TIDMCNCT
RNS Number : 1677C
Connect Group PLC
14 October 2015
Connect Group PLC
('Connect Group' or 'the Group')
Preliminary Results Announcement for the year ended 31 August
2015
Transformational year establishes foundations for growth
Connect Group, a leading specialist distributor operating in
four divisions: News & Media, Books, Education & Care and
Parcel Freight, is pleased to announce its preliminary results for
the year ended 31 August 2015.
Adjusted results (1) FY2015 FY2014 Change
Revenue GBP1,875.1m GBP1,808.5m +3.7%
Profit before tax GBP56.5m GBP50.0m +13.0%
Earnings per share 19.7p 19.6p (5) +0.5%
Statutory results
Revenue GBP1,875.1m GBP1,808.5m +3.7%
Profit before tax GBP29.0m GBP43.1m -32.8%
Earnings per share 9.3p 16.8p -44.6%
Dividend per share 9.2p 8.8p (5) +4.5%
Free cash flow (2) GBP39.8m GBP37.2m +7.0%
Net debt (4) GBP153.4m GBP93.0m
---------------------- ------------ ------------ -------
HIGHLIGHTS:
Strong performance with Adjusted profit ahead of
expectations
-- Revenue of GBP1,875.1m up 3.7% and Adjusted profit before tax
up 13.0% to GBP56.5m, benefitting from the post-acquisition
contribution from Tuffnells
-- Adjusted earnings per share of 19.7p up 0.5%, reflecting
post-acquisition profits from Tuffnells and impact of rights issue
shares
-- Free cash flow of GBP39.8m, up 7.0%; Net debt GBP153.4m; Net
debt/Adjusted EBITDA (3) 1.9x, starting paydown from peak post
acquisition debt level
-- Final dividend of 6.3p up 5.0%, making a full year dividend of 9.2p, up 4.5%
Transformational year for the Group
-- Scale acquisition of Tuffnells completed in December 2014
o Excellent early performance under Connect Group ownership
o Integration and synergies on track and creating new growth
opportunities
-- Launch of Click & Collect delivery service: Pass My Parcel
o Successfully accelerated rollout to over 3,000 stores
o Agreement in principle to launch new mobile enabled returns
service with new client
Foundations in place for continuing growth
-- Strategy on track with clear opportunities across the Group
Mark Cashmore, Group Chief Executive, commented:
"It has been a transformational year for the Group. Profits were
ahead of expectations and we have made significant progress towards
our medium-term strategic goals. The foundations for further growth
are well established, with a clear strategy in each division
enabling us to leverage the Group's capabilities and strengths. We
are better positioned than ever to continue growing the business
and generating strong shareholder returns."
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 'non-recurring and other 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:
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.
Adjusted operating profit; is defined as operating profit
including the operating profit of businesses from the date of
acquisition and excludes non-recurring and other items and
operating profit of businesses disposed of in the prior year.
Adjusted profit before tax; is defined as adjusted operating
profit less finance costs attributable to adjusted operating profit
and before non-recurring and other items; including amortisation of
intangibles and network and reorganisation costs.
Adjusted earnings per share; is defined as 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.
Non-recurring and other 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 non-recurring and other
items.
(3) 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,
non-recurring 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.
(4) Net debt; is calculated as total debt less cash and cash
equivalents. Total debt includes loans and borrowings, overdrafts
and obligations under finance leases.
(5) Rebased earnings per share and rebased dividends per share
adjust last year reported figures by the rights issue bonus factor
adjustment of 0.9015 following the 2 for 7 rights issue in December
2014.
(6) Like for like revenues exclude the impact of gains and
losses (including contracts, new business and acquisitions)
reported in the current or prior year total revenues.
(7) FY2015 refers to the full year ended 31 August 2015, FY2014
refers to the full year ended 31 August 2014.
Enquiries:
Connect Group PLC
Mark Cashmore, Group Chief Executive Today: 020 7466 5000
Nick Gresham, Chief Financial Officer Thereafter: 01793 563641
www.connectgroupplc.com
Buchanan
Sophie McNulty / Richard Oldworth / Gabriella
Clinkard
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 14 October 2015 commencing at
9.30am. Connect Group PLC's Preliminary Results 2015 are available
at www.connectgroupplc.com
An audio webcast will be available on:
http://vm.buchanan.uk.com/2015/connect141015/registration.htm
About Connect Group PLC:
Connect Group PLC is a leading specialist distributor operating
in large and diverse markets. The Group has four separate
divisions, connecting suppliers to customers in an efficient,
knowledgeable and service oriented way:
-- Connect News & Media - Encompassing: Smiths News and
Dawson Media Direct. Smiths News is the UK's largest newspaper and
magazine wholesaling business with an approximate 55 per cent.
market share. It distributes newspapers and magazines on behalf of
the majority of the major national publishers as well as a large
number of regional publishers. It serves approximately 30,000
customers across England and Wales, including large general
retailers as well as smaller independent newsagents delivering
approximately 35 million newspapers and 11 million magazines
weekly. The News business also wholly owns Pass My Parcel, a new
Click & Collect delivery service for outbound and returns
parcels with Amazon as its first client; Dawson Media Direct is an
international media direct business supplying newspapers,
magazines, inflight entertainment technology and content to over 80
airlines in 50 countries.
-- Connect Books - Combining a number of recognised brands in
print and digital bookselling across four customer focused business
units: Wholesale, including Bertrams Books; Libraries, including
Dawson Books; Direct to Consumer, including Wordery and
International, including Houtschild. The division serves over 8,200
customers in approximately 100 countries, with over 156,000 in
stock titles and access to over a further seven million consumer
and twenty million academic titles.
-- Connect Education & Care - A leading independent supplier
of consumable products through The Consortium and West Mercia
Supplies. The division holds an approximate 5 per cent. market
share of the estimated addressable market, comprising the
consumables element of education spend. It serves over 30,000
customers with an extensive range of over 40,000 products across a
branded, own-brand and value range, including exercise books,
stationery, arts and craft and cleaning products through a paper
based catalogue and increasing focus on e-commerce trading with
schools.
-- Connect Parcel Freight - Tuffnells is a leading provider of
next-day B2B delivery of mixed freight/ parcel consignments,
specialising in items of irregular dimension and weight ("IDW"),
examples of which include bulky furnishings, building materials and
automotive parts. Tuffnells offers distribution coverage throughout
the UK through a network of 35 depots and operates a largely
depot-to-depot operational model, providing over 10 million
deliveries per annum, through a wide range of services to over
4,200 largely 'SME' customers.
Notes to Editors
(MORE TO FOLLOW) Dow Jones Newswires
October 14, 2015 02:01 ET (06:01 GMT)
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 taxation;
industrial disputes; war and terrorism. For a more detailed
description of these risks, uncertainties and other factors, please
see the section titled "Risks and Uncertainties". 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 preliminary announcement
for the full-year ended 31 August 2015 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.
OPERATING REVIEW
INTRODUCTION
2015 was a strong year for the Group, achieving Adjusted profit
ahead of expectations and making considerable strategic progress,
establishing clear growth opportunities.
Total revenue of GBP1,875.1m was up 3.7% and Adjusted profit
before tax of GBP56.5m was up 13.0%. This overall performance was
helped by a first-time contribution from Tuffnells (our Parcel
Freight division) but was also underpinned by the performance of
our other divisions. Both News & Media and Books grew Adjusted
operating profit, excluding the prior year profits from World Cup
sales, while making pleasing progress with organic sales
initiatives. Education & Care was broadly flat for the year
with a stronger second half and an encouraging peak performance in
what remains a competitive market.
Free cash flow of GBP39.8m was up 7.0%, another good result
given the Group's investments made in the year and starting a pay
down of peak net debt post-acquisition. Adjusted EPS at 19.7p was
slightly ahead of the prior year, reflecting post-acquisition
profits from Tuffnells and impact of rights issue shares. Looking
ahead, the Board is confident that Tuffnells will be earnings
accretive in its first full year of trading in the Group.
The acquisition of Tuffnells for an initial consideration of
GBP114.5m has transformed the shape and future prospects of the
Group. It provides entry to a new and growing market and it
enhances our position as a leading UK specialist distributor,
giving national coverage and access to a wide variety of new
customers and sales opportunities. The early trading performance
under Connect Group ownership has been excellent.
Pass My Parcel, our Click & Collect offer, was successfully
launched and, following the proof of concept trial last Autumn, the
plan to accelerate expansion of stores, services and clients is
well on track. We have also reached an agreement in principle to
launch a new mobile enabled returns service with a new client.
The Group's divisions are in enviable market positions and are
well placed to make further progress with strategic initiatives
identified. Each has a clear strategy, combining our trademark of
service and efficiency with a mix of market share gains, organic
initiatives and leveraging of the Group's capabilities. The Board
is confident of the Group's future prospects and continued cash
generation and has recommended a final dividend of 6.3p, an
increase of 5.0%, resulting in a full year dividend of 9.2p, an
increase of 4.5%.
CONNECT NEWS & MEDIA
Total News and Media revenue of GBP1,504.7m was down 2.9% and
Adjusted operating profit of GBP43.7m was down 3.3% with the News
Distribution business being the main driver of performance.
Excluding the prior year profits from World Cup sales, Adjusted
operating profit would be up 3.3%.
The News Distribution business has made further progress in the
year, with planned operational efficiencies mitigating the decline
in sales and the GBP2m net investment in organic opportunities.
Revenue was down 3.0% to GBP1,479.3m and on a like for like basis
down 3.4%, comfortably within our medium term strategic forecast of
-3% to -5% per annum. Adjusted operating profit of GBP41.4m was
down 3.5%.
Revenues of newspapers have remained resilient, albeit with
lower cover price inflation this year. The decline in overall
magazine sales has continued to slow from historic trends.
With contracts securing over 85% of our current newspaper and
magazine revenues through to 2019 and beyond, the Group has the
foundation for further efficiencies. A small regional press gain
was made in the year in Liverpool. The Metro distribution areas
were also extended to cover both Liverpool and additional areas of
London.
The cost efficiency programme continues to deliver sustainable
savings with a further GBP5m achieved this year, meeting in full
our GBP20m target over the past three years. We remain confident of
delivering a further GBP5m per annum of cost savings in each of the
next two years.
DMD, our media supply business, performed well, winning a number
of new contracts and making further progress with its digital
offer. Total revenue of GBP25.4m was up 1.0%, with Adjusted
operating profit of GBP2.3m down 0.9%. Highlights of the year
include a new contract with Virgin Atlantic, the renewal of our
Eurostar contract and the launch of a Media Wall concept at Gatwick
airport which has had promising initial results and is on track to
distribute 20 million copies per annum directly to consumers.
News & Media - Strategy for Growth:
Organic diversification remains a key strategic priority for
this division and good progress has been made in all of our
targeted areas. We have extended our relationship with Amazon's
logistics division, demonstrating our ability to make 'last mile'
deliveries to consumers' homes. A trial service in Newcastle and
Brighton launched in January and was quickly extended to
Southampton. We will shortly be expanding into Newport and
Newmarket.
Jack's Beans, our vended coffee offer, has made steady progress
and we now have over 300 outlets across the network with almost
half a million cups of coffee sold since launch. The introduction
of a fixed rental charge for the vending machines has proved
attractive and is supporting further expansion while limiting
risk.
We remain very excited about the opportunities for Pass My
Parcel which uses the existing Smiths News network to create a
twice daily delivery that has the UK's fastest turn-around from
'click to collection'. The service was launched in October 2014
with Amazon as our first client. The initial low volume trial
period demonstrated that the process worked efficiently and that
the consumer demand was there for a fast and convenient local
service. In April 2015, we announced an accelerated investment and
parcel-shop roll-out. Our targets have been achieved in full with
over 3,000 stores live ahead of this year's seasonal peak.
The market for Click & Collect continues to exhibit high
levels of growth, forecasted at a rate of 20% per year for all
Click & Collect options, including in-store, parcel-shops and
lockers (Source: IMRG CollectPlus UK Click & Collect Review
2015). Barclays also recently estimated that the online consumer
market will grow to 1.3 billion parcels by 2018, of which 35% will
be handled through Click & Collect deliveries. Our current
network of over 3,000 stores gives us coverage of an estimated two
thirds of the UK's online consumer traffic. Our aim is to deliver a
national footprint targeting between 5,000 and 6,000 stores.
The launch of a returns service is the next step in our strategy
to grow Pass My Parcel and it is therefore pleasing that we have
reached an agreement in principle with a new client. Industry
experience demonstrates the importance of returns for Click &
Collect volumes, indicating that up to twice the number of returns
parcels are handled by Click & Collect shops for every outward
delivery. We believe that the speed, efficiency, ease of use and
local availability of Pass My Parcel positions the business to
benefit from these current market trends.
As part of the drive to increase our service, stores and client
base, we intend to make a further net GBP2-3m investment in Pass My
Parcel in the current financial year, supporting expansion of the
parcel-shop network and meeting the needs of our clients. We are
committed to investing in this fast growing and innovative market,
and believe it is a significant medium term profit opportunity.
CONNECT BOOKS
(MORE TO FOLLOW) Dow Jones Newswires
October 14, 2015 02:01 ET (06:01 GMT)
The Books Division has made good progress after a challenging
year in 2014. Revenue of GBP190.1m was 1.8% lower than the prior
year, however like for like revenue was up 3.1%. Adjusted operating
profit was up 4.6% to GBP2.6m helped by better margins and a strong
second half, also creating momentum into the current financial
year.
The new management team, led by Justin Adams, has stabilised the
business and set out a clear strategy for sustainable growth. A
comprehensive review of the business has been completed and action
has been taken to restructure the business into four business
units, each with a distinct market focus and a strategy for growth:
Wholesale, Direct to Consumer, Libraries and International.
