Connect Group PLC
('Connect Group' or 'the Group')
Preliminary Results Announcement for the year ended 31 August 2016
Solid performance with good progress on operational priorities
Connect Group, a leading specialist distributor operating in four divisions: News & Media, Parcel Freight, Education & Care and Books, is pleased to announce its preliminary results for the year ended 31 August 2016.
Adjusted results (1) | FY2016 | FY2015 | Change |
| Revenue | £1,906.5m | £1,875.1m | +1.7% |
| Profit before tax | £60.7m | £56.5m | +7.4% |
| Earnings per share | 19.8p | 19.7p | +0.5% |
Statutory results | | | |
| Revenue | £1,906.5m | £1,875.1m | +1.7% |
| Profit before tax | £41.9m | £29.0m | +44.5% |
| Earnings per share | 13.7p | 9.3p | +47.3% |
| | | | |
| Dividend per share | 9.5p | 9.2p | +3.3% |
| Free cash flow (2) | £49.6m | £39.8m | +24.6% |
| Net debt (4) | £141.7m | £153.4m | +7.6% |
HIGHLIGHTS:
Solid financial performance in line with expectations
· Total revenue of £1.9bn, up 1.7%. Revenue in Smiths News was down 2.4%, slightly better than expected
· Adjusted profit before tax of £60.7m up 7.4%, benefitting from a full year of Tuffnells, and underpinned by solid performances from both the News & Media and Education & Care divisions
· Another year of strong cash generation, with free cash flow of £49.6m, up 24.6%
· Final dividend of 6.5p up 3.2%, making a full year dividend of 9.5p, up 3.3%
Good progress on strategic and operational priorities
· Continued strong performance of Tuffnells
· Growing scale and capability in Pass My Parcel
· Delivered £7m of business efficiencies across the Group, including £5m in Smiths News
· Invested in operational capability and capacity, particularly in Pass My Parcel and Tuffnells
· Closer collaboration between Smiths News and Tuffnells
Mark Cashmore, Group Chief Executive, commented:
"This has been a year of both strategic and operational progress for Connect Group. Tuffnells has delivered another strong performance, underpinning solid financial results for the Group. In addition, our confidence in the opportunity for us to succeed in the Click & Collect market has been reinforced by the growing scale and capability of Pass My Parcel.
In 2017, a particular focus will be on accelerating the collaboration between Smiths News and Tuffnells, whilst investing in our organic initiatives to support long-term sustainable profit growth."
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 'Exceptionals' 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:
The Group results include the Parcel Freight division, Tuffnells, results for FY2016 for a full 12 months and 36 weeks results post acquisition for FY2015.
Adjusted operating profit: is defined as operating profit including the operating profit of businesses from the date of acquisition and excludes Exceptionals and operating profit of businesses disposed of.
Adjusted profit before tax: is defined as adjusted operating profit less finance costs attributable to adjusted operating profit and before Exceptionals; including amortisation of intangibles and network and reorganisation costs.
Adjusted earnings per share: is defined as adjusted profit before tax, less taxation attributable to adjusted profit before tax and including any adjustment for minority interest to result in adjusted profit after tax attributable to shareholders divided by the basic weighted average number of shares in issue.
Exceptionals: 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, legal provisions 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 Exceptionals.
(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, Exceptional items and share based payments charge but after adjusting for the last 12 months of profits for any acquisitions or disposals made in the year.
(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) FY2016 refers to the full year ended 31 August 2016, FY2015 refers to the full year ended 31 August 2015.
Enquiries:
| Connect Group PLC Mark Cashmore, Group Chief Executive David Bauernfeind, Chief Financial Officer |
Today: 020 7466 5000 Thereafter: 01793 563641 |
|
| |
| Buchanan Sophie McNulty / Richard Oldworth |
020 7466 5000 |
| | |
A meeting for analysts will be held at the office of Buchanan, 107 Cheapside, London, EC2V 6DN on 18 October 2016 commencing at 9.30am. Connect Group PLC's Preliminary Results 2016 are available at www.connectgroupplc.com
An audio webcast will be available on:
http://vm.buchanan.uk.com/2016/connectgroup181016/registration.htm
About Connect Group
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, Dawson Media Direct and Pass My Parcel. 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 serving approximately 30,000 customers across England and Wales on a daily basis, including large general retailers as well as smaller independent newsagents with approximately 40 million newspapers supplied weekly; Dawson Media Direct is an international media direct business supplying newspapers, magazines and inflight entertainment technology and content to over 80 airlines in 50 countries. Pass My Parcel, a wholly-owned 'click and collect' delivery service, operated by the Smiths News business, has a network of over 3,000 parcel shops and clients which include Amazon and ASOS.
· Connect Parcel Freight - Tuffnells is a leading provider of next-day B2B delivery of mixed parcel freight consignments, specialising in items of irregular dimension and weight ("IDW"), examples of which include bulky furnishings, building materials and automotive parts. Tuffnells offers distribution coverage throughout the UK through a network of 37 depots and operates a largely depot-to-depot operational model, delivering over 13 million consignments per annum, through a wide range of services to over 4,500 customers focusing on SMEs.
· Connect Education & Care - A leading independent supplier of consumable products to the Education and Care markets through The Consortium and West Mercia Supplies. The division currently holds an approximate 5 per cent. market share of the estimated addressable market, and serves over 30,000 customers with an extensive range of over 40,000 products across a branded, own-brand and value range, including stationery, arts and craft and cleaning.
· Connect Books - Combining a number of recognised brands in print and digital bookselling, including Bertrams, Dawson Books and Wordery. A leading distributor of printed and digital books, the division supplies a mix of traditional and online booksellers, academic and public libraries and direct to consumer through Wordery.
Notes to Editors
This document contains certain forward-looking statements with respect to Connect Group PLC's financial condition, its results of operations and businesses, strategy, plans, objectives and performance. Words such as 'anticipates', 'expects', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'targets', 'may', 'will', 'continue', 'project' and similar expressions, as well as statements in the future tense, identify forward-looking statements. These forward-looking statements are not guarantees of Connect Group PLC's future performance and relate to events and depend on circumstances that may occur in the future and are therefore subject to risks, uncertainties and assumptions. There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by such forward looking statements, including, among others the enactment of legislation or regulation that may impose costs or restrict activities; the re-negotiation of contracts or licences; fluctuations in demand and pricing in the industry; fluctuations in exchange controls; changes in government policy and 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 2016 which can be found on the Investor Relations section of the Connect Group PLC website - www.connectgroupplc.com. However, the contents of Connect Group PLC's website are not incorporated into and do not form part of this document.
OPERATING REVIEW
INTRODUCTION
Connect Group has delivered another solid performance, increasing profit in line with expectations and making progress on all key financial metrics. Total revenue of £1,907m is up 1.7% with Adjusted profit before tax of £60.7m up 7.4%, benefitting from a full year contribution from Tuffnells, and underpinned by solid performances from both News & Media and Education & Care.
Adjusted earnings per share at 19.8p is marginally up after taking the increased shares from the December 2014 rights issue into account. It is also a continuing strength of the Group that it generates significant cash, with free cash flow of £49.6m up 24.6% on FY2015.
This performance supports the Group's commitment to growing shareholder returns, with the final dividend of 6.5p up 3.2%, giving a full year dividend of 9.5p, up 3.3%.
In addition, the Group has made good progress with its operational priorities. The continued growth of Tuffnells has driven the Group's progress and the Board continues to be pleased with its performance since acquisition. Furthermore, the targeted business efficiencies of £7m have been achieved in full, £5m of which were delivered in Smiths News. These efficiencies have been achieved in parallel with investment in operational capability and capacity which will support future growth, particularly within Pass My Parcel and Tuffnells. Finally, collaboration between Smiths News and Tuffnells is increasing, which is key to leveraging the Group's capabilities.
CONNECT NEWS & MEDIA
The News & Media division had a solid year, within the context of a structurally declining market, with continued resilience in core sales and profits.
Revenue of £1,471.4m was down 2.2% and Adjusted operating profit of £42.4m was down 3.0% after the impact of increased losses in Pass My Parcel.
During the year, Smiths News renewed its contracts with Northern & Shell (publisher of, amongst others, The Express and Daily Star newspapers and OK! magazine) and Topps Direct (a leading producer of stickers and collectables). The two contracts represent the last major publishers to formalise agreements with the division in the current cycle of contract renewals, meaning that Smiths News now has contracts encompassing 94% of publisher revenues at current levels secured to at least 2019 and 70% secured through to 2021. These contracts not only provide relative predictability of revenues, they also confirm the territorial footprint required for the coming years, allowing the effective planning of future network and process efficiencies with confidence.
Total sales in Smiths News were down 2.4% and down 3.4% on a like for like basis, slightly better than management's medium term forecasts and with the impact of volume declines being broadly offset by ongoing cover price inflation. Smiths News has delivered the targeted £5m of efficiencies this year, bringing the total saved over the last five years to over £25m. Plans are in place to maintain this momentum and management is confident of achieving an additional £10m of efficiencies over the next two years.
In a continuation of previous trends, newspapers have benefitted from cover price inflation which has been stronger in the second half. Magazines have continued to slow their rate of decline year on year with an improved performance from monthly titles, although in this case the second half has been softer. This year the division also benefitted from the sale of European football championships sticker albums, which boosted sales by £9m, contributing £1.9m to profit.
Jack's Beans, the Group's vended coffee offer, has expanded to over 400 stores and with revenue of £1.3m from coffee sales and rental income, it is now having a modest but positive impact on operating cash flows.
DMD, the Group's specialist supplier of printed and digital media to airports, airlines and travel points had a good year. Sales of £27.6m are up by 8.9% and 1.6% on a like for like basis through a number of new contract wins. Adjusted operating profit of £2.4m is up by 3.5%. The business benefited from new and extended contracts in both print and digital including News UK (publisher of The Sun and The Times newspapers), Virgin and Eurostar amongst others.
Pass My Parcel
The progress and experience in Pass My Parcel ("PMP") this year reinforces the Board's confidence in the opportunity for the Group in the Click & Collect market. Demand for Click & Collect services continues to grow in response to consumer demand for more convenient deliveries and simple returns processes. It is now the fastest growing sector of the parcels market, forecast to grow from £3bn in 2013 to £6.5bn in 2018, a compound annual growth rate of 16%. In certain sectors, such as clothing, consumers have come to regard speedy local delivery and easy returns as a standard offering and as a result, retailers are having to develop new solutions to meet this growing expectation.
In the last 12 months, the Group has proven and grown its operational capability in this fast-moving environment. Serving a network of over 3,000 parcel shops, PMP has delivered half a million parcels, achieving some of the fastest turnaround times for online consumers. They, in turn, rate the service as excellent. The vast majority of customers report that they are extremely satisfied and would recommend PMP to others. In a survey which the Group conducted with Amazon recently, 92% of customers said they intend to use PMP again, achieving an upper quartile Net Promoter Score of over 60%.All of this confirms that the Group is delivering a high quality service.
In April 2016, PMP launched a returns service in partnership with ASOS (the online clothes retailer), and this Autumn will extend its agreement with Amazon to include returns ahead of the seasonal peak. This is an important step as consumer habits mean more returns are made via parcel shops than deliveries.
Finally, by utilising Tuffnells' infrastructure as well as Smiths News, PMP has increased its territorial reach and can now offer retailers a complete solution of deliveries and returns across the whole of mainland UK.
Looking ahead to the current financial year, PMP is aiming to increase the number of retail clients as well as launch an online portal that will open up PMP's network to thousands of small businesses selling on marketplace sites such as eBay. These initiatives will support the plan to grow volumes in FY2017 to 3m parcels, a sixfold increase from FY2016 that would establish PMP as a scale operator.
