WH Smith PLC

Welcome to our interim results presentation for six months ending 28th of February 2019. As you all know, I'm Stephen Clarke, Group CEO. We've got Robert Moorhead, our Group CFO and COO, and Carl Collin, who is the MD of our high street business and recently joined the board. And just to warn you, the presentation is a little bit longer than usual because we want to give you an update in motion. So sorry, you two over there. But before that, let me do a quick introduction and I'm pleased to tell you that we've had another good half across the group with total sales up 8% and profit before tax of 81 million, which is right in line with expectations. The distinct strategies for each of our businesses continue to deliver. In travel, we've seen another good half of like for like sales growth in our UK business. internationally we continue to be very successful in winning new business and of course as you know we've acquired in motion during the half. High Street delivered a good performance despite the well-documented challenges of the UK High Street as our strategy continues to deliver. So the group is in good shape and on track for another year of good profit growth. So I'll now hand over to Robert to do the numbers.

Thank you, Steve. Good morning, everybody. So let's start off with the group financial summary. So we've had a strong first half, and we expect the full year outcome to be ahead of our initial expectations. But before I run through the six months numbers in detail, it's worth saying that this is quite an unusual half for us. First, we've had the acquisition of InMotion in the half. Second, we're continuing to see the group shift towards travel with the peak trading period in our second half, and this has accentuated further buy-in motion. Third, the shape of the high streets profits are also changing towards the second half, reflecting the greater mix of stationary with the peak back-to-school period, and this continues the trend that we've seen over the last few years. And fourth, We have a number of non-underlying items in the half relating to the in-motion acquisition and also from the completion of the high street review. And I'll touch on all these as I go through the numbers. So to bring that all together, we have today delivered a strong performance with our first half in line with expectations. Total group revenue was 695 million, up 8%, with group like-for-likes up 1%. Profit from trading operations at 92 million was up 1 million, with headline group profit before tax at 81 million. Headline earnings per share was 60.6p, broadly in line with last year. Free cash flow generated in the period was 27 million compared to 39 million last year, and I'll come on and talk about the cash flow in more detail later, but it does include some one-off items in the half. we expect full year free cash flow generation to be around 100 million. The board has declared an interim dividend of 17.2 pence per share, an increase of 8%, which reflects the good business performance, our strong cash generation, and our confidence in the outcome for the full year. As usual, we expect to have the interim dividend accounting for around one third of the total dividends for the year. So let's look first at revenue. Overall group revenue was 695 million, up 8% on last year, with light flight sales up 1%. It was another strong performance from travel. Total revenue was 364 million, up 18%, including 30 million from in motion. Excluding in motion, travel sales were up 8%, with light flight sales up 3%. And you'll have noticed that for the first time, travel's first half sales were higher than the high street. UK air, rail, and hospitals all performed well in the half, reflecting our initiatives and passenger numbers. In international, excluding in motion, sales were up 25%, with more directly run businesses this year. And in high street, we saw our second best revenue performance over the past decade. Like-for-like revenue was down 2%, whilst total revenue was down 1% as expected. So if we look by category, Stationary like-for-likes were up 2%, with a good performance from our new product development and a number of our seasonal categories, including Christmas cards and wrap, diaries, and our latest fashion stationery ranges. News and impulse like-for-likes were up 2%. We've seen a good performance from continued development of impulse categories, and we've gained market share in newspapers and magazines. Books for likes were down 5%. Market performance continues to vary by category, and our performance was impacted by our ongoing shift of space away from backlist books and into post offices and stationery. All three categories saw an increase in gross margin in the half. So turning to group profit before tax. Travel delivered a profit of 44 million, up 7% on last year. In UK travel, profit increased by 3% to 38 million, reflecting higher sales and increased margin and additional space. Profits in international were 6 million. Excluding in motion, profits were 4 million in line with last year, although this includes a challenging performance in Madrid, where we have a short-term contract due to airport redevelopment. Excluding Madrid, we still saw good profit growth in international in the half, and for the full year, we expect profit in international to be up on last year. Finally, in international travel, we completed the acquisition