Preliminary Results

WH Smith PLC

Nov 10 2022 07:00 GMTSource: RNS

RNS Number : 9079F

WH Smith PLC

10 November 2022

WH SMITH PLC

PRELIMINARY RESULTS ANNOUNCEMENT

FOR THE YEAR ENDED 31 AUGUST 2022

Group now in its strongest ever position as a global travel retailer;

Dividend reinstated

· Significant recovery in Group performance with Group revenue of £1,400m (2021: £886m)

· Strong performance from Travel; momentum continuing into new financial year; total Travel revenue in 10 week period to 5 November 2022 at 148% of 2019

· Final dividend of 9.1p per share reflecting confidence in future and strong current trading

· New store pipeline of 150 stores won and yet to open in Travel, including 70 in North America, with over 125 stores due to open this financial year

· Headline profit before tax and non-underlying items* of £73m (2021: loss of £55m)

· Total Travel trading profit* of £89m (2021: loss of £39m)

· High Street trading profit* of £33m (2021: £19m)

· Investing for growth with capex in the current financial year expected to be around £150m

· Strong balance sheet with leverage now at 2x with further strengthening expected

Carl Cowling, Group Chief Executive, commented:

"2022 has been a successful year for WHSmith and we enter the new financial year with the Group in its strongest ever position as a global travel retailer with multiple growth opportunities across the world.

"We have opened 98 new stores in the year and we have a pipeline of 150 new stores yet to open across 16 countries and in airports as varied as Los Angeles, Salt Lake City, Brussels, Oslo and Melbourne.

"We continue to grow our North America business at pace and we have a very strong pipeline of new store openings. In the current financial year, our North America business is set to become larger, in profit terms, than our UK High Street business and we see significant opportunities to grow this business further.

"Our InMotion technology stores have had a very good year. We now have over 150 InMotion stores open, including 36 outside of the US. Our recently opened stores in the UK are trading ahead of our initial expectations and we have received excellent feedback from customers and landlords. We see significant scope to grow the brand globally.

"Our High Street division, including our online businesses, delivered another resilient and profitable performance. These businesses continue to generate strong cash flow allowing us to invest across the Group.

"The achievements of the last year are due to the tremendous efforts of the entire team around the world for which I am sincerely grateful.

"The resumption of the dividend announced today reflects our strong current trading and the Board's confidence in the future prospects of the Group.

"We have started the year well and, while there is economic uncertainty, travel patterns globally continue to improve and this, combined with the strength of the Group's growth opportunities, means that we are well positioned for a year of significant progress in 2023."

* Pre-IFRS 16

Group financial summary:

			Headline
	IFRS 16		pre-IFRS 16²
	Aug 2022	Aug 2021	Aug 2022	Aug 2021
Travel UK trading profit/(loss)¹	£60m	£(29)m	£54m	£(32)m
North America ('NA') trading profit¹	£33m	£2m	£31m	£6m
Rest of the World ('ROW') trading profit/(loss)¹	£3m	£(17)m	£4m	£(13)m
Total Travel trading profit/(loss)¹	£96m	£(44)m	£89m	£(39)m
High Street trading profit¹	£45m	£36m	£33m	£19m
Group profit/(loss) from trading operations¹	£141m	£(8)m	£122m	£(20)m
Group profit/(loss) before tax and non-underlying items¹	£83m	£(51)m	£73m	£(55)m
Diluted earnings/(loss) per share before non-underlying items¹	47.7p	(22.1)p	41.7p	(23.7)p
Non-underlying items¹	£(20)m	£(65)m	£(12)m	£(49)m
Group profit/(loss) before tax	£63m	£(116)m	£61m	£(104)m
Basic earnings/(loss) per share	36.2p	(62.6)p	35.4p	(54.2)p
Diluted earnings/(loss) per share	35.6p	(62.6)p	34.8p	(54.2)p

Revenue performance:

	£m	Total % change vs Aug 2021
Travel UK	521	167%
North America	288	73%
Rest of the World	118	195%
Total Travel	927	131%
High Street	473	(2)%
Group	1,400	58%

¹ Alternative Performance Measure (APM) defined and explained in the Glossary on page 47.

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 2022 and 31 August 2021 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 47. 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 2022 are available at whsmithplc.co.uk.

GROUP OVERVIEW

The Group has had a strong year and is now trading ahead of 2019 levels. We continue to capitalise on multiple growth opportunities by utilising our broad suite of brands, new store opening programme and continuing to win new stores throughout the world. The Group is now in its strongest ever position as a global travel retailer.

We have had another very successful year in winning new business. Across North America, Rest of the World and the UK we won 99 stores in the year and now have 150 stores won and due to open, with over 125 stores scheduled to open in the current financial year.

