Preliminary Results, 11 Nov 2021 07:00

11 November 2021, 07:00

Source - LSE Regulatory

RNS Number : 0194S

WH Smith PLC

11 November 2021

WH SMITH PLC

PRELIMINARY RESULTS ANNOUNCEMENT

FOR THE YEAR ENDED 31 AUGUST 2021

Improving trends in Travel; well positioned for the recovery;

successfully won all technology stores in UK airports

· Good start to new financial year; well positioned to return to meaningful profit in 2022

· Improving trends in Travel over recent months with total Travel revenue at 84% of October 2019

· Focused plan on customer conversion, increasing average transaction value (ATV), category development and cost management continues to drive performance

· Strong position to benefit from growth opportunities with over 100 new stores won and planned to open in Travel over the next three years with 58 in North America

· Successfully won all 30 technology stores across UK airports; InMotion brand is now the global leader in this category in travel locations with further growth opportunities

· Good recovery in North America. Trading profit^* of £6m and significant new business wins at major US airports

· High Street trading profit^* of £19m with good cash generation; record performance from funkypigeon.com

· Headline loss before tax and non-underlying items^* of £55m, reflecting global travel restrictions

· Strong balance sheet following refinancing announced in April 2021; free cash generation of £14m; access to over £350m of liquidity as at 31 August 2021

Carl Cowling, Group Chief Executive, commented:

"The Group has delivered a good performance in the evolving trading environment. Thanks to the outstanding efforts of all our colleagues across the business, we have continued to adapt successfully to the changing environment and we are now in a strong position to grow our business as our markets continue to recover, returning to meaningful profitability in the current financial year.

"In Travel UK, we are delighted to have won all 30 of the technology stores across UK airports. This is a significant win for the Group and we look forward to showcasing the very best of our US brand, InMotion, in these locations. These latest wins mean InMotion is now the largest technology retailer in travel locations in the world, and we see plenty more opportunity to grow the brand globally.

"In addition to the InMotion stores in the UK, we have a very strong pipeline of new store openings with over 100 stores already won and due to open in Travel over the next three years - the majority of these in North America. We expect more space to become available as our markets recover and we are very well positioned to benefit from these opportunities.

"Despite the challenges of the UK high street, more generally, our High Street business has delivered a resilient and profitable performance. Our online businesses have delivered strong growth in the year, including a record performance from funkypigeon.com.

"I would like to take this opportunity to thank the entire team for their outstanding contribution in another challenging year. We have made excellent progress and none of this would be possible without their hard work and commitment.

"We are a financially strong and resilient Group with significant opportunities to grow. While we continue to plan with caution, the Group is well positioned to capitalise on the recovery in our key markets and take advantage of the many exciting opportunities ahead."

* Pre-IFRS 16

Group financial summary:

			Headline
	IFRS 16		pre-IFRS 16²
	Aug 2021	Aug 2020	Aug 2021	Aug 2020
Travel UK trading loss¹	£(29)m	£(1)m	£(32)m	£(1)m
North America trading profit/(loss)¹	£2m	£(14)m	£6m	£(18)m
Rest of the World trading loss¹	£(17)m	£(12)m	£(13)m	£(14)m
Total Travel trading loss¹	£(44)m	£(27)m	£(39)m	£(33)m
High Street trading profit/(loss)¹	£36m	£(4)m	£19m	£(10)m
Group loss from trading operations¹	£(8)m	£(31)m	£(20)m	£(43)m
Group loss before tax and non-underlying items¹	£(51)m	£(68)m	£(55)m	£(69)m
Loss per share before non-underlying items¹	(22.1)p	(43.3)p	(23.7)p	(44.2)p
Non-underlying items¹	£(65)m	£(212)m	£(49)m	£(157)m
Group loss before tax	£(116)m	£(280)m	£(104)m	£(226)m
Basic loss per share	(62.6)p	(199.2)p	(54.2)p	(160.0)p
Diluted loss per share	(62.6)p	(199.2)p	(54.2)p	(160.0)p

Revenue performance:

	£m	Total % change vs Aug 2020
Travel UK	195	(43)%
North America	166	43%
Rest of the World	40	(57)%
Total Travel	401	(27)%
High Street	485	4%
Group	886	(13)%

¹ Alternative Performance Measure (APM) defined and explained in the Glossary on page 51.

² The Group adopted IFRS 16 'Leases' with effect from 1 September 2019. The Group continues to monitor performance and allocate resources based on pre-IFRS 16 information (applying the principles of IAS 17), and therefore the results for the years ended 31 August 2021 and 31 August 2020 have been presented on both an IFRS 16 and a pre-IFRS 16 basis.

Measures described as 'Headline' are presented pre-IFRS 16.

For the purposes of narrative commentary on the Group's performance and financial position, both pre-IFRS 16 and IFRS 16 measures are provided. Reconciliations from pre-IFRS 16 measures to IFRS 16 measures are provided in the Glossary on page 51. Group revenue was not affected by the adoption of IFRS 16, and therefore all references to and discussion of revenue are based on statutory measures.

ENQUIRIES:

WH Smith PLC
Nicola Hillman	Media Relations	01793 563354
Mark Boyle	Investor Relations	07879 897687

Brunswick
Tim Danaher		020 7404 5959

WH Smith PLC's Preliminary Results 2021 are available at whsmithplc.co.uk.

GROUP OVERVIEW

Impact of Covid-19 pandemic:

Covid-19 continues to have a significant impact on the performance of the Group. Over the last year, we have worked hard throughout the world to navigate our way through the changing government restrictions in each country. The imposition and subsequent easing of lockdowns and restrictions has meant we have developed a flexible and dynamic approach to operating our stores, opening up when we had sufficient customer traffic to generate incremental cash or, in line with government guidelines, remaining open to provide essential products and services to our customers.

As at 31 October 2021, we had 1,540 stores open around the world out of a total portfolio of 1,711 stores.

Our overriding priority during the year has been the health and wellbeing of all our colleagues and customers. All stores, distribution centres and head offices had appropriate safety measures in place in line with the relevant government guidance, including social distancing measures, PPE for colleagues' use, protective screens and guidelines to limit the number of customers in store. In addition, all head office staff, having initially worked at home, are now operating a hybrid model, combining home and office working.

Strategic Initiatives

Throughout the year, the trading environment remained impacted by Covid-19 with extensive restrictions in place. We focused on initiatives within our control that have supported us in the immediate term and put us in a good position to emerge operationally stronger as our markets continue to recover.

These key areas of focus are:

· Securing our financial position through the new banking arrangements and convertible bond issuance announced in April 2021. This gives us a strong balance sheet, extends maturity dates to 2025 and increases our revolving credit facility to £250m

· Driving ATV and sales per passenger

· Extending our categories and ranges to reflect the specific needs of our customers in each location where we operate. For example, health and beauty products across our Travel stores and working from home and electrical accessories ranges across our High Street stores

· Working with landlords, building on our strong relationships to create opportunities for winning new business, extending categories, renewing key contracts and improving the quality and location of the space where we operate. The expansion of InMotion into the UK through the winning of every technology store in UK airports is a good example of this in practice, reflecting the combination of our core travel retail expertise, strong brand and landlord relationships, and builds on the learnings from operating InMotion in the US

· Investing capex in strategically important projects which set us up well for the future, such as our refitted stores at London Heathrow Terminal 5 and our stores at the new terminal at Manchester Airport

· Building our internet proposition by extending ranges, investing in the websites, marketing, fulfilment and building customer engagement through social media

· Forensic focus on costs and cash, minimising discretionary spend and managing our cash burn resulting in cash on deposit of £107m and access to £357m of liquidity as at the end of October 2021

Group Summary

Total Group revenue as a percentage of 2019 total revenue has been:

	% of 2019 Revenue³
	FY 2021				FY 2022
	Q1	Q2	Q3	Q4	9 weeks to 30 October 2021
High Street	88%	83%	86%	87%	88%
Travel	39%	35%	45%	63%	79%
Group	59%	58%	61%	71%	82%

³ Equivalent month in 2019

Covid-19 continued to have a significant impact on the Group. Total Group revenue at £886m (2020: £1,021m) was down 13% compared to last year (which included six months pre-pandemic) and was 62% of 2019³. Travel remained impacted by the government enforced travel restrictions throughout the year. However, we saw an improved performance across all channels in the second half as restrictions were eased in most countries where we operate and which has continued into Q1 of the current financial year. We saw a consistently robust performance in High Street throughout the year, despite footfall declines, with the important December trading period at 92% of 2019. Our internet businesses have continued to perform strongly.

The Headline Group loss from trading operations¹ for the year was £20m (2020: loss of £43m) with Headline Group loss before tax and non-underlying items¹ at £55m (2020: loss of £69m). This includes a second half performance over £110m better than the prior year. Including non-underlying items, the Headline Group loss before tax¹ was £104m (2020: loss of £226m).

The Group loss before tax, after non-underlying items and including IFRS 16, was £116m (2020: loss of £280m).

On 28 April 2021, the Group announced new financing arrangements which included a £250m Revolving Credit Facility (RCF) (increased from £200m) with maturity extended to 2025. At the same time, the Group launched an offering of convertible bonds which mature in 2026. The bonds raised £327m, of which £50m was retained by the Group to fund new and existing growth opportunities, with over 100 stores won and yet to open in Travel, including the InMotion stores won in the UK. The remaining £267m was used to pay down a significant proportion of the Group's term debt with its commercial banks, which now stands at £133m with a maturity in 2025.

The Group has the following cash, committed facilities and drawn debt as at 31 August 2021:

	31 August 2021	Maturity
Cash and cash equivalents	£130m
Revolving Credit Facility⁴	£250m	April 2025
Term Loan	£133m	April 2025
Convertible bond	£327m	April 2026

⁴Undrawn as at 10 November 2021

As at 31 August 2021, Headline net debt¹ was £291m (2020: £301m). We continued to focus on cash. Group free cash flow¹ was an inflow of £14m (2020: outflow of £41m).

As at 31 October 2021, access to liquidity was £357m being cash on deposit of £107m and the undrawn RCF.

The Board has announced that it will not be paying a dividend in respect of the financial year ending 31 August 2021.

The Group's approach to capital allocation remains unchanged:

· investing in our existing business and in new opportunities where we see attractive rates of return ahead of the cost of capital;

· re-establishing a dividend for our shareholders;

· undertaking attractive value-creating acquisitions in strong and growing markets;

· returning surplus capital to shareholders by way of share buybacks.

In normalised conditions, we have a leverage target of between 0.75X and 1.25X EBITDA.

Outlook

The Group has responded quickly to the changing trading environment despite the challenges and uncertainties faced during the year. We have managed our cash position well, refinanced our debt, and have sufficient liquidity to capitalise on the significant growth opportunities that have become available as a result of the pandemic.

We continue to make good progress in winning new space in Travel both in the UK, North America and the Rest of the World. In UK Air, we have now won 30 technology stores. These stores will trade under the brand InMotion, further strengthening our presence in this category in Travel. As well as the 117 stores in North America, these 30 InMotion stores in the UK, including at London Heathrow, London Gatwick and London Stansted airports, will make InMotion the leading technology retailer in travel locations. In addition, we are delighted to have been awarded preferred bidder status for a further two InMotion stores at Dublin Airport.

We have also made good progress investing in our existing stores, opening new formats and winning new business. We anticipate further growth opportunities across all our markets. All this puts us in a robust position to continue to recover and emerge operationally stronger from the pandemic.

We are financially strong and are an important retail partner for our travel landlords. As a result, we are well positioned to benefit from further opportunities, including extending our user clauses to drive spend per passenger.

Our High Street business has delivered a robust performance and is well placed to continue to generate cash from its portfolio of well-located stores and growing internet businesses. Across our digital channels over the medium-term we expect to see strong growth, particularly from funkypigeon.com, and we are well positioned to grow this platform further.

Subject to uncertainties in our markets, which continue to be impacted by government actions, we are optimistic that we will be able to achieve 2019 sales levels in the current financial year⁵.

TOTAL TRAVEL

Our Travel business comprises three divisions: UK, North America (NA) and Rest of the World (ROW). Going forward we will split Travel into these three segments when reporting our results.

Covid-19 continued to significantly impact the business across all our markets. This has resulted in a Total Travel Headline trading loss¹ in the year of £39m (2020: loss of £33m). Total revenue was £401m (2020: £553m), down 27% compared to the previous year.

£m	Trading (loss)/profit¹ (IFRS 16)		Headline trading (loss)/profit¹ (pre-IFRS 16)		Revenue
	2021	2020	2021	2020	2021	2020
Travel UK	(29)	(1)	(32)	(1)	195	344
North America	2	(14)	6	(18)	166	116
Rest of the World	(17)	(12)	(13)	(14)	40	93
Total Travel	(44)	(27)	(39)	(33)	401	553

In all our markets, we have focused on initiatives within our control which support us in the immediate term and put us in a good position to emerge operationally stronger as our markets recover:

· Business development and winning new business

We do this through building and managing relationships with all our landlord partners to win new space, improve the quality and amount of space, develop new formats and extend contracts. As at 31 October 2021, we had over 100 stores won and yet to open across our global Travel business, including 22 InMotion stores in UK Air.

⁵ Includes acquisitions and new wins

· ATV growth and spend per passenger

We do this through our forensic attention to space, cross category promotions, merchandising, store layouts and store refits.

· Category development

We do this by developing adjacent product categories relevant for our customers, such as health and beauty and electrical accessories ranges; and expanding existing categories, e.g. premium food ranges.

· Minimising costs

We remain focused on cost control and minimising our cost base to reflect the level of sales in each channel and country whilst retaining our ability to trade as recovery occurs.

As restrictions have eased, we have seen a gradual improvement in passenger numbers, led first by domestic travel and then short-haul. We expect long-haul travel to return last. Consensus of industry forecasts including the Airports Council International (ACI) expect passenger numbers to return to 2019 levels by 2024, although the speed and shape of the recovery remains unclear and variable. We concur with this view of the recovery.

As at 31 August 2021, our global Travel business, including MRG and InMotion, operated from 1,166 units (31 August 2020: 1,174 units). Of these, 996 were open as at 31 October 2021. Outside of the UK, as at 31 August 2021 we are present in over 100 airports and 30 countries with 291 stores in North America, 84 stores in Europe, 98 in the Middle East and India and 122 in Asia Pacific. Excluding franchise units, Travel occupies 1.0m square feet.

TRAVEL UK

Our Travel UK business continued to be impacted by a significant decline in passenger numbers as a result of government-imposed travel restrictions in place throughout the financial year. Total revenue in the year was £195m, (2020: £344m), down 43% on the previous year. Compared to 2019³, revenue in Air was 17%, our Hospital channel was 76%, and Rail was 32%. This resulted in a Headline trading loss¹ of £32m (2020: loss of £1m).

While first half trading in Travel UK was impacted by lockdown restrictions, quarantine measures and resultant reduced passengers on public transport, we saw encouraging signs of recovery across all our channels in the second half as restrictions were progressively eased. This improved performance has continued into the new financial year. Revenue in September 2021 was 60% of 2019 revenue. In October 2021, revenue was 71% of 2019, with Air at 59%, Hospitals at 92% and Rail at 74%.

In Air, we saw a significant improvement in passenger numbers in the second half as restrictions eased and more countries were added to the UK Government's green list. We saw an improvement in our hospital performance, with higher levels of visitors, as hospitals returned to more general medical care with more elective surgeries. Similarly, we saw an improved performance in our Rail business as restrictions eased over the summer months and commuter traffic increased. Since the beginning of the new financial year, we have seen a notable shift in rail passenger numbers with strong performances particularly over weekends and an improving weekday performance albeit still below pre-pandemic levels.

We have worked hard across all our channels to deliver against our plan, focusing on key priorities within our control. All three channels saw a double digit increase in ATV during the year.

As at 31 August 2021, Travel UK operated from 571 stores of which 518 were open as at 31 October 2021. Over the next three years, we expect to open, on average, an additional 10 to 15 stores each year.

Air

In Air, where leisure passengers have been the most important customer segment before and during the pandemic, we have continued to build on our strong position in this channel, including successfully winning all the technology stores across UK airports, including London Heathrow, London Gatwick and London Stansted airports. These business wins comprise 30 stores and will trade under the InMotion brand. Combining the learnings and expertise from our InMotion stores in the US, these stores will provide a first-class customer service experience and showcase a range of premium brands, such as Apple, Bose and Samsung, as well as an extensive range of tech accessories.