Progress has also been made in improving the productivity and
service of the warehouse operation.
The wholesale sector remains our largest trade segment and
recent trends have seen some recovery from independent bookshops
and improving sales through online and multiple retailers. The
library markets, however, continue to be challenging with tight
budgets limiting growth and affecting the order levels anticipated
under contract agreements.
In implementing a stronger commercial focus, we have been
rigorous in achieving a more sustainable return through improved
gross margin which is up 130 basis points on last year.
Wordery, one of the UK's largest online independent book shops,
continues to grow with total revenue up 65% to GBP38.3m, an
impressive performance in just three years since its launch. We
have also acquired the minority 49% stake in Wordery for an initial
consideration of GBP5.1m and future potential consideration of a
further GBP3.3m, reflecting the importance of Wordery to the
division's future plans.
Books - Strategy for Growth:
The review of the business has been comprehensive in its
assessment of future opportunities and the actions required to
achieve a sustainable return to growth. Plans have been put in
place to address each of the four business units which will
strengthen the division as a whole and improve our commercial
position in each sector.
Investment in Wordery will be accelerated, improving the
wordery.com website, expanding its international reach and
increasing direct to consumer marketing to grow sales and brand
awareness. This will improve margin and further establish Wordery
as a major online book retailer.
The core wholesale offer will be refocused, with a more rigorous
commercial approach fed into pricing and contract tenders.
Underpinning this is a greater attention to service, targeting
productivity and quality metrics that will improve customer
experience and reduce overall operating costs.
Investment will be made in our academic and digital capability.
The academic market remains large and there is opportunity to win
further share by ensuring tenders demonstrate a more distinct
offering based on the combination of printed and digital services
while being priced appropriately. The launch of Dawsonera 5 (an
online academic portal) in June 2015 was a significant step in
addressing the needs of UK academic libraries improving the quality
of the digital offer to match the service in printed books.
The International segment will see operations being integrated
into a European hub in Amsterdam. There is opportunity for further
growth, through a combination of cost synergies, harmonisation of
operating systems and potential rationalisation of the brands which
are marketed to European customers.
Underpinning these plans, the Norwich warehouse operation has
been reconfigured and now operates as a third party supplier to the
business units. This gives greater visibility of efficiency,
service and cost to serve that can be built into pricing models
which will support growth in net margin. It also means the running
of the large fulfilment operation is given the focus and investment
that is required to support the reconfigured sales and marketing
activity.
CONNECT EDUCATION & CARE
Our Education & Care division has had a challenging year
impacted by a tougher market environment, particularly in the
Secondary education sector. The division has however made good
progress with its strategic initiatives and delivered a solid peak
trading performance. Revenue of GBP65.9m is up 1.7%, with core
revenues up 1.8% from continued strength in Primary up 6.7% and
Early Years up 15.6%.
Adjusted operating profit is broadly flat at GBP7.8m, with
improved gross margin up 100 basis points, and increased costs in
the first half which related to the introduction of the new
warehouse management system. Second half performance showed
encouraging progress with profit up 4.0%, particularly pleasing in
the context of tougher trading conditions. We have recently renewed
the largest framework agreement in Wales, covering 15 out of 22
local authorities. The Care sector was down by 3.2% over the year
but with a steadily improving trend that saw a return to growth in
the last quarter.
Our strategy to develop the leading e-commerce offer is taking
shape; overall web traffic is up by over 20% and we now have 25% of
all school orders being placed online.
Education & Care - Strategy for Growth:
Looking at our growth strategy in more detail, we believe the
overall market will remain in growth at low single digit
percentages. Plans to gain market share remain in place from a
combination of increased share of wallet and expansion into new
territories with focus on service, margin and e-commerce.
Our aim is to be the best and most responsive education supplier
in the market. This means making the shopping and buying experience
as easy as possible - delivering great value to customers and
backing this with excellent service. This will be achieved through
three main initiatives.
To attract customers through 'easy shopping' in what is
otherwise a complex paper-based process. The website has been
developed to better reflect customers' needs with a more
consumer-facing approach rather than traditional B2B websites. A
comprehensive web-based platform and integrated order process with
schools' accounting software will increase customer loyalty and
order frequency, while also being used for marketing to drive
promotional offers. We are targetting to have 50% of all school
orders placed online which, aside from the sales benefits, will
create overhead reductions and drive further profit growth.
The development of our catalogue range and quality own brand
offer is an important part of the value proposition, delivering
value to customers and an improved margin level for the
business.
The drive for sales and margin will be underpinned by 'best in
class' service. Our new warehouse management system is expected to
improve stock control, product availability and the achievement of
'on time and in full' delivery.
Together, these actions will enhance our leading offer in the
market, attracting new business and securing greater share of spend
from existing customers.
CONNECT PARCEL FREIGHT
The performance of the Parcel Freight division, established with
the acquisition of Tuffnells in December 2014, has been excellent.
Revenues of GBP114.4m and Adjusted operating profit of GBP9.7m
reflected strong growth of 19.6% and 10.8% respectively for the
first eight months of ownership compared to the comparable
pre-acquisition period. This strong performance is driven by a
combination of new business wins, an increase in consignments from
existing customers and a rate-card increase which did not adversely
impact our volumes.
Tuffnells has a clear market position with capabilities that set
the business apart from other parcel carriers; in particular the
ability to handle items of irregular dimension and weight and the
long term partnerships with many of the small and medium sized
businesses that form the majority of the customer base. These
characteristics reflect a service that is primarily focused on B2B
customers with premium offerings such as 9.30 am next day delivery
or a guaranteed tailgate service for especially heavy items.
During the period, Tuffnells opened one new site to close the
year at 35 depots. Another new site opened in September 2015 and an
additional site is due to open in October 2015. During the year, we
also extended and invested in five sites and extended our vehicle
fleet by 102 vehicles. To support future growth, we expect to grow
the number of depots from 35 to 40 over the next three years.
Supporting the improvement of the network, the Group has also
committed to upgrading the facilities at all current depots. A
two-year rolling programme commenced in July 2015 to review the
working environment at all our depots, prioritising investments in
infrastructure that will improve capacity, operational efficiency
and on-site safety.
The shortage of qualified drivers is a well-documented industry
issue that limits in-house capability and could be a potential
constraint on the pace of growth. Following the failure of City
Link in December 2014, we were able to recruit over 50 drivers, but
the challenge is ongoing. In response, we have introduced a variety
of incentives to attract new drivers and launched an apprentice
scheme for young people. As a division of Connect Group we can
provide further opportunities for those with the talent and
ambition to develop their careers.
The early integration into the wider Group has gone well, with
the immediate cost synergies being realised and the transition to
new leadership under Chris Ward achieved by the end of August 2015.
The majority of the other members of the senior team remain in
their roles providing continuity and the retention of key skills
and knowledge. Tuffnells is now well placed to continue to drive
growth from the core business as well as looking at cross-Group
opportunities.
Parcel Freight - Strategy for Growth:
Ambitious plans are in place for the Parcel Freight division.
The market is in structural growth, further aided by the trend of
small to medium sized enterprises seeking to outsource
distribution.
(MORE TO FOLLOW) Dow Jones Newswires
October 14, 2015 02:01 ET (06:01 GMT)
Our expertise and focus on irregular by dimension and/ or weight
("IDW") freight strengthens the Tuffnells market position, which is
being further improved by large players moving away from
unconventional IDW freight to more regular parcel delivery.
Our aim is to manage ongoing volume growth while keeping a tight
control of costs and maintaining Tuffnells' service and reputation
for excellence. We currently deliver a 'next day and on time'
delivery for over 96% of our consignments. Network expansion and
fleet optimisation levels will be key to sustaining and improving
this measure and we are investing to ensure we have the number of
depots and vehicle mix and flexible routing planning to support our
leading service.
As highlighted at the time of the acquisition, there are also
clear opportunities to leverage Tuffnells' services across the
Connect Group which we continue to explore.
BOARD SUCCESSION
As reported last year, Dennis Millard, Anthony Cann and John
Worby would each have served as directors for nine years in August
2015. Accordingly, following a thorough process Gary Kennedy was
duly appointed as a non-executive director and Chairman designate
on 2 March 2015 and became Chairman on Dennis Millard's retirement
on 1 May 2015.
The process to identify suitable candidates to succeed Anthony
Cann and John Worby, who are both expected to step down from the
Board during the first half of 2016 is nearing completion and
appointments are expected to be made shortly.
SUMMARY AND OUTLOOK
In summary, the Group delivered a strong performance in 2015
ahead of expectations for the year. Exciting progress has been made
with the Group's organic sales opportunities and the overall growth
strategy is on track. Each division has a focused plan for growth
underpinned by leveraging Connect Group's commercial, operational
and capital management opportunities.
In News & Media, we will continue to operate a lean,
efficient News distribution business, underpinned by long term
contracts and generating good levels of cash generation, while
building Pass My Parcel into a scale business with 5,000 - 6,000
stores, more customers and more services. In the medium term, the
goal is to become a major player in the Click & Collect market,
the contribution from which is expected to offset the future
decline in the core News distribution revenues.
In Books, we will continue to drive profit growth in the next 12
months with a strong focus on Wordery while investing in the
infrastructure of the business. As a result of these ongoing
actions, we will aim to double profitability of the division in the
next three years.
In Education & Care, we are developing a market leading
e-commerce platform, increasing choice and margins through the 'own
brand' offering and maintaining a focus on excellent service
levels. The division is well placed to outperform its market with a
focus on continually improving service, margin and e-commerce
sales; targeting to achieve at least 50% of orders online within
the next three years.
Parcel Freight will be a key driver of growth in the immediate
future, with the Group providing investment to increase capacity
and exploit our unique market position. We aim to continue to grow
ahead of the market through optimising volume growth, keeping a
tight control on costs and delivering a best in class service.
Network expansion will be an important part of this growth and, as
previously indicated, we are planning to reach 40 depots within the
next three years.
Looking ahead, recent trading is in line with current management
expectations and we remain in a good position to build on the
progress made in the year under review. We will continue to invest
to support long term progress and leverage the capabilities of the
Connect Group network, technology and people. As a result, the
Board is confident of the outlook for the current financial year
and beyond.
FINANCIAL REVIEW
GROUP
Adjusted results (1) GBPm 2015 2014 Change
--------------------------- -------- -------- --------
Revenue 1,875.1 1,808.5 3.7%
Gross profit 236.9 199.0 19.0%
Operating costs (173.1) (143.5) (20.6)%
--------------------------- -------- -------- --------
Operating profit 63.8 55.5 14.9%
Net finance costs (7.3) (5.5) (31.8)%
--------------------------- -------- -------- --------
Profit before tax 56.5 50.0 13.0%
Taxation (11.1) (9.3) (20.4)%
--------------------------- -------- -------- --------
Tax rate 19.7% 18.7%
--------------------------- -------- -------- --------
Profit after tax 45.4 40.7 11.3%
--------------------------- -------- -------- --------
Group revenues were GBP1,875.1m, up 3.7% and Group Adjusted
operating profit of GBP63.8m was up 14.9%, driven by the
acquisition of Tuffnells and supported by the performance of our
other divisions.
Net finance costs at GBP7.3m (FY2014: GBP5.5m) were up GBP1.8m
in the year. Net bank interest and related charges were GBP5.8m
(FY2014: GBP4.7m) as a result of higher average borrowings
following the part debt funding of the Tuffnells acquisition. In
addition, finance costs include a charge for fair value movements
in interest rate hedges of GBP0.2m (FY2014: GBP0.4m credit).
Group Adjusted profit before tax of GBP56.5m was up 13.0%.
The underlying tax charge for the year of GBP11.1m represented
an effective tax rate of 19.7%. This was up on prior year of 18.7%
which included a higher level of favourable corporation tax
adjustments. Future effective tax rates are expected to be broadly
in line with standard UK corporation tax rates.
Adjusted profit after tax of GBP45.4m was up 11.3%.
EPS AND DIVIDEND
Adjusted (1) Statutory
-------------------------------------- --------------- -----------------
2015 2014 2015 2014 (5)
-------------------------------------- ------- ------ ------ ---------
Earnings attributable to ordinary
shareholders (GBPm) 45.5 40.5 21.5 34.6
Basic weighted average number of
shares (millions) (5) 230.9 206.4 230.9 206.4
Basic EPS (5) 19.7p 19.6p 9.3p 16.8p
Diluted weighted number of shares
(millions) (5) 238.5 213.4 238.5 213.4
Diluted EPS (5) 19.0p 19.0p 9.0p 16.2 p
Dividend per share (paid & proposed)
(5) 9.2p 8.8p 9.2p 8.8p
Dividend per share (recognised)
(5) 8.8p 8.5p 8.8p 8.5p
-------------------------------------- ------- ------ ------ ---------
(5) Rebased earnings per share and rebased dividends per share
adjust last year reported figures by the rights issue bonus factor
adjustment of 0.9015 following the 2 for 7 rights issue in December
2014.
On an Adjusted basis, earnings attributable to shareholders of
GBP45.5m resulted in an EPS of 19.7p, an increase of 0.1p or 0.5%
on prior year. The increase reflects post-acquisition profits from
Tuffnells and impact of rights issue shares.
Including non-recurring and other items, statutory earnings
attributable to shareholders of GBP21.5m resulted in an EPS of
9.3p, a decrease of 7.5p on prior year.
In December 2014, the Group successfully completed a 2 for 7
Rights Issue, issuing c.54m shares which impact both the weighted
and fully diluted share numbers. The weighted average basic number
of shares issued for the year was 230.9m (FY2014: 206.4m). The
fully diluted number of shares was 238.5m (FY2014: 213.4m).