Despite some disruption from Covid-19 in the first half, it has been a year of substantial progress supported by the key pillars of our strategy and our ongoing forensic approach to retailing across each of our businesses. These include:

· Space growth:

o Opening new stores;

o Winning new business;

o New, better quality space;

o Extending contracts;

o Developing formats and brands

· ATV growth:

o Space management;

o Refitting stores;

o Range development

· Category development:

o One-stop-shop travel essentials format;

o Developing the InMotion brand;

o Improving ranges, e.g. health and beauty, food to go, and tech

· Cost and cash management:

o Flexible rent model;

o Investing for growth (capex in the current financial year expected to be around £150m);

o Productivity and efficiencies

· Maintain profitability of UK High Street business and grow our digital businesses

· Disciplined capital allocation, supporting investment in growth and shareholder returns

Group summary

The Group saw a strong recovery during the year which has continued into the current financial year. Total Group revenue as a percentage of 2019 total revenue by quarter has been:

	% of 2019 Revenue³
	FY 2022				FY 2023
	Q1	Q2	Q3	Q4	10 weeks to 5 November 2022
Travel UK	69%	72%	102%	113%	118%
North America⁴	91%	91%	110%	116%	117%
Rest of the World⁵	41%	48%	87%	116%	131%

Total Travel⁶	83%	81%	122%	135%	148%⁸

High Street⁷	87%	84%	79%	81%	87%

Group	85%	83%	106%	117%	125%

Second half revenue for the Group was 113% of 2019 on a total basis and 89% on a like-for-like¹ ('LFL') basis as shown in the table below. LFL revenue in Travel was 92% of 2019.

	FY 2022 H2 % of 2019 Revenue³
	Total	LFL¹
Travel UK	109%	94%
North America⁴	113%	94%
Rest of the World⁵	103%	82%

Total Travel⁶	130%	92%

High Street⁷	82%	83%

Group	113%	89%

Total Group revenue at £1,400m (2021: £886m) was up 58% compared to the prior year and slightly ahead of 2019. It was the highest annual revenue generated by the Group since its creation in its current form in 2006.

In Travel, while the first half was impacted by the Omicron variant from December 2021 to February 2022, we saw thereafter a robust recovery across all our travel markets and a strong rebound in profitability. Travel revenue for the second half was at 130% ⁶ of 2019 (92% on a LFL¹ basis) and over the key summer trading period from June to August, Travel revenue was at 135% of 2019 (96% on a LFL¹ basis).

In the 10 week period to 5 November 2022, Travel revenue has been 148% ⁸ of 2019 which demonstrates the intrinsic strength of our business and the markets in which we operate.

We saw a consistently good performance in High Street throughout the year with the important December 2021 trading period at 90% of 2019.

Total Travel delivered a substantial increase in trading profit¹ to £89m (2021: loss of £39m) and High Street a trading profit¹ of £33m (2021: £19m).

Headline Group profit from trading operations¹ for the year was £122m (2021: loss of £20m) with Headline Group profit before tax and non-underlying items¹ at £73m (2021: loss of £55m). Including non-underlying items, the Headline Group profit before tax¹ was £61m (2021: loss of £104m).

³ Equivalent month in 2019

⁴ Pro forma, constant currency

⁵ Constant currency

⁶ As reported (excludes pro forma North America adjustment)

⁷ Includes internet businesses

⁸ 141% on constant currency basis

The Group profit before tax, including non-underlying items and on an IFRS 16 basis, was £63m (2021: loss of £116m).

The Group has a strong balance sheet, is very cash generative and has substantial liquidity. In addition to £327m of convertible bonds which mature in 2026 and £133m of term loan with a maturity in 2025, the Group has an undrawn £250m Revolving Credit Facility ('RCF') which matures in 2025.

The Group has the following cash, committed facilities and drawn debt as at 31 August 2022:

	31 August 2022	Maturity
Cash and cash equivalents⁹	£132m
Revolving Credit Facility¹⁰	£250m	April 2025
Term loan	£133m	April 2025
Convertible bonds	£327m	May 2026

⁹ Cash and cash equivalents comprises cash on deposit of £101m and cash in transit of £31m

¹⁰ Undrawn as at 31 August 2022 and 9 November 2022

As at 31 August 2022, Headline net debt¹ was £296m (2021: £291m) with access to over £350m of liquidity (£101m cash on deposit and £250m undrawn RCF). We have a clear focus on cash generation. Group free cash flow¹ was an inflow of £41m (2021: £14m), reflecting the strong trading performance as well as our investment in growth opportunities with capital investment in the year of £83m (2021: £44m).

The Group pays a fixed coupon at 1.625% on the convertible bonds and the term loan is interest bearing at a margin over SONIA. As a consequence, around 70% of our debt is at fixed interest rates. The Group places surplus cash in overnight interest bearing accounts, ensuring immediate liquidity. As at 31 August 2022, the Group had £101m placed in interest bearing deposit accounts.

On 8 August 2022, the Group announced that the Trustee of the WHSmith Pension Trust, (the 'Trust'), had purchased a bulk annuity insurance policy from Standard Life, insuring all liabilities to pay all future defined benefit pensions to the Trust's 12,950 members and any eligible dependants. The insurance policy was purchased using most of the existing assets held within the Trust, without the need for the Group to make any additional cash contributions. As a result of this comprehensive risk removal, the Group will not be required to make any future cash contributions into the Trust regarding defined benefit liabilities.

The Board today announces that it will be reinstating the dividend and is proposing a final dividend of 9.1p per share in respect of the financial year ending 31 August 2022 which is payable on 26 January 2023. This reflects our strong start to the year and our confidence in the future prospects of the Group. Assuming a 1/3:2/3 split between interim and final dividends, this implies a cover ratio of 3 times earnings for the full year. Our intention is to return, in time, to a cover ratio of around 2.5 times normalised earnings paid on an interim and final basis on a 1/3:2/3 split.