The loss on PMP in FY2016 was £4m. To support business growth in FY2017, the plan is for total costs to increase, however, the anticipated uplift in volume and revenue will reduce the loss to circa £2.5m. The additional costs invested will be focused on technology to ease the integration of new retail clients and brand marketing to improve consumer awareness.
CONNECT PARCEL FREIGHT
Parcel Freight had another strong year of sales growth, building on the progress of FY2015. Revenue of £174.4m is up 7.3% (on a 52 week basis) and Adjusted operating profit of £15.0m is up 4.9% (on a 52 week basis). Top-line growth has been driven by improved service and increased capacity, with profit growth rate lower due to the investments being made to upgrade and professionalise the Tuffnells infrastructure in order to support sustainable future growth.
Looking at the market in which the division operates, demand for Irregular Dimension and Weight ("IDW") freight has remained buoyant. Tuffnells continues to win market share and attract new customers, helped by a number of the other parcel carriers de-prioritising what is a complex sector that requires specialist expertise.
Tuffnells is investing to grow its network and further strengthen its position in the market. This year, the Group opened two new depots in Leicester and Norwich. We have plans for a further four new depots, as well as one regional hub and 10 relocations which will upgrade our capabilities over the next three years. As a result, in FY2017, approximately £15m will be invested to support maintenance and future growth across the Tuffnells estate.
The business continues to win in its chosen space, growing its customer base by over 11% at the same time as implementing a rate rise that was absorbed with virtually no loss of business. As a further example of progress, in August 2016, Tuffnells signed its largest ever contract, an exclusive five year deal with Blackcircles.com, the online tyre distributor. The agreement is a great example of the growing demand for high service, specialist distribution contributing to future increased revenues for the division.
It is nearly two years since the Group acquired Tuffnells and the post-acquisition reviews confirm that it has been an excellent fit for the Group. The synergy and integration plan is on track and across a range of areas there is an evolving opportunity to leverage the combined skills and competencies of Tuffnells and Smiths News, as well as driving benefits from the increased scale of the Group. For example, after running successful proof of concept trials, Smiths News is now partnering with Tuffnells at three locations, providing drivers and vehicles to deliver early morning parcels outside of the newspaper and magazine delivery windows. This arrangement allows the Group to flex capacity at low cost and can be scaled up in the run-up to Tuffnells' peak trading period which occurs in the Spring.
Mirroring this sharing of capacity, Tuffnells is now making deliveries for PMP. Currently operating from 11 depots, the partnership gives PMP national reach and delivers a flexible and cost effective solution to reaching those areas beyond the Smiths News territorial footprint.
CONNECT EDUCATION & CARE
Despite challenging markets, Education & Care achieved a good performance relative to the wider sector maintaining Adjusted operating profit at £7.8m on total revenue down 1.6% at £64.8m and down 2.4% on a like for like basis. Overall, the market is estimated to be down by around 6% this year, impacted by an increase in teacher pension and National Insurance costs that had to be absorbed by school budgets. In this context, the business has responded well, outperforming its competitors, growing share and developing its customer channels to support further gains as the market returns to growth in the medium term. This performance was also underpinned by taking early action in response to the market downturn, with an organisation review and tight cost management helping to offset the impact of the tougher conditions.
The continued progress of Early Years confirms the division's strength in this sector, securing a fourth consecutive year of growth and representing an overall CAGR of 12% since its acquisition in 2012.
The strategy to win new business by developing the leading e-commerce platform for schools is on track. Customer adoption of the new websites is growing, with more than 35% of school orders now placed online. The division is now targeting 50% of all orders being placed online by the end of FY2017.
These positive developments flowed through into a good summer peak trading period which was managed more efficiently following improvements to the warehouse and operations last year.
CONNECT BOOKS
Having stabilised the Books division, in FY2015, it faced another challenging year, with the benefits of progress in Wordery and a good recovery in UK wholesale was offset by challenges in the library markets and cost pressures that could not be fully mitigated in the period. As a result, total revenue of £195.9m was up 3.1% and Adjusted operating profit of £2.5m was down 3.8% on FY2015.
In terms of progress, the UK consumer market for books has returned to growth and supported by better operational service, sales to high street and online retailers are up by 9%. Wordery has also continued its strong growth with sales of £49m up 26%. In addition, direct sales through Wordery.com now represent 23% of Wordery's revenue and investment is continuing to drive future growth.
However, the UK library markets have continued to be extremely tough, with an adverse effect on the division's overall margin. In response to these ongoing pressures, the library servicing operation has been restructured, which will improve efficiency and underpin business stability.
Whilst the UK wholesale market has seen an increase in revenue, the staff profile of the division's warehouse operation also means the introduction of the National Living Wage has had a disproportionate impact on the Books division. Management continues to work hard to mitigate this effect but inevitably it will add to cost pressure in the medium term. More broadly, operational performance has been strong as a result of improvements in the warehouse and to the quality of deliveries.
Looking ahead, the Group will continue to invest in Wordery and capitalise on the return to growth of the UK consumer market.
HEALTH AND SAFETY
The Group is committed to ensuring our staff work at all times across all divisions in a safe environment with clear processes, regular and appropriate training and a culture of attention to safety in all that we do. Across the Group, we work round the clock to manage the movement of goods and vehicles, often under extreme time pressure. In these conditions, the safety of our workforce must be paramount.
This year, following the acquisition of Tuffnells, we have invested heavily in training, our facilities and our vehicles in order to reduce hazards and accidents. It was therefore deeply distressing that in January 2016 a fatal accident took place at Tuffnells' Brierley Hill depot. Since the incident we have been assisting the Health & Safety Executive in its investigation, which is ongoing. We are also making every effort to learn from the circumstances and root causes of this tragic event and our thoughts have been with the family affected and we have worked to support affected colleagues too.
In the event that the Parcel Freight division is charged and subsequently found guilty of a Health and Safety offence, then a fine and associated costs will be incurred, for which we are not insured. In the opinion of the Board and its advisers, there is significant uncertainty over the potential outcome and timing of this process. Having considered these uncertainties and having regard for the circumstances surrounding this incident, the Board considers it appropriate to make a provision of £1.5m for any potential fine and associated legal costs in this matter as an Exceptional item. We will provide an update as further information becomes available.
GROUP STRATEGY
The Group is a specialist distributor, managing a portfolio of businesses to achieve long term, sustainable profit growth and strong cash generation. This in turn supports the balance of dividend, deleverage and re-investment for further growth, both in the existing businesses or through new acquisitions.
The experience this year reinforces the Board's view that there are increasing opportunities to leverage the Group's capabilities, driven by an acceleration of the collaboration between Smiths News and Tuffnells.
In News & Media, Smiths News will continue to focus on strong cash generation, achieved by a combination of relatively predictable revenues and a clear focus on the need for sustainable efficiencies. Complementing the core news wholesale business is the investment in organic growth, primarily in the Click & Collect market.
Parcel Freight is an important element of growth and continued investment will help to give it the capacity and capability to capitalise on its position as the leading IDW specialist. In parallel, closer cooperation with Smiths News will leverage the combined strengths of the Group's two largest businesses.
In Education & Care the plan remains to drive market share and profit growth through the e-commerce strategy, while maintaining the division's strong cash contribution to the Group. In Books, the focus is on delivering further growth in Wordery, which, together with tight cost management, will underpin stability and continued cash generation.
BOARD CHANGES
As announced in July 2016, David Bauernfeind, Chief Financial Officer, joined Connect Group in August 2016 and subsequently joined the Board on 1 October 2016. At the same time, Nick Gresham, stepped down from the Board but will remain with the Group until later in the calendar year to ensure a thorough and smooth handover to David. A chartered accountant, David was previously Chief Financial Officer and Executive Director at Xchanging PLC, a position he held from 2011 until its takeover and delisting in June 2016. Before joining Xchanging PLC in 2001, David held management roles in BAE Systems PLC and Johnson Matthey PLC.
SUMMARY AND OUTLOOK
The Group has achieved a solid financial performance in FY2016 against a backdrop of the challenging conditions in some of its markets. Despite this, it has made further progress in delivering its key operational priorities, whether the continued realisation of cost efficiencies or the development of its growth strategy. In addition, the opportunities to leverage the Group's capabilities, most notably between Smiths News and Tuffnells, are moving ahead.
Despite challenging markets and increased investment in our business, we are confident of delivering a robust performance in FY2017 and are confident in our longer term prospects.
FINANCIAL REVIEW
GROUP
| Adjusted results (1) £m | 2016 | 2015 | Change |
| Revenue | 1,906.5 | 1,875.1 | 1.7% |
| Gross profit | 256.4 | 236.9 | 8.2% |
| Operating costs | (188.7) | (173.1) | (9.0)% |
| Operating profit | 67.7 | 63.8 | 6.2% |
| Net finance costs | (7.0) | (7.3) | 3.7% |
| Profit before tax | 60.7 | 56.5 | 7.4% |
| Taxation | (12.4) | (11.1) | (11.1)% |
| Tax rate | 20.4% | 19.7% | |
| Profit after tax | 48.3 | 45.4 | 6.4% |
Total Group operating profit for the year was £67.7m, up 6.2% on the prior year (FY2015: £63.8m), benefitting from a full year of Tuffnells, and underpinned by solid performances from both the News & Media and Education & Care divisions.
After net finance charges of £7.0m, total Group Profit before Tax was £60.7m, up 7.4% on last year.
Taxation of £12.4m resulted in an effective tax rate of 20.4%, which was in line with expectations and slightly lower than in the first half.
EPS AND DIVIDEND
| | Adjusted (1) | Statutory | ||
| | 2016 | 2015 | 2016 | 2015 |
| Earnings attributable to ordinary shareholders (£m) | 48.3 | 45.5 | 33.4 | 21.5 |
| Basic weighted average number of shares (millions) | 243.4 | 230.9 | 243.4 | 230.9 |
| Basic EPS | 19.8p | 19.7p | 13.7p | 9.3p |
| Diluted weighted number of shares (millions) | 247.2 | 238.5 | 247.2 | 238.5 |
| Diluted EPS | 19.5p | 19.0p | 13.5p | 9.0p |
| Dividend per share (paid & proposed) | 9.5p | 9.2p | 9.5p | 9.2p |
| Dividend per share (recognised) | 9.3p | 8.9p | 9.3p | 8.9p |
Earnings attributable to shareholders on an adjusted basis of £48.3m resulted in an adjusted EPS of 19.8p, an increase of 0.5% year on year. The increased profitability in the year has been offset by the continued increase in the weighted average basic shares from 230.9m last year to 243.4m for the period, as a result of the December 2014 Rights Issue.
The fully diluted number of shares was 247.2m (FY2015: 238.5m). Fully diluted shares includes 2.3m shares for employee incentive schemes (FY2015: 4.1m) and 1.5m shares (FY2015: 3.5m) for the deferred consideration arising out of the Tuffnells acquisition.
Including Exceptional items, statutory earnings attributable to shareholders of £33.4m resulted in an EPS of 13.7p, up 47.3% on FY2015.
The Board is proposing a final dividend of 6.5p, taking the full year dividend to 9.5p, an increase of 0.3p or 3.3% (FY2015: 9.2p). The proposed final dividend for the year ended 31 August 2016 of 6.5p is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these accounts. The proposed dividend, if approved, will be paid on 10 February 2017 to shareholders on the register at close of business on 13 January 2017.