Fully diluted shares include 4.1m for employee incentive schemes
(FY2014: 5.4m) and 3.5m shares (FY2014: 1.6m) being the weighted
impact of future share schemes and shares allotted in relation to
Tuffnells deferred consideration.
Including the proposed final dividend of 6.3p, the full year
dividend of 9.2p is an increase of 0.4p or 4.5% on the rebased
prior year figure of 8.8p.
The proposed final dividend for the year ended 31 August 2015 of
6.3p is subject to approval by shareholders at the Annual General
Meeting on 4 February 2016 and has not been included as a liability
in these accounts. The proposed dividend, if approved, will be paid
on 12 February 2016 to shareholders on the register at close of
business on 15 January 2016.
NEWS DISTRIBUTION
Adjusted figures (1) - GBPm 2015 2014 Change LFL (6)
----------------------------- -------- -------- ------- --------
Revenue 1,479.3 1,524.8 (3.0%) (3.4%)
Gross profit 120.7 125.1 (3.6%)
Operating costs (79.3) (82.2) 3.5%
----------------------------- -------- -------- ------- --------
Operating profit 41.4 42.9 (3.5%)
----------------------------- -------- -------- ------- --------
Gross margin 8.2% 8.2% -
Cost ratio (5.4%) (5.4%) -
Operating margin 2.8% 2.8% -
----------------------------- -------- -------- ------- --------
News Distribution revenues of GBP1,479.3m were down 3.0%, like
for like revenues were down 3.4% which remains well within our
medium term forecast range of between -3.0% and -5.0%, in part due
to continued resilient newspaper and magazine sales.
Gross margin was in line with the prior year.
The cost ratio was in line with prior year, as a result of total
cost savings of GBP5m. Network savings and continued operational
efficiencies combined to deliver our targeted cost savings for the
year, being partly offset by our investments to grow organic
opportunities, including GBP2m net investment in Pass My
Parcel.
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Adjusted operating profit of GBP41.4m decreased 3.5% on the
prior year, which includes GBP2.9m of profits from World Cup sales
not repeating in FY2015. Operating margin of 2.8% remained flat on
prior year. After excluding the benefit of last year's World Cup,
Adjusted operating profit would be up 3.5%.
MEDIA
Adjusted figures (1) - GBPm 2015 2014 Change LFL (6)
----------------------------- -------- -------- -------- --------
Revenue 25.4 25.1 1.0% (3.1%)
Gross profit 12.5 12.3 1.5%
Operating costs (10.2) (10.0) (2.0%)
----------------------------- -------- -------- -------- --------
Operating profit 2.3 2.3 (0.9%)
----------------------------- -------- -------- -------- --------
Gross margin 49.2% 49.0% 20bps
Cost ratio (40.2%) (39.8%) (40bps)
Operating margin 9.1% 9.2% (10bps)
----------------------------- -------- -------- -------- --------
Media revenues of GBP25.4m were up 1.0% on the prior year, as a
result of winning a number of new contracts and making further
progress with its digital offer. On a like for like basis revenues
were down 3.1%.
Gross margin was up 20bps to 49.2%.
Adjusted operating profit of GBP2.3m decreased 0.9% on the prior
year and resulted in an operating margin of 9.1%, down 10bps.
BOOKS
Adjusted figures (1) - GBPm 2015 2014 Change LFL (6)
----------------------------- -------- -------- --------- --------
Revenues 190.1 193.7 (1.8%) 3.1%
Gross profit 36.4 34.6 5.2%
Operating costs (33.8) (32.1) (5.2%)
----------------------------- -------- -------- --------- --------
Operating profit 2.6 2.5 4.6%
----------------------------- -------- -------- --------- --------
Gross margin 19.2% 17.9% 130bps
Cost ratio (17.8%) (16.6%) (120bps)
Operating margin 1.4% 1.3% 10bps
----------------------------- -------- -------- --------- --------
Books revenue of GBP190.1m was down 1.8%, like for like revenue
was up 3.1% with Wordery continuing its impressive growth - sales
are up from GBP23.2m to GBP38.3m, an increase of 65%. The Wholesale
sector remains our largest trade segment and recent trends have
seen a good recovery from independent booksellers, supported by
improving sales through online retailers and key chains. Library
markets continue to be challenging with tight budgets limiting
growth and affecting the order levels anticipated under contract
agreements.
Gross margin was up 130bps due to a focus on exiting or
renegotiating low margin contracts. The cost ratio declined 120bps
on the prior year, as we continued to invest to grow the business
and protect service.
Adjusted operating profit of GBP2.6m increased 4.6% on the prior
year and resulted in an operating margin of 1.4% up 10bps on last
year.
EDUCATION & CARE
Adjusted figures (1) - GBPm 2015 2014 Change LFL (6)
----------------------------- -------- -------- --------- --------
Revenue 65.9 64.9 1.7% 1.7%
Gross profit 28.0 26.9 4.1%
Operating costs (20.2) (19.1) (5.9%)
----------------------------- -------- -------- --------- --------
Operating profit 7.8 7.8 (0.2%)
----------------------------- -------- -------- --------- --------
Gross margin 42.5% 41.5% 100bps
Cost ratio (30.7%) (29.5%) (120bps)
Operating margin 11.8% 12.0% (20bps)
----------------------------- -------- -------- --------- --------
Education & Care revenues of GBP65.9m were up 1.7% on the
prior year and up 1.7% on a like for like basis. Core revenues in
Education, Care and Early Years increased 1.8% on a like for like
basis, as a result of increased spend with existing customers and
winning new contracts, with particular strength in Primary and
Early Years.
Gross margin was up 100bps as a result of a focus on profitable
sales in core markets, buying synergies and a stronger own brand
mix. The cost ratio declined 120bps as a result of increased costs
in the first half which related to the implementation of the new
warehouse management system.
Adjusted operating profit of GBP7.8m remained broadly flat on
the prior year down 0.2% and resulted in an operating margin of
11.8%, down 20bps.
PARCEL FREIGHT
Adjusted figures (1) - GBPm 2015 2014 Change LFL
---------------------------- ------- ----- ------- ----
Revenue 114.4 -
Gross profit 40.3 -
Operating costs (30.6) -
---------------------------- ------- ----- ------- ----
Operating profit 9.7 -
---------------------------- ------- ----- ------- ----
Gross margin 35.2% -
Cost ratio 26.8% -
Operating margin 8.5% -
---------------------------- ------- ----- ------- ----
Tuffnells Parcels Express, the Group's Parcel Freight division,
was acquired on 19 December 2014 and these results represent the 36
week post acquisition period to 31 August 2015.
Parcel Freight revenues of GBP114.4m were up 19.6% on the same
pre-acquisition period last year. Progress came from a combination
of new business, an increase in consignments from existing
customers, and pricing increases.
Adjusted operating profit of GBP9.7m increased 10.8% on the same
pre-acquisition period last year and resulted in an operating
margin of 8.5%.
The twelve month annualised figures to 31 August 2015 would be
revenue of GBP162.6m and Adjusted operating profit of GBP14.3m.
NON-RECURRING AND OTHER ITEMS (1)
GBPm 2015 2014
----------------------------------------- ------- ------
Network and re-organisation costs (4.4) (3.0)
Acquisition and disposal costs (15.1) (0.9)
(Charge)/release of property provisions (0.1) 0.5
Impairment - (0.5)
Amortisation of acquired intangibles (7.9) (3.0)
Total before finance costs and taxation (27.5) (6.9)
----------------------------------------- ------- ------
Finance costs - -
----------------------------------------- ------- ------
Total before taxation (27.5) (6.9)
----------------------------------------- ------- ------
Taxation 3.5 1.0
----------------------------------------- ------- ------
Total after taxation (24.0) (5.9)
----------------------------------------- ------- ------
Non-recurring and other items were GBP27.5m before tax and
GBP24.0m after tax which was GBP18.1m higher than the prior year,
principally arising from acquisition costs and the associated
increase in amortisation of acquired intangibles from the Tuffnells
acquisition in December 2014.
Network and reorganisation costs of GBP4.4m are predominantly
rationalisation costs to drive efficiency savings in Smiths News.
They also include costs to support the strategic review and
reorganisation of the Books division and one off costs for the
implementation of the warehouse management system in Education
& Care.
Acquisition related costs include GBP3.5m for deal expenses and
cost of integration plus GBP11.6m of deferred consideration for the
acquisition of Tuffnells in December 2014. A further GBP3.1m of
equity raise expenses were charged direct to reserves.
A charge of GBP0.1m was made in relation to vacant property
arising from network reorganisation. In the prior year the Group
released GBP0.5m relating to the historical property reversionary
lease provisions following the settlement of two historical
claims.
Amortisation of acquired intangibles of GBP7.9m has been
incurred relating to acquisitions amortised over their expected
economic lives for which there is no ongoing cash impact. The
amortisation charge has increased compared to the prior year due to
the acquisition of Tuffnells. The net book value of acquired
intangibles of GBP65.4m will be amortised over future years.
Non-recurring and other items are largely non-cash items. The
cash impact for the period was GBP8.2m (FY2014: GBP4.4m).
FREE CASH FLOW (2)
GBPm 2015 2014
----------------------------------------- ------ -------
Adjusted profit before interest and tax 63.8 55.5
Depreciation & amortisation 10.8 8.0
----------------------------------------- ------ -------
Adjusted EBITDA 74.6 63.5
Working capital movements (8.0) 1.2
Capital expenditure (9.2) (10.3)
Net interest paid (5.8) (6.1)
Taxation (8.7) (9.8)
Pension funding (5.4) (4.6)
Other 2.3 3.3
----------------------------------------- ------ -------
Free cash flow 39.8 37.2
----------------------------------------- ------ -------
The Group continued to generate strong free cash flow,
delivering GBP39.8m in FY2015, an increase of GBP2.6m or 7.0% on
prior year.
Increased Adjusted EBITDA is partially offset by a working
capital outflow of GBP8.0m, with last year's working capital
supported by World Cup receipts.
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Capital expenditure was GBP9.2m including investment in organic
initiatives Pass My Parcel and Jack's Beans, as well as the
Warehouse Management system in Education & Care and digital
platform investments in Books.
Net interest paid was lower year on year as a result of
refinancing fees taken in FY2014. Taxation paid was lower, in line
with the declining statutory tax charge.
Cash contributions into pension funds increased year on year
mainly as a result of the defined benefit scheme for Tuffnells.
NET DEBT (4)
GBPm 2015 2014
--------------------------------------------- -------- -------
Opening net debt (93.0) (98.5)
Free cash flow 39.8 37.2
Dividend paid (21.4) (17.7)
Non-recurring items (8.2) (4.4)
Acquisitions and investment in subsidiaries (119.1) (0.3)
Net acquisition financing 52.1 -
Other (3.6) (9.3)
Closing net debt (153.4) (93.0)
--------------------------------------------- -------- -------
As at 31 August 2015 net debt was GBP153.4m (FY2014: GBP93.0m)
including acquisition outflows of GBP119.1m and proceeds from the
issue of shares of GBP52.1m. Net debt is a combination of GBP164.3m
of gross debt and GBP10.9m of cash held in local entities to
finance local operations.
As at 31 August 2015 Net Debt/Adjusted Bank EBITDA ratio was
1.9x up from the prior year end (FY2014: 1.4x), but already showing
a pay down from the point of Tuffnells completion when debt peaked
at GBP159m and 2.0x Net Debt/Adjusted Bank EBITDA.
The Group borrowings are cyclical during the financial year
resulting in average borrowings GBP40m higher than the closing
position and maximum borrowings of GBP196.4m.
The Group completed a refinancing through a syndicate of five
banks in January 2014. The facility was extended in November 2014
to GBP250m of committed facilities to support the acquisition of
Tuffnells. The facility provides funding for over three 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.
We continue to remain comfortably within our banking covenants
with Net debt/Adjusted Bank EBITDA of 1.9x as at 31 August 2015
versus a covenant test of 2.75x. We also remain comfortably within
our other covenants of fixed charge cover, interest cover, and
guarantor cover.
PENSION
The Group operates four defined benefit schemes, all closed to
new entrants and two closed to future accrual.
The Smiths News section of the WH Smith pension trust has assets
of GBP536.8m and an actuarial deficit of GBP23.0m as at June 2013.
As at 31 August 2015 the IAS 19 surplus of GBP135.6m (FY2014:
GBP75.7m) was not recognised in the accounts as the amount
available on a reduction of future contributions is GBPnil. The
Group recognises the present value of the actuarial deficit agreed
schedule of future contributions as a pension liability of GBP13.8m
on the balance sheet (FY2014: GBP17.3m). A March 2015 actuarial
valuation has commenced.
The Consortium defined benefit schemes together have combined
assets of GBP15.9m and a combined actuarial deficit of GBP1.5m as
at December 2013. As at 31 August 2015 the IAS 19 deficit was
GBP3.6m.
The Tuffnells defined benefit scheme, which is open to future
accrual, has assets of GBP10.6m and an actuarial deficit of GBP2.5m
as at April 2013. As at 31 August 2015 the IAS 19 deficit was
GBP0.7m.
As at 31 August 2015, the Group's total net pension liability
recognised on the balance sheet was GBP18.1m (FY2014: GBP21.0m).
The total cash contribution of defined benefit schemes and expenses
in the cash flow statement for FY2015 was GBP5.4m (FY2014:
GBP4.6m).
FUTURE ASSUMPTIONS
Looking forward, key inputs for future modelling include;
Tuffnells, the Parcel Freight division, achieved revenue of
GBP114.4m and Adjusted operating profit of GBP9.7m for the 36 weeks
to 31 August 2015. On a last twelve month basis, this would equate
to GBP162.6m and GBP14.3m respectively.