The Group's disciplined approach to capital allocation remains unchanged:

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

· paying a dividend to our shareholders;

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

· returning surplus cash to shareholders.

Leverage at 31 August 2022 was 2.0x Headline EBITDA¹. We have a leverage target of between 0.75x and 1.25x Headline EBITDA¹ and we anticipate achieving this level within the next 12 to 18 months, including this year's significant investment programme.

TOTAL TRAVEL

Our Travel business comprises three divisions: UK, North America and Rest of the World.

Total revenue was £927m (2021: £401m), up 131% compared to the previous year generating a Total Travel Headline trading profit¹ in the period of £89m (2021: loss of £39m).

£m	Trading profit/(loss)¹ (IFRS 16)		Headline trading profit/(loss)¹ (pre-IFRS 16)		Revenue
	2022	2021	2022	2021	2022	2021
Travel UK	60	(29)	54	(32)	521	195
North America	33	2	31	6	288	166
Rest of the World	3	(17)	4	(13)	118	40
Total Travel	96	(44)	89	(39)	927	401

In Travel, we have continued to focus on initiatives that position us well for future growth:

· Business development and winning new business

Through building and managing relationships with all our landlord partners, we look to win new space, improve the quality and amount of space, develop new formats and extend contracts. During the year, we have opened 98 stores and now have a store pipeline of 150 stores which are due to open over the next three years. Going forward, we expect to win around 50 to 60 new stores a year.

· ATV growth and spend per passenger

We aim to grow ATV through our forensic analysis of the return on our space, cross-category promotions, merchandising, store layouts and store refits. During the year, we have continued to focus on re-engineering our ranges and we continue to see double digit ATV growth across all our channels.

· Category development

We do this by developing adjacent product categories relevant for our customers, such as health and beauty and tech ranges, and expanding existing categories, e.g. premium food ranges. Throughout the year, we have focused on identifying opportunities where we can reposition our traditional news, books and convenience ('NBC') format to a one-stop-shop travel essentials format.

· Minimising costs

We remain focused on cost efficiency and productivity, and making value creating investments.

The strong momentum that we saw in Q4 has continued into the new financial year with the Group now in its strongest position ever as a global travel retailer. Passenger numbers have recovered strongly, albeit with further recovery to go, and we are very well positioned to capitalise on the significant space growth opportunities across each of our markets.

TRAVEL UK

All our channels in Travel UK have seen a sustained and strong recovery across the year with the division delivering sales of 113% of 2019 in Q4 and 118% in the first 10 weeks of the current financial year.

Total revenue in the year was £521m which, together with improved margins, resulted in a Headline trading profit¹ of £54m (2021: loss of £32m). We have seen a consistent double digit increase in ATV versus 2019 across our Air, Hospital and Rail channels during the period as a result of our work to broaden our categories and extend our ranges.

	% of 2019 Revenue³
	Air	Hospitals	Rail	Total
H1 FY22	60%	90%	70%	71%
Q3 FY22	111%	102%	87%	102%
Q4 FY22	124%	110%	90%	113%
Year to 31 August 2022	93%	98%	79%	90%
10 weeks to 5 November 2022	132%	114%	92%	118%

As at 31 August 2022, Travel UK had 587 stores. In addition, over the next three years, we expect to win and open an additional 10 to 15 stores each year in UK Travel, with the majority of the new stores in the Hospital channel.

Air

In Air, we saw a significant step up in revenue over the key summer trading period, with sales in July and August 2022 at 121% and 126% respectively of the comparable months in 2019. This was during a period of disruption and passenger caps at some UK airports which limited the number of passengers travelling.

As was the case pre-pandemic, leisure passengers are our most important customer segment. We continue to focus on expanding our proposition and identifying opportunities where we can reposition our traditional NBC format to a unique one-stop-shop for travel essentials. By extending our categories such as health and beauty, tech, food to go and pharmacy products, we are able to provide time-pressed travelling customers with a fast and convenient shopping experience, under one roof. This enables us to expose customers to a broader range of categories which has resulted in an increase in sales per square metre, a higher ATV and spend per passenger. This delivers good returns for us with improved margins and attractive economics for our landlords. Customer and landlord feedback has been very positive.

We have now opened all 30 of the InMotion stores that we recently won in UK Air, positioning us as the market-leading technology retailer in travel locations globally. We are pleased with the performance of our new InMotion stores in UK Air, which are trading above our initial expectations. Combining the learnings and expertise from our InMotion stores in the US, as well as the results of extensive customer research in the UK, these stores provide a first-class customer service experience and showcase a range of premium brands, such as Apple, Bose, Sony and Samsung, as well as an extensive range of tech accessories.

Hospitals

The Hospital channel is an important channel for us and is our second largest channel currently by revenue in Travel UK. During the year, we have seen a consistent improvement in revenue as restrictions eased.

Our Hospital channel is a good example of how we continue to innovate with a strong proposition tailored to each location. We are able to offer hospital trusts a broad suite of formats and brands including WHSmith, M&S Simply Food, Costa Coffee and the Post Office. We now have 49 M&S Simply Food or shared space stores across our hospital estate, 11 Costa Coffee shops and 3 Post Offices.

In addition, there are considerable opportunities for us to open new space in hospitals. As at 31 August 2022, we operated from 136 stores in around 100 hospitals and we believe there are a further 200 hospitals which could support at least one of our four store formats. The government continues to invest in both infrastructure and staff numbers in the health sector as the sector emerges from Covid.