of InMotion on the 30th of November, which contributed two million in the first half, as expected. We are well-placed for travel's peak trading through the second half. High Street delivered profits of 48 million, as expected, with sales down 1%, an increase in gross margin, and cost saves of four million in the half. Like 2018, we expect a shift in profits towards the second half, reflecting the ongoing mixed shift to stationary, and this year, also the phasing of cost saves, which are greater in the second half. So that leaves profit from trading operations at 92 million. Central costs were slightly higher, leaving group operating profit in line with last year at 83 million. Finance costs are higher due to the additional borrowings used for the acquisition of InMotion. And that leaves headline profit at 81 million in line with our expectations. And we remain well positioned for the full year. We have some non-underlying items in the half, so let me take you through them now. So the non-underlying items in the half relate to the InMotion acquisition and completing the high street review we announced in October 2018. InMotion costs of nine million include transaction costs, integration costs, and the non-cash amortization charge. We expect the full year non-underlying items relating to InMotion to be around 11 million, with the addition being further integration costs and the second half amortization charge. Also in the half, we completed the review announced in October 2018 of central costs and our store operations in High Street. The costs relating to this were broadly as expected at seven million. As this review is now finished, there are no further costs to come. The cash cost of these items in the half was nine million, with a further five million expected in the second half. So let's look at profit from trading operations in more detail. With sales increasing by 8% and total gross margin increasing by 10 basis points, gross contribution for the group increased by 32 million to 415 million. Travel's underlying gross margin before in motion was up 40 bps in the first half, mainly due to mixed management. In High Street, gross margin increased by around 70 basis points through category mix management, representing around 50% of the increase, with buying, sourcing, promotional, and markdown management being the balance. In the second half, we expect Travel's underlying gross margin to be up around 90 basis points, and High Street's gross margin also up at around 140 basis points. In terms of costs in trading operations, as we continue to grow travel, the group sees an increase in costs. In travel, this is due to the higher rent, rents being based on turnover, new stores in both the UK and international, and our continued investment in service and stores. And of course, these numbers include the in-motion costs, which are not included in last year's comparative. Across both businesses and all cost lines, we remain focused on cost efficiency and cost management. In High Street, we continue to identify cost savings, and in the half, we saw lower rents at lease expiry, where our average reduction was 33%. We've worked hard over the years to inject flexibility into our lease portfolio, and with an average lease length of under four years, we have over 300 leases up for renewal over the next three years, spread right across the portfolio and the country. The cost base in High Street remained substantial at over 300 million, and we continue to see opportunities for further savings, and we will also have the benefit from the High Street review going forward. So let's look now at the free cash flow. We've delivered a free cash flow of 27 million in the period, which is lower than last year due to higher investment capex and some working capital investment. CapEx spend was as expected at 31 million, five million higher than the previous year, mainly as a result of our continued investment in stores. In the period, we made CapEx investment in, for example, travel with new stores in both the UK and directly run stores internationally, in our in-store operating model, and investing in high street stores, including the latest tranche of post offices. This was an unusual half of working capital, reflecting some one-offs. We invested around 5 million in working capital as part of our contingency plans for Brexit, which we expect to unwind in due course. Secondly, we have seen an adverse movement in the half of around 9 million relating to rent and travel, be a combination of some early rent payments on a couple of new contracts and a wash-up of historic rents on a number of contract extensions. While this has a one-off impact on the group's working capital, the new and extended contracts set us up well for the future. The remaining working capital cash pattern is similar to last year, reflecting the seasonality of the business, and like last year, we expect most to reverse in the second half. We will, however, continue to see an ongoing working capital investment as a result of our store opening program in travel. Non-cash items primarily include chair-based payment charges, and we continue to see the cash-generative nature of both Travel and High Street as one of the group's strengths, and anticipate a full-year free cash flow generation of around 100 million. So if we look now at the net debt. We remain disciplined about the group's debt