Pass My Parcel will continue to roll out to more parcel shops,
with more services and more clients in FY2016 and the expected
impact on Smiths News profit is a net cost of GBP2-3m, compared to
the net cost of GBP2m incurred in the year to 31 August 2015.
Employee related costs include an estimate of National Living
Wage increases and auto enrolment pension costs, both of which are
due to rise over the next couple of years. We expect the cost
increase in FY2016 to be approximately GBP1m for employees over 25
years of age and currently paid under GBP7.20 per hour. However, as
wages rise towards GBP9.00 per hour, employer pension contributions
increase and the potential knock-on to other staff whose wage
differential will be eroded is included, we could experience a
gross increase of GBP3m per annum over the medium term before
future mitigating actions. At operating profit level, mitigating
actions include accelerating cost efficiencies to drive staff
productivity and some pricing flexibility outside of Smiths News
long term contracts. At profit after tax level, two already
announced future reductions in the corporate tax rate will further
mitigate the impact on earnings.
Capital investment for FY2016 and FY2017 is likely to be
approximately GBP20m per annum as we continue to invest, largely in
Pass My Parcel and Tuffnells capacity increases to support our
longer term growth opportunities.
Continued focus on cash and capital management is expected to
drive free cash inflow of approximately GBP45m in FY2016, after
increased capital expenditure. Total net debt is expected to fall
by GBP10m in FY2016 after continued shareholder returns, with a
target of GBP100m net debt by August 2018.
The full year impact of the December 2014 rights issue will
continue to flow through the weighted share number in FY2016, with
the estimated number for basic average weighted shares being
245m.
GOING CONCERN
Despite the uncertain economic environment the directors are
satisfied that the Group has sufficient resources to continue in
operation for the foreseeable future, a period of not less than 12
months from the date of this report. Accordingly they continue to
adopt the going concern basis in preparing the condensed financial
statements.
RISKS AND UNCERTAINTIES
The Group has robust risk management processes in place
including the identification and review of its principal risks, an
annual risk appetite assessment and robust monitoring and reporting
of its internal control environment.
The Director's assessment of the Group's principal risks are
aligned to the strategic business planning process, the outputs
from the annual risk appetite exercise and the business/ divisions
internal risk committees. Risks are mapped for impact and
likelihood, ownership assigned, and reviewed quarterly by the Group
Executive and Audit Committee including the appropriateness of
mitigating actions.
The Group's principal risks are detailed below.
Principal Risks Potential Impact Mitigating actions and assurance
Structural market Sales decline in newspaper A consistent pattern and clear
changes are deeper/ and magazines are worse view of market volumes ensures
quicker than predicted, than expected (3%-5% more accurate forecasting and
including print range) and/ or the combines with an expectation
migration to digital. Books market is impacted, of continued declines for newspapers
each resulting in lower and magazines. Management continues
profit and negative to identify efficiencies to
market sentiment related compensate for market declines.
to printed media. Connect Parcel Freight is a
significant contributor toward
the Group, mitigating market
declines for newspapers and
magazines. The Group's organic
strategy including Pass my
Parcel and Jack's Beans, seeks
to further protect the Group
from over exposure to individual
market risks.
---------------------------------- -----------------------------------------
Uncertainty of Reductions in discretionary Annual budgets and quarterly
Government policy spending may impact forecasts set realistic expectations
could adversely sales of newspapers, internally and externally allowing
impact current magazines, parcels for or changing objectives
business performance. and books with reductions to meet short and medium-term
in Government spending financial targets. Management
potentially reducing has a track record of delivering
consumables budgets revenues and efficiencies to
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October 14, 2015 02:01 ET (06:01 GMT)
in schools. compensate for market impacts.
---------------------------------- -----------------------------------------
Major supplier Impact on supply of In Connect News & Media, publishers
or customer loss product or route to typically award 5 year contracts
or consolidation market may erode margin supporting the market structure.
impacts the trading and/ or increase cost Connect Books, Connect Education
relationship. to serve. & Care and Connect Parcel Freight
operate in very fragmented
markets with fewer 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.
---------------------------------- -----------------------------------------
Competitive environment Challenges to sales Market scale and expertise
becomes more challenging. growth and margin performance provides the ability to offer
remain a key risk / value and service to customers.
focus. Current performance Connect Books, Connect Education
and strategic actions & Care and Connect Parcel Freight
have placed the Group monitor and track propositions
in a strong position to ensure competitive positioning,
to meet these challenges able to adjust pricing throughout
although impact remains the period if required.
the same.
---------------------------------- -----------------------------------------
Failure to prevent Customer service and/ External specialist advice
cyber-attacks that or satisfaction could supports a strong central governance
cause disruption be adversely impacted framework including responsibilities
or loss of systems leading to compensation, for reviewing the Group's exposure,
and/ or commercially/ increased costs for measuring effectiveness of
employee sensitive rectification and/or existing controls and recommending
data. increased future investment new controls if required. Controls
requirements. Continued further enhanced through implementing
risk of penalty through a robust Security Governance
breach of regulation Framework, establishing a Vulnerability
such as the Data Protection Management solution and strengthening
Act. of the Security Architecture
and process landscape.
---------------------------------- -----------------------------------------
Failure to deliver Sales and profit expected Financial and operational metrics
business plan and from acquisitions may are considered along with risk
financial returns not be met and/ or assessments and impact on management
on recent acquisitions. reputation of the Group before decisions are made.
and support for future Performance to plans are reviewed
acquisitions are challenged. monthly with post investment
Cultural change for analysis producing a more thorough
acquisitions results review of each acquisition
in reduced performance within 12 months after completion.
and financial returns. Detailed integration process,
governance and support framework
ensures effective and timely
adoption of standards and process
into recent acquisitions.
---------------------------------- -----------------------------------------
Legislative changes Increased number of Contractors have clearly articulated
or interpretation employees or cost per agreements defining tasks they
impacting the engagement employee increases are contracted to provide to
of employees and the cost base and potentially News with annually set commercial
delivery contractors creates greater redundancy terms. Minimum number of employees
resulting in an costs from future efficiency are directly impacted by living
increase in the programmes. wage, however knock-on impact
number of employees across grades will be monitored.
and costs. Regular checks are carried
out by Internal Audit across
the News network ensures understanding
and compliance.
---------------------------------- -----------------------------------------
Failure by DMD Costs could increase External security advice supports
to prevent breach through additional internal staff to review DMD's
of airside security security requirements exposure, measure effectiveness
causes disruption and/ or penalties with of controls and recommend new
or loss. severe reputational controls if required. In addition,
damage potentially insurance is taken out to cover
causing the loss of the Group from major risks.
contracts for our media
business.
---------------------------------- -----------------------------------------
Increasing reliance Trading capability, Investment is made by the organisation
on centralised customer experience to provide Disaster Recovery
system solutions, and sales/ margin performance capability across the Group
complex operations impacted through inability for all essential systems.
and networks are to operate due to systems External expertise is used
not supported by outages or location to provide guidance and a Disaster
sufficiently robust access. Recovery facility. In addition,
Business Continuity a programme led centrally ensures
Planning & Disaster Business Continuity Planning
Recovery solutions procedures and standards are
to prevent disruption embedded across the business
outside of expected divisions.
tolerances.
---------------------------------- -----------------------------------------
Loss of key executives Loss of key skills Performance and capability
and subsequent and leadership impacts management processes in place,
loss of knowledge the capability of the reviewed by the Remuneration
and skills in established Group to deliver its Committee and Group Executive
and recently acquired strategic goals. Committee. Succession planning
businesses impacts for critical roles and development
current and future plans for key individuals reviewed
business performance. by the Nominations Committee.
Integration plans in place
to support key executives within
(MORE TO FOLLOW) Dow Jones Newswires
October 14, 2015 02:01 ET (06:01 GMT)
Connect Parcel Freight.
---------------------------------- -----------------------------------------
3 year strategic Inability of warehousing/ FY2015 Business Planning process
business plan and operational/ IT and has considered this risk and
scale of business support systems to has ensured appropriate investment
change at risk meet growth expectations is budgeted to ensure growth
from constraints of the Group, creates targets are achieved, including
on capacity of poor customer experience, a capital expenditure budget
divisional premises increased investment of circa GBP20m.
and equipment/ costs and reduced profitability.
systems to meet
growth plans, leading
to increased investment
costs and reduced
profitability.
---------------------------------- -----------------------------------------
Effort and/ or Management's focus Key imperatives identified
specialist skills on current business for organisational and cultural
required to complete operations and performance change, leading to investment
organisational is distracted by organisational in resources and skills that
change are missing change and new initiatives. are required to deliver the
from new structures/teams, Management become overstretched successful integration/ development
thus increasing and demotivated by of new businesses and business
demand on existing demands of the Group critical initiatives, including
management skills and exit, taking valuable investment in expert skills
and impacting current skills and knowledge in change management and project
business performance. with them. management.
---------------------------------- -----------------------------------------
RESPONSIBILITY STATEMENT
The responsibility statement below has been prepared in
connection with the Group's full annual report for the year ending
31 August 2015. Certain parts thereof are not included within this
announcement.
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with IFRSs as
adopted by the European Union, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
company and the undertakings included in the consolidation taken as
a whole;
- the strategic report includes a fair review of the development
and performance of the business and the position of the company and
the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and
uncertainties they face; and
- the annual report and financial statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the company's performance,
business model and strategy.
The responsibility statement was approved by the board of
directors on 14 October 2015 and is signed on its behalf by:
Mark Cashmore Nick Gresham
Group Chief Executive Chief Financial Officer
Connect Group PLC
Group Income Statement for the year ended 31 August 2015
GBPm 2015 2014
------------------------ ---- -------------------------------- --------------------------------
Note Adjusted Non-recurring Total Adjusted Non-recurring Total
(1) and other (1) and other
items items
------------------------ ---- -------- ------------- ------- -------- ------------- -------
Continuing operations
Revenue 2 1,875.1 - 1,875.1 1,808.5 - 1,808.5
------------------------ ---- -------- ------------- ------- -------- ------------- -------
Operating profit 2,3 63.8 (27.5) 36.3 55.5 (6.9) 48.6
Investment revenue 6 - - - 0.4 - 0.4
Finance costs 6 (7.3) - (7.3) (5.9) - (5.9)
------------------------ ---- -------- ------------- ------- -------- ------------- -------
Profit before tax 56.5 (27.5) 29.0 50.0 (6.9) 43.1
Income tax expense 7 (11.1) 3.5 (7.6) (9.3) 1.0 (8.3)
------------------------ ---- -------- ------------- ------- -------- ------------- -------
Profit for the
year 45.4 (24.0) 21.4 40.7 (5.9) 34.8
------------------------ ---- -------- ------------- ------- -------- ------------- -------
Profit attributable
to equity shareholders 45.5 (24.0) 21.5 40.5 (5.9) 34.6
------------------------ ---- -------- ------------- ------- -------- ------------- -------
(Loss)/ Profit
attributable to
non-controlling
interest (0.1) - (0.1) 0.2 - 0.2
------------------------ ---- -------- ------------- ------- -------- ------------- -------
45.4 (24.0) 21.4 40.7 (5.9) 34.8
------------------------ ---- -------- ------------- ------- -------- ------------- -------
Earnings per share
Basic 919.7p 9.3p 19.6p 16.8p
Diluted 919.0p 9.0p 19.0p 16.2p
Equity dividends
per share (paid
and proposed) 8 9.2p 8.8p
------------------- ----- ---- ----- -----
Group Statement of Comprehensive Income for the year ended 31
August 2015
GBPm Note 2015 2014
-------------------------------------------------- ---- ------ ------
Items that will not be reclassified to
the Group Income Statement
Actuarial gain on defined benefit pension
scheme 5 53.5 14.8
Impact of IFRIC 14 on defined benefit
pension scheme 5 (52.8) (16.2)
Tax relating to components of other comprehensive
income that will not be reclassified 7 (0.1) 0.1
-------------------------------------------------- ---- ------ ------
0.6 (1.3)
Items that may be reclassified to the
Group Income Statement