As at 31 October 2021, we have 8 InMotion stores trading in UK airports. These include a combined WH Smith and InMotion store at London Stansted airport which forms part of a format trial, combining under one roof a news, books and convenience offer by WH Smith with a technology range from InMotion. Similar to our flagship store at London Heathrow Terminal 2, this store boasts a large digital fascia which complements further digital signage instore, creating an attractive look and feel while also promoting key offers and products. While it is still early days, there is scope to further develop this new combined format across our existing large airport stores going forward. In addition, we will launch a new reserve and collect service later this year in our new InMotion stores to provide our customers with another quick and convenient way to shop.

Technology and accessories is a strong growth market and in a fully recovered travel market we would anticipate that these stores will deliver c.£80m of incremental sales per year. Investment in capex and working capital relating to these stores in the year ending 31 August 2022 will be c.£18m. We expect most of the remaining stores to open by the end of the first half of the current financial year.

We have also continued to invest in our stores, develop new formats and win new business in this channel. This has included: major refits across London Heathrow Terminal 5 to our 'store of the future' format during the year, the opening of three stores in the new terminal at Manchester airport in October 2021, our first shared space store with M&S Food at Liverpool Airport, the opening of a new standalone Bookshop at Heathrow Terminal 2, and, under a franchise agreement, new Costa Coffee stores in Aberdeen and Southampton airports.

Our ongoing investment in format development puts us in a stronger position to win more new business while benefitting from higher levels of customer penetration, delivering a greater return on our space. Going forward, we expect more space to become available.

Category development remains a key part of the strategy and we have made good progress in the year, extending our ranges into new categories such as health and beauty, tech accessories, premium souvenirs and premium food trials. The premium food trials include YO! Sushi and Crussh which have delivered a 25% increase in ATV and have been rolled out to further stores.

As expected, we have seen a faster return of leisure passengers over the year. We saw another step change in sales over the half-term holiday in October, with sales at 70% of the comparable period in 2019.

During the year, we have also successfully extended a number of key contracts.

Hospitals

The Hospitals channel is an important channel for us and, pre-Covid, was our second largest channel by revenue in Travel UK. While sales were clearly impacted in the first half of the financial year, with no hospital visitors and elective surgeries cancelled, we saw an improvement in the second half as restrictions eased and these stores performed well. This strength in performance has extended to the new financial year with sales in October at 92% of 2019³ levels.

The hospital market continues to grow with additional government investment. We are well placed to service the increased demand for retail services in hospitals resulting from the extended operating times to compensate for department backlogs as part of the government's commitment to additional investment in health spend. In addition, there are considerable space opportunities for us to improve the retail offer across UK hospitals.

As at 31 August 2021, we operate from 138 stores in 100 hospitals and we believe there is scope for around 300 hospitals in the UK that are able to support at least one of our three store formats (a WH Smith format, a M&S Food and a Costa Coffee).

This channel is a good example of how we continue to innovate with a strong proposition tailored to each location, and a broad suite of formats and brands, including most recently, our first WH Smith format with a Post Office in Travel.

As at 31 August 2021, we operate 49 M&S standalone or shared space stores across Hospitals, including a recently opened M&S Café at St Thomas' hospital in London.

Looking ahead, we would expect to return to opening on average c.10 new stores each year in this channel over the medium term.

Rail

Rail remains an attractive channel. According to the Department for Transport, pre-pandemic rail had approximately 1.7bn passenger journeys with leisure passengers accounting for around 40% of these journeys.

During the year, we have seen a gradual improvement in sales as restrictions have eased. Concourse data for October suggested passenger numbers in October were 66% of 2019 levels. Revenue in Rail in October was at 74% of 2019 levels.

As we have done across all our channels, we continue to focus on driving ATV and we have seen some good results with a double-digit increase from expanding categories (such as premium food as we have in air) and changing store layouts.

We also continue to invest and develop new formats in this channel. We have recently opened our first shared space store in Rail with M&S at Bristol Templemeads Station. While it is still early days, both customer and landlord feedback has been positive.

In addition, we will be launching a new 'blended essentials' store at Euston Station in London in December 2021. This store will combine our traditional news, books and convenience offer with electrical accessories, health and beauty products and a pharmacy.

NORTH AMERICA

We saw a strong performance from North America, where there was a steady recovery in passenger numbers and also visitors to Las Vegas over the spring and summer months. Total revenue for the year in NA was £166m (2020: £116m), with a Headline trading profit¹ of £6m (2020: loss of £18m). The Headline trading profit¹ of £6m reflects the recovery in passenger numbers and tight cost control including the benefits from merging the MRG and InMotion head offices into Las Vegas.

The growth opportunities in North America are substantial. The US is the largest travel retail market in the world with annual sales, pre-pandemic, at $3.2bn. Approximately 85% of passengers are domestic, with leisure passengers the biggest segment. TSA (Transportation Security Administration) data continues to show the gradual recovery in passenger numbers week on week, with passenger numbers at the end of October 2021 at 84% of 2019 levels.

MRG has a strong track record of winning new business and we have 58 new stores (including InMotion) won and due to open in North America over the next three years with 17 stores won this financial year, including significant wins at major US airports. During the year, MRG opened 8 airport stores, including stores at La Guardia and San Francisco airports. InMotion has an excellent store portfolio with 117 stores located across 41 airports in North America and three stores in Resorts. During the year, InMotion opened seven units, including three InMotion stores in Resort locations.

Differentiated from its competitors by its strategy of developing highly customised retail experiences tailored to local customers and landlords, which we also now use in tenders around the world, MRG has a highly successful and proven business model. The combination of WH Smith, MRG and InMotion now enables the Group to participate in the entire North American airport specialty retail market. We expect a substantial amount of retail space to be offered for tender over the next ten years.

Outside of the airport business, the Resorts channel continues to be resilient. MRG is a leading player in this channel in Las Vegas with very longstanding relationships and a significant amount of expertise. The Resorts channel has similar dynamics to our Travel business with a high number of short stay visitors who tend to stay around the Las Vegas Strip and Fremont Street areas, where most of our stores are located. This market has proven resilient as a leisure location over the summer with occupancy levels, according to the Las Vegas Convention and Visitors Authority, at 87% of 2019 over July and August. Whilst many people drive to Las Vegas, we are also seeing an increase in passenger numbers at McCarran International Airport.

Our sales performance has reflected these trends with overall sales in North America at 90%⁶ of 2019 levels in October. We are currently trading from 264 stores (151 MRG and 113 InMotion).

We continue to invest in digital technology to enhance the customer experience in our stores and we will be opening our first frictionless, checkout-free store in the coming weeks. The WH Smith branded store will provide US customers with a quick and easy way to shop using Amazon's Just Walk Out technology.

REST OF THE WORLD

Total revenue for the year in ROW was £40m (2020: £93m), down 57% versus the previous year. The Headline trading loss¹ for the year was £13m (2020: loss of £14m).The ROW has seen broadly similar trends to the UK, with passenger numbers significantly down year on year. The pace of recovery has varied by geography, as expected, with Europe and the Middle East the best performing regions in the second half. As we have done in Travel UK, we remain focused on areas within our control, including increasing ATV.

As this market recovers, we expect to see more space become available. Our very low market share of the News Books and Convenience market outside of the UK and NA means there is significant opportunity to grow this business further. We also see good opportunities to win new business in the technology market under our InMotion brand. We are delighted to have been awarded preferred bidder status for two InMotion stores at Dublin Airport. This win in a significant European airport will bring the total number of InMotion stores in ROW to 10.

As at 31 October 2021, we had 214 stores trading (c.70% of the total).

During the year we opened 17 new stores. In addition, we won 21 new stores, including significant tenders at Adelaide Airport, Melbourne Airport Terminal 1 and Bali Airport. In total, as at 31 August 2021, we operate 304 stores (2020: 307). 40% are directly run, 52% are franchised with the balance being joint ventures. We will continue to use these three economic models flexibly in order to create value and win new business.

HIGH STREET

Our High Street business comprises our store portfolio on UK high streets and includes our websites whsmith.co.uk, cultpens.com and our personalised greeting cards and gifts business, funkypigeon.com. During the year, High Street delivered a resilient performance with Headline trading profit¹ of £19m (2020: loss of £10m) on revenue of £485m, 4% higher than 2020. We managed the business tightly in an uncertain trading environment, keeping focused on costs and cash generation.

The market has changed significantly during the pandemic, resulting in a shift in consumer behaviour over the past 18 months. High street footfall is down 25% versus 2019³ levels with internet retailing growing. The speed of this change has accelerated during the pandemic. As a consequence, we have acted quickly to this changing market in a number of ways:

· We have reviewed our categories and extended them where appropriate to ensure we have greater relevance in this market and where competitors have closed. New categories include working from home ranges and tech accessories, and we have increased our ranges of cards where competition has weakened.

· We have invested in our whsmith.co.uk, funkypigeon.com and cultpens.com websites where we are seeing significant growth.

⁶ Includes proforma MRG for 2019

· We restructured the cost base to reduce costs and also to increase the level of flexibility in our business model, for example labour costs in stores, head offices and the distribution centres, and in occupancy costs reducing rent and keeping leases short and flexible.

· We closed 24 stores over the last 12 months where leases had become uneconomic and now have a closure process where the costs of closure are largely cash neutral. While closing stores is not an easy decision to make for our colleagues or the communities we serve, it is vital we retain a strong and cash generative high street portfolio going forward.

The strategy we have in place in our High Street business remains as relevant today as it has ever been: space and category management, increasing margins and reducing costs. Our stores are well located with 95% in prime pitch locations.

We consider retail space as a strategic asset and we utilise our space to maximise return in the current year, in ways that are sustainable for future years. We have extensive and detailed space and range elasticity data for every store, built up over many years and we utilise our space to maximise the return on every metre drop of display space in every store. This approach remains as appropriate today.

Driving efficiencies remains a core part of our strategy and we continue to focus on all areas of cost in the business. We achieved cost savings of £30m in the year. These savings come from right across the business, including rent savings at lease renewal (on average over 50%) which continue to be a significant proportion, government business rates holiday, marketing efficiencies and productivity gains from our distribution centres. An additional £45m of cost savings have been identified over the next three years of which £35m are planned for 2022.

Over the years, we have actively looked to put as much flexibility into our store leases as we can, and this leaves us well positioned in the current environment. The average lease length in our High Street business, including where we are currently holding over at lease end, is under 2.5 years. We only renew a lease where we are confident of delivering economic value over the life of that lease. We have c.430 leases due for renewal over the next three years, including 150 where we are holding over and in negotiation with our landlord.

As at 31 August 2021, the High Street business operated from 544 WH Smith stores (2020: 568) which occupy 2.6m square feet (2020: 2.7m square feet). 24 WH Smith stores were closed in the year (2020: eight).

Specialist websites

During the year, we have increased our investment and focus on whsmith.co.uk and have seen rapid growth through investing in the site. This has included improving customer conversion and product presentation; broadening our approach to marketing; and investing in fulfilment using our Swindon distribution centre. This enables us to have a credible multi-channel offer which is complementary for our customers. Our specialist pen website, cultpens.com, has continued to perform well. During the year, we have invested further in the site, adding international functionality to build on our existing international sales, and we have extended our fulfilment centre to meet demand. In addition, we have continued to focus on our luxury pen ranges with increased marketing investment in ranges such as Montblanc.

Funkypigeon.com delivered a record performance in the year. Total revenue was £54m with Headline EBITDA¹ of £14m for the year.

The market for greetings cards in the UK is substantial and estimated at £1.6bn⁷ with online penetration estimated at c.15%⁷ with OC&C forecasting online growth of single cards over the next three years, taking penetration to c.20%⁷ of the card market by 2024. The UK greetings card market has been stable with adults sending on average 20⁷ greetings cards per person each year. We therefore see significant growth opportunities with funkypigeon.com.

⁷Company estimates / OC&C 2019

We continue to invest in the site. During the year, we have developed the funkypigeon.com app to improve customer conversion, and invested in platform enhancements, including improving our customer relationship management capability. We have further extended the fulfilment capability to meet demand, supporting the significant increase in new customers over the past 18 months, with a new production facility in Swindon and leveraging the Group's existing assets. In addition, we have strengthened the management team, with a new Managing Director.

We have also recently launched a new next day delivery service, operational seven days a week to further enhance our customer proposition. Orders placed before 9:30pm will be fulfilled the following day. This has received very positive customer feedback.

Whilst the current year will see a lower sales and Headline EBITDA¹ as we anniversary the lockdowns, we believe there are substantial opportunities to grow the platform further and significantly grow sales and profits.

Environmental, Social and Corporate Governance ('ESG')

During the first half of the financial year, we launched our new sustainability strategy, 'Our journey to a better business', and we have continued to focus on our ESG performance.

During the year, we have met our target to reach carbon neutrality for our UK operations, reducing our energy consumption by over 60% since 2007, switching to 100% renewable electricity and investing in tree planting projects to neutralise residual emissions.

Over the next few years, we intend to extend this approach to our international operations and encourage our supply chain to join us on the pathway to net zero. We will be seeking independent assessment and approval of our carbon targets from the Science Based Target Initiative in the next year.

We continue to focus on more environmentally responsible sourcing practices and we have removed plastic glitter from all our own-brand ranges. This is in addition to our work to redesign and remove plastic packaging from our seasonal ranges wherever possible.

One of the greatest impacts of the pandemic has been the increasing gap in children's literacy levels. We are therefore proud to continue our partnership with the National Literacy Trust at such an important time.

We are committed to continuing to play our part to address some of the key challenges facing society and the environment over the years ahead.

GROUP

The Group generated a Headline loss before tax and non-underlying items¹ of £55m (2020: £69m) and, after non-underlying items and IFRS 16, a Group loss before tax of £116m (2020: £280m). During the year, the Group received a total of £11m from the UK Government's Job Retention Scheme and similar schemes in other countries. The Group also benefited from the business rates holiday implemented by the UK Government which was worth £40m in the year.

			Headline
	IFRS		pre-IFRS 16
£m	2021	2020	2021	2020
Travel UK trading loss¹	(29)	(1)	(32)	(1)
North America trading profit / (loss)¹	2	(14)	6	(18)
Rest of the Wold trading loss¹	(17)	(12)	(13)	(14)
Total Travel trading loss¹	(44)	(27)	(39)	(33)
High Street trading profit / (loss)¹	36	(4)	19	(10)
Group loss from trading operations¹	(8)	(31)	(20)	(43)
Unallocated costs¹	(19)	(17)	(19)	(17)
Group operating loss before non-underlying items¹	(27)	(48)	(39)	(60)
Net finance costs	(24)	(20)	(16)	(9)
Group loss before tax and non-underlying items¹	(51)	(68)	(55)	(69)
Non-underlying items¹	(65)	(212)	(49)	(157)
Group loss before tax	(116)	(280)	(104)	(226)

Non-underlying items¹

Items which are not considered part of the normal operating costs of the business, are non-recurring and are exceptional because of their size, nature and incidence, are treated as non-underlying items and disclosed separately. As in 2020, most non-underlying items are directly attributable to Covid-19, and are detailed in the table below. Most do not impact cash.

The cash spend relating to non-underlying items in the 2021 financial year was £38m and mainly related to activity announced in 2020.

		IFRS	pre-IFRS 16	IFRS	pre-IFRS 16
£m	Ref.	2021	2021	2020	2020
Items directly attributable to Covid-19
Impairment	(1)	42	18	135	55
Onerous leases	(2)	-	5	-	13
Stock provisions, write-offs and other costs	(3)	3	6	15	15
Restructuring	(4)	9	9	25	25
Other property costs	(2)	-	-	-	12
Costs associated with refinancing activity	(5)	6	6	-	-
Other non-underlying items
Transaction costs	(6)	-	-	11	11
Integration costs	(6)	2	2	9	9
Amortisation	(7)	3	3	3	3
Pension past service cost	(8)	-	-	14	14
		65	49	212	157

Items 1-5 in the above table have arisen as a direct consequence of Covid-19, and reflect the impact of lost revenues as a result of store closures, and downward revisions to budgeted revenues based on expectations of the rate of return to pre-pandemic levels of footfall and passenger numbers.

(1) Impairment of Property, plant and equipment and Right-of-use assets

The impact on the Group's operations of Covid-19 is expected to continue during the next year and beyond. As a result, the Group has carried out a review for potential impairment across the entire store portfolio. The impairment review compared the value-in-use of individual store cash-generating units, based on managements' assumptions regarding likely future trading performance taking into account the effect of Covid-19 to the carrying values at 31 August 2021. Following this review, a charge of £18m (2020: £55m) was recorded for impairment of retail store assets on a pre-IFRS 16 basis, and £42m (2020: £135m) on an IFRS 16 basis which includes an impairment of right-of-use assets of £28m (2020: £95m).

(2) Onerous leases and other property costs

As a result of the impact of Covid-19, the Group has carried out a review of leases where the obligations of those leases exceed the potential economic benefits expected to be received under them. This resulted in a charge for the year of £5m (2020: £13m). This concept relates to pre-IFRS 16 numbers only and does not exist under IFRS 16.