position. Following the acquisition of InMotion, the group's debt position changed materially. We funded the acquisition with a 200 million term loan at LIBOR plus 100 bps. As a result, the group's net debt at the end of February was 221 million. This additional debt is expected to take us to approximately 0.9 times the EBITDA at the year end. We also saw a 20 million higher cash outflow from non-trading items as part of our capital allocation policy with dividends of 41 million up 4 million on last year and a higher buyback in this half, which at 25 million was 16 million higher than last year. And let me just reiterate our approach to capital allocation. Our disciplined approach to cash and capital allocation remains unchanged. As we have said many times before, we see three uses for the cash. Invest in the business where we see attractive returns ahead of the cost of capital. We expect capex this year to be around 60 million. Returning cash to shareholders, firstly through a progressive dividend policy and then the share buyback. and considering appropriate acquisitions that drive shareholder value. The board reviews the balance sheet on an ongoing basis. We're comfortable operating with a level of net debt up to 1.25 times EBITDA. And as I said, we expect the leverage at the year end to be around 0.9 times. And we're not changing our guidance on the buyback of up to 50 million announced on the 11th of October, 2018. So let's look now at that return of cash. We've increased the interim dividend by 8% and have now grown the dividend every year since 2006. And as I've said, we have the share buyback. So far this year, we've completed 25 million of the up to 50 million share buyback that we announced last October. So through a combination of dividends and buybacks, we will have returned over 1 billion to shareholders since the 2007 financial year, with 80 million returned last year. And since 2006, we've retired 40% of our equity. So finally, to recap, these are the group key indicators, most of which I've touched on already. Let me just mention fixed charges cover at 1.7 times. We expect this to be 1.6 times at the full year, in line with last year, the higher cover at the half year, reflecting the seasonality of profits. And Steve will now discuss the operational performance of the business.

Right, I'll do travel and Carl will do High Street. So first up, let me remind you of the four key elements of the travel strategy. Firstly, to drive like-for-like sales in our UK business through a forensic approach to space management, developing our formats and ranges to best meet changing customer and landlord needs, and investing in stores and service to increase throughput capacity and sales per passenger. Secondly, to win new space and retain existing space in our UK business. Thirdly, to win profitable new space internationally, where we can create significant long-term value. And finally, to take appropriate acquisition opportunities that create long-term strategic and financial value for the group. So let's move on then to operating performance. And travel delivered another strong performance with total sales up 18% in the half and that's up 8% if you exclude in motion with like for likes up three. Now this is the sixth year in succession of good like for like growth. Profit in the half was up 7% to 44 million. As you all know, we've made significant investments in our travel business over the past six years. This investment has been a key driver of our like-for-like sales performance, along with passenger growth. And importantly, we continue to see investment opportunities to drive the UK business forward in the years ahead, particularly in format development across all three of our channels. As usual, we worked hard at managing costs and margins, with gross margin up 40 basis points in the half, driven mainly by category mix management. And we continue to grow our store base, both here in the UK and overseas. We opened five new stores in the UK and a half, with three new airport units and two additional units in hospitals, and we expect to have opened around 20 units over the course of the full year. Internationally, we won 21 units, including four new in motion units in the US, and I'll come on to that bit shortly. So let's look at channel performance. And in UK air, total sales were up 5% with like for likes up four. This is another strong performance in air despite the recent economic uncertainty and it reflects the success of our new large airport format. In our hospital channel, total sales were up 11% with like for likes up four. This reflects our format development initiatives in hospitals and new store openings, including M&S Simply Food Stores. Now this is particularly pleasing as the hospital channel will be our second biggest channel by sales by the end of this financial year. And there's plenty of opportunity to continue growing the hospital channel. In railways, total sales were flat with like for likes up one. Now this performance in rail continues to be affected by the ongoing disruption from upgrading of the network and softer passenger numbers. In our international business, total sales including in motion were up 76% with like for likes up four and I'll come on to all of that shortly. And of course, as you all know, as sales and passenger numbers grow in our travel business, so do our variable costs, particularly