(Loss)/ gain on cash flow hedges (0.6) 0.6
Currency translation differences (0.1) (0.2)
Tax relating to components of other comprehensive
income that may be reclassified 7 - (0.1)
-------------------------------------------------- ---- ------ ------
(0.7) 0.3
Other comprehensive income for the year (0.1) (1.0)
Profit for the year 21.4 34.8
-------------------------------------------------- ---- ------ ------
Total comprehensive income for the year 21.3 33.8
Total comprehensive income attributable
to equity shareholders 21.4 33.6
Total comprehensive income attributable
to non-controlling interest (0.1) 0.2
-------------------------------------------------- ---- ------ ------
Group Balance Sheet at 31 August 2015
GBPm Note 2015 2014
---------------------------------------- ---- ------- -------
Non-current assets
Intangible assets 10 174.8 65.7
Property, plant and equipment 44.6 29.0
Interest in jointly controlled entities 4.5 4.3
Derivative financial instruments - 0.6
Retirement benefit assets 5 0.4 0.3
Deferred tax assets 7.5 7.2
231.8 107.1
---------------------------------------- ---- ------- -------
Current assets
Inventories 42.0 45.3
Trade and other receivables 147.3 128.1
Cash and cash equivalents 13 10.9 20.4
200.2 193.8
---------------------------------------- ---- ------- -------
Total assets 432.0 300.9
---------------------------------------- ---- ------- -------
Current liabilities
Trade and other payables (203.5) (192.3)
Current tax liabilities (5.4) (6.1)
Bank loans and other borrowings 13 (56.5) (60.9)
Obligations under finance leases (2.9) (0.9)
Retirement benefit obligations 5 (3.3) (4.1)
Provisions 14 (10.4) (3.4)
(282.0) (267.7)
---------------------------------------- ---- ------- -------
Non-current liabilities
Retirement benefit obligations 5 (15.2) (17.2)
Bank loans and other borrowings 13 (98.4) (48.4)
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Obligations under finance leases (6.5) (3.2)
Derivative financial instruments (0.2) -
Other non-current liabilities (1.0) (1.4)
Deferred tax liabilities (13.5) (3.2)
Non-current provisions 14 (6.0) (1.9)
---------------------------------------- ---- ------- -------
(140.8) (75.3)
---------------------------------------- ---- ------- -------
Total liabilities (422.8) (343.0)
---------------------------------------- ---- ------- -------
Total net assets/ (liabilities) 9.2 (42.1)
---------------------------------------- ---- ------- -------
Group Balance Sheet at 31 August 2015 (continued)
GBPm Note 2015 2014
------------------------------------ ----- ------- -------
Equity
Called up share capital 17(a) 12.2 9.5
Share premium account 17(c) 55.2 5.3
Demerger reserve 18(a) (280.1) (280.1)
Own shares reserve 18(b) (4.1) (5.2)
Hedging & translation reserve 18(c) (0.5) (0.3)
Retained earnings 226.5 228.5
------------------------------------ ----- ------- -------
Total shareholders' equity 9.2 (42.3)
------------------------------------ ----- ------- -------
Non-controlling interests in equity - 0.2
------------------------------------ ----- ------- -------
Total equity 9.2 (42.1)
------------------------------------ ----- ------- -------
The accounts were approved by the Board of Directors and
authorised for issue on 14 October 2015 and were signed on its
behalf by:
Registered number - 05195191
Mark Cashmore Nick Gresham
Group Chief Executive Chief Financial Officer
Group Statement of Changes in Equity for the year ended 31
August 2015
GBPm Share Share Demerger Own shares Hedging Retained Non-controlling Total
capital Premium reserve reserve & earnings interests
account translation in equity
reserve
------------------ --------- --------- --------- ----------- ------------- ---------- ---------------- -------
Balance at 31
August 2013 9.2 1.2 (280.1) (1.5) (0.6) 214.9 - (56.9)
Profit for the
year - - - - - 34.6 0.2 34.8
Gain on cash
flow hedges - - - - 0.6 - - 0.6
Actuarial gain
on defined
benefit
pension scheme - - - - - 14.8 - 14.8
Impact of IFRIC
14 on defined
benefit pension
scheme - - - - - (16.2) - (16.2)
Currency
translation
differences - - - - (0.2) - - (0.2)
Tax relating
to components
of other
comprehensive
income - - - - (0.1) 0.1 - -
------------------ --------- --------- --------- ----------- ------------- ---------- ---------------- -------
Total
comprehensive
income for the
year - - - - 0.3 33.3 0.2 33.8
Issue of share
capital 0.3 4.1 - - - - - 4.4
Purchase of
own shares - - - (6.3) - - - (6.3)
Dividends paid - - - - - (17.7) - (17.7)
Employee share
schemes - - - 2.6 - (2.6) - -
Recognition
of share based
payments - - - - - 0.6 - 0.6
Balance at 31
August 2014 9.5 5.3 (280.1) (5.2) (0.3) 228.5 0.2 (42.1)
------------------ --------- --------- --------- ----------- ------------- ---------- ---------------- -------
Profit/ (loss)
for the year - - - - - 21.5 (0.1) 21.4
Loss on cash
flow hedges - - - - (0.6) - - (0.6)
Actuarial gain
on defined
benefit
pension scheme - - - - - 53.5 - 53.5
Impact of IFRIC
14 on defined
benefit pension
scheme - - - - - (52.8) - (52.8)
Currency
translation
differences - - - - (0.1) - - (0.1)
Tax relating
to components
of other
comprehensive
income - - - - - (0.1) - (0.1)
------------------ --------- --------- --------- ----------- ------------- ---------- ---------------- -------
Total
comprehensive
income for the
year - - - - (0.7) 22.1 (0.1) 21.3
Issue of share
capital 2.7 49.9 - - - - - 52.6
Reclassification
between reserves - - - - 0.5 (0.5) - -
Purchase of
own shares - - - (4.2) - - - (4.2)
Dividends paid - - - - - (21.4) - (21.4)
Employee share
schemes - - - 5.3 - (5.3) - -
Adjustment
arising
from change
in NCI - - - - - (5.1) (0.1) (5.2)
Recognition
of share based
payments net
of tax - - - - - 8.2 - 8.2
Balance at 31
August 2015 12.2 55.2 (280.1) (4.1) (0.5) 226.5 - 9.2
------------------ --------- --------- --------- ----------- ------------- ---------- ---------------- -------
Group Cash Flow Statement for the year ended 31 August 2015
GBPm Note 2015 2014
--------------------------------------------- ---- ------- ------
Net cash inflow from operating activities 16 46.5 47.4
--------------------------------------------- ---- ------- ------
Investing activities
Dividends received from associates 0.2 0.2
Acquisitions 11 (105.7) (0.3)
Purchase of property, plant and equipment (4.7) (6.8)
Purchase of intangible assets (4.5) (3.5)
Net cash used in investing activities (114.7) (10.4)
--------------------------------------------- ---- ------- ------
Financing activities
Interest paid (5.8) (6.1)
Dividend paid (21.4) (17.7)
Purchase of equity in subsidiary 12 (5.1) -
Repayments of obligations under finance
leases (2.9) (1.3)
Proceeds on issue of shares 52.6 0.7
Purchase of shares for Employee Benefit
Trust (4.2) (6.3)
Repayments of borrowings - (34.0)
New bank loans raised 50.0 50.0
Decrease in borrowings (4.4) (11.9)
Net cash from/(used in) financing activities 58.8 (26.6)
--------------------------------------------- ---- ------- ------
Net (decrease)/ increase in cash and
cash equivalents (9.4) 10.4
Effect of foreign exchange rate changes (0.1) (0.1)
--------------------------------------------- ---- ------- ------
(9.5) 10.3
Opening net cash and cash equivalents 20.4 10.1
Closing net cash and cash equivalents 13 10.9 20.4
--------------------------------------------- ---- ------- ------
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Analysis of net debt
GBPm Note 2015 2014
-------------------------- ---- ------- ------
Cash and cash equivalents 13 10.9 20.4
Current borrowings 13 (56.5) (60.9)
Non-current borrowings 13 (98.4) (48.4)
-------------------------- ---- ------- ------
Net borrowings (144.0) (88.9)
Finance lease liabilities (9.4) (4.1)
Net debt (153.4) (93.0)
-------------------------- ---- ------- ------
Notes to the accounts
1. Basis of preparation
The Results are based on the Company's financial statements
which are prepared in accordance with International Financial
Reporting Standards (IFRS) adopted for use in the European Union
(EU) and therefore comply with Article 4 of the EU IAS legislation
and with those parts of the Companies Act 2006 that are applicable
to companies reporting under IFRS.
There have been no significant changes in accounting policies
from those set out in the accounting policies set out in the
accounting policies section of the Connect Group PLC Annual Report
and Accounts 2014. The accounting policies have been applied
consistently throughout the years ended 31 August 2014 and 31
August 2015.
The following Standards with an effective date of 1 January 2014
have been adopted without any significant impact on the amounts
reported in these financial statements:
IFRS 10 'Consolidated Financial Statements'
IFRS 10, IFRS 12 and IAS 27 (amended) 'Investment Entities'
IFRS 11 'Joint Arrangements'
IAS 12 (amended) 'Deferred Tax: Recovery of Underlying
Assets'
IAS 27 (revised) 'Separate Financial Statements'
IAS 28 (revised) 'Investments in Associates and Joint
Ventures'
IAS 32 (amended) 'Offsetting Financial Assets and Financial
Liabilities'
IAS 39 (amended) 'Novation of Derivatives and Continuation of
Hedge Accounting'.
The financial information set out in these results does not
constitute the Group's statutory accounts for the years ended 31
August 2015 and 31 August 2014 but is derived from those accounts.
Statutory accounts for Connect Group PLC for the year ended 31
August 2014 have been delivered to the Registrar of Companies and
those for the year ended 31 August 2015 will be delivered following
the Company's Annual General Meeting. The auditor's reports on the
2014 and the 2015 accounts were unqualified, did not draw attention
to any matters by way of emphasis without qualifying their report
and did not contain a statement under section 498(2) or (3) of the
Companies Act 2006.
The Company intends to publish the Annual Report and Accounts
that comply with IFRSs. The Annual Report and Accounts will be
available for shareholders in December 2015 at
www.connectgroupplc.com.
These results were approved by the Board of Directors on 14
October 2015.
2. Segmental analysis
In accordance with IFRS 8 'Operating Segments', Group management
has identified its operating segments. The performance of these
operating segments is reviewed, on a monthly basis, by the Board.
The Board monitors the tangible, intangible and financial assets
attributable to each segment to determine the allocation of
resources and the performance of each segment.
These operating segments are:
Connect News & Media: The UK market leading distributor of newspapers
News Distribution (also and magazines to 30,000 retailers across
referred to as Smiths England and Wales from 42 distribution
News) centres.
Connect News & Media: A supplier of newspaper and magazines to
Media airlines and a provider of inflight services.
(also referred to as
DMD)
-----------------------------------------------------
Connect Books A leading UK distributor of physical and
(also referred to as digital books to high street and on-line
Bertrams, Dawson Books retailers, public libraries, academic institutions
and Wordery) and direct to consumers with a strong international
presence, supplying 100 countries.
-----------------------------------------------------
Connect Education and A leading distributor of education and
Care care consumable products servicing 30,000
(also referred to as customers across the UK.
The Consortium)
-----------------------------------------------------
Connect Parcel Freight A leading provider of next day B2B delivery
(also referred to as of mixed parcel freight consignments.
Tuffnells)
-----------------------------------------------------
The following is an analysis of the Group's revenue and results
by reportable segment:
Revenue
----------------------------- ------------------
GBPm 2015 2014
----------------------------- -------- --------
Connect News & Media: News
Distribution 1,479.3 1,524.8
Connect News & Media: Media 25.4 25.1
Connect Books 190.1 193.7
Connect Education and Care 65.9 64.9
Connect Parcel Freight 114.4 -
Total Group 1,875.1 1,808.5
------------------------------ -------- --------
The accounting policies of the reportable segments are the same
as the Group's accounting policies.
2015 2014
--------------------------- --------------------------------------- ----------------------------------------
GBPm Adjusted Non-recurring Operating Adjusted Non-recurring Statutory
operating and other profit operating and other operating
profit items profit items profit
--------------------------- ----------- -------------- ---------- ----------- -------------- -----------
Connect News &
Media: News Distribution 41.4 (18.2) 23.2 42.9 (2.1) 40.8
Connect News &
Media: Media 2.3 (0.4) 1.9 2.3 (0.3) 2.0
Connect Books 2.6 (2.2) 0.4 2.5 (2.5) -
Connect Education
and Care 7.8 (2.1) 5.7 7.8 (2.0) 5.8
Connect Parcel
Freight 9.7 (4.6) 5.1 - - -
Total group 63.8 (27.5) 36.3 55.5 (6.9) 48.6
---------------------------- ----------- -------------- ---------- ----------- -------------- -----------
Net finance expense (7.3) (5.5)
---------------------------- ----------- -------------- ---------- ----------- -------------- -----------
Profit before taxation 29.0 43.1
---------------------------- ----------- -------------- ---------- ----------- -------------- -----------
Information about major customers
Included in revenues arising from newspaper and magazine
wholesaling are revenues of approximately GBP155.1m (2014:
GBP162.1m) which arose from sales to the Group's largest customer.
No other single customer contributed 8% or more of the Group's
revenue in either 2015 or 2014.
Segment assets and liabilities
Assets Liabilities Net assets/(liabilities)
------------------------ -------------- ------------------ ---------------------------
GBPm 2015 2014 2015 2014 2015 2014
------------------------ ------ ------ -------- -------- ------------- ------------
Connect News & Media:
News 93.1 144.5 (293.0) (261.1) (199.9) (116.6)
Connect News & Media:
Media 18.9 18.8 (7.2) (7.2) 11.7 11.6
Connect Books 79.9 79.8 (63.2) (56.9) 16.7 22.9
Connect Education and
Care 63.6 57.8 (18.9) (17.8) 44.7 40.0
Connect Parcel Freight 176.5 - (40.5) - 136.0 -
Consolidated assets/
(liabilities) 432.0 300.9 (422.8) (343.0) 9.2 (42.1)
------------------------ ------ ------ -------- -------- ------------- ------------
Segment depreciation, amortisation and non-current asset
additions
Depreciation Amortisation Additions to
non-current assets
----------------------- --------------- --------------- ----------------------
GBPm 2015 2014 2015 2014 2015 2014
----------------------- ------- ------ -------- ----- ---------- ----------
Connect News & Media:
News (4.2) (4.0) (1.8) (1.4) 8.0 7.7
Connect News & Media:
Media (0.1) (0.1) (0.4) (0.3) 0.2 -
Connect Books (0.7) (0.6) (2.5) (2.4) 1.9 2.5
Connect Education and
Care (0.5) (0.5) (2.0) (1.7) 1.8 1.2
Connect Parcel Freight (1.8) - (4.7) - 131.8 -
Consolidated total (7.3) (5.2) (11.4) (5.8) 143.7 11.4
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----------------------- ------- ------ -------- ----- ---------- ----------
Additions to non-current assets include intangible assets and
property, plant and equipment. The intangible assets (GBP110.2m)
and fair value of the property, plant and equipment (GBP18.6m)
acquired on the acquisition of Tuffnells are included within
Connect Parcel Freight.