Other property costs of £12m (pre-IFRS 16) in the prior year relate to reinstatement liabilities for stores where the long-term viability has been impacted by Covid-19. Under IFRS 16 these costs are included in right-of-use assets and are therefore included within the impairment figure of £95m.

(3) Stock provisions, write-offs and other

During the year, non-underlying provisions of £5m have been recorded against inventory, and relates to dated and perishable stock and stock subject to obsolescence where the sell through rate has significantly reduced due to store closures and lower footfall. Other costs relate to international franchisees, and under IFRS 16 only, the derecognition of lease liabilities relating to the disposal of WH Smith France.

(4) Restructuring costs

The charge of £9m (2020: £25m) is principally attributable to redundancies and restructuring costs following a review of store operations across our High Street business, as a result of the impact of Covid-19 on footfall on the UK high street. These costs are presented as a non-underlying item as they are part of a Board-agreed restructuring programme, and are considered material and one-off in nature.

(5) Costs associated with refinancing activity

Costs associated with refinancing include £1m of non-cash charges relating to unamortised fees connected with extinguished liabilities, £3m of fees incurred in relation to amendment and extension of the Group's previous financing arrangements incurred in March 2021 prior to the issuance of the convertible bond, and £2m of professional fees relating to refinancing and debt structuring activity required as a result of Covid-19. Other fees incurred relating to refinancing activity have been recognised in underlying finance costs or recognised as a deduction from the value of liabilities recognised, and will be amortised over the period of the arrangement through underlying finance costs.

(6) Integration costs

During the year, the Group incurred further costs of £2m in relation to the integration of MRG into the Group, and the merging of the InMotion and MRG corporate offices into Las Vegas, which has now been completed. In the prior year, transaction and integration costs of £20m were incurred in relation to the acquisition of MRG.

(7) Amortisation of acquired intangible assets

Amortisation of acquired intangible assets primarily relates to the MRG and InMotion brands.

(8) Pension past service cost

Past service cost of £14m was recognised in the prior year. This related to the equalisation of pension benefits between men and women for the period from 1 April 1992 to 29 July 1993 ('Barber equalisation').

A tax credit of £12m (2020: £25m) has been recognised in relation to the above items (£9m pre-IFRS 16 (2020: £18m)).

Net Finance Costs

			Headline
	IFRS		pre-IFRS 16
£m	2021	2020	2021	2020
Interest payable on bank loans and overdrafts	10	9	10	9
Interest on convertible bonds	4	-	4	-
Unwind of discount on onerous lease provisions (pre-IFRS 16)	-	-	2	-
Interest on lease liabilities	10	11	-	-
Net finance costs	24	20	16	9

Pre-IFRS 16 net finance costs for the year were £16m (2020: £9m) with the year on year increase reflecting the refinancing activity during the year.

The interest on the convertible bonds includes the accrued coupon and c.£2m of the non-cash debt accretion charge. Looking forward, in the current financial year ending 31 August 2022, net finance costs will include the coupon on the convertible bonds and c.£8m of non-cash debt accretion charges.

The £2m non-cash unwind of discount on onerous lease provisions relates to onerous lease provisions recognised in the current and prior year as a result of Covid-19. This relates to pre-IFRS 16 only and does not exist under IFRS 16.

Lease interest of £10m arises on lease liabilities recognised under IFRS 16, bringing the total net finance costs under IFRS 16 to £24m (2020: £20m).

We expect finance costs on a pre-IFRS 16 basis to be approximately £25m in the current year, with cash finance costs approximately £10m lower than this. These costs are considerably lower than had the April refinancing not occurred.

Tax

The effective tax rate¹ was 47% (2020: 23%) on the loss incurred in the year. The effective tax rate is higher than the prior year rate due to the profile of losses incurred in the UK and overseas, and includes a credit of £8m arising on the substantive enactment of a change in UK tax rate from 19 to 25 per cent. This new law was substantively enacted on 24 May 2021. The tax rate on the IFRS 16 Group statutory loss was 31 per cent (2020: 15 per cent).

During the year, the Group received a corporation tax refund of £10m following the carry back of 2020 losses against prior year profits.

Fixed Charges Cover¹

	pre-IFRS 16
£m	2021	2020
Headline net finance charges¹	16	9
Net operating lease rentals (pre-IFRS 16)¹	151	210
Total fixed charges	167	219
Headline (loss)/profit before tax and non-underlying items¹	(55)	(69)
Headline profit before tax, non-underlying items and fixed charges	112	150
Fixed charges cover - times	0.7x	0.7x

Fixed charges, comprising property operating lease rentals and net finance charges, were covered 0.7 times (2020: 0.7 times) by Headline loss/profit before tax, non-underlying items and fixed charges.

Cash Flow

Free cash flow¹ reconciliation

	pre-IFRS 16
£m		2021	2020
Headline Group operating loss before non-underlying items¹		(39)	(60)
Depreciation, amortisation and impairment (pre-IFRS 16)⁸		50	60
Non-cash items		8	3
		19	3
Capital expenditure		(44)	(79)
Working capital (pre-IFRS 16)⁸		37	40
Net tax refunded / (paid)		10	5
Net interest paid (pre-IFRS 16)		(8)	(7)
Other		-	(3)
Free cash flow¹		14	(41)

⁸Excludes cashflow impact of non-underlying items

The free cash inflow¹ for the year was £14m. The operating cash inflow was £19m (2020: £3m) driven by a good trading performance from High Street. We continued to focus on managing our working capital, making appropriate buying decisions for stores we have open, and generated an inflow of £37m in the year, which also includes the working capital benefit from the improved trading over the summer.

Net corporation tax refunded in the year was £10m (2020: £5m) following the carry back of 2020 losses against prior year profits.

Capital expenditure was £44m (2020: £79m). We continue to invest in strategically important projects, such as London Heathrow Airport Terminal 5 and the new terminal at Manchester Airport, as well as opening stores around the world. We expect capex spend for the current financial year to be around £100m.

£m	2021	2020
New stores and store development	17	34
Refurbished stores	17	17
Systems	9	14
Other	1	14
Total capital expenditure	44	79

Reconciliation of Headline net debt¹

Headline net debt is presented on a pre-IFRS 16 basis. See Note 9 of the Financial statements for the impact of IFRS 16 on net debt.

As at 31 August 2021 the Group had Headline net debt¹ of £291m comprising convertible bonds of £283m, term loans of £132m (net of fees), £6m of finance lease liabilities and net cash of £130m (2020: £301m, comprising term loan of £400m relating to the acquisition of InMotion and MRG, £9m of finance lease liabilities and net cash of £108m).

	Headline
	pre-IFRS 16
£m	2021	2020
Opening Headline net debt¹	(301)	(180)
Movement in year
Free cash flow	14	(41)
Dividends	-	(47)
Pensions	(3)	(3)
Non-underlying items	(38)	(20)
Net purchase of own shares for employee share schemes	(2)	(2)
Acquisition of businesses, net of cash acquired - MRG/InMotion	1	(316)
Net proceeds from placings	-	312
Equity component of convertible bond	41	-
Other	(3)	(4)
Closing Headline net debt¹	(291)	(301)
Cash	130	108
Term Loans (net of fees)	(132)	(400)
Convertible bond	(283)	-
Finance leases (pre-IFRS 16)	(6)	(9)
	(291)	(301)

The Group had closing Headline net debt¹ of £291m at the year end. In addition to the free cash flow, the Group paid defined benefit pension funding of £3m (see Note 16 on pensions); and £38m of non-underlying items which mainly relate to restructuring following the review of store and head office operations, as previously reported and charged to the income statement in the prior year. In addition, there were costs associated with integration of the US businesses and the refinancing in April.

As part of the Group's refinancing in April 2021, the Group issued convertible bonds maturing in 2026. The convertible bonds raised £327m which was used to partially pay down the existing £400m of term loans from both the MRG and InMotion acquisitions. The convertible bond is a compound financial instrument, which includes an equity option. As a consequence, the debt is bifurcated into an equity component, reported in equity, and a debt component. The debt component accretes up to par over the life of the bond, so for each 12 month period we will have c.£8m non-cash debt accretion in finance costs. In addition, the Group increased the RCF from £200m to £250m and extended its tenor to April 2025.

On an IFRS 16 basis, net debt was £755m, which includes an additional £464m of lease liabilities.

Balance sheet

			Headline
	IFRS		pre-IFRS 16
£m	2021	2020	2021	2020
Goodwill and other intangible assets	473	493	474	495
Property, plant and equipment	174	192	167	190
Right of use assets	328	413	-	-
Investments in joint ventures	2	2	2	2
	977	1,100	643	687

Inventories	135	150	135	150
Payables less receivables	(214)	(183)	(237)	(226)
Working capital	(79)	(33)	(102)	(76)

Derivative financial asset	-	-	-	-
Net current and deferred tax asset	56	28	46	17
Provisions	(14)	(14)	(28)	(27)
Operating assets employed	940	1,081	559	601
Net debt	(755)	(851)	(291)	(301)
Net assets excluding pension liability	185	230	268	300
Pension liability	(3)	(4)	(3)	(4)
Deferred tax asset on pension liability	1	1	1	1
Total net assets	183	227	266	297

The Group had Headline net assets of £268m before pension liabilities and associated deferred tax assets, £32m lower than last year end reflecting the lower level of capex and the impact of impairment reviews as a result of Covid-19. Headline net assets after the pension liability and associated deferred tax asset were £266m compared to £297m at 31 August 2020. Under IFRS the Group had net assets of £183m.

Pensions

The latest actuarial revaluation of the main defined benefit pension scheme, the WH Smith Pension Trust, was at 31 March 2020 at which point the deficit was £9m (31 March 2017 actuarial revaluation deficit of £11m). The Group has agreed a continuation of the annual funding schedule with the Trustees from March 2020 for the next five years, which includes the deficit recovery contributions and other running costs, of just under £3m per annum. During the year ended 31 August 2021, the Group made a contribution of £3m to the scheme.

The scheme has been closed to new members since 1996 and closed to defined benefit service accrual since 2007. The Liability Driven Investment (LDI) policy adopted by the scheme continues to perform well with 100% of the inflation and interest rate risks hedged.

As at 31 August 2021, the Group has an IFRIC 14 minimum funding requirement in respect of the WH Smith Pension Trust of £2m (2020: £3m) and an associated deferred tax asset of £1m (2020: £1m) based on the latest schedule of contributions agreed with the Trustees. As at 31 August 2021, the scheme had an IAS 19 surplus of £284m (2020: surplus of £268m) which the Group has continued not to recognise. There is an actuarial deficit due to the different assumptions and calculation methodologies used compared to those under IAS 19.

The IAS 19 pension deficit on the relatively small UNS defined benefit pension scheme was £1m (2020: £1m).

Principal and Emerging Risks and Uncertainties

The Board has undertaken a robust assessment of the principal and emerging risks and uncertainties facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. The Board has assessed the ongoing impact of Covid-19 as a significant risk facing the Group, due to uncertainty around the timing and extent of recovery on our ability to operate our Travel and High Street stores, both in the UK and Internationally, and its impact upon the levels of global and domestic travel. The Group has deployed a framework of operational procedures, mitigating actions and business continuity plans as outlined in this announcement and will continue to adapt these plans as the situation evolves.

Changes to the risk profile due to Covid-19

Where the consequences of the Covid-19 pandemic may impact the business, we have incorporated these considerations into our assessment in relation to each of our principal risk headings. The grid below explains where the potential risk implications of the pandemic link with, and impact upon, our other principal risks.

A full disclosure of the Group's principal and emerging risks and uncertainties including the factors which mitigate them will be set out within the Strategic report of the 2021 Annual Report and Accounts.

Relevant Principal Risk	Covid-19 Impact
Economic, political, competitive & market risks	The Group may fail to effectively respond to the pressures of an increasingly changing retail environment, where Covid-19 materially changes consumer spending patterns and habits, such as shifting from physical to online shopping, and from any longer-term damage to the travel industry and reductions in the level of international travel.
Brand and reputation	The reputation of the brand may be impacted in the event that customers were to perceive that our store environments are insufficiently safe and secure in response to the continuing experience of the virus.
Key suppliers and supply chain management	Given that large elements of our sourcing rely on factories and shipment from the Far East, these supply chains and principal product flows could be negatively impacted by any interruptions due to any further shutdown of factories and supply routes or international outbreaks.
Store portfolio	The Group's performance is reliant upon trading from our wide portfolio of premium shopping locations, where our performance may be negatively impacted in the event of further store closures, constraints on trading and travel restrictions, or further extensions in the scale and nature of local lockdowns.
Business interruption	The business could be negatively impacted by any concentration of illness in a particular location such as Head Office, distribution centres or particular stores, should these need to close temporarily, and large numbers of staff were required to self-isolate.
Reliance on key personnel	The business could be negatively impacted in the event that any of the senior leadership team were to fall ill or be personally impacted by the virus.
International expansion	The business continues to grow outside of the UK. Such ongoing growth could therefore be negatively impacted by further enforced store closures, constraints on trading and the longer-term continuation of international travel restrictions or curtailment in passenger numbers.
Treasury, financial and credit risk management	Significantly reduced trading over an extended period from further outbreaks of new Covid strains and the inability for effective vaccines to be distributed and keep pace with newly identified variants could cause further negative impact on the Group's financial position in the longer term.
Cyber risk, Data Security and GDPR compliance	Further risks from significant increases in industry wide phishing activity and cyber threats could pose additional risks of potential systems interruption.
Environment and sustainability	Continued uncertainty and business interruption from the Covid-19 pandemic could provide further challenges to the delivery of our ongoing sustainability programme.

This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulations.

This announcement contains certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results to differ from those anticipated. Nothing in this announcement should be construed as a profit forecast. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

WH Smith PLC

Group Income Statement

For the year ended 31 August 2021

		2021			2020
£m	Note	Before non-underlying items¹	Non-underlying items²	Total	Before non-underlying items¹	Non-underlying items²	Total

Revenue	2	886	-	886	1,021	-	1,021
Group operating loss	2, 3	(27)	(65)	(92)	(48)	(212)	(260)
Finance costs	5	(24)	-	(24)	(20)	-	(20)
Loss before tax		(51)	(65)	(116)	(68)	(212)	(280)
Income tax credit	6	24	12	36	16	25	41
Loss for the year		(27)	(53)	(80)	(52)	(187)	(239)

Attributable to equity holders of the parent		(29)	(53)	(82)	(52)	(187)	(239)
Attributable to non-controlling interests		2	-	2	-	-	-
		(27)	(53)	(80)	(52)	(187)	(239)

Earnings per share
Basic	7			(62.6)p			(199.2)p
Diluted	7			(62.6)p			(199.2)p

¹ Alternative Performance Measure. The Group has defined and explained the purpose of its alternative performance measures in the Glossary on page 51.

² See Note 4 for an analysis of Non-underlying items. See Glossary on page 51 for a definition of Alternative Performance Measures.

