25.6

Reclassified as held for sale

-

(20.9)

-

-

(4.1)

-

-

-

(25.0)

-

-

Total

96.3

75.4

96.3

96.3

84.0

46.2

60.2

55.2

180.4

121.6

156.5

151.5














Other intangibles










13.6

12.3

13.3

Reclassified as held for sale










(2.2)

-

-

Total Intangible assets










133.0

168.8

164.8

 

13 Cash and Borrowings

 

Cash and borrowings by currency (sterling equivalent) are as follows:

 

£m

Sterling

Euro

USD

Other

Total

28 Feb 2017

At 29

Feb 2016

At 31

Aug 2016

Cash and cash equivalents

7.8

5.3

2.6

0.3

16.0

4.6

9.1

Term loan - disclosed within current liabilities

(20.0)

-

-

-

(20.0)

-

(20.0)

Term loan - disclosed within non-current liabilities

(69.4)

-

-

-

(69.4)

(98.7)

(79.1)

Revolving credit facility

(67.0)

-

-

-

(67.0)

(56.6)

(41.0)

Total borrowings

(156.4)

-

-

-

(156.4)

(155.3)

(140.1)

Net borrowings

(148.6)

5.3

2.6

0.3

(140.4)

(150.7)

(131.0)









Total borrowings








Amount due for settlement within 12 months

(87.0)

-

-

-

(87.0)

(66.6)

(61.0)

Amount due for settlement after 12 months

(69.4)

-

-

-

(69.4)

(88.7)

(79.1)


(156.4)

-

-

-

(156.4)

(155.3)

(140.1)

 

Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value.

 

At 28 February 2017, the Group had £83.0m (29 February 2016: £94.7m) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met.

 

14 Financial Instruments

 

The fair value of interest rate swaps and forward currency contracts at the reporting date are based on market values of equivalent instruments at the balance sheet date and are disclosed below. All derivative financial instruments are classified as level 2 based upon the degree to which the fair value movements are observable. Level 2 fair value measurements are defined as those derived from inputs other than quoted prices that are observable for the asset or liability, either directly (prices from third parties) or indirectly (derived from third party prices).

 


Current

Non-current


Feb 2017

Feb 2016

Aug 2016

Feb 2017

Feb 2016

Aug 2016

Derivatives that are being designated and effective as hedging instruments carried at fair value







Interest rate swaps - Liabilities

(0.3)

-

-

(0.8)

(1.3)

(1.5)

Forward foreign currency contracts - Assets

-

0.1

0.1

-

-

-

 

15 Provisions

 

£m


Reorganisation provisions

Insurance and legal provisions

Deferred contingent consideration

Property provisions

Total








At 1 September 2015


1.0

2.8

5.2

7.4

16.4

Additions


0.6

0.2

1.0

-

1.8

Release


-

(0.1)

-

(0.3)

(0.4)

Utilised in period


(1.3)

-

(5.2)

(0.2)

(6.7)

Unwinding of discount utilisation


-

-

-

0.1

0.1

At 29 February 2016


0.3

2.9

1.0

7.0

11.2








At 1 March 2016:


0.3

2.9

1.0

7.0

11.2

Additions


0.7

1.7

0.9

0.8

4.1

Release


(0.1)

(0.1)

-

(1.0)

(1.2)

Utilised in period


(0.3)

(0.2)

0.1

(0.4)

(0.8)

Unwinding of discount utilisation


-

-

-

0.1

0.1

At 31 August 2016


0.6

4.3

2.0

6.5

13.4








At 1 September 2016


0.6

4.3

2.0

6.5

13.4

Additions


-

0.3

0.7

0.3

1.3

Utilised in period


(0.4)

(0.1)

(1.0)

(0.4)

(1.9)

Unwinding of discount utilisation


-

-

-

0.1

0.1

At 28 February 2017


0.2

4.5

1.7

6.5

12.9








£m




Feb 2017

Feb 2016

Aug 2016

Included within current liabilities




6.3

5.2

8.5

Included within non-current liabilities




6.6

6.0

4.9

Total




12.9

11.2

13.4

 

The property provision represents the estimated future cost of the Group's onerous leases on non-trading properties and for an estimate of dilapidations costs on certain properties. The provision has been discounted and this discount will be unwound over the life of the leases.