Geographical analysis
GBPm Revenue by destination Non-current assets
by location of operation
2015 2014 2015 2014
-------------------- ------------ ----------- --------------- -----------
United Kingdom 1,791.9 1,729.9 223.7 98.6
Europe 48.8 51.2 0.2 0.2
Rest of World 34.4 27.4 - -
--------------------- ------------ ----------- --------------- -----------
Consolidated total 1,875.1 1,808.5 223.9 98.8
--------------------- ------------ ----------- --------------- -----------
Non-current assets in the table above exclude retirement benefit
assets, deferred tax assets and derivative financial
instruments
3. Operating profit
The Group's results are analysed as follows:
GBPm 2015 2014
Note Adjusted Non-recurring Total Adjusted Non-recurring Total
and other and other
items items
-------------------------- ---- --------- ------------- --------- --------- ------------- ---------
Revenue 1,875.1 - 1,875.1 1,808.5 - 1,808.5
-------------------------- ---- --------- ------------- --------- --------- ------------- ---------
Cost of inventories
recognised as an
expense (1,562.1) - (1,562.1) (1,607.7) - (1,607.7)
Write down of inventories
recognised as an
expense (0.1) - (0.1) (0.6) - (0.6)
Other cost of sales (76.0) - (76.0) (1.2) - (1.2)
-------------------------- ---- --------- ------------- --------- --------- ------------- ---------
Cost of sales (1,638.2) - (1,638.2) (1,609.5) - (1,609.5)
-------------------------- ---- --------- ------------- --------- --------- ------------- ---------
Gross profit 236.9 - 236.9 199.0 - 199.0
-------------------------- ---- --------- ------------- --------- --------- ------------- ---------
Distribution costs (92.3) - (92.3) (73.9) - (73.9)
-------------------------- ---- --------- ------------- --------- --------- ------------- ---------
Administrative
expenses (76.3) (12.9) (89.2) (65.6) (3.4) (69.0)
Share-based payment
expense (1.3) (6.7) (8.0) (1.5) - (1.5)
Amortisation of
intangibles 10 (3.5) (7.9) (11.4) (2.8) (3.0) (5.8)
Impairment 10 - - - - (0.5) (0.5)
Administrative
expenses (81.1) (27.5) (108.6) (69.9) (6.9) (76.8)
-------------------------- ---- --------- ------------- --------- --------- ------------- ---------
Share of profits
from jointly controlled
entities 0.3 - 0.3 0.3 - 0.3
-------------------------- ---- --------- ------------- --------- --------- ------------- ---------
Operating profit 63.8 (27.5) 36.3 55.5 (6.9) 48.6
-------------------------- ---- --------- ------------- --------- --------- ------------- ---------
The operating profit is stated after charging/ (crediting):
GBPm Note 2015 2014
--------------------------------------------- ----- ------ ------
Depreciation on property, plant & equipment 7.3 5.2
Amortisation of intangible assets 10 11.4 5.8
Operating lease charges
* occupied land and buildings 9.3 8.5
* equipment and vehicles 12.1 0.8
Operating lease rental income - land
and buildings (0.1) (0.1)
Loss on disposal of fixed assets 0.2 -
Staff costs 136.5 93.4
--------------------------------------------- ----- ------ ------
Included in administrative expenses are amounts payable to
Deloitte LLP and their associates by the Company and its subsidiary
undertakings in respect of audit and non-audit services which are
as follows:
GBPm 2015 2014
--------------------------------------------- ----- -----
Fees payable to the Company's auditor for
the audit of the Company's annual accounts 0.2 0.1
Fees payable to the Company's auditor for
the audit of the Company's subsidiaries 0.2 0.2
--------------------------------------------- ----- -----
Total audit fees 0.4 0.3
Other services 0.2 0.1
--------------------------------------------- ----- -----
Total non-audit fees 0.2 0.1
--------------------------------------------- ----- -----
Total fees 0.6 0.4
--------------------------------------------- ----- -----
In the current year the Group incurred GBP0.2m of non-audit fees
with Deloitte relating to acquisition/ transaction support,
remuneration advice and other advisory services. In the prior year
the Group incurred GBP0.1m of non-audit fees with Deloitte relating
to remuneration advice and other advisory services.
4. Non-recurring and other items
GBPm 2015 2014
-------------------------------------- ----- ------- ------
Network re-organisation costs (a) (4.4) (3.0)
Acquisition and disposal costs (b) (15.1) (0.9)
(Charge)/release of property
provisions (c) (0.1) 0.5
Impairment (d) - (0.5)
Amortisation of acquired intangibles (e) (7.9) (3.0)
Total before taxation (27.5) (6.9)
---------------------------------------------- ------- ------
Income tax expense 3.5 1.0
---------------------------------------------- ------- ------
Total after taxation (24.0) (5.9)
---------------------------------------------- ------- ------
The Group incurred a total of GBP24.0m (2014: GBP5.9m) in
non-recurring and other items, after tax.
This comprises:
(a) Network re-organisation costs
Network and reorganisation costs of GBP4.4m are predominantly
rationalisation costs to drive efficiency savings in Smiths News.
They also include costs to support the strategic review and
reorganisation of the Books division and one off costs for the
implementation of the warehouse management system in Education
& Care.
(b) Acquisition and disposal costs
Acquisition related costs for the Tuffnells acquisition include
GBP3.5m for deal expenses and cost of integration plus GBP11.6m of
deferred contingent consideration which is payable conditional on
the financial performance and on continued employment of former
owners. A further GBP3.1m of equity raise expenses were charged
direct to reserves. Details of the acquisition are included in note
11. In the prior year acquisition and disposal costs of GBP0.9m
relate primarily to reviewing and targeting future acquisitions,
together with the final apportionment of deferred consideration
from the acquisition of The Consortium in April 2012 and costs
associated with the acquisition of Martin Lavell in September
2013.
(c) (Charge)/ release of property provisions
A charge of GBP0.1m was made in relation to vacant property
arising from network reorganisation. In the prior year the Group
released GBP0.5m relating to the historical property reversionary
lease provisions following the settlement of two historical
claims.
(d) Impairment
No impairment was recognised during the year. During the year to
31 August 2014 the carrying value of acquired intangibles from the
acquisition of Blackwell customer relationships in the Books
division was reviewed and as a result of lower than anticipated
sales conversion an amount of GBP0.5m was written off.
(e) Amortisation of acquired intangibles
Amortisation of acquired intangibles of GBP7.9m (FY2014:
GBP3.0m) has been incurred relating to acquisitions amortised over
their expected economic lives for which there is no ongoing cash
impact. The amortisation charge has increased compared to the prior
year due to the acquisition of Tuffnells. The net book value of
acquired intangibles of GBP65.4m will be amortised over future
years.
5. Retirement benefit obligation
Defined benefit pension schemes
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The Group now operates four defined benefit schemes, of which
the WH Smith Pension Trust (the 'Pension Trust') represents 93% of
the total obligation at 31 August 2015. As part of the acquisition
of the Consortium, the Group acquired the assets and liabilities in
respect of two other defined benefit schemes (the 'Consortium CARE'
and 'Platinum' schemes). The 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 Group's defined benefit pension plans are final salary
pension plans, which provide benefits to members in the form of a
guaranteed level of pension payable for life. The level of benefits
provided depends on members' length of service and their salary in
the final years leading up to retirement. Benefits are paid to
members from trustee-administered funds. The trustees are
responsible for ensuring that the plan is sufficiently funded to
meet current and future benefit payments. If investment experience
is worse than expected, the Group's obligations are increased.
The trustees must agree a funding plan with the sponsoring
company such that any funding shortfall is expected to be met by
additional contributions and investment performance. In order to
assess the level of contributions required, triennial valuations
are carried out with plan's obligations measured using prudent
assumptions (relative to those used to measure accounting
liabilities). The trustees' other duties include managing the
investment of plan assets, administration of plan benefits and
exercising of discretionary powers.
The amounts recognised in the balance sheet are as follows:
GBPm WH Smith Consortium Platinum Tuffnells 2015 WH Smith Consortium Platinum 2014
Pension CARE Parcels Pension CARE
Trust Express Trust
---------------- --------- ----------- --------- ---------- -------- --------- ----------- --------- --------
Present value
of defined
benefit
obligation (401.2) (18.7) (0.8) (11.3) (432.0) (431.6) (18.4) (0.6) (450.6)
Fair value
of assets 536.8 14.7 1.2 10.6 563.3 507.3 14.4 0.9 522.6
---------------- --------- ----------- --------- ---------- -------- --------- ----------- --------- --------
Net surplus/
(loss) 135.6 (4.0) 0.4 (0.7) 131.3 75.7 (4.0) 0.3 72.0
Amounts not
recognised
due to asset
limit (135.6) - - - (135.6) (75.7) - - (75.7)
---------------- --------- ----------- --------- ---------- -------- --------- ----------- --------- --------
- (4.0) 0.4 (0.7) (4.3) - (4.0) 0.3 (3.7)
Additional
liability
recognised
due to minimum
funding
requirements (13.8) - - - (13.8) (17.3) - - (17.3)
---------------- --------- ----------- --------- ---------- -------- --------- ----------- --------- --------
Pension
liability (13.8) (4.0) (0.7) (18.5) (17.3) (4.0) - (21.3)
---------------- --------- ----------- --------- ---------- -------- --------- ----------- --------- --------
Pension asset - - 0.4 - 0.4 - - 0.3 0.3
---------------- --------- ----------- --------- ---------- -------- --------- ----------- --------- --------
The primary defined benefit pension scheme (the Smiths News
Section of the WH Smith Pension Trust) has an IAS19 surplus of
GBP135.6m at 31 August 2015 (2014:GBP75.7m surplus) which the Group
does not recognise in the accounts as the investment policy being
used means that the amount available on a reduction of future
contributions is expected to be GBPnil (2014: GBPnil). The
valuation of the defined benefit schemes for the IAS 19 disclosures
have been carried out by independent qualified actuaries based on
updating the most recent funding valuations of the respective
schemes, adjusted as appropriate for membership experience and
changes in the actuarial assumptions.
The 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.
WH Smith Pension Trust
The process to complete the triennial valuation as at 31 March
2015 is underway and is scheduled to be reported during 2016. The
actuarial valuation of the Smiths News section of the WH Smith
Pension Trust, at June 2013 was a deficit of GBP23.0m. A cash
contribution of GBP4.1m was made during the year to reduce the
funding shortfall.
Future cash contributions by the Group to the pension trustees
and investment manager total GBP4.1m per annum through to March
2019. The Group recognises the present value of these agreed
contributions as a pension liability of GBP13.8m (2014:
GBP17.3m).
Other defined benefit schemes
For the Consortium CARE and Platinum schemes, the Group
contributed GBP0.6m in 2015. The funding valuation of the
Consortium CARE scheme as at 31 December 2013 was a deficit of
GBP1.5m. 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 2013 was an agreed
liability of GBP2.5m (1 April 2010: GBP0.15m). Guaranteed Minimum
Pension ("GMP") equalisation is expected to lead to an increase in
scheme liabilities at some future date on the Consortium Care and
the Tuffnells Parcels Express scheme.
The weighted average duration of the schemes is 17 years for the
Pension Trust, 20 years for the Consortium Care scheme, 29 years
for the Platinum scheme and 21 years for the Tuffnells Parcels
Express scheme.
The principal long-term assumptions used to calculate scheme
liabilities on all Group schemes are:
% p.a. 2015 2014
-------------------------------- -------------- --------------
Discount rate 3.80 3.85
Inflation assumptions - CPI 2.25 2.25
Inflation assumptions - RPI 3.25 3.25
Demographic assumptions for WH
Smith pension trust:
Life expectancy at age 65 Male Female Male Female
Member currently aged 65 21.7 23.7 21.7 23.9
Member currently aged 45 23.0 25.2 23.1 25.4
-------------------------------- ----- ------- ----- -------
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:
GBPm Fair Defined Impact of Total
value benefit IFRIC 14
of scheme obligation on defined
assets benefit pension
schemes
------------------------------------------ ----------- ------------ ----------------- -------
At 31 August 2013 469.6 (419.2) (73.5) (23.1)
------------------------------------------ ----------- ------------ ----------------- -------
Current service cost (1.3) 1.2 - (0.1)
Net interest cost 20.6 (18.2) (3.3) (0.9)
Total amount recognised in income
statement 19.3 (17.0) (3.3) (1.0)
------------------------------------------ ----------- ------------ ----------------- -------
Actual less expected return on
scheme assets 44.6 - - 44.6
Actuarial losses arising from
experience - 0.8 - 0.8
Actuarial loss arising from changes
in financial assumptions - (33.3) - (33.3)
Actuarial loss arising from changes
in demographic assumptions - 2.6 - 2.6
Change in surplus not recognised - - (16.2) (16.2)
Amount recognised in other comprehensive
income 44.6 (29.9) (16.2) (1.5)
Employer contributions 4.6 - - 4.6
Benefit payments (15.4) 15.4 - -
------------------------------------------ ----------- ------------ ----------------- -------
Amounts included in cash flow
statement (10.8) 15.4 - 4.6
------------------------------------------ ----------- ------------ ----------------- -------
At 31 August 2014 522.7 (450.7) (93.0) (21.0)
------------------------------------------ ----------- ------------ ----------------- -------
Current service cost (0.5) - (0.5)
Net interest cost 20.0 (17.2) (3.6) (0.8)
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Total amount recognised in income
statement 19.5 (17.2) (3.6) (1.3)
------------------------------------------ ----------- ------------ ----------------- -------
Actual less expected return on
scheme assets 28.7 - - 28.7
Actuarial gains arising from
experience - 25.1 - 25.1
Actuarial loss arising from changes
in financial assumptions - (2.2) - (2.2)
Actuarial gains arising from
changes in demographic assumptions - 1.9 - 1.9
Change in surplus not recognised - - (52.8) (52.8)
Amount recognised in other comprehensive
income 28.7 24.8 (52.8) 0.7
Employer contributions 5.3 0.1 - 5.4
Employee contributions 0.1 (0.1) - -
Benefit payments (23.6) 23.6 - -
------------------------------------------ ----------- ------------ ----------------- -------
Amounts included in cash flow
statement (18.2) 23.6 - 5.4
------------------------------------------ ----------- ------------ ----------------- -------
Acquisition of subsidiary 10.6 (12.5) (1.9)
------------------------------------------ ----------- ------------ ----------------- -------
At 31 August 2015 563.3 (432.0) (149.4) (18.1)
------------------------------------------ ----------- ------------ ----------------- -------
Included within Non-current assets 0.4
Included within Current liabilities (3.3)
Included within Non-current liabilities (15.2)
------------------------------------------ ----------- ------------ ----------------- -------
The charge for the current service cost is included within
administrative expenses. 'Net interest costs' are calculated by
applying a discount rate to the net defined benefit asset or
liability scheme assets and are included within finance income and
expense.