NEWS DISTRIBUTION
| Adjusted figures (1) - £m | 2016 | 2015 | Change | LFL (6) |
| Revenue | 1,443.8 | 1,479.3 | (2.4%) | (3.4%) |
| Gross profit | 120.0 | 120.7 | (0.5%) | |
| Operating costs | (80.0) | (79.3) | (0.9%) | |
| Operating profit | 40.0 | 41.4 | (3.4%) | |
| Gross margin | 8.3% | 8.2% | 0.1% | |
| Cost ratio | (5.5%) | (5.4%) | (0.1%) | |
| Operating margin | 2.8% | 2.8% | - | |
News Distribution revenues of £1,443.8m represented a 2.4% decrease on FY2015 and like for like revenues were down 3.4% which remains comfortably within the Group's medium term forecast range of between -3.0% and -5.0% per annum.
Gross margin was broadly in line with the prior year up 0.1%.
The cost ratio was in line with prior year, as a result of a total cost saving of £5m. Network savings and continued operational efficiencies combined to deliver our targeted cost savings for the year, being partly offset by ongoing investments, predominantly in Pass My Parcel, which incurred £4m loss in the period.
Adjusted operating profit of £40.0m decreased 3.4% on the prior year, which includes the impact of the increased losses in Pass My Parcel. Operating margin of 2.8% remained flat on prior year.
MEDIA
| Adjusted figures (1) - £m | 2016 | 2015 | Change | LFL (6) |
| Revenue | 27.6 | 25.4 | 8.9% | 1.6% |
| Gross profit | 14.2 | 12.5 | 13.5% | |
| Operating costs | (11.8) | (10.2) | (16.1%) | |
| Operating profit | 2.4 | 2.3 | 3.5% | |
| Gross margin | 51.5% | 49.2% | 2.3% | |
| Cost ratio | (42.8%) | (40.2%) | (2.6%) | |
| Operating margin | 8.6% | 9.1% | (0.5%) | |
Media revenues of £27.6m were up 8.9% on prior year, as a result of a number of new contract wins in both print and digital media.
Gross margin was 51.5%, up 2.3% on prior year.
Adjusted operating profit of £2.4m was 3.5% up on the prior year and resulted in an operating margin of 8.6%, down 0.5% on prior year.
PARCEL FREIGHT
| Adjusted figures (1) - £m | 2016 | 52 week 2015 | Change | LFL | 36 weeks 2015 |
| Revenue | 174.4 | 162.6 | 7.3% | 7.3% | 114.4 |
| Gross profit | 57.6 | | | | 40.3 |
| Operating costs | (42.6) | | | | (30.6) |
| Operating profit | 15.0 | 14.3 | 4.9% | | 9.7 |
| Gross margin | 33.0% | | | | 35.2% |
| Cost ratio | (24.4%) | | | | (26.8%) |
| Operating margin | 8.6% | 8.8% | | | 8.5% |
Parcel Freight revenues of £174.4m were up 7.3% on the equivalent 12 month period to 31 August 2015. Strong revenue performance has been driven by improved service, increased capacity and a number of new client wins leading to an 11% growth in overall customers.
Gross margin was 33.0%, 2.2% down on the 36 week period in the prior year since acquisition.
Adjusted operating profit of £15.0m increased 4.9% on an equivalent 52 week period, as the division continued to invest in modernising and expanding the network to support sustainable growth for the future. This resulted in an operating margin of 8.6% down 0.2% on the 52 week period.
EDUCATION & CARE
| Adjusted figures (1) - £m | 2016 | 2015 | Change | LFL (6) |
| Revenue | 64.8 | 65.9 | (1.6%) | (2.4%) |
| Gross profit | 28.7 | 28.0 | 2.3% | |
| Operating costs | (20.9) | (20.2) | (3.2%) | |
| Operating profit | 7.8 | 7.8 | (0.1%) | |
| Gross margin | 44.2% | 42.5% | 1.7% | |
| Cost ratio | (32.2%) | (30.7%) | (1.5%) | |
| Operating margin | 12.0% | 11.8% | 0.2% | |
Education & Care revenues of £64.8m were down 1.6% on the prior year and down 2.4% on a like for like basis. Core revenues in Education, Care and Early Years decreased 2.2% impacted by an increase in teacher pension and National Insurance costs that had to be absorbed by school budgets. The continued progress of Early Years confirms our relative strength in this sector, securing a fourth consecutive year of growth and an overall CAGR of 12% since our acquisition in 2012.
Gross margin was 44.2%, up 1.7% on prior year driven by a continued focus on more profitable sales in core markets and a stronger own brand mix. The cost ratio of 32.2% declined 1.5% on prior year.
Adjusted operating profit of £7.8m was broadly flat on the prior year, down 0.1% and resulted in an operating margin of 12.0% up 0.2% on prior year.
BOOKS
| Adjusted figures (1) - £m | 2016 | 2015 | Change | LFL (6) |
| Revenues | 195.9 | 190.1 | 3.1% | 7.4% |
| Gross profit | 37.2 | 36.4 | 2.2% | |
| Operating costs | (34.7) | (33.8) | (2.6%) | |
| Operating profit | 2.5 | 2.6 | (3.8%) | |
| Gross margin | 19.0% | 19.2% | (0.2%) | |
| Cost ratio | (17.7%) | (17.8%) | 0.1% | |
| Operating margin | 1.3% | 1.4% | (0.1%) | |
Books revenue of £195.9m was 3.1% up on the prior period, as the continued strong progress in Wordery, up 26%, and a good recovery in UK wholesale business up 9%, were largely offset by challenges in the library markets and cost pressures that could not be fully mitigated in the period.
Gross margin was 19.0% down 0.2% on prior year despite a continued focus of exiting or renegotiating low margin contracts. The cost ratio was 17.7% which decreased 0.1% on the prior year.
Adjusted operating profit of £2.5m was down 3.8% on prior year, which was adversely affected by the challenging conditions in the libraries market and cost headwinds, including the impact of National Living Wage. This resulted in an operating margin of 1.3% down 0.1% on the prior year.
EXCEPTIONAL ITEMS (1)
| £m | 2016 | 2015 |
| | | |
| Network and re-organisation costs | (4.4) | (4.5) |
| Acquisition and disposal costs | (3.8) | (15.1) |
| Pension credit | 1.1 | - |
| Amortisation of acquired intangibles | (10.2) | (7.9) |
| Legal provision - potential health and safety offences | (1.5) | - |
| Total before finance costs and taxation | (18.8) | (27.5) |
| Taxation | 3.9 | 3.5 |
| Total after taxation | (14.9) | (24.0) |
The statutory profit impact of these in the year was £18.8m before tax (FY2015: £27.5m).
Network and reorganisation costs of £4.4m are predominantly property and staff rationalisation costs to drive efficiency savings in Smiths News of £2.5m. They also include costs to support the strategic review and reorganisation of the Books division and one off costs for the back office re-organisation in Education & Care and planned leadership changes at Parcel Freight.
Acquisition and disposal costs of £3.8m include £1.9m of anticipated deferred consideration for Tuffnells and Wordery. There is a maximum of £3.6m future deferred consideration to expense in future years. There was also £1.9m incurred on external fees relating to acquisition and disposal activity in the period.
The £1.1m pension credit relates to Education & Care adjustments to reduce discretionary increases on the Consortium scheme.
The largest item in the year, at £10.2m, was the non cash amortisation of intangibles resulting from previous acquisitions. The net book value of the acquired intangibles of £55.2m will continue to be amortised over future years.
As a result of the continuing investigation by the Health & Safety Executive into the fatality at Parcel Freight's Brierley Hill depot in January 2016 a provision of £1.5m has been charged as an exceptional item in respect of any potential fine and legal costs. See provisions note for further details.
The total cash impact of exceptional items, including relating to prior periods, was £10.8m. This comprised of £5.1m deferred consideration relating to Tuffnells, with the remainder being network reorganisation and other restructuring costs.
FREE CASH FLOW (2)
| £m | 2016 | 2015 |
| Adjusted operating profit | 67.7 | 63.8 |
| Depreciation & amortisation | 13.4 | 11.6 |
| Adjusted EBITDA | 81.1 | 75.4 |
| Working capital movements | - | (8.0) |
| Capital expenditure | (13.9) | (9.2) |
| Net interest and fees | (4.9) | (5.8) |
| Taxation | (8.5) | (8.7) |
| Pension funding | (5.3) | (5.4) |
| Other | 1.1 | 1.5 |
| Free cash flow | 49.6 | 39.8 |
Free cash flow generation remains one of the Group's key strengths, delivering a strong cash performance in the period, generating £49.6m in free cash flow, an increase of 24.6% on prior year.
Net interest and fees of £4.9m is lower than the prior year which included re financing fees relating to the acquisition of Tuffnells in December 2014.
The cash tax and pension funding remain in line with our expectations.
NET DEBT (4)
| £m | 2016 | 2015 |
| Opening net debt | (153.4) | (93.0) |
| Free cash flow | 49.6 | 39.8 |
| Dividend paid | (22.7) | (21.4) |
| Exceptional items | (10.8) | (8.2) |
| Net acquisition financing | - | (67.0) |
| Finance lease payments and other | (4.4) | (3.6) |
| Closing net debt | (141.7) | (153.4) |
Net Debt closed the period at £141.7m, which was in line with our expectations.
Net Debt at £141.7m improved on prior year and our Net Debt/EBITDA ratio of 1.7x, down from 1.9x improved year on year as a result of strong free cash flow generation, even after exceptional items. This has enabled a £11.7m reduction in net debt while delivering £22.7m in dividend payments.
We remain comfortably within our Bank facilities of £250m, available through to November 2018 and also within our covenant ratios. We will, in line with the normal cycle, renew our facilities in the coming financial year and are already planning this process with our lenders.
Although we will be increasing our capital investment in the business, in particular in Parcel Freight, we remain committed to our stated aim to continue to reduce Net Debt and our medium term plans support this.
The total cash impact of exceptional items, including relating to prior periods, was £10.8m. This comprised £5.1m deferred consideration payments relating to Tuffnells, with the remainder being network reorganisation and other restructuring costs.
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 £641.5m and an actuarial deficit of £23.0m as at June 2013. As at 31 August 2016 the IAS19 surplus of £151.3m (FY2015: £135.6m) was not recognised in the accounts as the amount available on a reduction of future contributions is £nil.
The Group recognises the present value of the agreed schedule of future contributions as a pension liability of £10.3m on the balance sheet (FY2015 £13.8m).
The two Consortium defined benefit schemes have combined assets of £17.7m and a combined actuarial deficit of £1.5m as at December 2013. As at 31 August 2016 the combined IAS19 deficit was £7.9m.
The Tuffnells defined benefit scheme has assets of £12.7m and an actuarial deficit of £2.5m as at 1 April 2013. As at 31 August 2016 the IAS19 deficit was £3.0m.
The total cash contribution of defined benefit schemes and expenses in the cash flow statement for FY2016 was £5.3m (FY2015: £5.4m).
FUTURE ASSUMPTIONS
Key inputs for modelling include:
We will be increasing our investment in Pass My Parcel, however, as revenues rise we expect to see a reduction in losses to £2.5m in FY2017 in comparison with the £4m loss in FY2016.
Employee related costs include an estimate of National Living Wage increases, which will continue to rise over the next two years. We expect the gross cost increase in FY2017 to be approximately £2m, and as wages rise towards the stated Government ambition of £9.00 per hour by 2020, we expect an ongoing gross increase of £5m per annum over the medium term. This impact is before we take any mitigating actions, which will include accelerating cost efficiencies and some pricing flexibility outside of Smiths News' long term contracts. At the profit after tax level, two future reductions in the UK corporation tax rate will further mitigate the impact on earnings. We will continue to provide updates as the Group addresses each of these matters.