WH Smith PLC

Group Statement of Comprehensive Income

For the year ended 31 August 2021

£m	Note	2021	2020
Loss for the year		(80)	(239)
Other comprehensive loss:
Items that will not be reclassified subsequently to the income statement:
Actuarial (losses) / gains on defined benefit pension schemes	16	(1)	11
		(1)	11
Items that may be reclassified subsequently to the income statement:
(Losses) / gains on cash flow hedges
- Net fair value losses		-	(8)
- Reclassified and recognised in inventories		-	(1)
- Reclassified and recognised in goodwill		-	8
- Reclassified and reported in the income statement		-	(1)
Exchange differences on translation of foreign operations		(13)	(22)
		(13)	(24)

Other comprehensive loss for the year, net of tax		(14)	(13)
Total comprehensive loss for the year		(94)	(252)
Attributable to equity holders of the parent		(96)	(252)
Attributable to non-controlling interests		2	-
		(94)	(252)

WH Smith PLC

Group Balance Sheet

As at 31 August 2021

£m	Note		2021	2020
Non-current assets
Goodwill	11		406	418
Other intangible assets	11		67	75
Property, plant and equipment	12		174	192
Right-of-use assets	13		328	413
Investments in joint ventures			2	2
Deferred tax assets			57	23
Trade and other receivables			6	9
			1,040	1,132
Current assets
Inventories			135	150
Trade and other receivables			45	49
Current tax receivable			-	8
Cash and cash equivalents	9		130	108
			310	315
Total assets			1,350	1,447
Current liabilities
Trade and other payables			(265)	(241)
Retirement benefit obligations	16		(1)	(1)
Lease liabilities	14		(108)	(130)
Short-term provisions			(2)	(5)
			(376)	(377)

Non-current liabilities
Retirement benefit obligations	16		(2)	(3)
Bank overdrafts and other borrowings	9		(415)	(400)
Long-term provisions			(12)	(9)
Lease liabilities	14		(362)	(429)
Deferred tax liabilities			-	(2)
			(791)	(843)
Total liabilities			(1,167)	(1,220)
Total net assets			183	227

Shareholders' equity
Called up share capital		29		29
Share premium		316		315
Capital redemption reserve		13		13
Translation reserve		(27)		(14)
Other reserves		(240)		(279)
Retained earnings		82		158
Total equity attributable to equity holders of the parent		173		222
Non-controlling interest		10		5
Total equity		183		227

WH Smith PLC

Group Cash Flow Statement

For the year ended 31 August 2021

£m	Note	2021	2020
Operating activities
Cash generated from operating activities	10	113	94
Interest paid¹		(13)	(13)
Net cash inflow from operating activities		100	81
Investing activities
Purchase of property, plant and equipment		(37)	(67)
Purchase of intangible assets		(7)	(12)
Acquisition of subsidiaries, net of cash acquired		1	(316)
Net cash outflow from investing activities		(43)	(395)
Financing activities
Dividend paid	8	-	(47)
Distributions to non-controlling interests		-	1
Proceeds from share placings		-	312
Issue of new shares for employee share schemes		1	-
Purchase of own shares for employee share schemes		(2)	(2)
Proceeds from issuance of convertible bonds	9	327	-
Proceeds from borrowings	9	-	200
Repayment of borrowings	9	(267)	(15)
Financing arrangement fees		(8)	(3)
Repayments of obligations under leases	9	(86)	(72)
Net cash (outflow) / inflow from financing activities		(35)	374

Net increase in cash and cash equivalents in the year		22	60

Opening cash and cash equivalents		108	49
Effect of movements in foreign exchange rates		-	(1)
Closing cash and cash equivalents		130	108

¹ Includes interest payments of £5m on lease liabilities (2020: £6m).

WH Smith PLC

Group Cash Flow Statement (continued)

For the year ended 31 August 2021

Reconciliation of net cash flow to movement in net debt¹


£m	Note	2021	2020
Net debt at beginning of the year		(851)	(180)
Net increase in cash and cash equivalents		22	60
Impact of adoption of IFRS 16		-	(479)
Lease liability acquired through business combinations		-	(106)
Increase in borrowings	9	(15)	(185)
Net decrease in lease liability		84	32
Effect of movements in foreign exchange rates		5	7
Net debt at end of the year	9	(755)	(851)

¹ Net debt is an Alternative Performance Measure defined and explained in the Glossary on page 51. Further information on the items in the above reconciliation are provided in Note 9.

WH Smith PLC

Group Statement of Changes in Equity

For the year ended 31 August 2021

£m	Called up share capital and share premium	Capital redemption reserve	Translation reserves	Other reserves	Retained earnings		Total equity attributable to equity holders of the parent	Non-controlling interests	Total equity
Balance at 1 September 2020	344	13	(14)	(279)	158	222		5	227
Loss for the year	-	-	-	-	(82)	(82)		2	(80)
Other comprehensive loss:
Actuarial losses on defined benefit pension schemes (Note 16)	-	-	-	-	(1)	(1)		-	(1)
Exchange differences on translation of foreign operations	-	-	(13)	-	-	(13)		-	(13)
Total comprehensive loss for the year	-	-	(13)	-	(83)	(96)		2	(94)

Issue of new shares	1	-	-	-	-	1		-	1
Issue of convertible bonds - value of conversion rights (Note 9)	-	-	-	40	-	40		-	40
Deferred tax on share-based payments	-	-	-	-	1	1		-	1
Employee share schemes	-	-	-	(1)	6	5		-	5
Non cash movement on non-controlling interests	-	-	-	-	-	-		3	3
Balance at 31 August 2021	345	13	(27)	(240)	82	173		10	183

Balance at 31 August 2019	33	13	8	(274)	455	235		2	237
Impact of adoption of IFRS 16	-	-	-	-	(22)	(22)		-	(22)
Adjusted balance at 1 September 2019	33	13	8	(274)	433	213		2	215
Loss for the year	-	-	-	-	(239)	(239)		-	(239)
Other comprehensive income / (loss):
Actuarial gains on defined benefit pension schemes (Note 16)	-	-	-	-	11	11		-	11
Cash flow hedges	-	-	-	(2)	-	(2)		-	(2)
Exchange differences on translation of foreign operations	-	-	(22)	-	-	(22)		-	(22)
Total comprehensive loss for the year	-	-	(22)	(2)	(228)	(252)		-	(252)

Issue of shares	311	-	-	-	-	311		-	311
Dividends paid (Note 8)	-	-	-	-	(47)	(47)		-	(47)
Net cash flows from non-controlling interests	-	-	-	-	-	-		1	1
Employee share schemes	-	-	-	(3)	-	(3)		-	(3)
Non-controlling interest arising on acquisition (Note 17)	-	-	-	-	-	-		2	2
Balance at 31 August 2020	344	13	(14)	(279)	158	222		5	227

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

1. Basis of preparation

Whilst the information included in the consolidated financial statements has been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, this announcement does not itself contain sufficient information to comply with IFRSs. The financial information in this full year results statement does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006.

Statutory accounts for the year ending 31 August 2020 have been delivered to the Registrar of Companies and those for 2021 will be delivered following the Company's Annual General Meeting. The Annual Report for the year ending 31 August 2021 and this full year results statement were approved by the Board on 11 November 2021. The auditors have reported on the Annual Report for the years ended on 31 August 2021 and 2020 and neither report was qualified and neither contained a statement under Section 498(2) or (3) of the Companies Act 2006.

The consolidated financial information for the year ended 31 August 2021 have been prepared on a consistent basis with the financial accounting policies set out in the Accounting Policies section of the WH Smith PLC Annual Report and Accounts 2020 except as described below. The Group has adopted the following standards and interpretations which became mandatory for the first time during the year ended 31 August 2021. The Group has considered the below new standards and amendments and has concluded that, with the exception of the Amendments to IFRS 16, they are either not relevant to the Group or they do not have a significant impact on the Group's consolidated financial statements.

Amendments to references to Conceptual Framework in IFRS standards
Amendments to IFRS 16	Covid-19 related rent concessions
Amendment to IFRS 9, IAS 39 and IFRS 7	Interest rate benchmark reform - Phase 1
Amendments to IFRS 3	Definition of a business
Amendments to IAS 1 and IAS 8	Definition of material

The impact of the amendment to IFRS 16 is described in Note 14.

At the Group balance sheet date, the following standards and interpretations, which have not been applied in these condensed financial statements, were in issue but not yet effective:

IFRS 17	Insurance Contracts
Amendments to IFRS 3	Reference to the Conceptual Framework
Amendments to IFRS 9, IAS 39 and IFRS 7, IFRS 4 and IFRS 16	Interest Rate Benchmark Reform - Phase 2
Amendments to IAS 1	Presentation of financial statements on classification of liabilities
Amendments to IAS 16	Proceeds before intended use
Amendments to IAS 37	Onerous contracts - cost of fulfilling a contract
Amendments to IAS 12 and IFRS 1	Deferred tax related to assets and liabilities arising from a single transaction
Narrow scope amendments to IFRS 3, IAS 16 and IAS 37
Annual improvements to IFRS Standards 2018-2020
Amendments to IAS 1	Disclosure of accounting policies
Amendments to IAS 8	Definition of accounting estimate

The directors anticipate that the adoption of these standards and interpretations in future years will have no material impact on the Group's condensed financial statements.

Alternative Performance Measures

The Group has identified certain Alternative Performance Measures ("APMs") that it believes will assist the understanding of the performance of the business. These APMs are not defined or specified under the requirements of IFRS.

The Group believes that these APMs, which are not considered to be a substitute for, or superior to, IFRS measures, provide stakeholders with additional useful information on the underlying trends, performance and position of the Group and are consistent with how business performance is measured internally. The APMs are not defined by IFRS and therefore may not be directly comparable with other companies' APMs.

The key APMs that the Group uses include: measures before non-underlying items, Headline profit before tax, Headline earnings per share, trading profit, Headline trading profit, Headline Group profit from trading operations, like-for-like revenue, gross margin, fixed charges cover, EBITDA, Net debt/funds and Headline net debt/funds and free cash flow. These APMs are set out in the Glossary on page 51 including explanations of how they are calculated and how they are reconciled to a statutory measure where relevant.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

1. Basis of preparation (continued)

Non-underlying items

The Group has chosen to present a measure of profit and earnings per share which excludes certain items, that are considered non-underlying and exceptional due to their size, nature or incidence, and are not considered to be part of the normal operations of the Group. These measures may exclude the financial effect of non-underlying items which are considered exceptional or occur infrequently such as, inter alia, restructuring costs linked to a Board agreed programme, costs relating to business combinations, impairment charges and other property costs, significant items relating to pension schemes, and impairment charges and items meeting the definition of non-underlying specifically related to the Covid-19 pandemic, and the related tax effect of these items. In addition, non-underlying measures exclude the income statement impact of amortisation of intangible assets acquired in business combinations, which are recognised separately from goodwill. This amortisation is not considered to be part of the underlying operating costs of the business and has no associated cash flows.

The Group believes that the separate disclosure of these items provides additional useful information to users of the financial statements to enable a better understanding of the Group's underlying financial performance.

Further details of the non-underlying items are provided in Note 4.

Going concern

The consolidated financial statements have been prepared on a going concern basis. The directors are required to assess whether the Group can continue to operate for the 12 months from the date of approval of these financial statements, and to prepare the financial statements on a going concern basis.

The directors report that they have undertaken a rigorous assessment of current performance and forecasts, including expenditure commitments, capital expenditure and borrowing facilities, and have concluded that the Group is able to adequately manage its financing and principal risks, and that the Group will be able to operate within the level of its facilities and meet the required covenants for the period to February 2023. Based on this assessment, which is outlined below, it is appropriate to adopt the going concern basis of accounting in preparing these financial statements.

The Strategic report describes the Group's financial position, cash flows and borrowing facilities and also highlights the principal risks and uncertainties facing the Group. As a result of the Group's refinancing, announced on 28 April 2021, the balance sheet has been significantly strengthened.

The refinancing arrangements included a £250m multi-currency revolving credit facility ('RCF') increased from £200m with an extended maturity from December 2023 to April 2025 and provided by an expanded syndicate of lending banks. As at 31 October 2021, the Group is not drawn down on the RCF and has £107m cash on deposit.

As part of the refinancing, the Group also raised £327m from the issue of convertible bonds, of which £50m was retained by the Group to fund the opening of c.100 new Travel stores won and yet to open over the next three years, including thirty new InMotion stores in UK Travel. The remainder of the proceeds, net of costs, were used to partially pay down the term loans from both the Marshall Retail Group ('MRG') and InMotion acquisitions, leaving the Group with £133m of term loans. The maturity of the remaining term loan has also been extended from 2023 to 2025 in line with the RCF.

In making the going concern assessment, the directors have modelled a number of scenarios for the period to February 2023. The base case scenario is consistent with the Board approved 2022 Budget and the three year plan. Under this scenario the Group has significant liquidity and comfortably complies with all covenant tests to February 2023.

A severe but plausible scenario has also been modelled which assumes a further three-month lockdown over the period December 2021 to February 2022 across the group, with High Street store sales down over 40 per cent across December to February versus the equivalent months in the year ending August 2019. Sales are assumed to recover gradually from March 2022 at around 35 per cent below the equivalent month in the year ending August 2019 to down 30 per cent at February 2023. In Travel UK we have also assumed a lockdown over the December 2021 to February 2022 period, with sales down 76 per cent versus the equivalent months in the year ending August 2019. We then assume a gradual recovery, reflecting our experience of the post-lockdown recovery period from 2020 and earlier in the year, to a position in February 2023 where Travel UK sales are forecast to be down between zero and 12 per cent, depending on the channel, versus February 2019. In the US we have assumed a lockdown over the December 2021 to February 2022 period followed by a gradual recovery, reflecting our experience of the post-lockdown period from earlier in the year. The severe but plausible scenario does not assume any further government financial support despite the continuation of lockdowns. However, the severe but plausible scenario includes a number of mitigating actions including savings in store and head office payrolls and rent relief in Travel UK, to mitigate the impact of lockdown with lower sales.

In both the base case and severe but plausible scenarios the Group would continue to have sufficient liquidity headroom on its existing facilities, as described above.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

1. Basis of preparation (continued)

The covenants on the above facilities are tested half-yearly. The covenant tests at 31 August 2021, 28 February 2022 and 31 August 2022 are based on minimum liquidity and under the base case and severe but plausible scenarios the Group would meet these covenant tests. The covenant test as at 28 February 2023 is based on fixed charges cover and net borrowings. Under both the base case and the severe but plausible scenarios, the Group would meet these covenant tests. In addition, we have received excellent support from our banks who have granted covenant waivers throughout the pandemic. The Group Overview also sets out the Group's business activities together with the factors that are likely to affect its future developments, performance and position.

As a result of the above analysis, the directors believe that the Group has sufficient financial resources to continue in operation and meet its obligations as they fall due for the 12 months from the date of approval of these financial statements.

Critical accounting judgements and key sources of estimation uncertainty

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates and any subsequent changes are accounted for with an effect on income at the time such updated information becomes available.

The most critical accounting judgements and sources of estimation uncertainty in determining the financial condition and results of the Group are those requiring the greatest degree of subjective or complex judgement. These relate to the classification of items as non-underlying, assessment of lease substitution rights, determination of the lease term, determination of the incremental borrowing rate, valuation of retirement benefit obligations, determination of operating segments and allocation of goodwill, valuation of other non-current assets and inventory valuation.

Critical accounting judgements

Non-underlying items

The Group has chosen to present a measure of profit and earnings per share which excludes certain items that are considered non-underlying and exceptional due to their size, nature or incidence, and are not considered to be part of the normal operations of the Group. These measures may exclude the financial effect of non-underlying items which are considered exceptional and occur infrequently such as, inter alia, restructuring costs linked to a Board agreed programme, amortisation of acquired intangibles assets, costs relating to business combinations, impairment charges and other property costs, significant items relating to pension schemes, and impairment charges and items meeting the definition of non-underlying specifically related to the Covid-19 pandemic, and the related tax effect of these items. The Group believes that they provide additional useful information to users of the financial statements to enable a better understanding of the Group's underlying financial performance. The classification of items as non-underlying requires significant management judgement. The definition of non-underlying items has been applied consistently year on year. Further details of non-underlying items are provided in Note 4.

IFRS 16 Lease accounting

Substantive substitution rights

Judgement is required in determining whether a contract meets the definition of a lease under IFRS 16. Management has determined that certain retail concession contracts give the landlord substantive substitution rights because the contract gives the landlord rights to relocate the retail space occupied by the Group. In such cases, management has concluded that there is not an identified asset and therefore such contracts are outside the scope of IFRS 16. For these contracts, the Group recognises the payments as an operating expense on a straight-line basis over the term of the contract unless another systematic basis is more representative of the time pattern in which economic benefits from the underlying contract are consumed.

Determination of lease term

In determining the lease term for contracts that have options to extend or terminate early, management has applied judgement in determining the likelihood of whether such options will be exercised. This is based on the length of time remaining before the option is exercisable, performance of the individual store and the trading forecasts.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

1. Basis of preparation (continued)

Critical accounting judgements (continued)

Initial recognition of convertible bond

On initial recognition of the convertible bond, judgement is required in respect of the accounting treatment of embedded derivatives. The fixed principal amount of each bond is convertible into a fixed number of shares and as a result management has determined that the conversion feature meets the fixed-for-fixed criterion for equity classification. The bonds include anti-dilution provisions to ensure that the holder's potential interest in the equity of the Company is not diluted in specified circumstances. If these provisions are triggered, the number of shares that will be delivered to the holder is adjusted. Management considers that the provisions are anti-dilutive and exist to ensure that the holder's potential interest in the equity of the Company is not diluted under each of these circumstances. These provisions are not deemed to breach the fixed-for-fixed criterion therefore the conversion feature is accounted for as equity.

Determination of operating segments

During the year the Group has reviewed its assessment of its operating segments, as a result of internal reorganisation and changes to the composition of information used by the Board to monitor the performance of the Group. This review has resulted in a change to the reportable segments identified, and prior year comparatives have been restated. There is no change to the total revenue or Group profit from trading operations.

Further information in respect of the Group's operating segments is included in Note 2.

Sources of estimation uncertainty

Retirement benefit obligation

The Group recognises and discloses its retirement benefit obligation in accordance with the measurement and presentational requirement of IAS 19 'Retirement Benefit Obligations'. The calculations include a number of judgements and estimations in respect of the discount rate, inflation assumptions, the rate of increase in salaries, and life expectancy, among others. Changes in these assumptions can have a significant effect on the value of the retirement benefit obligation. Further information and sensitivity analysis in respect of the Group's retirement benefit obligation is included in Note 16.