Over the medium-term, we would expect to open on average eight to ten new stores each year in the Hospital channel.

Rail

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

During the year, we have seen a steady improvement in revenue as travel restrictions eased and this momentum has continued into the new financial year, despite the disruption caused by the recent rail strikes. Passenger numbers are now at 80% of 2019 levels with leisure and weekend passenger numbers recovering the fastest. We know from our segmentation and return on space analysis in Rail that this customer segment is the most valuable to us.

As with our other channels in Travel, we continue to invest in re-engineering our ranges and broadening our categories to meet customer and landlord needs. In the first half of the year, we opened our first one-stop-shop format in Rail at London's Euston Station. This store combines our traditional news, books and convenience offer with tech, health and beauty products and a pharmacy. We have received positive feedback from customers and the store is performing strongly. During the current financial year, we will be trialling our one-stop-shop for travel essentials format in Rail across a further eight major Network Rail locations, including London Paddington, London Victoria and London Liverpool Street stations. Across these stores, we will be investing in new store layouts and enhancing the space afforded to categories such as health and beauty.

In addition, we have opened a new standalone bookshop at Edinburgh Waverley Station and our first Rail store with a combined M&S food offer at Bristol Temple Meads Station. Early customer and landlord reaction has been positive.

NORTH AMERICA

We saw a strong performance from North America. Given its domestic focus, the North American market recovered the fastest from the pandemic. Transportation Security Administration ('TSA') data and visitor numbers in Las Vegas have continued to improve during the year. Total revenue for the year in NA was £288m (2021: £166m), an increase of 73% of which 10% was due to changes in exchange rates. Headline trading profit¹ was £31m (2021: £6m), reflecting the recovery in passenger numbers and improved margins. In the current financial year, we expect our North America business to become an increasingly significant part of the Group and the second largest in profit terms, after Travel UK. The Group is exposed to movements in the GBP:USD exchange rate. A 10 cent move in this rate results in a c.£3m movement in annual profit. Current consensus suggests an average exchange rate of GBP:USD of 1.30.

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 being the largest segment. TSA data continues to show the gradual recovery in passenger numbers week on week, with passenger numbers at the end of October 2022 at 95% of 2019 levels.

Given the similar customer dynamic and high footfall environments to our Travel UK business, we have applied our forensic approach to retailing from the UK to the US market and we are seeing some good results. This includes, space management, category development to higher margin products such as health and beauty and tech, enhanced promotional activity and increased operational efficiencies, for example self-scan tills which we introduced in September 2022.

Including the 22 store openings in the year, MRG now have 78 and InMotion 118 stores trading in airports. We continue to grow our North America business at pace and we have a very strong pipeline of new store openings, including some significant tender wins at Los Angeles and Salt Lake City airports. During the year, we have won an additional 22 stores and we expect to open 49 in the current financial year.

So far this financial year, we have won a further 5 stores including Jacksonville and Boston airports. Our analysis of the North American market pre-pandemic shows that there were a total of 2,004 news and gift and specialty retail stores in the top 70 airports, giving our North America business a market share of c.12%¹¹. With our continued success rate of winning new tenders and our expectation of the amount of space likely to come to the market for tender over the medium-term, we are well placed to grow our North America business.

Outside of the airport business, the Resorts channel continues to be attractive. MRG is a leading player in this channel in Las Vegas with stores located at key visitor locations of the Strip and Fremont Street. MRG has very longstanding relationships with resort landlords and a significant amount of expertise built up over an extended period. The Resorts channel has similar dynamics to our Travel UK business with a high number of short stay visitors who tend to remain close to their hotel. Visitors to Las Vegas were approximately 3.4m in the month of September 2022, c.4% below 2019.

In addition, we have won and opened our first store in Rail in North America. This store opened in February 2022 at Moynihan Train Hall, New York. While it is still early days, this store is performing well and in line with our expectations. We have also won a further store at neighbouring Penn Station.

Our revenue performance in the current financial year has reflected these trends with overall revenue in North America at 130%¹² of 2019 levels for the 10 weeks to 5 November 2022 (of which 13% relates to currency movements, giving growth of 117% at constant currencies).

REST OF THE WORLD

Total revenue for the year in ROW was £118m (2021: £40m). Headline trading profit¹ was £4m (2021: loss of £13m). As anticipated, the pace of recovery has varied by geography with the strongest recovery in Europe and, more recently, notable improvements in Australia and Asia. As we have done in Travel UK, we have remained focused on areas within our control, including increasing ATV. Revenue in the first 10 weeks of the current financial year was at 131% of 2019⁵ levels reflecting the ongoing recovery and opening of new stores.

As this market continues to recover, we expect to see more space become available. Our strong and compelling proposition and our very low market share currently means there is significant opportunity to grow this business in new and existing territories through our traditional NBC retail proposition and with technology tenders under the InMotion brand. We continue to use our three operating models of directly run, joint venture and franchise in order to create value and win new business.

We made good progress in the year opening 38 new stores and we have won a further 64 stores, with significant tender wins in Spain, Belgium, Italy, Sweden, Norway and Australia. Utilising our experience from our North America business, we have created a localised store design concept for each airport, drawing on local landmarks and popular cultural references. This has been very well received by landlords and gives us confidence in winning more stores in new territories as space becomes available.