Capital expenditure in FY2017 is expected to be £25m up £11m on FY2016, before reducing in FY2018.
We expect free cash flow generation in FY2017 to be approximately £40m. This is broadly flat on FY2016, after allowing for the increased capital investment in FY2017.
Net debt in FY2017 is expected to be consistent with FY2016. We then expect to see net debt reducing in 2018.
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 |
| Development of new technologies and demographics drives change in customer behaviour and supply chain dynamics resulting in structural market changes being deeper and quicker than predicted, including migration from print to digital. | Sales decline in newspapers and magazines are worse than expected (forecasted expectation of a -3% to -5% range) and/or the Books market is impacted, each resulting in lower profit and negative market sentiment related to printed media. | A consistent pattern and clear view of market volumes ensures more accurate forecasting and combines with an expectation of continued declines for newspapers and magazines. Management continues to identify efficiencies to compensate for market declines. The Parcel Freight division is a significant financial contributor toward the Group's overall results, mitigating market declines for newspapers, magazines and books. The Group's organic strategy, including Pass My Parcel, seeks to further protect the Group from over exposure to individual market risks.
|
| Change in Government policy, including the uncertainty of the impact of Brexit, economic conditions and/or competitive environment could adversely impact current and/or projected business performance above that included in the business planning and review process. | Reductions in discretionary spending may impact sales of newspapers, magazines or books and/or see a reduction in parcel volumes. Reductions in Government spending may also be seen, potentially reducing consumables budgets in schools. Uncertainty from Brexit may affect the Group in both the short and medium term on trade arrangements, future capital investment strategies, resourcing costs, availability and government strategy on public services/schools.
| Annual budgets and quarterly forecasts take into account potential macro market and competitive impacts when setting expectations internally and externally, allowing for or changing objectives to meet short and medium term financial targets. Management has a track record of delivering revenues and efficiencies to compensate for market impacts. |
| Major supplier or customer loss / consolidation or dominance changes the trading relationship, impacting current and projected business performance. | Impact on supply of product or route to market may erode margin and/or increase cost to serve. | In News & Media, publishers typically award five year contracts supporting the market structure. The Books, Education & Care and Parcel Freight divisions operate in very fragmented markets with fewer key significant suppliers or customers. Strong relationships across the supply chain help the Group to understand and demonstrate its strengths for the benefit of its suppliers and customers.
|
| Failure to deliver business plans and/or financial returns on recent acquisitions or new initiatives or a failure to identify new organic growth opportunities or acquisitions impacts external confidence and shareholder perception, bringing into question the future strategic direction of the Group and confidence in its delivery. | Sales and/or profit expected from acquisitions / organic growth may not be met and/or the Group's reputation and support for future acquisitions are challenged. Cultural change for diversification results in reduced performance and financial returns. Uncertainty from Brexit may affect the Group in both the short and medium term on trade arrangements, future capital investment strategies, resourcing costs and availability and government strategy on public services/schools.
| Financial and operational metrics are considered along with risk assessments and impact on management before decisions are made. Performance to plans are reviewed monthly with post investment analysis producing a more thorough review of each acquisition within 12 months after completion. Detailed integration process, governance and support framework ensures effective and timely adoption of standards and process into acquisitions. |
| Legislative changes or interpretation impacting the engagement of employees and delivery contractors result in an increase in the number of employees and/or costs, including the uncertainty of the impact of Brexit. | Increased number of employees or cost per employee increases the cost base and potentially creates greater redundancy liabilities from future efficiency programmes. Brexit uncertainty over the continued availability of EU workforce and/or treatment of current EU workers in the UK could result in the short and medium term shortage of labour and/or increased labour costs. | Self-employed delivery contractors have clearly articulated agreements defining tasks they are contracted to provide to News & Media with annually set commercial terms. The introduction of the National Living Wage (and future anticipated increases) impacts only a limited proportion of employees, when assessed across the Group as a whole. The associated knock-on impact of the National Living Wage to maintain wage differentials across grades will continue to be monitored. Regular checks are carried out by Internal Audit across the Group network ensuring understanding and compliance.
|
| Breach of airside security at DMD exposes the business to penalties and/or reputational impact, leading to increased costs and potentially loss of contracts.
| Costs could increase through additional security requirements and/or penalties, with severe reputational damage potentially causing the loss of contracts for our media business. | External security advice supports internal staff to review DMD's exposure, measure effectiveness of controls and recommend new controls if required. In addition, insurance is taken out to cover the Group from major risks. |
| Major business disruption incurred through operational events (e.g. contractor / employee disputes, increasing reliance on centralised system solutions and complex operations, including single sites) are not supported by robust Business Continuity Planning and Disaster Recovery solutions to prevent disruption outside of expected tolerances.
| Trading capability, customer experience and sales/margin performance impacted through inability to operate due to systems outages, location access or employee/contractor strikes. | Investment is made to provide disaster recovery capability across the Group for all essential systems. Expertise is used to provide guidance and the Group operates an external disaster recovery facility. In addition, a programme led centrally ensures business continuity planning procedures and standards are embedded across the divisions. |
| Loss of key executives and subsequent loss of knowledge and skills impacts current and future business performance. | Loss of key skills and leadership impacts the capability of the Group to deliver its strategic goals. | Performance and capability management processes are in place, reviewed by the Remuneration Committee and Group Executive. Succession planning for critical roles and development plans for key individuals is also reviewed by the Nominations Committee.
|
| 3 year strategic business plan is jeopardised by constraints on capacity and/or increasing costs of divisional premises and equipment/systems to meet growth plans.
| Inability of warehousing / operational / IT and support systems to meet growth expectations of the Group, creates poor customer experience, increased investment costs and reduced profitability. | The annual business and strategic planning process ensures appropriate investment is budgeted to ensure growth targets are achieved. |
| Effort required for organisational change in new and established organisations is increased due to lack of appropriate skills. Creates excessive demands on new and existing staff. Results in loss of key people, lack of engagement and loss of in-depth knowledge and specialist skills impacting both current and future business performance.
| Management's focus on current business operations and performance is distracted by organisational change and new initiatives. Management become overstretched and demotivated by demands of the Group and exit, taking valuable skills and knowledge with them. | Organisational and cultural change is a key imperative, leading to investment in resources and skills that are required to deliver the successful integration and development of new businesses and business critical initiatives, including investment in expert skills in change management and project management. |
| Failure to embed and promote health and safety standards in current and recently acquired businesses, results in serious injury to employees and/or the public. Reputational impact and breach in regulatory standards leads to loss of operating license, significant financial and personal penalties.
| Health and safety practices are not embedded within the Group resulting in serious incidents, reputational impact and/or loss of regulatory licences (e.g. operator's licence). | Group oversight is led by the Group Head of Health & Safety to ensure good practice standards are embedded across the divisions as standard operating practices. Current strategies exist for divisions to manage/train health and safety standards, with dedicated roles assigned. The Parcel Freight division continue to focus on execution of key deliverables and areas identified for further improvement, with clear action plans and dedicated resources allocated. Significant continued investment is budgeted for health and safety improvements across the estate in FY2017. |
DIRECTORS' RESPONSIBILITIES STATEMENT
The responsibility statement has been prepared in connection to the Company's full Annual Report for the year ended 31 August 2016. Certain parts of the Annual Report are not included in this announcement, as described in note 1.
Responsibility statement
We confirm that to the best of our knowledge:
· the financial statements, prepared in accordance with the relevant financial reporting framework, 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 Operating Review and Financial Review 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 that they face; and
This responsibility statement was approved by the board of directors on 18 October 2016 and is signed on its behalf by:
| Mark Cashmore | David Bauernfeind |
| Group Chief Executive | Chief Financial Officer |
Connect Group PLC
Group Income Statement for the year ended 31 August 2016
| £m | | 2016 | | 2015 | ||||
| | Note | Adjusted* | Adjustments | Total | | Adjusted* | Adjustments | Total |
| | | | | | | | | |
| Revenue | 2 | 1,906.5 | - | 1,906.5 | | 1,875.1 | - | 1,875.1 |
| Operating profit | 2,3 | 67.7 | (18.8) | 48.9 | | 63.8 | (27.5) | 36.3 |
| Finance costs | 6 | (7.0) | - | (7.0) | | (7.3) | - | (7.3) |
| Profit before tax | | 60.7 | (18.8) | 41.9 | | 56.5 | (27.5) | 29.0 |
| Income tax expense | 7 | (12.4) | 3.9 | (8.5) | | (11.1) | 3.5 | (7.6) |
| Profit for the year | | 48.3 | (14.9) | 33.4 | | 45.4 | (24.0) | 21.4 |
| | | | | | | | | |
| Profit attributable to equity shareholders | | 48.3 | (14.9) | 33.4 | | 45.5 | (24.0) | 21.5 |
| Loss attributable to non-controlling interest | | - | - | - | | (0.1) | - | (0.1) |
| | | 48.3 | (14.9) | 33.4 | | 45.4 | (24.0) | 21.4 |
| Earnings per share | | | | | | | | |
| Basic | 9 | 19.8p | | 13.7p | | 19.7p | | 9.3p |
| Diluted | 9 | 19.5p | | 13.5p | | 19.0p | | 9.0p |
| | | | | | | | | |
| Equity dividends per share (paid and proposed) | 8 | | | 9.5p | | | | 9.2p |
* Adjusted before Exceptional items.
All amounts are derived from continuing operations.