Valuation of goodwill

As a result of the change to the Group's identified operating segments described above, the goodwill previously allocated to the Travel operating segment has been allocated to the new operating segments using a relative value approach. This method of allocation requires the determination of value-in-use of each of the new segments. The key assumptions in the value-in-use calculations include growth rates of revenue and expenses, and discount rates.

A sensitivity analysis of the goodwill impairment calculation has shown that no reasonably possibly change in assumptions would lead to an impairment of goodwill in the next financial year. Further to this sensitivity analysis, an assessment of the goodwill allocation was performed which showed that an impairment assessment under the previous allocation of goodwill to the Travel operating segment, or under any other reasonable split of the goodwill balance, would not have resulted in an impairment of goodwill.

Intangible assets, property, plant and equipment and right-of-use asset impairment reviews

Property, plant and equipment, right-of-use assets and intangible assets are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount of an asset or a cash-generating unit is determined based on value-in-use calculations prepared on the basis of management's assumptions and estimates.

The key assumptions in the value-in-use calculations include growth rates of revenue and expenses, discount rates and likelihood of lease renewal. Due to the ongoing Covid-19 global pandemic, there is an increased level of uncertainty in all of the above assumptions such that a reasonably possible change in these assumptions could lead to a material change in the carrying value of assets.

Further information in respect of the Group's property, plant and equipment and right-of-use assets is included in Notes 12 and 13 respectively.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

1. Basis of preparation (continued)

Inventory valuation

Inventory is carried at the lower of cost and net realisable value which requires the estimation of sell through rates, and the eventual sales price of goods to customers in the future. Any difference between the expected and the actual sales price achieved will be accounted for in the period in which the sale is made. A sensitivity analysis has been carried out on the calculation of inventory provisions, including consideration of the uncertainties arising from Covid-19. The key assumption driving the stock provision calculation is forecast revenue. A 10 per cent change in the revenue assumptions applied in the provision calculation, representing a reasonably possible outcome, would reduce the net realisable value of inventories by £2m.

2. Segmental analysis of results

IFRS 8 requires segment information to be presented on the same basis as that used by the Chief Operating Decision Maker for assessing performance and allocating resources. The Group's operating segments are based on the reports reviewed by the Board of Directors who are collectively considered to be the chief operating decision maker.

For management and financial reporting purposes, the Group is organised into two operating divisions and which comprise four reportable segments - Travel UK, North America, Rest of the World within the Travel division, and High Street. The North America operating segment includes both MRG and InMotion from the dates of acquisition. For further information in relation to the acquisition of MRG in the prior year, see Note 17.

The information presented to the Board is prepared in accordance with the Group's IFRS accounting policies, with the exception of IFRS 16, and is shown below as Headline information in Section b). A reconciliation to statutory measures is provided below in accordance with IFRS 8, and in the Glossary on page 51 (Note A2).

a)	Group revenue

£m	2021	2020
Travel UK	195	344
North America	166	116
Rest of the World¹	40	93
Total Travel	401	553
High Street	485	468
Group revenue	886	1,021

¹ Rest of the World revenue includes revenue from Australia of £20m (2020: £38m). No other country has individually material revenue.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

2. Segmental analysis of results (continued)

b)	Group results

		2021				2020
£m	Headline¹ (Pre-IFRS 16)		Headline Non-underlying items¹ (Pre-IFRS16)	IFRS 16	Total	Headline¹ (Pre-IFRS 16)	Headline Non-underlying items¹ (Pre-IFRS16)	IFRS 16	Total

Travel UK trading (loss) / profit	(32)		-	3	(29)	(1)	-	-	(1)
North America trading profit / (loss)	6		-	(4)	2	(18)	-	4	(14)
Rest of the World trading (loss) / profit	(13)		-	(4)	(17)	(14)	-	2	(12)
Total Travel trading (loss)/ profit	(39)		-	(5)	(44)	(33)	-	6	(27)
High Street trading profit / (loss)	19		-	17	36	(10)	-	6	(4)
Group (loss) / profit from trading operations	(20)		-	12	(8)	(43)	-	12	(31)
Unallocated central costs	(19)		-	-	(19)	(17)	-	-	(17)
Group operating (loss) / profit before non-underlying items	(39)		-	12	(27)	(60)	-	12	(48)
Non-underlying items (Note 4)	-		(49)	(16)	(65)	-	(157)	(55)	(212)
Group operating loss	(39)		(49)	(4)	(92)	(60)	(157)	(43)	(260)
Finance costs	(16)		-	(8)	(24)	(9)	-	(11)	(20)
Loss before tax	(55)		(49)	(12)	(116)	(69)	(157)	(54)	(280)
Income tax credit	26		9	1	36	16	18	7	41
Loss for the period	(29)		(40)	(11)	(80)	(53)	(139)	(47)	(239)

¹ Presented on a pre-IFRS 16 basis. Alternative Performance Measures are defined and explained in the Glossary on page 51.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

2. Segmental analysis of results (continued)

c)	Other segmental items

	2021
	Non-current assets¹			Right-of-use assets
£m	Capital additions	Depreciation and amortisation	Impairment	Depreciation	Impairment

Travel UK	11	(14)	-	-	-
North America	15	(10)	-	-	-
Rest of the World	2	(3)	-	-	-
Total Travel	28	(27)	-	-	-
High Street	16	(17)	(2)	-	-
Unallocated	-	(4)	-	-	-
Headline, before non-underlying items	44	(48)	(2)	-	-
Headline non-underlying items (pre-IFRS 16)	-	(3)	(18)	-	-
Headline, after non-underlying items	44	(51)	(20)	-	-
Impact of IFRS 16	-	1	-	(84)	-
Non-underlying items (IFRS 16)	-	-	4	-	(28)
Group	44	(51)	(16)	(84)	(28)

	2020
	Non-current assets¹			Right-of-use assets
£m	Capital additions	Depreciation and amortisation	Impairment	Depreciation	Impairment

Travel UK	18	(16)	-	-	-
North America	26	(10)	-	-	-
Rest of the World	4	(6)	-	-	-
Total Travel	48	(32)	-	-	-
High Street	24	(23)	-	-	-
Unallocated	-	(5)	-	-	-
Headline, before non-underlying items	72	(60)	-	-	-
Headline non-underlying items (pre-IFRS 16)	-	(3)	(55)	-	-
Headline, after non-underlying items	72	(63)	(55)	-	-
Impact of IFRS 16	-	8	-	(110)	-
Non-underlying items (IFRS 16)	-	-	15	-	(95)
Group	72	(55)	(40)	(110)	(95)

¹ Non-current assets including property, plant and equipment and intangible assets, but excluding right-of-use assets.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

3. Group operating profit

		2021			2020
£m	Note	Before non-underlying items	Non-underlying items	Total	Before non-underlying items	Non-underlying items	Total

Revenue		886	-	886	1,021	-	1,021
Cost of sales		(358)	-	(358)	(441)	-	(441)
Gross profit		528	-	528	580	-	580
Distribution costs¹		(419)	-	(419)	(538)	-	(538)
Administrative expenses		(140)	-	(140)	(92)	-	(92)
Other income²		4	-	4	2	-	2
Non-underlying items	4	-	(65)	(65)	-	(212)	(212)
Group operating loss		(27)	(65)	(92)	(48)	(212)	(260)

¹During the year there was an impairment charge of £2m (2020: £nil) for property, plant and equipment and other intangible assets included in distribution costs. Impairment charges related to Covid-19 are included in non-underlying items. See Note 4.

²Other income relates to profit on disposal and remeasurement of right-of-use assets, and profit attributable to property.

£m	2021	2020
Cost of inventories recognised as an expense	358	441
Write-down of inventories in the year³	7	14
Depreciation of property, plant and equipment	36	43
Depreciation of right-of-use assets
- land and buildings	80	105
- other	4	5
Amortisation of intangible assets	14	12
Impairment of property, plant and equipment	16	39
Impairment of right-of-use assets	28	95
Impairment of Intangibles	-	1
(Income) / expenses relating to leasing:
- expense relating to short-term leases	14	22
- expense relating to variable lease payments not included in the measurement of the lease liability	27	12
- Income relating to Covid-19 rent reductions	(23)	(15)
Other occupancy costs	27	49
Staff costs	232	217
Government grant income	(11)	(22)

³Write-down of inventories in the year are included within the amounts disclosed as Cost of inventories recognised as an expense, and recognised in Cost of sales.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

4. Non-underlying items

Items which are not considered part of the normal operating costs of the business are non-recurring and are considered exceptional because of their size, nature and incidence, are treated as non-underlying items and disclosed separately. Further details of the non-underlying items are included in Note 1, and in the Group Overview on page 12.

£m	2021	2020
Costs relating to business combinations
- Transaction costs	-	11
- Integration costs	2	9
Amortisation of acquired intangible assets	3	3
Pension past service cost	-	14
Costs directly attributable to Covid-19
- Impairment of property, plant and equipment	14	39
- Impairment of intangible assets	-	1
- Impairment of right-of-use assets	28	95
- Write-down of inventories	5	14
- Restructuring costs	9	25
- Costs associated with refinancing	6	-
- Other	(2)	1
Non-underlying items, before tax	65	212
Tax credit on non-underlying items	(12)	(25)
Non-underlying items, after tax	53	187

Non-underlying items recognised in the year are as follows:

Costs relating to business combinations

During the year, the Group incurred further integration costs of £2m in relation to the acquisition of Marshall Retail Group ('MRG'), which completed on 20 December 2019. In the prior year transaction and integration costs of £20m were incurred in relation to the acquisition of MRG.

Amortisation of acquired intangible assets

Amortisation of acquired intangible assets primarily relates to the MRG and InMotion brands (see Note 11).

Costs directly attributable to Covid-19

As described in the Strategic report the Covid-19 pandemic continues to have a substantial impact on the Group's operations. As a result, the Group continues to incur significant costs which have been separately recognised in non-underlying items, in accordance with the Group's accounting policy. The charges have arisen as a direct consequence of Covid-19, and reflect the impact of lost revenues as a result of ongoing store closures and travel restrictions, and downward revisions to budgeted revenues based on expectations of the rate of return to pre-pandemic levels of footfall and passenger numbers.

Impairment of property, plant and equipment and right-of-use assets

The impact on the Group's operations of Covid-19 is expected to continue during the next year and beyond. As a result, the Group has carried out a review for potential impairment across the entire store portfolio. The impairment review compared the value-in-use of individual store cash-generating units, based on management's assumptions regarding likely future trading performance (taking into account the effect of Covid-19) to the carrying values at 31 August 2021. Following this review, a charge of £42m (2020: £135m) was recorded within non-underlying items for impairment of retail store assets, of which £14m (2020: £39m) relates to property, plant and equipment, £nil (2020: £1m) relates to intangible assets and £28m (2020: £95m) relates to right-of-use assets. Refer to Note 12 for details of impairment of store cash-generating units. The impairment recognised on a pre-IFRS 16 basis is provided in the Glossary on page 51.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

4. Non-underlying items (continued)

Write-down of inventories

The Group assesses the recoverability of the carrying value of inventories at every reporting period and, where the expected recoverable amount is lower than the carrying value, a provision is recorded. During the year non-underlying provisions of £5m have been recorded against inventory, in addition to underlying provisions held of £13m, which relate to dated and perishable stock and stock subject to obsolescence where the sell through rate has significantly reduced due to store closures and lower footfall. The Group has recognised these charges as non-underlying as they meet the Group's definition of non-underlying.

Restructuring costs

The charge of £9m (2020: £21m) is principally attributable to redundancies and restructuring costs following a review of store operations across our High Street business, as a result of the impact of Covid-19 on footfall on the UK high street. These costs are presented as a non-underlying item as they are part of a Board-agreed restructuring programme, and are considered material and one-off in nature. In addition, in the prior year the Group incurred costs of £4m relating to exiting the Paris bookshop and the Brazil joint venture.

Costs associated with refinancing

Other prior year non-underlying items

Pension past service cost

Past service cost of £14m was recognised in the year ended 31 August 2020. This relates to equalisation of pension benefits between men and women over the period from 1 April 1992 to 29 July 1993 ('Barber equalisation'). The WHSmith Pension Trust has historically been administered assuming gender equalisation was achieved on 1 April 1992, and thus a Barber equalisation window of 17 May 1990 to 1 April 1992 applied. A new Trust Deed and Rules reflecting the equalisation of normal retirement ages at 65 was executed on 29 July 1993. It has since been determined that Barber equalisation was not effective until 29 July 1993. Accordingly, this past service cost is the expected cost of providing these benefits based on a normal retirement age of 60 rather than 65 for the period between 1 April 1992 and 29 July 1993. See Note 16.

A tax credit of £12m (2020: £25m) has been recognised in relation to the above items.

5. Finance costs

£m	2021	2020
Interest payable on bank loans and overdrafts	10	9
Interest of convertible bonds	4	-
Interest on lease liabilities	10	11
Net interest cost on the defined benefit pension liabilities	-	-
	24	20

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

6. Income tax

£m	2021	2020
Tax on loss	-	(5)
Adjustment in respect of prior years	(1)	(6)
Total current tax credit	(1)	(11)
Deferred tax - current year	(11)	(7)
Deferred tax - prior year	(4)	2
Deferred tax - adjustment in respect of change in tax rates	(8)	-
Tax on loss before non-underlying items	(24)	(16)
Tax on non-underlying items - current tax	-	(9)
Tax on non-underlying items - deferred tax	(12)	(16)
Total tax on loss	(36)	(41)

Reconciliation of the taxation credit

£m	2021	2020
Tax on loss at standard rate of UK corporation tax 19.00% (2020: 19.00%)	(22)	(53)
Tax effect of items that are not deductible or not taxable in determining taxable loss	1	15
Unrecognised tax losses	(1)	4
Differences in overseas tax rates	(1)	(3)
Adjustment in respect of prior years	(5)	(4)
Adjustment in respect of change in tax rates	(8)	-
Total income tax credit	(36)	(41)

The effective tax rate, before non-underlying items, was 47 per cent (2020: 23 per cent).

The UK corporation tax rate is 19 per cent effective from 1 April 2017. In the Spring Budget 2020, the UK Government announced that from 1 April 2023 the corporation tax rate will increase to 25 per cent. This new law was substantively enacted on 24 May 2021, and the main impact of this change is an increase to the deferred tax assets and an increase in the current year tax income statement credit of approximately £8m.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

7. Loss per share

a)	Loss / earnings

£m	2021	2020
Loss for the year, attributable to equity holders of the parent	(82)	(239)
Non-underlying items (Note 4)	53	187
Loss for the year before non-underlying items, attributable to equity holders of the parent	(29)	(52)

b)	Weighted average share capital

Millions	2021	2020
Weighted average ordinary shares in issue	131	120
Less weighted average ordinary shares held in ESOP Trust	-	-
Weighted average shares in issue for loss per share	131	120
Add weighted average number of ordinary shares under option	-	-
Weighted average ordinary shares for diluted loss per share	131	120

c)	Basic and diluted loss per share

Pence	2021	2020
Basic loss per share	(62.6)	(199.2)
Adjustments for non-underlying items	40.5	155.9
Basic loss per share before non-underlying items	(22.1)	(43.3)

Diluted loss per share	(62.6)	(199.2)
Adjustments for non-underlying items	40.5	155.9
Diluted loss per share before non-underlying items	(22.1)	(43.3)

Diluted loss per share takes into account various share awards and share options including SAYE schemes, which are expected to vest, and for which a sum below fair value will be paid. As the Group has incurred a loss in the years ending 31 August 2021 and 31 August 2020, the impact of its potential dilutive ordinary shares have been excluded as they would be anti-dilutive.

At 31 August 2021 the convertible bond has no dilutive effect as the inclusion of these potentially dilutive shares would improve loss per share.

The calculation of EPS on a pre-IFRS 16 basis is provided in the Glossary on page 51.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

8. Dividends

Amounts paid and recognised as distributions to shareholders in the period are as follows:

£m	2021	2020
Dividends
Final dividend for the year ended 31 August 2019 of 41.0p per ordinary share	-	47
	-	47

The Board of Directors have not declared an interim dividend and do not propose a final dividend in respect of the year ending 31 August 2021.