rent. So let's look at the UK in a bit more detail. And in UK travel, airports have been an area of significant investment for us, particularly the work that we've been doing on the new large store formats that will position us well for the future. And we've seen particularly good results from our new stores in Gatwick North and Gatwick South, and more recently, our stores in Heathrow, Birmingham, and Belfast, which have all had the upgrade. Our experience continues to show that we can deliver superior sales per passenger from these new large format stores. During the second half, we expect to open a further three of the large format in Dublin, Manchester and an additional store in Gatwick North. And we believe this new compelling offer will be of interest to more landlords as they reconfigure their space. Now, in addition to the large airport format, we've been working for some time on combining our traditional WH Smith format with a pharmacy, providing passengers with a compelling one-stop shop customer offer. Now, we've had a couple of small-scale trials operating with Well Pharmacy, Well are the UK's third largest pharmacy chain in our Southampton and Southend airport shops. Alongside these trials, we've been in discussions with Gatwick Airport for a large store format in Gatwick North terminal to essentially combine the large WH Smiths there and the large Boots there into one big store. I'm pleased to tell you that this new combined WH Smith pharmacy opened last week on the 1st of April and early signs are very positive. You can see the new store on the screen. It's over 5,000 square feet and has 2,500 pharmacy SKUs as well as the usual 6,000 news books and convenience SKUs from WH Smith. Now it really does provide time-pressed passengers with a true one-stop shop offer with a full range of the usual WH Smith products plus the two and a half health and beauty lines and a pharmacy counter to offer advice on the sale of medicines which can only be sold under the provision of a pharmacist. In addition to this store, we're about to build a new bookshop in Gatwick North and we'll also keep our existing 4,000 square foot store in the same terminal which opened just last year. So while it's early days and it will take some time to assess the results, we're confident that the new pharmacy format will present us with good opportunities to grow and good opportunities to create value for our landlords. So moving on then to the hospital channel. And as you know, the hospital channel is a very important business for us, as it provides good growth opportunities well into the future, and it's a great example of how we continue to innovate with our store formats. We now have 133 hospital shops open, and we believe there are around 300 hospitals in total that have the potential to support one of our hospital store formats. The hospital channel is also an attractive market as it's not subject to the usual cyclical nature of some other travel formats. And it's our innovation over the years that's enabled us to grow this channel further. We've invested in our stores, built great strong relationships with the NHS trusts, and we've restructured our pricing in hospital stores such that it's in line with other high street retailers and local supermarkets. As a result of all of this, sales in our hospital business have increased by over 90% in the last five years, meaning, as I said earlier, that hospitals will have overtaken railways by the end of this financial year. And very importantly, as I've also highlighted, there is plenty of room for much more growth. And our partnership with M&S continues to deliver great results in hospitals. So far, we've launched a dozen or so WH Smith stores that have an M&S food to go implant, and we expect this to reach 20 by the end of the second half. You can see a picture of one of our latest openings in Guy's Hospital on the left of the screen. In addition to the M&S implant stores, we've recently opened a new Simply Food store at West Middlesex Hospital, taking the total number of Simply Food stores we now have open to 20. and we continue to see plenty of scope to further roll out Simply Food stores well into the long term. And finally, during the half for hospitals, we entered into a new partnership with Costa Coffee, the UK's largest coffee shop operator, to become a franchise partner for the hospital channel. You can see a picture of our store in Blackburn Hospital on the right-hand side of the screen. Now, this partnership presents good growth opportunities for our hospital business going forward. And this broad suite of brands and formats allows us to meet the needs of our NHS partners in a variety of different sized hospitals across the country. And this is really demonstrated by our recent tender win in Colchester Hospital, where we will operate a WH Smith store, an M&S food hall and a Costa coffee shop. So moving on to railways. And we're also investing in the railway channel. As you know, we have a very strong presence in large mainline rail stations, and we continue to look for new space opportunities. During the half, we continue to develop our Tech Express offer. You'll remember I showed you a picture last time of our Tech Express format in London Bridge. Well, I'm pleased to say we've opened another one in Waterloo Station, which you can see on the screen. And we've won a further two new units in