Group Statement of Comprehensive Income for the year ended 31 August 2016
| £m | Note | 2016 | 2015 |
| Items that will not be reclassified to the Group Income Statement | | | |
| Actuarial (loss)/gain on defined benefit pension scheme | 5 | (2.0) | 53.5 |
| Impact of IFRIC 14 on defined benefit pension scheme | 5 | (6.5) | (52.8) |
| Tax relating to components of other comprehensive income that will not be reclassified | 7 | 1.7 | (0.1) |
| | | (6.8) | 0.6 |
| Items that may be subsequently reclassified to the Group Income Statement | | | |
| Loss on cash flow hedges | 17 | (1.2) | (0.6) |
| Currency translation differences | | 0.6 | (0.1) |
| Tax relating to components of other comprehensive income that may be reclassified | 7 | (0.3) | - |
| | | (0.9) | (0.7) |
| Other comprehensive income for the year | | (7.7) | (0.1) |
| Profit for the year | | 33.4 | 21.4 |
| Total comprehensive income for the year | | 25.7 | 21.3 |
| Total comprehensive income attributable to equity shareholders | | 25.7 | 21.4 |
| Total comprehensive income attributable to non-controlling interest | | - | (0.1) |
Group Balance Sheet at 31 August 2016
| £m | Note | 2016 | 2015 |
| Non-current assets | | | |
| Intangible assets | 10 | 164.8 | 174.8 |
| Property, plant and equipment | | 50.3 | 44.6 |
| Interest in jointly controlled entities | | 4.1 | 4.5 |
| Retirement benefit assets | 5 | 0.3 | 0.4 |
| Deferred tax assets | | 7.7 | 7.5 |
| | | 227.2 | 231.8 |
| Current assets | | | |
| Inventories | | 42.3 | 42.0 |
| Trade and other receivables | | 139.2 | 147.3 |
| Derivative financial instruments | | 0.1 | - |
| Cash and cash equivalents | 11 | 9.1 | 10.9 |
| | | 190.7 | 200.2 |
| Total assets | | 417.9 | 432.0 |
| Current liabilities | | | |
| Trade and other payables | | (198.8) | (203.5) |
| Current tax liabilities | | (6.9) | (5.4) |
| Bank loans and other borrowings | 11 | (61.0) | (56.5) |
| Obligations under finance leases | 12 | (3.0) | (2.9) |
| Retirement benefit obligations | 5 | (4.1) | (3.3) |
| Provisions | 13 | (8.5) | (10.4) |
| | | (282.3) | (282.0) |
| Non-current liabilities | | | |
| Retirement benefit obligations | 5 | (17.4) | (15.2) |
| Bank loans and other borrowings | 11 | (79.1) | (98.4) |
| Obligations under finance leases | 12 | (7.7) | (6.5) |
| Derivative financial instruments | | (1.5) | (0.2) |
| Other non-current liabilities | | (1.1) | (1.0) |
| Deferred tax liabilities | | (10.9) | (13.5) |
| Non-current provisions | 13 | (4.9) | (6.0) |
| | | (122.6) | (140.8) |
| Total liabilities | | (404.9) | (422.8) |
| Total net assets | | 13.0 | 9.2 |
| £m | Note | 2016 | 2015 |
| Equity | | | |
| Called up share capital | 16(a) | 12.3 | 12.2 |
| Share premium account | 16(c) | 59.2 | 55.2 |
| Demerger reserve | 17(a) | (280.1) | (280.1) |
| Own shares reserve | 17(b) | (3.5) | (4.1) |
| Hedging & translation reserve | 17(c) | (1.1) | (0.5) |
| Retained earnings | | 226.2 | 226.5 |
| Total shareholders' equity | | 13.0 | 9.2 |
The accounts were approved by the Board of Directors and authorised for issue on 18 October 2016 and were signed on its behalf by:
Registered number - 05195191
Mark Cashmore David Bauernfeind
Group Chief Executive Chief Financial Officer
Group Statement of Changes in Equity for the year ended 31 August 2016
| £m | Note | Share capital | Share premium account | Demerger reserve | Own shares reserve | Hedging & translation reserve | Retained earnings | Non- controlling interests in equity | Total |
| 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 | 16 | 2.7 | 49.9 | - | - | - | - | - | 52.6 |
| Reclassification between reserves | | - | - | - | - | 0.5 | (0.5) | - | - |
| Purchase of own shares | | - | - | - | (4.2) | - | - | - | (4.2) |
| Dividends paid | 8 | - | - | - | - | - | (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 | 16, 17 | 12.2 | 55.2 | (280.1) | (4.1) | (0.5) | 226.5 | - | 9.2 |
| Profit for the year | | - | - | - | - | - | 33.4 | - | 33.4 |
| Loss on cash flow hedges | | - | - | - | - | (1.2) | - | - | (1.2) |
| Actuarial loss on defined benefit pension scheme | | - | - | - | - | - | (2.0) | - | (2.0) |
| Impact of IFRIC 14 on defined benefit pension scheme | | - | - | - | - | - | (6.5) | - | (6.5) |
| Currency translation differences | | - | - | - | - | 0.6 | - | - | 0.6 |
| Tax relating to components of other comprehensive income | | - | - | - | - | - | 1.4 | - | 1.4 |
| Total comprehensive income for the year | | - | - | - | - | (0.6) | 26.3 | - | 25.7 |
| Issue of share capital | 16 | 0.1 | 4.0 | - | - | - | - | - | 4.1 |
| Purchase of own shares | | - | - | - | (1.1) | - | - | - | (1.1) |
| Dividends paid | 8 | - | - | - | - | - | (22.7) | - | (22.7) |
| Employee share schemes | | - | - | - | 1.7 | - | (1.7) | - | - |
| Recognition of share based payments net of tax | | - | - | - | - | - | (2.2) | - | (2.2) |
| Balance at 31 August 2016 | 16, 17 | 12.3 | 59.2 | (280.1) | (3.5) | (1.1) | 226.2 | - | 13.0 |
Group Cash Flow Statement for the year ended 31 August 2016
| £m | Note | 2016 | 2015 |
| Net cash inflow from operating activities | 15 | 58.2 | 46.5 |
| Investing activities | | | |
| Dividends received from associates | | 0.7 | 0.2 |
| Acquisitions | | - | (105.7) |
| Purchase of property, plant and equipment | | (9.1) | (4.7) |
| Purchase of intangible assets | | (4.8) | (4.5) |
| Net cash used in investing activities | | (13.2) | (114.7) |
| Financing activities | | | |
| Interest paid | | (4.9) | (5.8) |
| Dividend paid | 8 | (22.7) | (21.4) |
| Purchase of equity in subsidiary | | - | (5.1) |
| Repayments of obligations under finance leases | | (3.5) | (2.9) |
| Proceeds on issue of shares | | 0.4 | 52.6 |
| Net outflow on purchase of shares for Employee Benefit Trust | | (1.1) | (4.2) |
| New bank loans raised | | - | 50.0 |
| Decrease in borrowings | | (15.5) | (4.4) |
| Net cash(used in)/from financing activities | | (47.3) | 58.8 |
| | | | |
| Net decrease in cash and cash equivalents | | (2.3) | (9.4) |
| Effect of foreign exchange rate changes | | 0.5 | (0.1) |
| | | (1.8) | (9.5) |
| Opening net cash and cash equivalents | | 10.9 | 20.4 |
| Closing net cash and cash equivalents | 11 | 9.1 | 10.9 |
Analysis of net debt
| £m | Note | 2016 | 2015 |
| Cash and cash equivalents | 11 | 9.1 | 10.9 |
| Current borrowings | 11 | (61.0) | (56.5) |
| Non-current borrowings | 11 | (79.1) | (98.4) |
| Net borrowings | | (131.0) | (144.0) |
| Finance lease liabilities | 12 | (10.7) | (9.4) |
| Net debt | | (141.7) | (153.4) |
The year on year movement in net borrowings includes £0.7m amortisation of bank fees.
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 2016. The accounting policies have been applied consistently throughout the years ended 31 August 2016 and 31 August 2015.
The following Standards have been adopted without any significant impact on the amounts reported in these financial statements:
· IAS19 (amended) 'Defined Benefit Plans: Employee Contributions' (effective February 2015)
The financial information set out in these results does not constitute the Group's statutory accounts for the years ended 31 August 2016 and 31 August 2015 but is derived from those accounts. Statutory accounts for Connect Group PLC for the year ended 31 August 2015 have been delivered to the Registrar of Companies and those for the year ended 31 August 2016 will be delivered following the Company's Annual General Meeting. The auditor's reports on the 2015 and the 2016 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 2016 at www.connectgroupplc.com.
These results were approved by the Board of Directors on 18 October 2016.
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: News Distribution (also referred to as Smiths News)
| | The UK market leading distributor of newspapers and magazines to 30,000 retailers across England and Wales from 42 distribution centres. |
| Connect News & Media: Media (also referred to as DMD)
| | A supplier of newspaper and magazines to airlines and a provider of inflight services. |
| Connect Parcel Freight (also referred to as Tuffnells)
| | A leading provider of next day B2B delivery of mixed parcel freight consignments. |
| Connect Education and Care (also referred to as The Consortium)
| | A leading distributor of education and care consumable products servicing 30,000 customers across the UK. |
| Connect Books (also referred to as Bertrams, Dawson Books and Wordery)
| | A leading UK distributor of physical and digital books to high street and on-line retailers, public libraries, academic institutions and direct to consumers with a strong international presence, supplying 100 countries. |
The following is an analysis of the Group's revenue and results by reportable segment:
| | | Revenue | |
| £m | | 2016 | 2015 |
| Connect News & Media: News Distribution | | 1,443.8 | 1,479.3 |
| Connect News & Media: Media | | 27.6 | 25.4 |
| Connect Parcel Freight | | 174.4 | 114.4 |
| Connect Education and Care | | 64.8 | 65.9 |
| Connect Books | | 195.9 | 190.1 |
| Total Group | | 1,906.5 | 1,875.1 |
| | | 2016 | 2015 | ||||
| £m | | Adjusted operating profit | Exceptional items | Statutory operating profit | Adjusted operating profit | Exceptional items | Statutory operating profit |
| Connect News & Media: News Distribution | | 40.0 | (5.9) | 34.1 | 41.4 | (18.2) | 23.2 |
| Connect News & Media: Media | | 2.4 | (0.4) | 2.0 | 2.3 | (0.4) | 1.9 |
| Connect Parcel Freight | | 15.0 | (8.9) | 6.1 | 9.7 | (4.6) | 5.1 |
| Connect Education and Care | | 7.8 | (1.1) | 6.7 | 7.8 | (2.1) | 5.7 |
| Connect Books | | 2.5 | (2.5) | - | 2.6 | (2.2) | 0.4 |
| Total group | | 67.7 | (18.8) | 48.9 | 63.8 | (27.5) | 36.3 |
| Net finance expense | | | | (7.0) | | | (7.3) |
| Profit before taxation | | | | 41.9 | | | 29.0 |
Information about major customers
Included in revenues arising from newspaper and magazine wholesaling are revenues of approximately £156.8m
(2015: £155.1m) 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 2016 or 2015.
Segment assets and liabilities
| | Assets | Liabilities | Net assets/(liabilities) | |||
| £m | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 |
| Connect News & Media: News | 89.4 | 93.1 | (280.4) | (293.0) | (191.0) | (199.9) |
| Connect News & Media: Media | 20.5 | 18.9 | (7.6) | (7.2) | 12.9 | 11.7 |
| Connect Parcel Freight | 175.9 | 176.5 | (49.0) | (40.5) | 126.9 | 136.0 |
| Connect Education and Care | 57.4 | 63.6 | (20.4) | (18.9) | 37.0 | 44.7 |
| Connect Books | 74.7 | 79.9 | (47.5) | (63.2) | 27.2 | 16.7 |
| Consolidated assets/(liabilities) | 417.9 | 432.0 | (404.9) | (422.8) | 13.0 | 9.2 |
Segment depreciation, amortisation and non-current asset additions
| | Depreciation | Amortisation | Additions to non-current assets | ||||
| £m | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |
|
| Connect News & Media: News | (4.5) | (4.2) | (2.3) | (1.8) | 5.2 | 8.0 |
|
| Connect News & Media: Media | (0.1) | (0.1) | (0.4) | (0.4) | 0.3 | 0.2 |
|
| Connect Parcel Freight | (3.3) | (1.8) | (7.1) | (4.7) | 11.1 | 131.8 |
|
| Connect Education and Care | (0.4) | (0.5) | (2.2) | (2.0) | 1.5 | 1.8 |
|
| Connect Books | (0.6) | (0.7) | (2.7) | (2.5) | 1.2 | 1.9 |
|
| Consolidated total | (8.9) | (7.3) | (14.7) | (11.4) | 19.3 | 143.7 |
Additions to non-current assets includes intangible assets and property, plant and equipment.