In addition, we continue to build on areas where we already have stores, for example in Spain, which is one of the most popular destinations for the UK leisure traveller. In the first half, we won an additional 31 stores across Spanish airports, of which we have opened 23 to date. These stores are performing well and we know from our prior experience of operating in the country that our brand and offer resonates well. We successfully executed this store opening programme at pace to ensure over half the stores were trading throughout the peak summer period.

We also continue to see good opportunities to win new business in the tech market under our InMotion brand. During the year, we have won 8 InMotion stores in Dublin, Milan and Stockholm and Gothenburg. We now have a total of 11 InMotion stores outside of the UK and North America of which 6 are open. We remain well positioned to benefit from further opportunities as more space becomes available.

¹¹ Based on store numbers; including stores won and yet to open

¹² Includes pro forma MRG for 2019

We now have 311 stores and a further 76 won and yet to open. Of the 311 stores open, 45% are directly-run, 8% are joint venture and 47% are franchise.

Region	Number of stores
Europe	109
Middle East and India	84
Asia Pacific	118

Total Travel stores

During the year, we opened 98 stores in Travel. As at 31 August 2022, our global Travel business operated from 1,196 units (31 August 2021: 1,166 units). As at 31 August 2022, we are present in over 100 airports and 30 countries with 298 stores in North America, 109 in Europe, 84 in the Middle East and India and 118 in Asia Pacific. As part of our strategy to improve the quality of our space, we closed 68 stores in the period, largely in marginal locations. Excluding franchise units, Travel occupies 1.0m square feet.

HIGH STREET

During the year, High Street delivered a resilient performance with Headline trading profit¹ of £33m, as expected (2021: £19m - which included £30m of UK Government support on rates), with revenue of £473m (2021: £485m). We managed the business tightly, keeping focused on costs and cash generation. We are pleased with the start to the new financial year with LFL¹ revenue up 2% on the prior year for the 10 weeks to 5 November 2022.

The strategy we have in place in our High Street business remains as relevant today as it has ever been and ensures that the cash flow and profits of this business are robust and sustainable.

We consider retail space as a strategic asset and we utilise our space to maximise returns in the current year, in ways that are sustainable over the longer-term. 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.

Driving efficiencies remains a core part of our strategy and we continue to focus on all areas of cost in the business. During the year, we have delivered savings of £42m and we are on track to deliver savings of £24m over the next 3 years, of which £12m are planned in the current financial year. These savings come from right across the business, including rent savings at lease renewal (on average 53%) which continue to be a significant proportion, marketing efficiencies and productivity gains from our distribution centres. We have, for many years, actively fixed our energy costs in stores well in advance of consuming the energy. Our energy costs are currently fixed to August 2023 at rates that were put in place 12 months ago.

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 years. We only renew a lease where we are confident of delivering economic value over the life of that lease. We have c.450 leases due for renewal over the next three years, including over 150 where we are holding over and in negotiation with our landlord. The store closure process is cash neutral.

As at 31 August 2022, the High Street business operated from 527 stores (2021: 544) which occupy 2.5m square feet (2021: 2.6m square feet). 17 stores were closed in the period (2021: 24).

Specialist websites

Funkypigeon.com delivered, as expected, total revenue of £35m (2021: £54m) and Headline EBITDA¹ of £8m (2021: £14m) reflecting the cyber incident in April. Funkypigeon.com is recovering well and we are confident of the substantial opportunities to grow the platform further, and significantly grow revenue and profits over the medium-term.

The market for greeting cards in the UK is substantial and estimated at £1.6bn¹³ with online penetration continuing to grow. The UK greeting card market has been stable with adults sending on average 20¹³ greeting cards per person each year.

¹³ Company estimates / OC&C 2019

We have redeveloped the funkypigeon.com app to improve customer conversion and we have also launched a next day delivery service which operates seven days a week to further enhance our customer proposition. This has received very positive customer feedback.

During the year, we increased our investment and focus on whsmith.co.uk. This has included focusing on customer conversion, product presentation and broadening our approach to marketing. Our specialist pen website, cultpens.com, has continued to outperform the UK market with growing sales internationally. We have extended our ranges to broaden our customer offer and, during the year, we launched product personalisation to further develop the gifting category. This includes laser engraving of pens and notebook embossing. We are seeing good results.

ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE ('ESG')

We have excellent sustainability credentials and we have made good progress over the past 12 months. We were the top performing specialty retailer in Morningstar's Sustainalytics ESG Benchmark in the year, and were included, once again, in the Dow Jones World Sustainability Index.

We have set our target to achieve net zero. As a first step to this long-term goal, we have set near term targets to help track our performance against our overall climate target over time, and these have been validated by the Science Based Targets Initiative. We have continued to invest in energy saving measures, such as LED and chiller replacements, and have reduced Scope 1 and 2 emissions by around 60% since 2007.

The need for literacy support for disadvantaged children continues and we continue to invest in our partnership with the National Literacy Trust. During the year, we have been delighted to see a resurgence in children's books, with a particularly strong World Book Day.

In addition, we have enhanced our sustainability governance, introducing an ESG Committee of the Board, and we have included ESG measures into our senior executive short and long-term incentive plans.