9. Analysis of net debt

Movement in net debt can be analysed as follows:

£m	Term loans	Convertible bonds	Revolving credit facility	Leases	Sub-total Liabilities from financing activities	Cash and cash equivalents	Net debt
At 1 September 2020	(400)	-	-	(559)	(959)	108	(851)
Proceeds from borrowings	-	(327)	-	-	(327)	327	-
Repayments of borrowings	267	-	-	-	267	(267)	-
Bifurcation of convertible bond	-	41	-	-	41	-	41
Other non-cash movements	-	(2)	-	(7)	(9)	-	(9)
Other cash movements	1	5	-	91	97	(38)	59
Currency translation	-	-	-	5	5	-	5
At 31 August 2021	(132)	(283)	-	(470)	(885)	130	(755)

£m	Term loans	Convertible bonds	Revolving credit facility	Leases	Sub-total Liabilities from financing activities	Cash and cash equivalents	Net debt
At 1 September 2019	(200)	-	(15)	(14)	(229)	49	(180)
Recognised on adoption of IFRS 16	-	-	-	(479)	(479)	-	(479)
Movement on acquisition of subsidiaries	(115)	-	-	(106)	(221)	1	(220)
Proceeds from borrowings	(200)	-	-	-	(200)	200	-
Repayments of borrowings	-	-	15	-	15	(15)	-
Other non-cash movements	115	-	-	(46)	69	-	69
Other cash movements	-	-	-	78	78	(126)	(48)
Currency translation	-	-	-	8	8	(1)	7
At 31 August 2020	(400)	-	-	(559)	(959)	108	(851)

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

9. Analysis of net debt (continued)

An explanation of Alternative Performance Measures, including Net debt on a pre-IFRS 16 basis, is provided in the Glossary on page 51.

Cash and cash equivalents

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 to their fair value.

Lease liabilities

Non-cash movements in lease liabilities mainly relate to new leases, modifications and remeasurements in the year.

Term loans and revolving credit facilities

On 28 April the Group announced new financing arrangements. These included the issuance of £327m of convertible bonds, the repayment of the existing £400m term loans and replacement with a new £133m term loan, and an increased revolving credit facility of £250m.

At 31 August 2021 the Group has in place a five-year committed multi-currency revolving credit facility of £250m with Santander UK PLC, BNP Paribas, HSBC UK Bank PLC, JP Morgan Securities PLC and Barclays Bank PLC. The revolving credit facility is due to mature on 28 April 2025. The utilisation is interest bearing at a margin over SONIA. As at 31 August 2021, the Group has drawn down £nil on this facility (2020: £nil drawn down on previous facility).

As part of the new financing arrangements the additional multi-currency revolving credit facility of £120m, which was undrawn and due to expire in November 2021, was cancelled.

The Group has a four-year committed £133m term loan with Banco Santander S.A., London Branch, Barclays Bank PLC, BNP Paribas and HSBC UK Bank PLC, that was drawn down at the time of the refinancing in April 2021. This loan is interest bearing at a margin over SONIA and is due to mature on 28 April 2025.

Transaction costs of £1m relating to the term loan are amortised to the Income statement through the effective interest rate method. Transaction costs of £1m relating to the RCF have been capitalised and are amortised to the Income statement on a straight-line basis.

Convertible bonds

On 28 April 2021, the Group announced the launch of an offering of £327m of guaranteed senior unsecured convertible bonds due in 2026. Settlement and delivery of convertible bonds took place on 7 May 2021. The total bond offering of £327m covers a five-year term beginning on 7 May 2021 with a 1.625% per annum coupon payable semi-annually in arrears in equal instalments. The bonds are convertible into new and/or existing ordinary shares of WH Smith PLC. The initial conversion price was set at £24.99 representing a premium of 40% above the reference share price on 28 April 2021 (£17.85). If not previously converted, redeemed or purchased and cancelled, the Bonds will be redeemed at par on 7 May 2026.

The convertible bond is a compound financial instrument, consisting of a financial liability component and an equity component, representing the value of the conversion rights. The initial fair value of the liability portion of the convertible bond is determined using a market interest rate for an equivalent non-convertible bond at the issue date. The liability is subsequently recognised on an amortised cost basis using the effective interest rate method until extinguished on conversion or maturity of the bonds. The remainder of the proceeds is allocated to the conversion option and recognised in equity (Other reserves), and not subsequently remeasured. As a result, £286m was initially recognised as a liability in the balance sheet on issue and the remainder of the proceeds of £41m, which represents the option component, was recognised in equity.

Transaction costs of £6m were allocated between the two components and the element relating to the debt component of £5m is being amortised through the effective interest rate method. The issue costs apportioned to the equity component of £1m have been deducted from equity.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

10. Cash generated from operating activities

£m	2021	2020
Group operating loss	(92)	(260)
Depreciation of property, plant and equipment	36	43
Impairment of property, plant and equipment	16	39
Amortisation of intangible assets	14	12
Impairment of intangible assets	-	1
Depreciation of right-of-use assets	84	110
Impairment of right-of-use assets	28	95
Non-cash change in lease liabilities	(23)	(15)
Non-cash movement in pension	-	14
Share-based payments	6	-
Gain on disposal and remeasurement of leases	(3)	-
Other non-cash items	(2)	2
Decrease in inventories	14	35
Decrease in receivables	4	27
Increase/(decrease) in payables	24	(10)
Pension funding	(3)	(3)
Income taxes paid	-	(32)
Income taxes refunded	10	37
Movement on provisions (through utilisation or income statement)	-	(1)
Cash generated from operating activities	113	94

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

11. Intangible assets

£m	Goodwill	Brands and franchise contracts	Tenancy rights	Software	Total
Cost:
At 1 September 2020	418	43	13	96	570
Acquisitions (Note 17)	(1)	-	-	-	(1)
Additions	-	-	-	7	7
Disposals	-	-	-	(1)	(1)
Foreign exchange	(11)	(1)	-	-	(12)
At 31 August 2021	406	42	13	102	563
Accumulated amortisation:
At 1 September 2020	-	4	8	65	77
Amortisation charge	-	3	-	11	14
Disposals	-	-	-	(1)	(1)
At 31 August 2021	-	7	8	75	90
Net book value at 31 August 2021	406	35	5	27	473

Cost:
At 1 September 2019	176	16	13	109	314
Additions	-	-	-	11	11
Acquisitions (Note 17)	258	29	-	1	288
Disposals	-	-	-	(25)	(25)
Foreign exchange	(16)	(2)	-	-	(18)
At 31 August 2020	418	43	13	96	570
Accumulated amortisation:
At 1 September 2019	-	1	8	80	89
Amortisation charge	-	3	-	9	12
Impairment charge	-	-	-	1	1
Disposals	-	-	-	(25)	(25)
Foreign exchange	-	-	-	-	-
At 31 August 2020	-	4	8	65	77
Net book value at 31 August 2020	418	39	5	31	493

Adjustments to goodwill include an adjustment of £1m to the consideration paid in relation to the acquisition of Marshall Retail Group (MRG). Additions to goodwill in the prior year relate to the acquisition of MRG. See Note 17 for further information. Goodwill of USD $77m (£56m) relating to the acquisition of InMotion in 2018 is expected to be deductible for tax purposes in the future.

As a result of changes to the Group's reportable segments (as discussed in Note 2), goodwill previously attributable to the Travel operating segment has been reallocated to the new operating segments based on a relative value approach.

The carrying value of goodwill is allocated to the segmental businesses as follows:

£m	2021	2020
Travel UK	253
North America	113
Rest of World	25
Total Travel	391	403
High Street	15	15
	406	418

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

11. Intangible assets (continued)

Included within Tenancy rights are certain assets that are considered to have an indefinite life of £4m (2020: £4m), representing certain rights under tenancy agreements, which include the right to renew leases, therefore no amortisation has been charged. Management has determined that the useful economic life of these assets is indefinite because the Company can continue to occupy and trade from certain premises for an indefinite period. These assets are reviewed annually for indicators of impairment.

Impairment of goodwill and intangible assets

The Group tests goodwill for impairment annually or where there is an indication that goodwill might be impaired. For impairment testing purposes, the Group has determined that each store is a separate CGU, and goodwill is allocated to groups of CGUs in a manner that is consistent with our operating segments, as this reflects the lowest level at which goodwill is monitored. All goodwill has arisen on acquisitions of groups of retail stores. These acquisitions are then integrated into the Group's operating segments as appropriate. Acquired brands are considered together with goodwill for impairment testing purposes, and are therefore considered annually for impairment.

Goodwill and acquired brands have been tested for impairment by comparing the carrying amount of each group of CGUs, including goodwill and acquired brands, with the recoverable amount determined from value-in-use calculations. The value-in-use of each group of CGUs has been calculated using cash flows derived from the Group's latest Board-approved budget and three year plan, initially extrapolated to five years and taking into account the projected impact of Covid-19. The forecasts reflect knowledge of the current market, together with the Group's expectations on the future achievable growth and committed store openings. Cash flows beyond the initial forecast period are extrapolated using estimated long-term growth rates. Forecasts have taken into account the immediately quantifiable impacts of climate change, with no material impact on cash flows. Forecasts beyond the initial forecast period do not include a quantitative assessment of the impact of climate change on cash flows.

For certain groups of CGUs, additional adjustments to cash flows have been made during the extrapolation process for an extended period of up to 15 years before calculating a terminal value. This extended period of time is required to establish a normalised cash flow base on which a terminal value calculation can be appropriately calculated. The main reasons for cash flow adjustments include the need to forecast lease renewals under IFRS 16, and the unwinding of certain cash flow benefits arising from acquisitions in North America.

The key assumptions on which forecast three-year cash flows of the CGUs are based include revenue growth, product mix and operating costs, long-term growth rates and the pre-tax discount rate:

· The values assigned to each of the revenue growth, product mix and operating cost assumptions were determined based on the extrapolation of historical trends within the Group and external information on expected future trends in the travel and high street retail sectors.

· The pre-tax discount rates are derived from the Group's weighted average cost of capital, which has been calculated using the capital asset pricing model, the inputs of which include a country risk-free rate, equity risk premium, Group size premium and a risk adjustment (beta). The pre-tax discount rate used in the calculation was 10.4%.

· The long-term growth rate assumptions are between 0% and 2%.

The value-in-use estimates indicated that the recoverable amount of goodwill exceeded the carrying value for the groups of CGUs. As a result, no impairment has been recognised in respect of the carrying value of goodwill in the year (2020: £nil).

As disclosed in Note 1, Accounting policies, the forecast cash flows used within the impairment model are based on assumptions which are sources of estimation uncertainty and it is possible that significant changes to these assumptions could lead to an impairment of goodwill and acquired brands. Given the significant uncertainty surrounding the impact of Covid-19 on the Group's operations and on the global economy, management have considered a range of sensitivities on each of the key assumptions, with other variables held constant. The sensitivities include applying increases in the discount rate by 1 per cent and reductions in the long-term growth rates to 0 per cent. Under these severe scenarios, the estimated recoverable amount of goodwill and acquired brands still exceeded the carrying value.

The sensitivity analysis showed that no reasonably possible change in assumptions would lead to an impairment.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

12. Property, plant and equipment

£m	Freehold Properties		Leasehold improvements		Fixtures and fittings	Equipment and vehicles	Total
Cost or valuation:
At 1 September 2020		15		272	198	108	593
Additions		3		12	15	7	37
Acquisitions (Note 17)		-		(1)	-	-	(1)
Disposals		-		(5)	(5)	(2)	(12)
Reclassifications		-		14	(11)	(3)	-
Foreign exchange		-		(2)	(1)	-	(3)
At 31 August 2021		18		290	196	110	614
Accumulated depreciation:
At 1 September 2020		10		185	127	79	401
Depreciation Charge		-		17	12	7	36
Impairment Charge		-		9	5	2	16
Disposals		-		(5)	(5)	(2)	(12)
Reclassifications		-		-	2	(2)	-
Foreign Exchange		-		-	(1)	-	(1)
At 31 August 2021		10		206	140	84	440
Net book value at 31 August 2021		8		84	56	26	174

Cost or valuation:
At 31 August 2019		15		236	168	120	539
Adjustment on initial application of IFRS 16		-		(3)	(5)	(22)	(30)
At 1 September 2019		15		233	163	98	509
Additions		-		28	23	10	61
Acquisitions (Note 17)		-		18	14	2	34
Disposals		-		(5)	(1)	(1)	(7)
Foreign exchange		-		(2)	(1)	(1)	(4)
At 31 August 2020		15		272	198	108	593
Accumulated depreciation:
At 31 August 2019		10		147	103	78	338
Adjustment on initial application of IFRS 16		-		1	(1)	(12)	(12)
At 1 September 2019		10		148	102	66	326
Depreciation Charge		-		22	12	9	43
Impairment Charge		-		20	14	5	39
Disposals		-		(5)	(1)	(1)	(7)
At 31 August 2020		10		185	127	79	401
Net book value at 31 August 2020		5		87	71	29	192

Impairment of property, plant and equipment

For impairment testing purposes, the Group has determined that each store is a separate CGU. Each CGU is tested for impairment at the balance sheet date if any indicators of impairment have been identified. The significant disruption to trading as a result of the Covid-19 pandemic has been identified as an indicator of impairment, and therefore all CGUs have been tested for impairment as at the balance sheet date.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

12. Property, plant and equipment (continued)

Impairment of property, plant and equipment (continued)

Property, plant and equipment and right-of-use assets have been tested for impairment by comparing the carrying amount of each CGU with its recoverable amount determined from value-in-use calculations. It was determined that value in use was higher than fair value less costs to sell as a result of the significant impact on fair values as a result of Covid-19. The value-in-use of each CGU has been calculated using discounted cash flows derived from the Group's latest Board-approved budget and three-year plan, taking into account the projected impact of Covid-19, and reflects historic performance and knowledge of the current market, together with the Group's views on the future achievable growth. Cash flows beyond this three-year period are extrapolated using growth rates and inflation rates appropriate to each store's location. Cash flows have been included for the remaining lease life for the specific store. These growth rates do not exceed the long-term growth rate for the Group's retail businesses in the relevant territory. Where stores have a relatively short remaining lease life, an extension to the lease has been assumed where management consider it likely that an extension will be granted.

The key assumptions on which the forecast three-year cash flows of the CGUs are based include revenue and the pre-tax discount rate. Other assumptions in the model relate to gross margin, cost inflation and longer-term growth rates. The forecasts used in the impairment review are based on management's best estimate of revenue reductions versus a 'pre-Covid' base, and the recovery in revenue over the forecast period. In developing these forecasts, management have used available information, including historical knowledge of the store level cash flows, and knowledge gained during the pandemic up to the year end date.

The forecasts for the year for our High Street business assume that store like-for-like sales will be lower by around 20 per cent during the year ended 31 August 2022. In Travel UK, revenue is assumed to be initially down around 50 per cent recovering to around 5 per cent down by the end of that year. This is an average across all formats, with Hospitals recovering more quickly than Air. Our International locations outside of North America assume that like-for-like sales will be lower by around 75 per cent initially, and recovering to down around 25 per cent by the end of August 2022.

In North America, revenue is assumed to be down around 25 per cent in the early part of the next financial year, improving to around 2019 levels by the end of the August 2022 financial year. This is an average across all formats, with Resorts recovering more quickly than Air. The second and third years of the three year plan include further gradual recoveries across all locations

The pre-tax discount rates are derived from the Group's weighted average cost of capital, which has been calculated using the capital asset pricing model, the inputs of which include the risk-free rate, equity risk premium, Group size premium and a risk adjustment (beta). The pre-tax discount rate used in the calculation was 10.4 per cent.

Where the value-in-use was less than the carrying value of the CGU, an impairment of property, plant and equipment and right-of-use assets was recorded. These stores were impaired to their recoverable amount of £56m, which is their carrying value at year end. The Group has recognised an impairment charge of £16m to property, plant and equipment and £28m to right-of-use assets as a result of impairment testing. Impairments of £42m have been presented as non-underlying items in the current year (see Note 4), and impairments of £2m have been included in underlying results.

As disclosed in Note 1, Accounting policies, the forecast cash flows used within the impairment model are based on assumptions which are sources of estimation uncertainty and changes to these assumptions could lead to further impairments to assets. Given the significant uncertainty regarding the impact of Covid-19 on the Group's operations and on the global economy, management have considered sensitivities to the impairment charge as a result of changes to the estimate of future revenues achieved by the stores.

The Group has applied certain sensitivities in isolation to demonstrate the impact on the impairment of changes in key assumptions. The most significant assumption is the revenue assumption. The impact of a potential slower recovery from the pandemic has been modelled by incorporating a further 10% reduction in revenue in High Street stores and a delay in recovery of one year in Travel UK and North America, with no change to subsequent forecast revenue growth rate assumptions. This would result in a £21m increase in the impairment charge of retail store assets in the year ended 31 August 2021. An increase or decrease of 1 per cent in the discount rate would result in an increase or decrease in the impairment charge of around £2m.