Geographical analysis
| £m | | Revenue by destination | Non-current assets by location of operation | ||
| | | 2016 | 2015 | 2016 | 2015 |
| United Kingdom | | 1,823.6 | 1,791.9 | 218.9 | 223.7 |
| Europe | | 47.5 | 48.8 | 0.3 | 0.2 |
| Rest of World | | 35.4 | 34.4 | - | - |
| Consolidated total | | 1,906.5 | 1,875.1 | 219.2 | 223.9 |
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:
| £m | | 2016 | 2015 | ||||
| | Note | Adjusted | Exceptional items | Total | Adjusted | Exceptional items | Total |
| Revenue | | 1,906.5 | - | 1,906.5 | 1,875.1 | - | 1,875.1 |
| Cost of inventories recognised as an expense | | (1,531.5) | - | (1,531.5) | (1,562.1) | - | (1,562.1) |
| Write down of inventories recognised as an expense | | (0.1) | - | (0.1) | (0.1) | - | (0.1) |
| Other cost of sales | | (118.5) | - | (118.5) | (76.0) | - | (76.0) |
| Cost of sales | | (1,650.1) | - | (1,650.1) | (1,638.2) | - | (1,638.2) |
| Gross profit | | 256.4 | - | 256.4 | 236.9 | - | 236.9 |
| Distribution costs | | (106.5) | - | (106.5) | (92.3) | - | (92.3) |
| Administrative expenses | | (76.3) | (8.6) | (84.9) | (76.3) | (12.9) | (89.2) |
| Share-based payment expense | | (1.7) | - | (1.7) | (1.3) | (6.7) | (8.0) |
| Amortisation of intangibles | 10 | (4.5) | (10.2) | (14.7) | (3.5) | (7.9) | (11.4) |
| Administrative expenses | | (82.5) | (18.8) | (101.3) | (81.1) | (27.5) | (108.6) |
| Share of profits from jointly controlled entities | | 0.3 | - | 0.3 | 0.3 | - | 0.3 |
| Operating profit | | 67.7 | (18.8) | 48.9 | 63.8 | (27.5) | 36.3 |
The operating profit is stated after charging/(crediting):
| £m | Note | 2016 | 2015 |
| Depreciation on property, plant & equipment | | 8.9 | 7.3 |
| Amortisation of intangible assets | 10 | 14.7 | 11.4 |
| Operating lease charges | | | |
| · occupied land and buildings | | 11.0 | 9.3 |
| · equipment and vehicles | | 19.4 | 12.1 |
| Operating lease rental income - land and buildings | | (0.4) | (0.1) |
| Loss on disposal of fixed assets | | - | 0.2 |
| Staff costs | | 153.7 | 136.5 |
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:
| £m | 2016 | 2015 |
| Fees payable to the Company's auditor for the audit of the Company's annual accounts | 0.2 | 0.2 |
| Fees payable to the Company's auditor for the audit of the Company's subsidiaries | 0.2 | 0.2 |
| Total audit fees | 0.4 | 0.4 |
| Other services | - | 0.2 |
| Total non-audit fees | - | 0.2 |
| Total fees | 0.4 | 0.6 |
In the prior year the Group incurred £0.2m of non-audit fees with Deloitte relating to acquisition/transaction support, remuneration advice and other advisory services.
4. Exceptional items
| £m | | | 2016 | 2015 |
| Network and re-organisation costs | | (a) | (4.4) | (4.5) |
| Acquisition and disposal costs | | (b) | (3.8) | (15.1) |
| Pension credit | | (c) | 1.1 | - |
| Amortisation of acquired intangibles | | (d) | (10.2) | (7.9) |
| Legal provision - potential health and safety offences | | (e) | (1.5) | - |
| Total before taxation | | | (18.8) | (27.5) |
| Income tax expense | | | 3.9 | 3.5 |
| Total after taxation | | | (14.9) | (24.0) |
The Group incurred a total of £14.9m (2015: £24.0m) in exceptional items, after tax.
This comprises:
(a) Network re-organisation costs
Network and re-organisation costs of £4.4m are predominantly rationalisation costs to drive efficiency savings in Smiths News. They also include costs incurred in the reorganisation of the Books international divisions and of operations within Education & Care.
(b) Acquisition and disposal costs
Acquisition costs include £1.9m in relation to deferred contingent consideration payable conditional on the financial performance and on continued employment of former owners of Tuffnells £1.1m and the acquisition of Wordery £0.8m. The remaining £1.9m related to professional fees on acquisition and disposal activity.
In the prior year acquisition related costs for the Tuffnells acquisition included £3.5m for deal expenses and cost of integration plus £11.6m of deferred contingent consideration payable conditional on the financial performance and on continued employment of former owners. A further £3.1m of equity raise expenses were charged directly to reserves.
(c) Pension credit
The pension credit is associated with the impact of the Trustees decision to cease payment of discretionary increases on pre 97 pension rights within The Consortium Care scheme which results in a past service credit.
(d) Amortisation of acquired intangibles
Amortisation of acquired intangibles of £10.2m (FY2015: £7.9m) 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 £55.2m will be amortised over future years.
(e) Legal provision - potential health and safety offences
Potential fine and legal costs arising from the outcome of the HSE investigation into the fatality at Parcel Freight's Brierley Hill depot in January 2016. See note 13 for further details.
5. Retirement benefit obligation
Defined benefit pension schemes
The Group operates four defined benefit schemes, of which the WH Smith Pension Trust (the 'Pension Trust') represents 92% of the total obligation at 31 August 2016. 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:
| £m | WH Smith Pension Trust | Consortium CARE | Platinum | Tuffnells Parcels Express | 2016 | WH Smith Pension Trust | Consortium CARE | Platinum | Tuffnells Parcels Express | 2015 |
| Present value of defined benefit obligation | (490.2) | (24.0) | (1.6) | (15.7) | (531.5) | (401.2) | (18.7) | (0.8) | (11.3) | (432.0) |
| Fair value of assets | 641.5 | 15.8 | 1.9 | 12.7 | 671.9 | 536.8 | 14.7 | 1.2 | 10.6 | 563.3 |
| Net surplus/ (loss) | 151.3 | (8.2) | 0.3 | (3.0) | 140.4 | 135.6 | (4.0) | 0.4 | (0.7) | 131.3 |
| Amounts not recognised due to asset limit | (151.3) | - | - | - | (151.3) | (135.6) | - | - | - | (135.6) |
| | - | (8.2) | 0.3 | (3.0) | (10.9) | - | (4.0) | 0.4 | (0.7) | (4.3) |
| Additional liability recognised due to minimum funding requirements | (10.3) | - | - | - | (10.3) | (13.8) | - | - | - | (13.8) |
| Pension liability | (10.3) | (8.2) | - | (3.0) | (21.5) | (13.8) | (4.0) | - | (0.7) | (18.5) |
| Pension asset | - | - | 0.3 | - | 0.3 | - | - | 0.4 | - | 0.4 |
The primary defined benefit pension scheme (the Smiths News Section of the WH Smith Pension Trust) has an IAS 19 surplus of £151.3m at 31 August 2016 (2015: £135.6m 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 £nil (2015: £nil). 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 actuarial valuation of the Smiths News section of the WH Smith Pension Trust, at June 2013 was a deficit of £23.0m.
Future cash contributions by the Group to the pension trustees and investment manager total £4.1m per annum through to March 2019. The Group recognises the present value of these agreed contributions as a pension liability of £10.3m (2015: £13.8m).
Other defined benefit schemes
For the Consortium CARE and Platinum schemes, the Group contributed £0.8m in 2016. The funding valuation of the Consortium CARE scheme as at 31 December 2013 was a deficit of £1.5m. The Platinum scheme's 31 December 2013 funding valuation showed no deficit. The triennial actuarial valuation of the Tuffnells Parcels Express scheme as at 1 April 2013 was an agreed liability of £2.5m. 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. | 2016 | 2015 | ||
| Discount rate | 2.0 | 3.8 | ||
| Inflation assumptions - CPI | 2.0 | 2.2 | ||
| Inflation assumptions - RPI | 3.0 | 3.2 | ||
| Demographic assumptions for WH Smith pension trust: | | | | |
| Life expectancy at age 65 | Male | Female | Male | Female |
| Member currently aged 65 | 21.5 | 23.5 | 21.7 | 23.7 |
| Member currently aged 45 | 22.8 | 25.0 | 23.0 | 25.2 |
A summary of the movements in the net balance sheet asset/(liability) and amounts recognised in the Group Income Statement and Other Comprehensive Income are as follows:
| £m | Fair value of scheme assets | Defined benefit obligation | Impact of IFRIC 14 on defined benefit pension schemes | Total |
| At 31 August 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) |
| 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) |
| Current service cost | - | (0.3) | - | (0.3) |
| Net interest cost | 20.9 | (15.8) | (5.7) | (0.6) |
| Administration expenses | (0.1) | - | - | (0.1) |
| Past service credits | - | 1.1 | | 1.1 |
| Total amount recognised in income statement | 20.8 | (15.0) | (5.7) | 0.1 |
| Actual less expected return on scheme assets | 115.4 | - | - | 115.4 |
| Actuarial gains arising from experience | - | 7.5 | - | 7.5 |
| Actuarial loss arising from changes in financial assumptions | - | (128.3) | - | (128.3) |
| Actuarial gains arising from changes in demographic assumptions | - | 3.4 | - | 3.4 |
| Change in surplus not recognised | - | - | (6.5) | (6.5) |
| Amount recognised in other comprehensive income | 115.4 | (117.4) | (6.5) | (8.5) |
| Employer contributions | 5.3 | - | - | 5.3 |
| Employee contributions | 0.1 | (0.1) | - | - |
| Benefit payments | (33.0) | 33.0 | - | - |
| Amounts included in cash flow statement | (27.6) | 32.9 | - | 5.3 |
| At 31 August 2016 | 671.9 | (531.5) | (161.6) | (21.2) |
| Included within Non-current assets | | 0.3 | ||
| Included within Current liabilities | | | | (4.1) |
| Included within Non-current liabilities | | | | (17.4) |
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:
| £m | | 2016 | 2015 |
| Swap financing portfolio | Unquoted | 388.0 | 431.9 |
| Interest rate and inflation swaps | Unquoted | 226.7 | 79.5 |
| Loan fund | Unquoted | 26.7 | 25.4 |
| Equities (CARE,Tuffnells) | Unquoted | 24.1 | 21.0 |
| Bonds (CARE,Platinum) | Unquoted | 6.1 | 5.0 |
| Cash (CARE,Platinum,Tuffnells) | | 0.3 | 0.5 |
| | | 671.9 | 563.3 |
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 2016 was a gain of £136.2m (2015: a gain of £48.7m).
The value of the assets held by the trust in Connect Group PLC issued financial instruments is £nil (2015: £nil).
Sensitivity of results to changes in the main assumptions:
| Assumption | Change in assumption | Impact on IAS 19 liabilities |
| Discount rate | +/- 0.5% | -£42.5m/+£45.9m |
| Rate of inflation | +/- 0.5% | +£42.5m/-£39.4m |
| Life expectancy | +/- 1 year | +£18.9m/-£18.9m |
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:
| £m | 2016 | 2015 | 2014 | 2013 | 2012 |
| Present value of defined benefit obligation | (531.5) | (432.0) | (450.7) | (419.2) | (395.3) |
| Fair value of assets | 671.9 | 563.3 | 522.7 | 469.6 | 433.1 |
| Impact of IFRIC 14 on defined benefit pension schemes | (161.6) | (149.4) | (93.0) | (73.5) | (73.8) |
| Net deficit in the schemes | (21.2) | (18.1) | (21.0) | (23.1) | (36.0) |
| Experience adjustments on scheme liabilities | (117.4) | 25.1 | 0.8 | (1.4) | (1.0) |
| Experience adjustments on scheme assets | 115.4 | 28.7 | 44.6 | 27.9 | 34.0 |
The cumulative amount of actuarial gains and losses recognised in the statement of comprehensive income since the adoption of IFRS is a loss of £29.2m (2015: a loss of £20.7m).
The group's defined benefit pension plans have a number of areas of risk, the most significant of which and they ways in which the Group has sought to manage them are set out below:
| Risk | Description |
| Changes in bond yields | Falling bond yields tend to increase the funding and accounting liabilities.
The assets held in the swap financing portfolio of the WH Smith PensionTrust 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, reducing the exposure to changes in bond yields.
The Care, Platinum and Tuffnells schemes both hold investments in corporate and government bonds which offer a degree of matching, i.e. the movement in assets arising from changes in bond yields partially matches the movement in the funding or accounting liabilities. In this way, the exposure to movements in bond yields is reduced.
|
| Inflation risk | The plans' benefit obligations are linked to inflation and higher inflation will lead to higher liabilities (although in most cases caps on the level of inflationary increases are in place to protect the plan against extreme inflation).