FINANCIAL REVIEW

The Group generated a Headline profit before tax and non-underlying items¹ of £73m (2021: loss of £55m) and, after non-underlying items and IFRS 16, a Group profit before tax of £63m (2021: loss of £116m).

			Headline
	IFRS		pre-IFRS 16¹
£m	2022	2021	2022	2021
Travel UK trading profit/(loss)¹	60	(29)	54	(32)
North America trading profit¹	33	2	31	6
Rest of the World trading profit/(loss)¹	3	(17)	4	(13)
Total Travel trading profit/(loss)¹	96	(44)	89	(39)
High Street trading profit¹	45	36	33	19
Group profit/(loss) from trading operations¹	141	(8)	122	(20)
Unallocated central costs¹	(24)	(19)	(24)	(19)
Group operating profit/(loss) before non-underlying items¹	117	(27)	98	(39)
Net finance costs	(34)	(24)	(25)	(16)
Group profit/(loss) before tax and non-underlying items¹	83	(51)	73	(55)
Non-underlying items¹	(20)	(65)	(12)	(49)
Group profit/(loss) before tax	63	(116)	61	(104)

Unallocated central costs increased in the year due to higher share-based payment charges and £2m of costs in relation to a new payroll system which previously would have been treated as capex and now is treated as opex under the new accounting guidelines for software as a service.

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 or incidence, are treated as non-underlying items and disclosed separately. Non-underlying items in the year are detailed in the table below, and most do not impact cash.

The cash spend relating to non-underlying items in the 2022 financial year was £16m and mainly related to activity announced in 2020 and 2021.

		IFRS	Headline pre-IFRS 16¹	IFRS	Headline pre-IFRS 16¹
£m	Ref.	2022	2022	2021	2021

Impairment of Property, plant and equipment and Right-of-use assets	(1)	13	5	42	18
Amortisation of acquired intangible assets	(2)	3	3	3	3
Costs related to cyber incident	(3)	4	4	-	-
Onerous leases		-	-	-	5
Stock provisions, write-offs and other costs		-	-	3	6
Restructuring costs		-	-	9	9
Costs associated with refinancing		-	-	6	6
Cost relating to business combinations		-	-	2	2
		20	12	65	49

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

The Group has carried out an assessment for indicators of impairment across the store portfolio. This assessment has identified a number of stores where experience and expectations of the longer-term impact of Covid-19 is more negative than previously assumed, primarily driven by the impact of Covid-19 on consumer shopping patterns.

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 2022. Following this review, a non-cash charge of £5m (2021: £18m) was recorded for impairment of retail store assets on a pre-IFRS 16 basis, and £13m (2021: £42m) on an IFRS 16 basis which includes an impairment of right-of-use assets of £8m (2021: £28m).

(2) Amortisation of acquired intangible assets

Amortisation of acquired intangible assets primarily relates to the MRG and InMotion brands. This is a non-cash charge.

(3) Costs related to cyber incident

Costs of £4m were incurred in relation to the funkypigeon.com cyber security incident and include impairment of software assets, third party consultancy support and legal and other costs.

Other non-underlying items in the prior year included stock provisioning and impairment relating to the impact of Covid-19, restructuring costs following a review of store operations across our High Street business, costs associated with the refinancing activity in April 2021 and further integration costs in relation to the acquisition of MRG which completed in December 2019.

A tax credit of £4m (2021: £12m) has been recognised in relation to the above items (£3m pre-IFRS 16 (2021: £9m)).

Net finance costs

			Headline
	IFRS		pre-IFRS 16¹
£m	2022	2021	2022	2021
Interest payable on bank loans and overdrafts	9	10	9	10
Interest on convertible bonds	14	4	14	4
Unwind of discount on onerous lease provisions (pre-IFRS 16)	-	-	2	2
Interest on lease liabilities	11	10	-	-
Net finance costs	34	24	25	16

Pre-IFRS 16 net finance costs for the year were £25m (2021: £16m) with the year on year increase reflecting the refinancing undertaken in the prior year. Cash costs in relation to this financing cost were £10m lower at £15m.

The interest on the convertible bonds includes the accrued coupon (a fixed coupon of 1.625%) and c.£8m of the non-cash debt accretion charge.

The £2m non-cash unwind of discount on onerous lease provisions relates to onerous lease provisions recognised in the 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 £11m arises on lease liabilities recognised under IFRS 16, bringing the total net finance costs under IFRS 16 to £34m (2021: £24m).

Tax

The effective tax rate¹ was 17% (2021: 47%) on the profit for the year. Corporation tax payments in the year were £6m after all possible loss relief for the current year has been used (2021: refunds of £10m following the carry back of 2021 losses against prior year profits). Based on current legislation, we expect the tax rate in the current year to be 23%.

Fixed charges cover¹

	pre-IFRS 16¹
£m	2022	2021
Headline net finance costs¹	25	16
Net operating lease charges (pre-IFRS 16)¹	241	151
Total fixed charges	266	167
Headline profit/(loss) before tax and non-underlying items¹	73	(55)
Headline profit before tax, non-underlying items and fixed charges	339	112
Fixed charges cover - times	1.3x	0.7x

Fixed charges, comprising property operating lease charges and net finance costs, were covered 1.3 times (2021: 0.7 times) by Headline profit/loss before tax, non-underlying items and fixed charges.