Other changes in assumptions have been modelled and have shown that any reasonably possible changes would not lead to a significant impact on the impairment charge. Other modelled assumption changes include margin reductions and long-term growth rate reductions across all formats.

The impairment assessment has also been performed on a pre-IFRS 16 basis. See Glossary on page 51.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

13. Right-of-use assets

£m	Land and buildings	Equipment	Total

At 1 September 2020	400	13	413
Additions	45	-	45
Modifications and remeasurements	(13)	-	(13)
Disposals	(1)	-	(1)
Depreciation charge	(80)	(4)	(84)
Impairment charge	(28)	-	(28)
Effect of movements in foreign exchange rates	(4)	-	(4)
Net book value at 31 August 2021	319	9	328

£m	Land and buildings	Equipment	Total

At 1 September 2019	439	18	457
Additions	98	-	98
Acquisitions (Note 17)	108	-	108
Modifications and remeasurements	(35)	-	(35)
Disposals	(2)	-	(2)
Depreciation charge	(105)	(5)	(110)
Impairment charge	(95)	-	(95)
Effect of movements in foreign exchange rates	(8)	-	(8)
Net book value at 31 August 2020	400	13	413

Impairment of right-of-use assets

Right-of-use assets of £28m have been impaired in the year as a result of the impact of Covid-19. This impairment charge has been presented in non-underlying items (see Note 4). The approach to impairment testing is described in detail in Note 12, Property, plant and equipment.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

14. Lease liabilities

£m	Land and buildings	Equipment	Total
At 1 September 2020	548	11	559
Additions	41	-	41
Modifications and remeasurements	(37)	-	(37)
Disposals	(7)	-	(7)
Interest	10	-	10
Payments	(87)	(4)	(91)
Effect of movements in foreign exchange rates	(5)	-	(5)
At 31 August 2021	463	7	470

£m	Land and buildings	Equipment	Total
At 31 August 2019	-	14	14
Adjustment on initial application of IFRS 16	476	3	479
At 1 September 2019	476	17	493
Additions	87	-	87
Acquisitions (Note 17)	106	-	106
Interest	11	-	11
Payments	(72)	(6)	(78)
Modifications and remeasurements	(50)	-	(50)
Disposals	(2)	-	(2)
Effect of movements in foreign exchange rates	(8)	-	(8)
At 31 August 2020	548	11	559

£m	2021	2020
Analysis of total lease liabilities:
Non-current	362	429
Current	108	130
Total	470	559

The Group leases land and buildings for its retail stores, distribution centres, storage locations and office property. These leases have an average remaining lease term of 4 years. Some leases include an option to break before the end of the contract term or an option to renew the lease for an additional term after the end of the term. Management assess the lease term at inception based on the facts and circumstances applicable to each property.

Other leases are mainly forklift trucks for the retail stores and distribution centres, office equipment and vehicles. These leases have an average remaining lease term of 3 years.

The Group reviews the retail lease portfolio on an ongoing basis, taking into account retail performance and future trading expectations. The Group may exercise extension options or negotiate lease extensions or modifications. In other instances, the Group may exercise break options, negotiate lease reductions or decide not to negotiate a lease extension at the end of the lease term. Certain property leases contain rent review terms that require rent to be adjusted on a periodic basis which may be subject to market rent or increases in inflation measurements.

Many of the Group's property leases, particularly in Travel locations, also incur payments based on a percentage of revenue (variable lease payments) achieved at the location. In line with IFRS 16, variable lease payments which are not based on an index or rate are not included in the lease liability. See Note 3 for the expense charged to the Income statement relating to variable lease payments not included in the measurement of the lease liability.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

14. Lease liabilities (continued)

In response to the Covid-19 pandemic, an amendment was issued to IFRS 16 in June 2020 and further extended in March 2021. This amendment (practical expedient) allows the impact on the lease liability of temporary rent reductions/waivers affecting rent payments due on or before June 2022, to be recognised in the Income statement in the period they are received, rather than as lease modifications, which would require the remeasurement of the lease liability using a revised discount rate with a corresponding adjustment to the right-of-use asset. The Group has applied this practical expedient to all Covid-19 rent reductions/waivers that meet the requirements of the amendment. This has resulted in a credit to the Income statement of £23m for the year ended 31 August 2021.

Details of Income statement charges and income for leases are set out in Note 3. The right-of-use asset categories on which depreciation is incurred are presented in Note 13. Interest expense incurred on lease liabilities is presented in Note 5.

The total cash outflow for leases in the financial year was £123m. This includes cash outflow for short-term leases of £14m and variable lease payments (not included in the measurement of lease liability) of £18m. The total future income from sub-leasing the right-of-use assets is £1m.

15. Contingent liabilities and capital commitments

£m	2021	2020
Bank guarantees and guarantees in respect of lease agreements	31	31

Other potential liabilities that could crystallise are in respect of previous assignments of leases where the liability could revert to the Group if the lessee defaulted. Pursuant to the terms of the Demerger Agreement with Connect Group PLC (formerly Smiths News PLC), any such contingent liability which becomes an actual liability, will be apportioned between the Group and Connect Group PLC in the ratio 65:35 (provided that the actual liability of Connect Group PLC in any 12 month period does not exceed £5m). The Group's 65 per cent share of these leases has an estimated future rental commitment at 31 August 2021 of £1m (2020: £1m). The movement in the future rental commitment is due to the crystallisation of lease liabilities, lease expiries and the effluxion of time.

Contracts placed for future capital expenditure approved by the directors but not provided for amount to £26m (2020: £18m).

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

16. Retirement benefit obligations

WH Smith PLC has operated a number of defined benefit schemes (which are closed to new entrants and future service accrual) and defined contribution pension schemes. The main pension arrangements for employees are operated through a defined contribution scheme, WH Smith Retirement Savings Plan, and a defined benefit scheme, WHSmith Pension Trust. The most significant scheme is the defined benefit WHSmith Pension Trust.

The retirement benefit obligations recognised in the balance sheet for the respective schemes at the relevant reporting dates were:

£m	2021	2020
WHSmith Pension Trust	(2)	(3)
United News Shops Retirement Benefits Scheme	(1)	(1)
Retirement benefit obligation recognised in the balance sheet	(3)	(4)
Recognised as:
Current liabilities	(1)	(1)
Non-current liabilities	(2)	(3)

WHSmith Pension Trust

The amounts recognised in the balance sheet under IAS 19 in relation to this plan are as follows:

£m	2021	2020
Present value of the obligations	(1,172)	(1,144)
Fair value of plan assets	1,456	1,412
Surplus before consideration of asset ceiling	284	268
Amounts not recognised due to effect of asset ceiling	(284)	(268)
Additional liability recognised due to minimum funding requirements	(2)	(3)
Retirement benefit obligation recognised in the balance sheet	(2)	(3)

In accordance with the requirements of IFRIC 14 we have recognised the schedule of contributions as a liability of £2m (2020: £3m). The defined benefit pension schemes are closed to further accrual. The Group does not have an unconditional right to derive economic benefit from any surplus, as the Trustees retain the right to enhance benefits under the Trust deed, and therefore the present value of the economic benefits of the IAS 19 surplus in the pension scheme of £284m (2020: £268m) available as a reduction of future contributions is £nil (2020: £nil). As a result, the Group has not recognised this IAS 19 surplus on the balance sheet. There is an ongoing actuarial deficit primarily due to the different assumptions and calculation methodologies used compared to those on interpretation of IAS 19.

Income Statement

The amounts recognised in the income statement were as follows:

£m	2021	2020
Net interest cost on the defined benefit liability	-	-
Past service cost	-	(14)
	-	(14)

The net interest cost has been included in finance costs (Note 5). Actuarial gains and losses have been reported in the statement of comprehensive income.

In the prior year, past service costs of £14m were recognised in relation to equalisation of pension benefits relating to a period between 1 April 1992 and 29 July 1993 ('Barber equalisation'). This past service cost was disclosed within non-underlying items, in accordance with the accounting policy in Note 1.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

16. Retirement benefit obligations (continued)

Statement of comprehensive income

Total (expense) / income recognised in the Statement of Comprehensive Income ("SOCI"):

£m	2021	2020
Total actuarial loss before consideration of asset ceiling	(50)	(43)
Return on plan assets excluding amounts included in net interest cost	58	(38)
(Loss) / gain resulting from changes in amounts not recognised due to effect of asset ceiling excluding amounts recognised in net interest cost	(11)	92
Gain resulting from changes in additional liability due to minimum funding requirements excluding amounts recognised in net interest cost	1	-
Total actuarial gain / (loss) recognised in other comprehensive income	(2)	11

Actuarial gains recognised in the statement of comprehensive income on the United News Shops Retirement Benefits Scheme were £1m in the year to 31 August 2021 (2020: £nil).

Balance sheet

Movement in net retirement benefit liability during the period:

£m	2021	2020
At beginning of period	(3)	(3)
Current service cost	-	-
Past service cost	-	(14)
Contributions from the sponsoring companies	3	3
Actuarial gains / (losses) on defined benefit pension schemes	(2)	11
At end of period	(2)	(3)

A full actuarial valuation of the Scheme is carried out every three years with interim reviews in the intervening years. The latest full actuarial valuation of the Pension Trust was carried out as at 31 March 2020 by independent actuaries using the projected unit credit method and has been completed. At 31 March 2020 the deficit was £9m. The Group has agreed a continuation of the annual funding schedule with the Trustees from March 2020 for the following 5 years, which includes the deficit recovery contributions and other running costs of just under £3m.

During the year, the Group made a contribution of £3m to the WHSmith Pension Trust (2020: £3m) in accordance with the agreed pension deficit funding schedule, being £1m of deficit funding payable to the Trustee and £2m in relation to investment management costs.

The principal long-term assumptions used in the IAS 19 valuation were:

%	2021	2020
Rate of increase in pension payments	3.35	3.04
Rate of increase in deferred pensions	2.55	2.30
Discount rate	1.75	1.75
RPI Inflation assumption	3.45	3.10
CPI Inflation assumption	2.55	2.30

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2021

17. Acquisitions

Prior year acquisitions

On 20 December 2019, the Group acquired the entire issued share capital of Marshall Retail Group ('MRG'), for a total cash payment of USD $402m (£317m) comprising $243m enterprise value, $146m repayment of loans, $12m working capital, and $1m cash and restricted cash. During the year ended 31 August 2021, the Group received £1m as an adjustment to the consideration paid.

MRG is an independent travel retailer operating in high footfall airport and tourist locations in the United States. The acquisition builds further on the acquisition of InMotion in November 2018 and significantly strengthens the Group's offering in the United States, the world's largest travel retail market.

Included within the fair value of the net identifiable assets on acquisition is an intangible asset of £29m (US$37m) representing the MRG brand. The Board believes that the excess of consideration paid over the net assets on acquisition of £257m is best considered as goodwill on acquisition representing future operating synergies. This amount is not tax deductible.

The provisional goodwill calculation included significant estimates that may be refined for a period of 12 months from the acquisition date. During the year ended 31 August 2021, final fair value adjustments were recognised of £1m to property, plant and equipment and £1m to goodwill.

Transaction and integration costs totalling £20m were incurred in the year to 31 August 2020 in respect of the acquisition. A further £2m integration costs have been incurred in the year ended 31 August 2021.

WH Smith PLC

Glossary (unaudited)

Alternative Performance Measures

In reporting financial information, the Group presents Alternative Performance Measures, 'APMs', which are not defined or specified under the requirements of IFRS.

The Group believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional useful information on the underlying trends, performance and position of the Group and are consistent with how business performance is measured internally. The Alternative Performance Measures are not defined by IFRS and therefore may not be directly comparable with other companies' alternative performance measures.

Non-underlying items

IFRS 16

The Group adopted IFRS 16 in the prior year. IFRS 16 superseded the lease guidance under IAS 17 and the related interpretations. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model as the distinction between operating and finance leases is removed. The only exceptions are short-term and low-value leases. At the commencement date of a lease, a lessee will recognise a lease liability for the future lease payments and an asset (right-of-use asset) representing the right to use the underlying asset during the lease term. Lessees are required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset.

For the purposes of narrative commentary on the Group's performance and financial position in the Strategic report, the effects of IFRS 16 have been excluded, in order to provide meaningful year on year comparisons.

The impact of the implementation of IFRS 16 on the Income statement and Segmental information is provided in Notes A1 and A2 below. There is no impact on cash flows, although the classification of cash flows has changed, with an increase in net cash inflows from operating activities being offset by a decrease in net cash inflows from financing activities, as set out in Note A9 below. The balance sheet as at 31 August 2021 both including and excluding the impact of IFRS 16 is shown in Note A10 below.

Leases policies applicable prior to 1 September 2019

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Assets held under finance leases are recognised as assets of the Group at their fair value determined at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. These assets are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. Lease payments are apportioned between finance charges and a reduction of the lease obligations so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised directly in the income statement.

Rentals payable and receivable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. The Group has a number of lease arrangements in which the rent payable is contingent on revenue. Contingent rentals payable, based on store revenues, are accrued in line with revenues generated.

WH Smith PLC

Glossary (unaudited)

Definitions and reconciliations

In line with the Guidelines on Alternative Performance Measures issued by the European Securities and Markets Authority ('ESMA'), we have provided additional information on the APMs used by the Group below, including full reconciliations back to the closest equivalent statutory measure.

APM	Closest equivalent IFRS measure	Reconciling items to IFRS measure	Definition and purpose
Income Statement Measures
Headline measures	Various	See Notes A1-A11	Headline measures exclude the impact of IFRS 16 (applying the principles of IAS 17). Reconciliations of all Headline measures are provided in Notes A1 to A11.
Group (loss)/profit before tax and non-underlying items	Group (loss) / profit before tax	See Note A1	Group (loss)/profit before tax and non-underlying items excludes the impact of non-underlying items as described below. A reconciliation from Group (loss)/profit before tax and non-underlying items to Group (loss)/profit before tax is provided on the Group income statement on page 20, and on a Headline (pre-IFRS 16) basis in Note A1.
Group (loss)/profit from trading operations and segment trading (loss)/ profit	Group operating (loss)/profit	See Note 2 and Note A2	Group (loss)/profit from trading operations and segment trading (loss)/ profit are stated after directly attributable share-based payment and pension service charges and before non-underlying items, unallocated costs, finance costs and income tax expense. A reconciliation from the above measures to Group operating (loss)/profit and Group (loss)/profit before tax on an IFRS 16 basis is provided in Note 2 to the financial statements and on a Headline (pre-IFRS 16) basis in Note A2.

Non-underlying items	None	Refer to definition and see Note 4 and Note A6	Items which are not considered part of the normal operating costs of the business, are non-recurring and considered exceptional because of their size, nature or incidence, are treated as non-underlying items and disclosed separately. The Group believes that the separate disclosure of these items provides additional useful information to users of the financial statements to enable a better understanding of the Group's underlying financial performance. An explanation of the nature of the items identified as non-underlying on an IFRS 16 basis is provided in Note 4 to the financial statements, and on a Headline (pre-IFRS 16) basis in Note A6.
(Loss)/earnings per share before non-underlying items	(Loss)/ earnings per share	Non-underlying items, see Note 10 and Note A4	(Loss)/profit for the year attributable to the equity holders of the parent before non-underlying items divided by the weighted average number of ordinary shares in issue during the financial year. A reconciliation is provided on an IFRS 16 basis in Note 10 and on a Headline (pre-IFRS 16) basis in Note A4.
Headline EBITDA	Group operating (loss)/profit	Refer to definition	Headline EBITDA is Headline Group operating (loss)/profit before non-underlying items adjusted for pre-IFRS 16 depreciation, amortisation and other non-cash items. See Group Overview on page 15.
Effective tax rate	None	Non-underlying items see Notes A3 and A6	Total income tax credit / charge excluding the tax impact of non-underlying items divided by Group Headline (loss) / profit before tax and non-underlying items. See Note 6 on an IFRS 16 basis, and Notes A3 and A6 on a pre-IFRS 16 basis.
Fixed charges cover	None	Refer to definition	This performance measure calculates the number of times Profit before tax covers the total fixed charges included in calculating profit or loss. Fixed charges included in this measure are net finance charges (excluding finance charges from IFRS 16 leases) and net operating lease rentals stated on a pre-IFRS 16 basis. The calculation of this measure is outlined in Note A5.

WH Smith PLC

Glossary (unaudited)

APM	Closest equivalent IFRS measure		Reconciling items to IFRS measure		Definition and purpose
Income Statement Measures (continued)
Gross margin		Gross profit margin		Not applicable		Where referred to throughout the Preliminary announcement statement, gross margin is calculated as gross profit divided by revenue.
Like-for-like revenue		Movement in revenue per the income statement		- Revenue change from non like-for-like stores - Foreign exchange impact		Like-for-like revenue is the change in revenue from stores that have been open for at least a year, with a similar selling space at a constant foreign exchange rate. As a result of the Covid-19 pandemic, this measure has not been utilised in the current year.