The assets held in the swap financing portfolio of the WH Smith Pension Trust 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, reducing the exposure to inflation.
For the Care, Platinum and Tuffnells schemes the majority of the assets are either unaffected by inflation (fixed interest bonds) or loosely correlated with inflation (equities), meaning that an increase in inflation will also increase the deficit.
|
| Life expectancy | The majority of the plans' obligations are to provide a pension for the life of the member, so increases in life expectancy will result in an increase in the plans' liabilities. |
Defined contribution schemes
The Group operates a number of defined contribution schemes. For the year ended 31 August 2016, company contributions totalled £3.0m (2015: £3.0m) which is included in the Income Statement.
A defined contribution plan is a pension plan under which the group pays contributions to an independently administered fund - such contributions are based upon a fixed percentage of employees' pay. The group has no legal or constructive obligations to pay further contributions to the fund once the contributions have been paid. Members' benefits are determined by the amount of contributions paid by the Company and the member, together with investment returns earned on the contributions arising from the performance of each individual's chosen investments and the type of pension the member chooses to buy at retirement. As a result, actuarial risk (that benefits will be lower than expected) and investment risk (that assets invested in will not perform in line with expectations) fall on the employee.
6. Finance costs
| £m | Note | 2016 | 2015 |
| Interest on bank overdrafts and loans | | (5.5) | (5.8) |
| Net interest expense on defined benefit obligation | 5 | (0.6) | (0.8) |
| Interest payable on finance leases | | (0.7) | (0.4) |
| Net change in fair value of derivative assets | | - | (0.2) |
| Unwinding of discount on provisions - trading | 13 | (0.2) | (0.1) |
| Finance costs | | (7.0) | (7.3) |
7. Income tax expense
| £m | | | 2016 | | | 2015 |
| | Adjusted | Exceptional items | Total | Adjusted | Exceptional items | Total |
| Current tax | 13.1 | (1.4) | 11.7 | 12.4 | (2.3) | 10.1 |
| Adjustment in respect of prior year UK corporation tax | (0.8) | (0.1) | (0.9) | (1.1) | (0.9) | (2.0) |
| Total current tax charge | 12.3 | (1.5) | 10.8 | 11.3 | (3.2) | 8.1 |
| Deferred tax - current year | (0.3) | (1.5) | (1.8) | (0.2) | (0.3) | (0.5) |
| Deferred tax - prior year | (0.1) | (0.1) | (0.2) | - | - | - |
| Deferred tax - impact of rate change | 0.5 | (0.8) | (0.3) | - | - | - |
| Total tax on profit | 12.4 | (3.9) | 8.5 | 11.1 | (3.5) | 7.6 |
| Effective tax rate | 20.4% | | 20.3% | 19.7% | | 26.3% |
The effective adjusted income tax rate for the year was 20.4% (2015: 19.7%). After adjusting for the impact of Exceptional items of £3.9m (2015: £3.5m), the effective statutory income tax rate was 20.3% (2015: 26.3%).
The tax rates used in the 2016 and 2015 reconciliations of the tax charge are the main rates of UK corporation tax, those being 20.0% (2015: 20.6%).
Reconciliation of the tax charge
| £m | 2016 | 2015 |
| Profit before tax | 41.9 | 29.0 |
| Tax on profit at the standard rate of UK corporation tax 20.0% (2015: 20.6%) | 8.4 | 5.9 |
| Permanent differences | 1.4 | 3.5 |
| Adjustment in respect of prior year UK corporation tax | (1.1) | (2.0) |
| Impact of change in UK tax rate | (0.3) | - |
| Impact of overseas tax rates | 0.1 | 0.2 |
| Total tax charge | 8.5 | 7.6 |
Tax charges to other comprehensive income and directly in equity
| £m | 2016 | 2015 |
| Current tax relating to the defined benefit pension scheme | (0.8) | (0.8) |
| Current tax relating to share based payments | (0.1) | (0.6) |
| Deferred tax relating to impact of change in tax rate | 0.4 | - |
| Deferred tax relating to derivative financial instruments | (0.3) | - |
| Deferred tax relating to share based payments | 0.3 | 0.6 |
| Deferred tax relating to retirement benefit obligations | (0.9) | 0.9 |
| Tax (credit)/ charge to other comprehensive income and directly in equity | (1.4) | 0.1 |
8. Dividends
Amounts paid & proposed as distributions to equity shareholders in the years:
| Paid & proposed dividends for the year | 2016 | 2015 | 2016 | 2015 |
| | Per share | Per share | £m | £m |
| Interim dividend - paid | 3.0p | 2.9p | 7.3 | 7.0 |
| Final dividend - proposed | 6.5p | 6.3p | 15.9 | 15.4 |
| | 9.5p | 9.2p | 23.2 | 22.4 |
| Recognised dividends for the year | | | | |
| Final dividend - prior year | 6.3p | 6.0p | 15.4 | 14.4 |
| Interim dividend - current year | 3.0p | 2.9p | 7.3 | 7.0 |
| | 9.3p | 8.9p | 22.7 | 21.4 |
The proposed final dividend for the year ended 31 August 2016 of 6.5p is subject to approval by shareholders at the Annual General Meeting on 26 January 2017 and in line with IAS10 - 'Events after the reporting period', this dividend has not been included as a liability in these accounts. The proposed dividend, if approved, will be paid on 10 February 2017 to shareholders on the register at close of business on 13 January 2017.
9. Earnings per share
| | 2016 | 2015 | ||||
| | £m | | Pence | £m | | Pence |
| | Earnings | Weighted average number of shares million | per share | Earnings | Weighted average number of shares million | per share |
| | | | | | | |
| Weighted average number of shares in issue | | 245.9 | | | 233.9 | |
| Shares held by the ESOP (weighted) | | (2.5) | | | (3.0) | |
| | | | | | | |
| Basic earnings per share (EPS) | | | | | | |
| Adjusted earnings attributable to ordinary shareholders | 48.3 | 243.4 | 19.8p | 45.5 | 230.9 | 19.7p |
| | | | | | | |
| Exceptional and other items | (14.9) | | | (24.0) | | |
| | | | | | | |
| Earnings attributable to ordinary shareholders | 33.4 | 243.4 | 13.7p | 21.5 | 230.9 | 9.3p |
| | | | | | | |
| Diluted earnings per share (EPS) | | | | | | |
| Effect of dilutive share options | | 3.8 | | | 7.6 | |
| | | | | | | |
| Diluted adjusted EPS | 48.3 | 247.2 | 19.5p | 45.5 | 238.5 | 19.0p |
| | | | | | | |
| Diluted EPS | 34.9 | 247.2 | 13.5p | 21.5 | 238.5 | 9.0p |
Dilutive shares increase the basic number of shares at 31 August 2016 by 3.8m to 247.2m (31 August 2015: 238.5m).
The calculation of diluted EPS reflects the potential dilutive effect of employee incentive schemes of 2.3m dilutive shares (31 August 2015: 4.1m) and a weighted 1.5m shares (31 August 2015: 3.5m) 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 generated development costs | Computer software costs | | ||
| £m | Goodwill | Customer relationships | Trade name | Software | Total | ||
| Cost: | | | | | | | |
| At 1 September 2015 | 96.3 | 48.8 | 33.5 | 1.5 | 9.1 | 13.8 | 203.0 |
| Additions | - | - | - | - | 2.1 | 2.6 | 4.7 |
| Transfers between asset classes | - | - | - | - | - | - | - |
| Disposals | - | - | - | - | - | (0.2) | (0.2) |
| At 31 August 2016 | 96.3 | 48.8 | 33.5 | 1.5 | 11.2 | 16.2 | 207.5 |
| Accumulated amortisation: | | | | | | | |
| At 1 September 2015 | - | 13.6 | 4.0 | 0.8 | 5.4 | 4.4 | 28.2 |
| Amortisation charge | - | 6.4 | 3.5 | 0.3 | 1.8 | 2.7 | 14.7 |
| Transfers between asset classes | - | - | - | - | - | - | - |
| Disposal | - | - | - | - | - | (0.2) | (0.2) |
| At 31 August 2016 | - | 20.0 | 7.5 | 1.1 | 7.2 | 6.9 | 42.7 |
| Net book value at 31 August 2016 | 96.3 | 28.8 | 26.0 | 0.4 | 4.0 | 9.3 | 164.8 |
| 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 |
The Group leases software under various finance lease arrangements. The net book value of finance leases contained within the software balance above is £0.4m (2015: £0.7m).
Goodwill and Intangibles by CGU
Goodwill of £4.1m and acquired intangibles totalling £5.1m 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 £18.1m and acquired intangibles of £7.8m. These were allocated to the two remaining individual CGU's identified at the time of the acquisition; Connect Books and Connect Media.
On the acquisition of Hedgelane Limited on 23 April 2012, the Group recognised goodwill of £20.9m and acquired intangibles of £10.4m which were attributed 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 £0.3m of goodwill which were attributed to Connect Books CGU.
The acquisition of Erasmus on 17 January 2013 generated £0.8m of goodwill and £0.3m of acquired intangible assets which were attributed to Connect Books CGU.
The acquisition of certain Blackwell contracts on 20 May 2013 generated £2.0m of acquired intangibles, attributed to Connect Books CGU.
The acquisition of trade and assets of Martin Lavell acquired on 1 September 2013 generated acquired intangibles of £0.3m, attributable to News CGU.
The acquisition of Tuffnells on 19 December 2014 generated £52.1m of goodwill and £58.1m of intangible assets which were attributed to Connect Parcel Freight CGU.
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 12.0% to 14.2%, 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% to 3%. The calculation of value in use is sensitive to the discount rate and growth rates used.
The Group has conducted sensitivity analysis on the impairment test of each CGU. The sensitised value in use exceeds the carrying value for all the CGUs, except the Books CGU. The Books CGU has headroom on its carrying value of £2.6m prior to any sensitivities. An increase in the risk adjusted post tax WACC from 11% to 12% for the Books CGU or a reduction in operating profits by 5% would cause the carrying value to equal the recoverable amount.
| | | Goodwill | Acquired Intangibles | Total | ||||||
| £m | | 2016 | 2015 | On acquisition | 2016 | 2015 | On acquisition | 2016 | 2015 | On acquisition |
| | | | | | | | | | | |
| Connect Books | | 17.6 | 17.6 | 17.6 | 2.9 | 4.2 | 12.7 | 20.5 | 21.8 | 30.3 |
| | | | | | | | | | | |
| Connect Media | | 5.7 | 5.7 | 5.7 | 0.8 | 1.2 | 2.6 | 6.5 | 6.9 | 8.3 |
| Connect News | | - | - | - | 0.1 | 0.2 | 0.3 | 0.1 | 0.2 | 0.3 |
| | | | | | | | | | | |
| Connect Education and Care | | 20.9 | 20.9 | 20.9 | 4.7 | 6.2 | 10.4 | 25.6 | 27.1 | 31.3 |
| | | | | | | | | | | |
| Connect Parcel Freight | | 52.1 | 52.1 | 52.1 | 46.7 | 53.6 | 58.1 | 98.8 | 105.7 | 110.2 |
| | | 96.3 | 96.3 | 96.3 | 55.2 | 65.4 | 84.1 | 151.5 | 161.7 | 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 £20.9m and £25.4m respectively with a remaining amortisation period of 6 and 8.5 years respectively.