 

Insurance and legal provisions represent the expected future costs of employer's liability, public liability and motor accident claims and legal claims. In January 2016, an employee in our Parcel Freight division was fatally injured in an accident at our Brierley Hill depot. Since the accident we have been assisting the Health & Safety Executive ("HSE") in its investigation and gave evidence at a Coroner's inquest held in September 2016. The HSE recently notified the Group's legal advisers that it intends to charge Tuffnells Parcels Express Limited with an offence under section 2(1) of the Health and Safety at Work etc Act 1974 and the business now awaits the letter of summons. A provision of £1.5m (£1.5m August 2016) is held in respect of a potential fine and associated legal costs.

 

Deferred contingent consideration relates to amounts provided in relation to the acquisition of The Big Green Parcel Holding Company Limited (Tuffnells) on 19 December 2014 and Wordery on 27 August 2015, the cost being contingent upon achievement of profit targets and the future employment of the former owners of the businesses. The contingent consideration for Tuffnells will be satisfied by a mix of cash and shares with the maximum total remaining payable amounting to £3.3m. The maximum contingent consideration payable in respect of Wordery is £3.3m. In aggregate £4.2m is held on the balance sheet within provisions and share based payment reserves to satisfy contingent consideration payable.

 

16 Share Capital

 

(a)   Share capital

 

£m

Feb 2017

Feb 2016

Aug 2016

Issued and fully paid ordinary shares of 5p each




Opening balance at 1 September

12.3

12.2

12.2

Shares issued in the period/ year

0.1

0.1

0.1

Closing balance

12.4

12.3

12.3

 

During the period to 28 February 2017, 875,135 ordinary 5p shares were issued for a consideration of £1,270,770 resulting in a share premium of £1,227,013.  Of these 394,007 shares related to the deferred consideration shares payable to the former owners of The Big Green Parcel Holding Company Limited following its acquisition in December 2014.

 

(b)   Movement in share capital

 

Number (m)

Ordinary shares of 5p each

At 1 September 2016

246.7

Issued in the period

0.9

At 28 February 2017

247.6

 

The holders of ordinary shares are entitled to receive dividends as declared from time-to-time and are entitled to one vote per share at the meetings of the Company. The Company has one class of ordinary shares, which carry no right to fixed income.

 

(c)    Share premium

 

£m

Feb 2017

Feb 2016

Aug 2016

Opening balance at 1 September

59.2

55.2

55.2

Share issues during the period/ year

1.2

3.9

4.0

Closing balance

60.4

59.1

59.2

 

17 Related Party Transactions

 

No related party transactions had a material impact on the financial performance in the period or financial position of the Group at 28 February 2017. There have been no material changes to or material transactions with related parties as disclosed in Note 32 of the Annual Report and Accounts for the year ended 31 August 2016.

 

18 Responsibility Statement

 

We confirm that to the best of our knowledge:

 

-        the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';

-        the interim management report includes a true and fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

-        the interim management report includes a true and fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

 

By order of the Board.

 

 

Mark Cashmore

David Bauernfeind

Group Chief Executive

Chief Financial Officer

25 April 2017

25 April 2017

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
IR KMGZDNDLGNZM
Close


London Stock Exchange plc is not responsible for and does not check content on this Website. Website users are responsible for checking content. Any news item (including any prospectus) which is addressed solely to the persons and countries specified therein should not be relied upon other than by such persons and/or outside the specified countries. Terms and conditions, including restrictions on use and distribution apply.

 


Unaudited Interim Results 6 mths ended 28 Feb 2017 - RNS