An analysis of the assets at the balance sheet date is detailed
below:
GBPm 2015 2014
---------------------------- ---------- ------ ------
Swap financing portfolio
(1) Unquoted 431.9 477.0
Interest rate and
inflation swaps Unquoted 79.5 6.2
Loan fund (2) Unquoted 25.4 24.2
Equities (CARE, Tuffnells) Unquoted 21.0 10.4
Bonds (CARE, Platinum) Unquoted 5.0 4.7
Cash (CARE,Platinum,
Tuffnells) 0.5 0.2
---------------------------------------- ------ ------
563.3 522.7
--------------------------------------- ------ ------
(1) Investments with the aim of generating a return above LIBOR
to finance the interest and inflation swaps in the Pension Trust.
At 31 August 2015 this comprised GBP179m total return swap and
GBP252m in a fund comprising a range of assets from government
bonds, hedge funds and equities that targets a return above
LIBOR.
(2) The loan fund looks to generate a return over a portfolio of
loans.
The assets held in the swap financing portfolio provide a
swap-based hedge against the change in value of a proportion of the
Trust's liabilities for changes in long-term interest rates and
inflation expectations.
The actual return on scheme assets during 2015 was a gain of
GBP48.7m (2014: a gain of GBP65.2m).
The value of the assets held by the trust in Connect Group PLC
issued financial instruments is GBPnil (2014: GBPnil).
Sensitivity of results to changes in the main assumptions:
Assumption Change in assumption Impact on IAS 19 liabilities
------------------ --------------------- -----------------------------
Discount rate +/- 0.5% -GBP34.8m/ +GBP39.1m
Rate of inflation +/- 0.5% +GBP36.3m/ -GBP33.3m
Life expectancy +/- 1 year +GBP15.2m/ -GBP15.2m
------------------ --------------------- -----------------------------
The sensitivity analysis for each significant actuarial
assumption has been determined based on reasonably possible changes
to the assumptions at the end of the reporting period. It is based
on a change in the key assumption while holding all other
assumptions constant. The effect of a change in more than one
assumption will be different to the sum of the individual changes.
When calculating the sensitivities, the same methodology used to
calculate the liability recognised in the balance sheet has been
applied. The methodology and types of assumptions used in preparing
the sensitivity analysis is consistent with the previous
period.
The history of experience adjustments is as follows:
GBPm 2015 2014 2013 2012 2011
---------------------------------- -------- -------- -------- -------- --------
Present value of defined benefit
obligation (432.0) (450.7) (419.2) (395.3) (348.3)
Fair value of assets 563.3 522.7 469.6 433.1 375.1
Impact of IFRIC 14 on defined
benefit pension schemes (149.4) (93.0) (73.5) (73.8) (63.1)
---------------------------------- -------- -------- -------- -------- --------
Net deficit in the schemes (18.1) (21.0) (23.1) (36.0) (36.3)
---------------------------------- -------- -------- -------- -------- --------
Experience adjustments on scheme
liabilities 25.1 0.8 (1.4) (1.0) (4.1)
----------------------------------
Experience adjustments on scheme
assets 28.7 44.6 27.9 34.0 (45.8)
---------------------------------- -------- -------- -------- -------- --------
The cumulative amount of actuarial gains and losses recognised
in the statement of comprehensive income since the adoption of IFRS
is a loss of GBP20.7m (2014: a loss of GBP21.4m).
Defined contribution schemes
The Group operates a number of defined contribution schemes. For
the year ended 31 August 2015, participating employer contributions
totalled GBP3.0m (2014: GBP2.8m) which is included in the Income
Statement.
6. Investment revenue and finance costs
GBPm Note 2015 2014
---------------------------------------- ------- ---------- --------
Net change in fair value of derivative
assets - 0.4
Investment revenue - 0.4
------------------------------------------------ ---------- --------
Interest on bank overdrafts and
loans (5.8) (4.7)
Net interest expense on defined
benefit obligation 5(0.8) (0.9)
Interest payable on finance leases (0.4) (0.2)
Net change in fair value of derivative
assets (0.2) -
Unwinding of discount on provisions
- trading (0.1) (0.1)
--------------------------------------- ----- -----
Finance costs (7.3) (5.9)
--------------------------------------- ----- -----
Net finance costs (7.3) (5.5)
--------------------------------------- ----- -----
7. Income tax expense
GBPm 2015 2014
Adjusted Non-recurring Total Adjusted Non-recurring Total
and other and other
items items
------------------------------- --------- -------------- ------ --------- -------------- ------
Current tax 12.4 (2.3) 10.1 12.3 (1.0) 11.3
Adjustment in respect
of prior year UK corporation
tax (1.1) (0.9) (2.0) (2.4) - (2.4)
Total current tax charge 11.3 (3.2) 8.1 9.9 (1.0) 8.9
Deferred tax - current
year (0.2) (0.3) (0.5) (0.4) - (0.4)
Deferred tax - prior
year - - - (0.2) - (0.2)
Total tax on profit 11.1 (3.5) 7.6 9.3 (1.0) 8.3
------------------------------- --------- -------------- ------ --------- -------------- ------
Effective tax rate 19.7% 26.3% 18.7% 19.4%
------------------------------- --------- -------------- ------ --------- -------------- ------
The effective adjusted income tax rate for the year was 19.7%
(2014: 18.7%). After adjusting for the impact of non-recurring and
other items of GBP3.5m (2014: GBP1.0m), the effective statutory
income tax rate was 26.3% (2014: 19.4%).
The tax rates used in the 2015 and 2014 reconciliations of the
tax charge are the main rates of UK corporation tax, those being
20.6% (2014: 22.2%).
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Reconciliation of the tax charge
GBPm 2015 2014
---------------------------------------------------- ------ ------
Profit before tax 29.0 43.1
---------------------------------------------------- ------ ------
Tax on profit at the standard rate of UK
corporation tax 20.6% (2014: 22.2%) 5.9 9.5
Permanent differences 3.5 1.3
Share schemes - (0.2)
Adjustment in respect of prior year UK corporation
tax (2.0) (2.6)
Impact of overseas tax rates 0.2 0.3
Total tax charge 7.6 8.3
---------------------------------------------------- ------ ------
Tax charges to other comprehensive income and directly in
equity
GBPm 2015 2014
----------------------------------------------- ------ ------
Current tax relating to the defined benefit
pension scheme (0.8) (0.7)
Current tax relating to share based payments (0.6) (0.5)
Deferred tax relating to derivative financial
instruments - 0.1
Deferred tax relating to share based payments 0.6 (0.5)
Deferred tax relating to retirement benefit
obligations 0.9 0.6
Tax charges to other comprehensive income
and directly in equity 0.1 (1.0)
----------------------------------------------- ------ ------
8. Dividends
Amounts paid & proposed as distributions to equity
shareholders in the years:
Paid & proposed dividends 2015 2014 2015 2014
for the year
Per share Per share GBPm GBPm
(5)
------------------------------ ---------- ---------- ----- -----
Interim dividend - paid 2.9p 2.8p 7.0 5.8
Final dividend - proposed 6.3p 6.0p 15.4 12.3
9.2p 8.8p 22.4 18.1
------------------------------ ---------- ---------- ----- -----
Recognised dividends for the
year
Final dividend - prior year 6.0p 5.7p 14.4 11.9
Interim dividend - current
year 2.9p 2.8p 7.0 5.8
------------------------------ ---------- ---------- ----- -----
8.9p 8.5p 21.4 17.7
------------------------------ ---------- ---------- ----- -----
(5) Rebased dividend per share adjusts last year's reported
figures by the rights issue bonus factor adjustment of 0.9015
following the 2 for 7 rights issue in December 2014
The proposed final dividend for the year ended 31 August 2015 of
6.3p is subject to approval by shareholders at the Annual General
Meeting on 4 February 2016 and in line with IAS 10 - 'Events after
the reporting period', this dividend has not been included as a
liability in these accounts. The proposed dividend, if approved,
will be paid on 12 February 2016 to shareholders on the register at
close of business on 15 January 2016.
9. Earnings per share
2015 2014
GBPm Pence GBPm Pence
Earnings Weighted per Earnings Weighted Rebased
average share average (1) per
number number share
of shares of shares
million million
------------------------------------ --------- ----------- ------- --------- ----------- ---------
Weighted average number of
shares in issue 233.9 208.0
Shares held by the ESOP (weighted) (3.0) (1.6)
Basic earnings per share (EPS)
------------------------------------ --------- ----------- ------- --------- ----------- ---------
Adjusted earnings attributable
to ordinary shareholders 45.5 230.9 19.7p 40.5 206.4 19.6p
------------------------------------ --------- ----------- ------- --------- ----------- ---------
Non-recurring and other items (24.0) (5.9)
Earnings attributable to ordinary
shareholders 21.5 230.9 9.3p 34.6 206.4 16.8p
------------------------------------ --------- ----------- ------- --------- ----------- ---------
Diluted earnings per share
(EPS)
Effect of dilutive share options 7.6 7.0
Diluted adjusted EPS 45.5 238.5 19.0p 40.5 213.4 19.0p
------------------------------------ --------- ----------- ------- --------- ----------- ---------
Diluted EPS 21.5 238.5 9.0p 34.6 213.4 16.2p
------------------------------------ --------- ----------- ------- --------- ----------- ---------
(1) Rebased Earnings per share and rebased Dividends per share
adjust last year reported figures by the rights issue bonus factor
adjustment of 0.9015 following the 2 for 7 rights issue in December
2014
Dilutive shares increased the basic number of shares at 31
August 2015 by 7.6m to 238.5m (31 August 2014: 213.4m).
The calculation of diluted EPS reflects the potential dilutive
effect of employee incentive schemes of 4.1m dilutive shares (31
August 2014: 5.4m) and a weighted 3.5m shares being the time
apportioned share capital relating to the deferred consideration
for the acquisition of The Big Green Parcel Holding Company
Limited.
10. Intangible assets
Acquired Intangibles Internally Computer
generated software
development costs
costs
---------------------------------- ------------- ----------
GBPm Goodwill Customer Trade Software Total
relationships name
------------------- --------- --------------- ------ --------- ------------- ---------- -------
Cost:
At 1 September
2014 44.2 22.0 3.0 0.7 6.0 6.8 82.7
Additions - - - - 1.6 3.6 5.2
Acquisition
of subsidiary 52.1 26.8 30.5 0.8 - - 110.2
Transfers between
asset classes - - - - 2.3 5.1 7.4
Disposals - - - - (0.8) (1.7) (2.5)
At 31 August
2015 96.3 48.8 33.5 1.5 9.1 13.8 203.0
------------------- --------- --------------- ------ --------- ------------- ---------- -------
Accumulated
amortisation:
At 1 September
2014 - 8.5 1.4 0.6 3.9 2.6 17.0
Amortisation
charge - 5.1 2.6 0.2 1.6 1.9 11.4
Transfers between
asset classes - - - - 0.7 1.6 2.3
Disposal - - - - (0.8) (1.7) (2.5)
At 31 August
2015 - 13.6 4.0 0.8 5.4 4.4 28.2
------------------- --------- --------------- ------ --------- ------------- ---------- -------
Net book value
at 31 August
2015 96.3 35.2 29.5 0.7 3.7 9.4 174.8
------------------- --------- --------------- ------ --------- ------------- ---------- -------
Cost:
At 1 September
2013 44.2 21.7 3.0 0.7 5.6 25.3 100.5
Additions - 0.3 - - 1.6 1.9 3.8
Disposals - - - - (1.2) (20.4) (21.6)
At 31 August
2014 44.2 22.0 3.0 0.7 6.0 6.8 82.7
------------------- --------- --------------- ------ --------- ------------- ---------- -------
Accumulated
amortisation:
At 1 September
2013 - 5.6 0.9 0.5 3.5 21.8 32.3
Amortisation
charge - 2.4 0.5 0.1 1.6 1.2 5.8
Impairment - 0.5 - - - - 0.5
Disposals - - - - (1.2) (20.4) (21.6)
At 31 August
2014 - 8.5 1.4 0.6 3.9 2.6 17.0
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------------------- --------- --------------- ------ --------- ------------- ---------- -------
Net book value
at 31 August
2014 44.2 13.5 1.6 0.1 2.1 4.2 65.7
------------------- --------- --------------- ------ --------- ------------- ---------- -------
During the year to 31 August 2015, goodwill and intangibles
totalling GBP110.2m arose on the Group's acquisition of Tuffnells
on 19 December 2014. Further details are disclosed in note 11. The
Group leases software under various finance lease arrangements. The
net book value of finance leases contained within the software
balance above is GBP0.7m (2014: GBP0.9m).