Balance Sheet Measures
Headline net debt	Net debt	Reconciliation of net debt	Headline net debt is defined as cash and cash equivalents, less bank overdrafts and other borrowings and both current and non-current obligations under finance leases as defined on a pre-IFRS 16 basis. Lease liabilities recognised as a result of IFRS 16 are excluded from this measure. A reconciliation of Net debt on an IFRS 16 basis provided in Note A8.
Other measures
Free cash flow	Net cash inflow from operating activities	See Group Overview	Free cash flow is defined as the net cash inflow from operating activities before the cash flow effect of IFRS 16, non-underlying items and pension funding, less net capital expenditure. The components of free cash flow are shown in Note A7 and on page 15, as part of the Group Overview.

WH Smith PLC

Glossary (unaudited)

A1. Reconciliation of Headline to Statutory Group operating loss and Group loss before tax

	2021
	pre-IFRS 16 basis			IFRS 16 Basis
£m	Headline, before non-underlying items	Headline non-underlying items	Headline	IFRS 16 adjustments	Total
Revenue	886	-	886	-	886
Cost of sales	(358)	-	(358)	-	(358)
Gross profit	528	-	528	-	528
Distribution costs	(431)	-	(431)	12	(419)
Administrative expenses	(136)	-	(136)	(4)	(140)
Other income	-	-	-	4	4
Non-underlying items	-	(49)	(49)	(16)	(65)
Group operating loss	(39)	(49)	(88)	(4)	(92)
Finance costs	(16)	-	(16)	(8)	(24)
Loss before tax	(55)	(49)	(104)	(12)	(116)
Income tax credit	26	9	35	1	36
Loss for the period	(29)	(40)	(69)	(11)	(80)
Attributable to:
Equity holders of the parent	(31)	(40)	(71)	(11)	(82)
Non-controlling interests	2	-	2	-	2
	(29)	(40)	(69)	(11)	(80)

	2020
	pre-IFRS 16 basis			IFRS 16 Basis
£m	Headline, before non-underlying items	Headline non-underlying items	Headline	IFRS 16 adjustments	Total
Revenue	1,021	-	1,021	-	1,021
Cost of sales	(441)	-	(441)	-	(441)
Gross profit	580	-	580	-	580
Distribution costs	(545)	-	(545)	7	(538)
Administrative expenses	(97)	-	(97)	5	(92)
Other income	2	-	2	-	2
Non-underlying items	-	(157)	(157)	(55)	(212)
Group operating loss	(60)	(157)	(217)	(43)	(260)
Finance costs	(9)	-	(9)	(11)	(20)
Loss before tax	(69)	(157)	(226)	(54)	(280)
Income tax credit	16	18	34	7	41
Loss for the period	(53)	(139)	(192)	(47)	(239)
Attributable to:
Equity holders of the parent	(53)	(139)	(192)	(47)	(239)
Non-controlling interests	-	-	-	-	-
	(53)	(139)	(192)	(47)	(239)

WH Smith PLC

Glossary (unaudited)

A2. Reconciliation of Headline to Statutory Segmental trading (loss) / profit and Group (loss) / profit from trading operations

	2021
	pre-IFRS 16 basis			IFRS 16 basis
£m	Headline, before non-underlying items	Headline non-underlying items	Headline	IFRS 16 adjustments	Total

Travel UK trading (loss) / profit	(32)	-	(32)	3	(29)
North America trading profit / (loss)	6	-	6	(4)	2
Rest of the World trading loss	(13)	-	(13)	(4)	(17)
Total Travel trading loss	(39)	-	(39)	(5)	(44)
High Street trading profit	19	-	19	17	36
Group (loss) / profit from trading operations	(20)	-	(20)	12	(8)
Unallocated costs	(19)	-	(19)	-	(19)
Group operating (loss) / profit	(39)	-	(39)	12	(27)
Non-underlying items	-	(49)	(49)	(16)	(65)
Group operating loss	(39)	(49)	(88)	(4)	(92)

	2020
	pre-IFRS 16 basis			IFRS 16 basis
£m	Headline, before non-underlying items	Headline non-underlying items	Headline	IFRS 16 adjustments	Total

Travel UK trading loss	(1)	-	(1)	-	(1)
North America trading (loss) / profit	(18)	-	(18)	4	(14)
Rest of the World trading (loss) / profit	(14)	-	(14)	2	(12)
Total Travel trading (loss) / profit	(33)	-	(33)	6	(27)
High Street trading (loss) / profit	(10)	-	(10)	6	(4)
Group (loss) / profit from trading operations	(43)	-	(43)	12	(31)
Unallocated costs	(17)	-	(17)	-	(17)
Group operating (loss) / profit	(60)	-	(60)	12	(48)
Non-underlying items	-	(157)	(157)	(55)	(212)
Group operating loss	(60)	(157)	(217)	(43)	(260)

WH Smith PLC

Glossary (unaudited)

A3. Reconciliation of Headline to Statutory tax (credit) / expense

	2021			2020
£m	Headline (pre-IFRS 16)	IFRS 16 adjustments	Total	Headline (pre-IFRS 16)	IFRS 16 adjustments	Total
Loss before tax and non-underlying items	(55)	4	(51)	(69)	1	(68)
Tax on loss	-	-	-	(5)	-	(5)
Standard rate of UK corporation tax 19.00% (2020: 19.00%)
Adjustment in respect of prior year UK corporation tax	(1)	-	(1)	(6)	-	(6)
Total current tax credit	(1)	-	(1)	(11)	-	(11)
Deferred tax - current year	(13)	2	(11)	(7)	-	(7)
Deferred tax - prior year	(4)	-	(4)	2	-	2
Deferred tax - adjustment in respect of change in tax rates	(8)	-	(8)	-	-	-
Tax on Headline (loss) / profit	(26)	2	(24)	(16)	-	(16)
Tax on non-underlying items - current tax	-	-	-	(5)	(4)	(9)
Tax on non-underlying items - deferred tax	(9)	(3)	(12)	(13)	(3)	(16)
Total tax on (loss) / profit	(35)	(1)	(36)	(34)	(7)	(41)

A4. Calculation of Headline and Statutory loss per share

	2021
	pre-IFRS 16 basis			IFRS 16 basis
£m	Headline, before non-underlying items	Headline non-underlying items	Headline	IFRS 16 adjustments	Total

Loss for the year, attributable to equity holders of the parent	(31)	(40)	(71)	(11)	(82)

Weighted average shares in issue for basic earnings per share			131		131
Weighted average shares in issue for diluted earnings per share			131		131

Basic loss per share (pence)	(23.7)p	(30.5)p	(54.2)p	(8.4)p	(62.6)p
Diluted loss per share (pence)	(23.7)p	(30.5)p	(54.2)p	(8.4)p	(62.6)p

	2020
	pre-IFRS 16 basis			IFRS 16 basis
£m	Headline, before non-underlying items	Headline non-underlying items	Headline	IFRS 16 adjustments	Total

Loss for the year, attributable to equity holders of the parent	(53)	(139)	(192)	(47)	(239)

Weighted average shares in issue for basic earnings per share			120		120
Weighted average shares in issue for diluted earnings per share			120		120

Basic loss per share (pence)	(44.2)p	(115.8)p	(160.0)p	(39.2)p	(199.2)p
Diluted loss per share (pence)	(44.2)p	(115.8)p	(160.0)p	(39.2)p	(199.2)p

WH Smith PLC

Glossary (unaudited)

A5. Fixed charges cover

£m	2021	2020
Headline net finance costs (pre-IFRS 16)	16	9
Net operating lease rentals (pre-IFRS 16)	151	210
Total fixed charges	167	219
Headline loss before tax and non-underlying items	(55)	(69)
Headline profit before tax, non-underlying items and fixed charges	112	150
Fixed charges cover - times	0.7x	0.7x

A6. Non-underlying items on pre-IFRS 16 and IFRS 16 bases

	2021		2020
£m	Headline (pre-IFRS16)	IFRS 16	Headline (pre-IFRS16)	IFRS 16
Costs relating to business combinations
- Transaction costs	-	-	11	11
- Integration costs	2	2	9	9
Amortisation of acquired intangible assets	3	3	3	3
Pension past service cost	-	-	14	14
Costs directly attributable to Covid-19
- Impairment of property, plant and equipment	18	14	54	39
- Impairment of Intangible assets	-	-	1	1
- Impairment of right-of-use assets	-	28	-	95
- Other property costs	5	-	25	-
- Write-down of inventories	5	5	14	14
- Restructuring costs	9	9	25	25
- Costs associated with refinancing	6	6	-	-
- Other	1	(2)	1	1
Non-underlying items, before tax	49	65	157	212
Tax credit on non-underlying items	(9)	(12)	(18)	(25)
Non-underlying items, after tax	40	53	139	187

Non-underlying items on a pre-IFRS 16 basis are calculated on a consistent basis with IFRS 16, with the exception of the below items.

A tax credit of £12m has been recognised in relation to the above items (£9m under IAS 17).

Impairment of property, plant and equipment and right-of-use assets

The impairment charge recognised on a pre-IFRS 16 basis differs from that recognised under IFRS 16. This is mainly due to a lower asset base pre-IFRS 16, coupled with lower expected store cash flows, with rental expenses being included in the forecast cash flows (treated as financing costs under IFRS 16), and a higher discount rate. The calculation of the Group's weighted average cost of capital differs under IFRS 16 versus pre-IFRS 16. The pre-tax discount rate used in the IFRS 16 calculation was 10.4% and the pre-tax discount rate used in the pre-IFRS 16 calculation was 13.9%.

Right-of-use assets are not recognised on a pre-IFRS 16 basis

WH Smith PLC

Glossary (unaudited)

A6. Non-underlying items on pre-IFRS 16 and IFRS 16 bases (continued)

Other property costs

Other property costs on a pre-IFRS 16 basis include provisions for onerous lease contracts; on an IFRS 16 basis, onerous lease contracts are recognised as an impairment of the right-of-use asset. As a result of the impact of Covid-19, the Group has carried out a review of leases where the obligations of those leases exceed the potential economic benefits expected to be received under them. We anticipate that a number of stores will not fully recover to pre-Covid-19 sales levels and have accelerated our internal forecasts for the rate of sales decline in those locations. As a result, we have recognised onerous provisions of £5m for stores where we now anticipate we will make a cash loss over the remaining term of their leases.

The Group's pre-IFRS 16 property provisions represent the present value of unavoidable future net lease obligations and related costs of leasehold property (net of estimated sublease income and adjusted for certain risk factors) where the space is vacant, loss-making or currently not planned to be used for ongoing operations. The unwinding of the discount is treated as an imputed interest charge. These provisions represent the best estimate of the liability at the time of the balance sheet date, the actual liability being dependent on future events such as economic environment and marketplace demand. Expectations will be revised each period until the actual liability arises, with any difference accounted for in the period in which the revision is made.

A7. Free cash flow

£m	Note	2021	2020
Cash generated from operating activities	10	113	94
Interest paid		(13)	(13)
Net cash inflow from operating activities		100	81
Cash flow impact of IFRS 16	A9	(83)	(66)
Add back:
- Cash impact of non-underlying items		38	20
- Pension funding		3	3
Deduct:
- Purchase of property, plant and equipment		(37)	(67)
- Purchase of intangible assets		(7)	(12)
Free cash flow		14	(41)

A8. Headline Net debt

£m	Note	2021	2020
Borrowings
- Revolving credit facility		-	-
- Convertible bonds		(283)	-
- Bank loans		(132)	(400)
- Lease liabilities	14	(470)	(559)
Liabilities from financing activities		(885)	(959)
Cash and cash equivalents		130	108
Net debt (IFRS 16)	9	(755)	(851)
- Add back lease liabilities recognised under IFRS 16¹		464	550
Headline net debt (pre-IFRS 16)		(291)	(301)

¹Excludes lease liabilities previously recognised as finance leases on a pre-IFRS 16 basis.

WH Smith PLC

Glossary (unaudited)

A9. Cash flow disclosure impact of IFRS 16

There is no impact of IFRS 16 on cash flows, although the classification of cash flows has changed, with an increase in net cash inflows from operating activities being offset by a decrease in net cash inflows from financing activities.

	2021			2020
£m	Headline (pre-IFRS 16)	IFRS 16 Adjustment	IFRS 16	Headline (pre-IFRS 16)	IFRS 16 Adjustment	IFRS 16
Net cash inflows from operating activities	17	83	100	15	66	81
Net cash outflows from investing activities	(43)	-	(43)	(395)	-	(395)
Net cash inflows/(outflows) from financing activities	48	(83)	(35)	440	(66)	374
Net increase in cash in the period	22	-	22	60	-	60

A10. Balance sheet impact of IFRS 16

The balance sheet as at 31 August 2021 including and excluding the impact of IFRS 16 is shows below:

	2021			2020
£m	Headline (pre-IFRS 16)	IFRS 16 Adjustment	IFRS 16	Headline (pre-IFRS 16)	IFRS 16 Adjustment	IFRS 16
Goodwill and other intangible assets	474	(1)	473	495	(2)	493
Property, plant and equipment	167	7	174	190	2	192
Right-of-use assets	-	328	328	-	413	413
Investments in joint ventures	2	-	2	2	-	2
	643	334	977	687	413	1,100

Inventories	135	-	135	150	-	150
Payables less receivables	(237)	23	(214)	(226)	43	(183)
Working capital	(102)	23	(79)	(76)	43	(33)

Derivative financial asset	-	-	-	-	-	-
Net current and deferred tax asset	46	10	56	17	11	28
Provisions	(28)	14	(14)	(27)	13	(14)
Operating assets employed	559	381	940	601	480	1,081
Net debt	(291)	(464)	(755)	(301)	(550)	(851)
Net assets excluding pension liability	268	(83)	185	300	(70)	230
Pension liability	(3)	-	(3)	(4)	-	(4)
Deferred tax asset on pension liability	1	-	1	1	-	1
Total net assets	266	(83)	183	297	(70)	227

WH Smith PLC

Glossary (unaudited)

A11. Operating lease expense

Amounts recognised in Headline Group operating profit on a pre-IFRS 16 basis are as follows:

£m	2021	2020
Net operating lease charges	151	210

In the prior year, the Group adopted IFRS 16. IFRS 16 requires lessees to account for all leases under a single on-balance sheet model as the distinction between operating and finance leases is removed. In order to provide comparable information, the Group has chosen to present Headline measures of operating profit/(loss) and profit/(loss) before tax, as explained in Note 2 Segmental analysis.

The table above presents the pre-IFRS 16 net operating lease charges, applying the principles of IAS 17, and Group accounting policies as applicable prior to 1 September 2019, as described in the Glossary on page 51.

The Group leases various properties under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. The Group has a number of lease arrangements in which the rent payable is contingent on revenue. Contingent rentals payable, based on store revenues, are accrued in line with revenues generated.

The average remaining lease length across the Group is four years.

Temporary rent reductions due to Covid-19, affecting rent payments due on or before June 2022, have been recognised in the Income statement in the period they are received.

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Brunswick

Net Finance Costs

Tax

Fixed Charges Cover¹

2021

2020

2021

2020

2021

2020

Tax on loss

Loss for the year, attributable to equity holders of the parent

Non-underlying items (Note 4)

Loss for the year before non-underlying items, attributable to equity holders of the parent

Weighted average ordinary shares for diluted loss per share

Basic loss per share

Adjustments for non-underlying items

Basic loss per share before non-underlying items

Diluted loss per share

Adjustments for non-underlying items

Diluted loss per share before non-underlying items

Dividends

Term loans

Term loans

2021

2020

IFRS 16

Headline

(pre-IFRS16)

IFRS 16

2020

Note

2021

Related Charts

Wh Smith PLC (SMWH)

Market Overview

UK 350 Risers and Fallers

Preliminary Results

Brunswick

Net Finance Costs

Tax

Fixed Charges Cover1

2021

2020

2021

2020

2021

2020

Tax on loss

Loss for the year, attributable to equity holders of the parent

Non-underlying items (Note 4)

Loss for the year before non-underlying items, attributable to equity holders of the parent

Weighted average ordinary shares for diluted loss per share

Basic loss per share

Adjustments for non-underlying items

Basic loss per share before non-underlying items

Diluted loss per share

Adjustments for non-underlying items

Diluted loss per share before non-underlying items

Dividends

Term loans

Term loans

2021

2020

IFRS 16

Headline

(pre-IFRS16)

IFRS 16

2020

Note

2021

Related Charts

Wh Smith PLC (SMWH)

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Market Overview

UK 350 Risers and Fallers

Fixed Charges Cover¹

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