rail, including a Tech Express at Euston Station and another WH Smith store. We expect these new units to open in the second half. Feedback from both landlords and our customers continues to be really positive, and we're seeing some really good sales results in Tech Express. There's scope for more of these stores and busy stations as space becomes available. And there are other opportunities in rail. During the second half, we will trial a new large format in Paddington Station, similar to our large airport format, and we'll update you on how that's going in October. So finally, for the UK looking ahead. And despite the uncertainty in the broader economic and political outlook, most airports are experiencing and continue to forecast low single-digit growth for the rest of this year and next, although as always, the forecasts do vary by location. In addition, we continue to invest in new stores across all our channels. And as I said earlier, we expect to open 20 new travel stores in the UK by the end of the current financial year. And at the same time, we continue to drive like for like sales through active space and mix management. And of course the UK isn't the only source of growth. So let's look at international and I'll start with that update on in motion. As you all know, we acquired Inmotion at the end of last year. Inmotion has an excellent stored portfolio with 115 stores across 43 airports, great relationships with landlords and brand suppliers, and a best-in-class service proposition. So this acquisition comes with all the benefits of owning a market-leading pure play travel retailer. In addition, the InMotion acquisition provides us with a platform to launch our WH Smith airport format in the world's largest travel retail market for news, books and convenience, with the ability to benefit from InMotion's deep market knowledge, good infrastructure and strong landlord relationships. And finally, we also think there are good opportunities to export the InMotion brand and format into other key territories outside of the US where we currently operate WH Smith stores. And as I said before, the integration of InMotion is really straightforward and I'm happy to say it's going to plan. The tender pipeline in the US looks very encouraging. In fact, since the acquisition, we've won a further four new airport units in the US, two in San Francisco, one in Boston, and one in Charlotte Douglas International Airport, and there's plenty of scope for future growth there. In addition, we've also met with a number of the major US landlords since acquiring the business to reestablish direct relationships for the WH Smith brand. And since acquisition, we've even won two airport tenders outside of the US with the in-motion format, one in Perth, Australia, and the other one in Alicante in Spain, demonstrating the potential for international growth. Now in both those locations, we already operate WH Smith stores, so the in-motion stores will bolster our presence in both those airports. Excuse me. So moving on then to the rest of international. So our international business is profitable and growing fast. The WH Smith brand and offer continue to be well received by both customers and landlords. And where we open new stores, sales per passenger continue to be strong. Total sales for the half internationally, including in motion, were 104 million. Like for likes, we're up four. In addition to InMotion, we've had some really good success winning new business during the half. 21 units in total, including five in Australia, one in Sydney, which is now our eighth store to open there, a further two in Perth in Western Australia, and two in Melbourne Terminal 3, which now gives us a strong presence across Terminals 2, 3 and 4 in Melbourne Airport. So at the end of the half, we had 425 units open internationally, including the 115 in motion shops. Profit for the half was 6 million, 2 million ahead of last year. And you can see on the screen here a picture of the recently opened store in Sydney. And as I've said, this is now our eighth store opening, giving us a very strong presence in Sydney International. So at the end of the first half, we were present in 99 airports and 30 countries outside of the UK. And you can see on the table for the first time, our units now open in both North and South America. And we continue to use the three operating models with 37% of open units franchised, 55% now directly run, and the balanced joint ventures. So finally, an international looking ahead. Now, WH Smith is still a small player in a very big market, but we are profitable and we're growing fast, and we see great long-term potential for us to continue to grow internationally. Our experience to date is that our brand customer offer and ability to drive sales per passenger are attractive to overseas landlord. In addition, our recent acquisition of InMotion provides us with the infrastructure to launch the WH Smith format in the US as well as grow the InMotion business both within the US and overseas. And our recent investment in strengthening the leadership team across the group, with Carl in High Street, Toby here heading up UK travel, and Phil McNally heading up international, means that the international business gets the focus it requires as it continues to grow both in size and complexity. So that's it for travel. I'll now hand you over to Carl, who'll do High Street.