11. Cash and borrowings
Cash and borrowings by currency (Sterling equivalent) are as follows:
| £m | Sterling | Euro | US Dollar | Other | Total 2016 | 2015 |
| Cash and cash equivalents | 3.0 | 4.3 | 1.3 | 0.5 | 9.1 | 10.9 |
| Term loan - disclosed within current liabilities | (20.0) | - | - | - | (20.0) | - |
| Term loan - disclosed within non-current liabilities | (79.1) | - | - | - | (79.1) | (98.4) |
| Revolving credit facility | (41.0) | - | - | - | (41.0) | (56.5) |
| Total borrowings | (140.1) | - | - | - | (140.1) | (154.9) |
| Net borrowings | (137.1) | 4.3 | 1.3 | 0.5 | (131.0) | (144.0) |
| | | | | | | |
| Total borrowings | | | | | | |
| Amount due for settlement within 12 months | (61.0) | - | - | - | (61.0) | (56.5) |
| Amount due for settlement after 12 months | (79.1) | - | - | - | (79.1) | (98.4) |
| | (140.1) | - | - | - | (140.1) | (154.9) |
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 2016, the Group had £109.0m (2015: £95.1m) of undrawn committed borrowing facilities in respect of which all conditions precedent 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.
12. Obligations under finance leases
| £m | 2016 | | 2015 | ||
|
| Minimum lease payments | Present value of minimum lease payments | | Minimum lease payments | Present value of minimum lease payments |
| Amount payable under finance leases: | | | | | |
| Within one year | 3.8 | 3.0 | | 3.3 | 2.9 |
| In the second to fifth years inclusive | 8.8 | 7.7 | | 7.0 | 6.5 |
| Total | 12.6 | 10.7 | | 10.3 | 9.4 |
| Less: future finance charges | (1.9) | - | | (0.9) | - |
| Present value of lease obligations | 10.7 | 10.7 | | 9.4 | 9.4 |
| Less: amount due for settlement within 12 months (shown under current liabilities) | | (3.0) | | | (2.9) |
| Amount due for settlement after 12 months | | 7.7 | | | 6.5 |
Group policy is to acquire certain items of its fixtures, equipment and software under finance leases. The average lease term is 4 years. Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.
The fair value of the Group's lease obligations approximates to their carrying amount.
13. Provisions
| £m | | Reorganisation provisions | Insurance and legal provision | Deferred contingent consideration | Property provisions | Total |
| Gross provision: | | | | | | |
| At 1 September 2015 | | 1.0 | 2.8 | 5.2 | 7.9 | 16.9 |
| Additions | | 1.3 | 1.9 | 1.9 | 0.8 | 5.9 |
| Released | | (0.1) | (0.2) | - | (1.3) | (1.6) |
| Utilised in year | | (1.6) | (0.2) | (5.1) | (0.6) | (7.5) |
| At 31 August 2016 | | 0.6 | 4.3 | 2.0 | 6.8 | 13.7 |
| Discount: | | | | | | |
| At 1 September 2015 | | - | - | - | (0.5) | (0.5) |
| Unwinding of discount utilisation | | - | - | - | 0.2 | 0.2 |
| At 31 August 2016 | | - | - | - | (0.3) | (0.3) |
| Net book value at 31 August 2016 | | 0.6 | 4.3 | 2.0 | 6.5 | 13.4 |
| 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) |
| Acquisition of business | | - | - | - | (0.1) | (0.1) |
| 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 |
| | | | | | | |
| £m | | | | | 2016 | 2015 |
| Included within current liabilities | | | | | 8.5 | 10.4 |
| Included within non-current liabilities | | | | | 4.9 | 6.0 |
| Total | | | | | 13.4 | 16.4 |
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 & legal provisions represent the expected future costs of employer's liability, public liability, motor accident claims and legal claims. In January 2016, an employee in our Parcel Freight division was fatally injured in an accident at our Brierley Hill depot. Since the incident, we have been assisting the Health & Safety Executive ("HSE") in its investigation and gave evidence at a Coroner's Inquest held in September 2016. The HSE has not yet completed its investigation and our Parcel Freight division has, to date, not been formally charged.
In the event that the Parcel Freight division is charged and subsequently found guilty of a Health and Safety offence, the Board expects that a fine and associated legal costs will be incurred, for which we are not insured. In the opinion of the Board and its advisers, there is significant uncertainty over the potential outcome and timing of this process. Having considered these uncertainties and having regard for the circumstances surrounding this incident, the Board considers it appropriate to make a provision of £1.5m for any potential fine and associated legal costs.
The Board will keep this provision under review as the HSE investigation proceeds and the current uncertainties are resolved. It is currently expected that any charges brought against our Parcel Freight division are likely to conclude within 24 months of the balance sheet date.
This provision has been charged as an Exceptional item (see Note 4) and is referred to in the Health & Safety section of the Operating Review.
The property provision represents the estimated future cost of the Group's onerous and reversionary leases in non-trading properties based on known and estimated rental sub-leases and for dilapidations on certain properties. The provision has been discounted at a risk adjusted rate and this discount will be unwound over the life of the leases. The provision is expected to be utilised over the period to 2026, when all of the leases provisions will have expired.
Deferred contingent consideration relates to amounts provided in relation to the acquisition of The Big Green Parcel Holding Company Limited (Tuffnells) on 19 December 2014 and Wordery on 27 August 2015, the cost being contingent upon achievement of profit targets and the future employment of the former owners of the businesses.
14. Operating lease commitments
The group as lessee:
Minimum lease payments under non-cancellable operating leases are as follows:
| | 2016 | | 2015 | |||||
| £m | Land & buildings | Equipment & vehicles | Total | | Land & buildings | Equipment & vehicles | Total | |
|
| Within one year | 10.7 | 14.1 | 24.8 | | 10.2 | 12.4 | 22.6 |
|
| In the second to fifth years inclusive | 29.8 | 23.6 | 53.4 | | 30.3 | 19.9 | 50.2 |
|
| In more than five years | 20.7 | - | 20.7 | | 23.3 | - | 23.3 |
|
| | 61.2 | 37.7 | 98.9 | | 63.8 | 32.3 | 96.1 |
The Group leases various distribution properties and plant and equipment under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights.
The group as lessor:
At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments:
| £m | 2016 | 2015 |
| Within one year | 0.3 | 0.1 |
| In the second to fifth years inclusive | 0.2 | 0.1 |
| | 0.5 | 0.2 |
Property rental income earned during the year was £0.3m (2015: £0.1m).
15. Net cash inflow from operating activities
| £m | 2016 | 2015 |
| Operating profit | 48.9 | 36.3 |
| Losses on disposal of assets | - | 0.2 |
| Share of profits of jointly controlled entities | (0.3) | (0.3) |
| Adjustment for pension funding | (5.3) | (5.4) |
| Depreciation of property, plant and equipment | 8.9 | 7.3 |
| Amortisation and impairment of intangible assets | 14.7 | 11.4 |
| Share based payments | 1.6 | 8.0 |
| (Increase)/ decrease in inventories | (0.3) | 3.8 |
| Decrease/(Increase) in receivables | 9.7 | (7.5) |
| (Decrease) in payables | (7.2) | (4.9) |
| Non cash pension costs | (0.6) | 0.5 |
| Income tax paid | (8.5) | (8.7) |
| (Decrease)/ increase in provisions | (3.4) | 5.8 |
| Net cash inflow from operating activities | 58.2 | 46.5 |
| Net cash inflow from operating activities is stated after the following Exceptional cash items: | | |
| Payment of deferred contingent consideration | (5.1) | - |
| Re-organisation and restructuring costs | (5.7) | (4.3) |
| Acquisition expenses | - | (3.9) |
| Total Exceptional cash items | (10.8) | (8.2) |
16. Share Capital
(a) Share capital
| £m | 2016 | 2015 |
| Issued and fully paid: | | |
| At 1 September | 12.2 | 9.5 |
| Shares issued during the year | 0.1 | 2.7 |
| 246.7m ordinary shares of 5p each (2015:244.1m) | 12.3 | 12.2 |
(b) Movement in share capital
| Number (m) | | Ordinary shares of 5p each |
| 31 August 2015 |
| 244.1 |
| Shares issued during the year | | 2.6 |
| At 31 August 2016 | | 246.7 |
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the general meetings of the Company. The Company has one class of ordinary shares, which carry no right to fixed income.
During the year to 31 August 2016, 2,606,751 ordinary 5p shares were issued. 2,164,181 were issued in relation to the satisfaction of deferred consideration to the former owners of The Big Green Parcel Holding Company Limited (Tuffnells).
The remainder was issued to satisfy share scheme exercises.
During the year to 31 August 2015, 54,855,669 ordinary 5p shares were issued for a consideration of £55,765,415 resulting in a share premium of £49,889,432 after accounting for equity issue related costs of £3.1m. 54,137,236 shares were issued as a result of the rights issue in December 2014.
(c) Share premium
| £m | 2016 | 2015 |
| | | |
| Balance at 1 September | 55.2 | 5.3 |
| Premium arising on issue of equity shares | 4.0 | 49.9 |
| Balance at 31 August | 59.2 | 55.2 |
17. Reserves
(a) Demerger reserve
| £m | 2016 | 2015 |
| At 1 September | (280.1) | (280.1) |
| At 31 August | (280.1) | (280.1) |
This relates to reserves created following the capital re-organisation undertaken as part of the demerger of WH Smith PLC in 2006. The balance represented the difference between the share capital and reserves of the Group restated on a pro-forma basis as at 31 August 2004 and the previously reported share capital.
(b) Own shares reserve
| £m | 2016 | 2015 |
| Balance at 1 September | (4.1) | (5.2) |
| Acquired in the period | (1.5) | (4.2) |
| Disposed of on exercise of options | 2.1 | 5.3 |
| Balance at 31 August | (3.5) | (4.1) |
The reserve represents the cost of shares in Connect Group PLC purchased in the market and held by the Smiths News Employee Benefit Trust to satisfy awards and options granted under the Group's Executive Share Schemes. The number of ordinary shares held by the Trust at 31 August 2016 was 2,313,644 (2015: 2,807,124).
(c) Hedging & translation reserve
| £m | 2016 | 2015 |
| Balance at 1 September | (0.5) | (0.3) |
| Net movement in cash flow hedges (net of tax) | (1.2) | (0.6) |
| Amounts previously recognised in the consolidated statement of comprehensive income | - | 0.5 |
| Exchange differences on translating net assets of foreign operations | 0.6 | (0.1) |
| Balance at 31 August | (1.1) | (0.5) |
The hedging reserve represents the cumulative amount of gains and losses on hedging instruments deemed effective in cash flow hedges. The cumulative deferred gain or loss on the hedging instrument is recognised in the profit or loss only when the hedged transaction ceases to be effective.
18. Related party transactions
Transactions between businesses within this Group, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
Transactions with the Group's pension schemes are disclosed in Note 5.
Trading transactions
| | Sales to related parties | Amounts owed by related parties | ||
| £m | 2016 | 2015 | 2016 | 2015 |
| Jointly controlled entities | 2.9 | 3.2 | 0.8 | 0.6 |
Sales to related parties are for management fees, payment is due on the last day of the month following the date of invoice.
Non-trading transactions
| | | Loans to related parties | ||
| £m | | | 2016 | 2015 |
| Jointly controlled entities | | | 0.3 | 0.3 |
The loans to related parties have no set date for repayment and accrue interest at LIBOR + 2%.
Aggregate remuneration of key management personnel
The remuneration of the directors and the executive management team, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 'Related Party Disclosures.'
| £m | 2016 | 2015 |
| Short-term employee benefits | 4.5 | 4.1 |
| Share based payments | 0.8 | 0.8 |
| | 5.3 | 4.9 |