Cash flow

Free cash flow¹ reconciliation

	pre-IFRS 16¹
£m		2022	2021
Headline Group operating profit / (loss) before non-underlying items¹		98	(39)
Depreciation, amortisation and impairment (pre-IFRS 16)¹⁴		49	50
Non-cash items		8	8
Operating cash flow^{1, 14}		155	19
Capital expenditure		(83)	(44)
Working capital (pre-IFRS 16)¹⁴		(10)	37
Net tax (paid)/refunded		(6)	10
Net finance costs paid (pre-IFRS 16)		(15)	(8)
Free cash flow ¹		41	14

The free cash inflow¹ for the year was £41m. This mainly reflects the return to profit of the business with the operating cash inflow increasing by £136m to £155m and continued investment in the Group as we recover from the impact of the pandemic and open new stores.

We had a working capital outflow of £10m in the year reflecting the launch of InMotion in the UK and investment to support the recovery of trading in Travel.

Net corporation tax payments in the period were £6m, compared to refunds of £10m last year.

Capital expenditure was £83m (2021: £44m) which includes the additional spend from opening 98 stores around the world.

£m	2022	2021
New stores and store development	37	17
Refurbished stores	22	17
Systems	13	9
Other	11	1
Total capital expenditure	83	44

¹⁴ Excludes cash flow impact of non-underlying items

Reconciliation of Headline net debt¹

Headline net debt¹ is presented on a pre-IFRS 16 basis. See Note 8 of the Financial statements for the impact of IFRS 16 on net debt.

As at 31 August 2022, the Group had Headline net debt¹ of £296m comprising convertible bonds of £292m, term loans of £132m (net of fees), £4m of finance lease liabilities and net cash of £132m (2021: £291m, convertible bonds of £283m, term loans of £132m (net of fees), £6m of finance lease liabilities and net cash of £130m).

	Headline¹
	pre-IFRS 16
£m	2022	2021
Opening Headline net debt¹	(291)	(301)
Movement in year
Free cash flow¹	41	14
Pensions	(2)	(3)
Non-underlying items¹	(16)	(38)
Net purchase of own shares for employee share schemes	(7)	(2)
Equity component of convertible bond	-	41
Other	(21)	(2)
Closing Headline net debt¹	(296)	(291)
Cash	132	130
Term loans (net of fees)	(132)	(132)
Convertible bond	(292)	(283)
Finance leases (pre-IFRS 16)	(4)	(6)
	(296)	(291)

The Group had closing Headline net debt¹ of £296m at the year end. In addition to the free cash flow, the Group paid defined benefit pension funding of £2m (see Note 15 on pensions) and £16m 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 prior years.

On an IFRS 16 basis, net debt was £869m, which includes an additional £573m of lease liabilities.

Balance sheet

			Headline¹
	IFRS		pre-IFRS 16
£m	2022	2021	2022	2021
Goodwill and other intangible assets	543	473	544	474
Property, plant and equipment	219	174	211	167
Right-of-use assets	446	328	-	-
Investments in joint ventures	2	2	2	2
	1,210	977	757	643

Inventories	198	135	198	135
Payables less receivables	(269)	(214)	(284)	(237)
Working capital	(71)	(79)	(86)	(102)

Derivative financial assets	1	-	1	-
Net current and deferred tax assets	54	56	54	46
Provisions	(14)	(14)	(26)	(28)
Operating assets employed	1,180	940	700	559
Net debt	(869)	(755)	(296)	(291)
Net assets excluding pension liability	311	185	404	268
Pension liability	-	(3)	-	(3)
Deferred tax asset on pension liability	-	1	-	1
Total net assets	311	183	404	266

The Group had Headline net assets of £404m, £138m higher than last year end reflecting the investment in store openings and exchange differences on translation of goodwill. Under IFRS the Group had net assets of £311m.

Pensions

In August 2022, the main defined benefit pension scheme, the WHSmith Pension Trust, purchased a bulk annuity insurance policy from Standard Life, part of Phoenix Group, insuring all liabilities to pay all future defined benefit pensions to the Trust's 12,950 members and any eligible dependants.

The insurance policy was purchased using most of the existing assets held within the Trust, without the need for the Group to make any additional cash contributions. The bulk annuity policy matches the Trust's cash flow benefit obligations to its members, removing longevity and other demographic risks as well as investment, interest rate and inflation risks. As a result of this comprehensive risk-removal, the Group will not be required to make any future cash contributions into the Trust regarding defined benefit liabilities, therefore the previously recognised minimum funding liability (£2m as at 31 August 2021) has been derecognised. During the year ended 31 August 2022, prior to the completion of the buy-in transaction, the Group made a contribution of £2m to the scheme (2021: £3m).

As at 31 August 2022, the scheme had an IAS 19 surplus of £120m (2021: surplus of £284m), representing the remaining assets of the scheme after the bulk annuity policy purchase above. The Group has continued not to recognise this surplus under the requirements of IFRS 14.

The IAS 19 pension deficit on the relatively small UNS defined benefit pension scheme was £nil (2021: £1m).