In prior year the Group acquired the trade and assets of Martin
Lavell giving rise to the recognition of an intangible asset of
GBP0.3m for customer relationships.
Goodwill and Intangibles by CGU
Goodwill of GBP4.1m and acquired intangibles totalling GBP5.1m
arose from the acquisition of the business and assets of Bertrams
on 20 March 2009 have been allocated to the Connect Books combined
cash generating unit (CGU).
The acquisition of Dawson Holdings PLC on 23 August 2011,
resulted in goodwill of GBP18.1m and acquired intangibles of
GBP7.8m. These have been allocated to the two remaining individual
CGU's identified at the time of the acquisition; Dawson Books and
Media Direct.
On the acquisition of Hedgelane Limited on 23 April 2012, the
Group recognised goodwill of GBP20.9m and acquired intangibles of
GBP10.4m which have been allocated to the Education and Care
CGU.
The acquisition of 100% of the issued share capital of
Houtschild Internationale Boekhandel B.V. on 13 June 2012 produced
a further GBP0.3m of goodwill.
The acquisition of Erasmus on 17 January 2013 generated GBP0.8m
of goodwill and GBP0.3m of acquired intangible assets.
The acquisition of certain Blackwell contracts on 20 May 2013
generated GBP2.0m of acquired intangibles.
The acquisition of trade and assets of Martin Lavell acquired on
1 September 2013 generated acquired intangibles of GBP0.3m.
The acquisition of Tuffnells on 19 December 2014 generated
GBP52.1m of goodwill and GBP58.1m of intangible assets. Further
details are disclosed in note 11. None of the goodwill arising on
the acquisition in the year is expected to be deductible for tax
purposes.
Goodwill is not amortised, but tested annually for impairment or
more frequently if there are indications that goodwill might be
impaired with the recoverable amount being determined from value in
use calculations. The recoverable amounts of the combined cash
generating units are determined from the value in use calculations.
The Group prepares cash flow forecasts derived from the most recent
budgets and forecasts for the following 3 years as approved by the
Board and extrapolates these cash flows on an estimated growth rate
of 1% into perpetuity. The rate used to discount the forecast cash
flows range from 12.1% to 12.5%, being the Group's risk adjusted
pre-tax WACC, specific for each cash generating unit. Pre-tax
discount rates are derived from the Group's post-tax WACC of 8%
risk adjusted by 2%. The calculation of value in use is sensitive
to the discount rate and growth rates used. Given the improved
outlook in the performance of Connect Books, higher growth rates
included in the assumptions for this division increase the value in
use. Management believes that no reasonable potential change in the
above key assumptions would cause the carrying value to exceed its
recoverable amount.
Goodwill Acquired Total
Intangibles
------------------ ---------- -------------- -------------- -------------- ----------- --------------
GBPm 2015 2014 On acquisition 2015 2014 On acquisition 2015 2014 On acquisition
------------------ ---- ---- -------------- ------ ------ -------------- ----- ---- --------------
Connect Books 17.6 17.6 17.6 4.2 5.6 12.7 21.8 23.2 30.3
Connect Media 5.7 5.7 5.7 1.2 1.6 2.6 6.9 7.3 8.3
Connect News - - - 0.2 0.2 0.3 0.2 0.2 0.3
Connect Education
and Care 20.9 20.9 20.9 6.2 7.8 10.4 27.1 28.7 31.3
Connect Parcel
Freight 52.1 - 52.1 53.6 - 58.1 105.7 - 110.2
96.3 44.2 96.3 65.4 15.2 84.1 161.7 59.4 180.4
------------------ ---- ---- -------------- ------ ------ -------------- ----- ---- --------------
The individual material intangible assets relate to the customer
relationships and brand acquired on the acquisition of Tuffnells.
The carrying value of these assets at 31 August 2015 is GBP24.5m
and GBP28.5m respectively with a remaining amortisation period of 7
and 9.5 years respectively.
11. Acquisitions
The acquisition of Tuffnells made during the period contributed
GBP114.4m to the Group's revenue and GBP9.7m to the Group's
operating profit before acquired intangible amortisation and
acquisition related costs.
The estimated contributions of the acquired business to the
results of the Group, as if the acquisition had been made at the
beginning of the period, are as follows:
GBPm
------------------------------------------------- ------
Revenue 159.8
Operating profit before intangible amortisation
and acquisition related costs 14.4
The net cash outflow in respect of the acquisition of the Big
Green Parcel Holding Company Limited (Tuffnells) in the year
comprised:
GBPm
----------------------------------------------- --------
Cash consideration (114.0)
Cash acquired 8.3
------------------------------------------------ --------
Net cash outflow relating to acquisition (105.7)
Acquisition related costs (recorded in
non-recurring and other items) (3.2)
Total cash outflow in respect of acquisitions (108.9)
------------------------------------------------ --------
Acquisitions are accounted for under the acquisition method of
accounting. The Group undertakes a process to identify the fair
values of the assets acquired and the liabilities assumed,
including the separate identification of intangible assets in
accordance with IFRS 3 'Business Combinations'. Until this
assessment is complete, the allocation period remains open up to
twelve months from the acquisition date.
On 19 December 2014, Smiths News Holdings Limited acquired 100%
of the issued share capital of The Big Green Parcel Holding Company
Limited (Tuffnells) for a cash consideration of GBP114.0m and
deferred contingent consideration of up to GBP15.3m, payable over 3
years following the acquisition contingent on both profit targets
and the continued employment of certain former owners. The
acquisition has been accounted for in accordance with IFRS 3
Business Combinations. The Big Green Parcel Holding Company
Limited's main trading subsidiary is Tuffnells Parcels Express
Limited. Tuffnells Parcels Express Limited is a leading UK provider
of next-day B2B delivery of mixed freight and parcel consignments,
specialising in items of irregular dimension and weight, examples
of which include bulky furnishings, building materials and
automotive parts.
The initial cash cost of the acquisition was GBP114.0m, financed
by a combination of increased debt facilities and a c.GBP55m Rights
Issue. The initial cash cost of GBP114.0m plus GBP0.5m of deferred
consideration is consideration as defined by IFRS 3 and has been
allocated against the identified net assets with the balance
recorded as goodwill.
IFRS 3 requires that any payments that are contingent on future
employment be charged to the income statement. The total GBP15.3m
of deferred consideration includes GBP14.8m that is contingent on
both profit targets and the continued employment of the former
owners of The Big Green Parcel Holding Company Limited. This
comprises:
- Up to GBP4.8m of deferred share capital and GBP3.8m in cash
being the fair value of deferred contingent consideration payable
conditional on the financial performance and on continued
employment in the 12 month period from 1 September 2014 to 31
August 2015;
- Up to a further GBP2.0m of deferred share capital and GBP1.1m
of cash payable conditional on the financial performance and
continued employment in the 12 month period from 1 September 2015
to 31 August 2016; and
- Up to a further GBP2.0m of deferred share capital and GBP1.1m
of cash payable conditional on the financial performance and
continued employment in the 12 month period from 1 September 2016
to 31 August 2017.
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The remaining GBP0.5m deferred consideration is contingent
solely upon future profit targets across the 36 month period from 1
September 2014 to 31 August 2017 and is included on the Director's
best estimate of the likely overall payment. The provisional effect
of the acquisition on the Group's assets and liabilities is as
follows:
Allocation of purchase
price
GBPm Acquired balance Fair value Fair value
sheet adjustments
Fixed assets 21.7 (3.1) 18.6
Stock 0.6 - 0.6
Trade and other receivables 13.1 (0.1) 13.0
Acquired intangible
assets - 58.1 58.1
Deferred tax 0.9 (9.9) (9.0)
Other liabilities (4.6) (4.2) (8.8)
Trade and other payables (14.4) (2.1) (16.5)
Net debt 8.3 - 8.3
Pensions (1.9) - (1.9)
------------------------------ ----------------- ------------- -----------
Net assets 62.4
Cash consideration 114.0
Contingent purchase
consideration 0.5
------------------------------ ----------------- ------------- -----------
Total Consideration 114.5
Goodwill arising on
acquisition 52.1
The fair value of receivables acquired (shown above) approximate
to the gross contractual amounts receivable. The amount of gross
contractual receivables not expected to be recovered is
immaterial.
The excess of the fair value of the consideration paid over the
fair value of the assets acquired is represented by customer
related intangibles of GBP26.8m, the value of the 'Big Green Parcel
Machine' trade name of GBP30.5m and other intangibles of GBP0.8m
with residual goodwill arising of GBP52.1m. The goodwill
represents:
- The value of the acquired workforce
- Potential to leverage the expertise and achieve synergies with
other Connect Group distribution businesses
The potential undiscounted amount of all future payments that
Connect Group plc could be required to make under the contingent
consideration arrangement, which has been measured based on current
expectations of future performance is GBP15.3m and the fair value
is GBP15.3m.
In the prior year the Group acquired the trade and assets from
Martin Lavell Ltd on 1 September 2013, a significant distributor in
the Business-to-Business sector of newspaper and magazine supplies
in London, for a consideration of GBP0.3m. The acquisition gave
rise to the recognition of a GBP0.3m intangible asset for customer
relationships.
12. Acquisition of non-controlling interests
On 27 August 2015, the Group purchased the remaining 49% of
shares in Magpie Investments Limited for an initial cash
consideration of GBP5.1m with a deferred consideration of GBP3.3m
which is contingent on both profit targets and continued employment
of the former owners. This deferred contingent consideration will
be charged to the income statement over a five year period to
August 2020.
13. Cash and borrowings
Cash and borrowings by currency (Sterling equivalent) are as
follows:
GBPm Sterling Euro US Dollar Other Total 2014
2015
--------- ----- ---------- ------ -------
Cash and cash equivalents 6.2 3.2 0.9 0.6 10.9 20.4
----------------------------- --------- ----- ---------- ------ ------- -------
Term loan - disclosed within - - - - - -
current liabilities
Term loan - disclosed within
non-current liabilities (98.4) - - - (98.4) (48.4)
Revolving credit facility (55.0) (1.5) - - (56.5) (60.9)
Total borrowings (153.4) (1.5) - - (154.9) (109.3)
Net borrowings (147.2) 1.7 0.9 0.6 (144.0) (88.9)
----------------------------- --------- ----- ---------- ------ ------- -------
Total borrowings
----------------------------- --------- ----- ---------- ------ ------- -------
Amount due for settlement
within 12 months (55.0) (1.5) - - (56.5) (60.9)
Amount due for settlement
after 12 months (98.4) - - - (98.4) (48.4)
----------------------------- --------- ----- ---------- ------ ------- -------
(153.4) (1.5) - - (154.9) (109.3)
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 31 August 2015, the Group had GBP95.1m (2014: GBP90.7m) of
undrawn committed borrowing facilities in respect of which all
conditions precedents had been met. Interest payable under the
current facility is calculated as the cost of one month LIBOR plus
an interest margin of between 1.35% and 2.35% dependent on the net
debt/ adjusted EBITDA covenant ratio.
As at 31 August 2015, the Group had GBP250m committed bank
facilities in place (2014: GBP200m). The facility was extended in
November 2014 to GBP250m to support the acquisition of
Tuffnells.
Bank facilities now comprise:
-- a GBP100m syndicated term loan with GBP10m repayable in
February 2017, August 2017, February 2018 and August 2018 with the
balance repayable in November 2018;
-- a GBP150m syndicated revolving credit facility which expires in November 2018;
14. Provisions
GBPm Reorganisation Insurance Deferred Property Total
provisions provision contingent provisions
consideration
Gross provision:
At 1 September 2014 0.7 1.4 - 3.6 5.7
Additions 2.3 0.1 5.2 1.0 8.6
Acquisition of business - 1.3 - 4.1 5.4
Released (0.2) - - (0.2) (0.4)
Utilised in year (1.8) - - (0.6) (2.4)
At 31 August 2015 1.0 2.8 5.2 7.9 16.9
Discount:
At 1 September 2014 - - - (0.4) (0.4)
Additions - - - - -
Acquisition of business - - - (0.1) (0.1)
Unwinding of discount - - - - -
utilisation
At 31 August 2015 - - - (0.5) (0.5)
Net book value at 31
August 2015 1.0 2.8 5.2 7.4 16.4
Gross provision:
At 1 September 2013 1.4 1.4 1.9 6.4 11.1
Additions 0.7 0.2 0.2 1.3 2.4
Released (0.1) - - (1.5) (1.6)
Utilised in year (1.3) (0.2) (2.1) (2.6) (6.2)
At 31 August 2014 0.7 1.4 - 3.6 5.7
Discount:
At 1 September 2013 - - - (0.8) (0.8)
Additions - - - (0.1) (0.1)
Disposals - - - 0.4 0.4
Unwinding of discount
utilisation - - - 0.1 0.1
At 31 August 2014 - - - (0.4) (0.4)
Net book value at 31
August 2014 0.7 1.4 - 3.2 5.3
GBPm 2015 2014
Included within current
liabilities 10.4 3.4
Included within non-current
liabilities 6.0 1.9
Total 16.4 5.3
Reorganisation provisions include amounts for programmes which
consist primarily redundancy costs, that have been announced prior
to the year end and are all expected to be utilised during the
following financial year.
Insurance provisions represent the expected future costs of
employer's liability, public liability and motor accident
claims.
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