PRINCIPAL AND EMERGING RISKS AND UNCERTAINTIES

The Board regularly reviews and monitors the risks and uncertainties that could have a material effect on the Group's financial results. The principal risks and uncertainties that could lead to a material impact have not significantly changed from those listed in the Annual Report and Accounts 2021. No new principal risks were identified in the year, however there were five risks where the potential impact had increased over the year, with the remaining risks having no change in their overall impact. We believe that the overall level of risk of Covid-19 has reduced. We have also recognised that the ongoing conflict in Ukraine has created further uncertainty in the macro economy. A summary of the principal risks has been provided below:

Risk	Impact
Economic, political, competitive and market risks - increased	The Group operates in highly competitive markets and in the event of failing to compete effectively with travel, convenience and other similar product category retailers, this may affect revenues obtained through our stores. Failure to keep abreast of market developments, including the use of new technology, could threaten our competitive position. Factors such as the economic climate, levels of household disposable income, seasonality of sales, changing demographics and customer shopping patterns, and raw material costs could impact on profit performance. The Group may also be impacted in the UK and internationally, by any future pandemics, escalation of global conflict, political developments such as regulatory and tax changes, increasing scrutiny by competition authorities, and other changes in the general condition of retail and travel markets.
Brand and reputation - no change	The WHSmith brand is an important asset and failure to protect it from unfavourable publicity could materially damage its standing and the wider reputation of the business, adversely affecting revenues. As the Group continues to expand its convenience food offer in travel locations, associated risks include compliance with food hygiene and health and safety procedures, product and service quality, environmental and ethical sourcing and associated legislative and regulatory requirements, including the latest allergen and calorie labelling regulations.
Key suppliers and supply chain management - increased	The Group has agreements with key suppliers in the UK, Europe and the Far East and other countries in which it operates. The interruption or loss of supply of core category products from these suppliers to our stores may affect our ability to trade. Quality of supply issues may also impact the Group's reputation and impact our ability to trade. Further escalation of geo-political risks may cause disruption to the supply chain which may necessitate the diversification of sourcing own brand products from the Far East.
Store portfolio - no change	The quality and location of the Group's store portfolio are key contributors to the Group's strategy. Retailing from a portfolio of good quality real estate in prime retail areas and key travel hubs at commercially reasonable rates remains critical to the performance of the Group. All of High Street's stores are held under operating leases, and consequently the Group is exposed, to the extent that any store becomes unviable as a result of rental costs. Most Travel stores are held under concession agreements, on average for 5 to 10 years, although there is no guarantee that concessions will be renewed or that Travel will be able to bid successfully for new contracts.
Business interruption - increased	An act of terrorism or war, or an outbreak of a further pandemic disease, could reduce the number of customers visiting WHSmith outlets, causing a decline in revenue and profit. In the past, our Travel business has been impacted by geopolitical events such as major terrorist attacks, which have led to reductions in customer traffic. Closure of travel routes both planned and unplanned, such as the disruption caused by natural disasters or weather-related events, may also have a material effect on business. The Group operates from a number of distribution centres and the closure of any one of them may cause disruption to the business. In common with most retail businesses, the Group also relies on a number of important IT systems, where any system performance problems, cyber risks or other breaches in data security could affect our ability to trade.
Reliance on key personnel - no change	The performance of the Group depends on its ability to continue to attract, motivate and retain key head office and store staff. The retail sector is very competitive and the Group's personnel are frequently targeted by other companies for recruitment.
International expansion - increased	The Group continues to expand internationally. In each country in which the Group operates, the Group may be impacted by political or regulatory developments, or changes in the economic climate or the general condition of the travel market.
Cyber risk and data security - increased	The Group is subject to the risk of systems breach or data loss from various sources including external hackers or the infiltration of computer viruses. Theft or loss of Company or customer data or potential damage to any systems from viruses, ransomware or other malware, or non-compliance with data protection legislation, could result in fines and reputational damage to the business that could negatively impact our sales.
Treasury, financial and credit risk management - no change	The Group's exposure to and management of capital, liquidity, credit, interest rate and foreign currency risk are analysed further in Note 22 on page 137 of the Annual Report and Accounts 2021. The Group also has credit risk in relation to its trade, other receivables and sale or return contracts with suppliers. The Group is exposed to interest rate changes and movements in foreign currencies.
Environment and sustainability - no change	Our investors, customers and colleagues expect us to conduct our business in a responsible and sustainable way. Climate change is now recognised as a global emergency. Failure to deliver our stated sustainability commitments could damage our reputation and introduce higher costs and impact our ability to meet strategic objectives.

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 2022

		2022			2021
£m	Note	Before non-underlying items¹	Non-underlying items²	Total	Before non-underlying items¹	Non-underlying items²	Total

Revenue	2	1,400	-	1,400	886	-	886
Group operating profit/(loss)	2, 3	117	(20)	97	(27)	(65)	(92)
Finance costs	5	(34)	-	(34)	(24)	-	(24)
Profit/(loss) before tax		83	(20)	63	(51)	(65)	(116)
Income tax (expense)/credit	6	(14)	4	(10)	24	12	36
Profit/(loss) for the year		69	(16)	53	(27)	(53)	(80)

Attributable to equity holders of the parent		63	(16)	47	(29)	(53)	(82)
Attributable to non-controlling interests		6	-	6	2	-	2
		69	(16)	53	(27)	(53)	(80)

Earnings/(loss) per share
Basic	7			36.2p			(62.6)p
Diluted	7			35.6p			(62.6)p

All results relate to continuing operations of the Group.

¹ Alternative performance measure. The Group has defined and explained the purpose of its alternative performance measures in the Glossary on page 47.

² See Note 4 for an analysis of non-underlying items. See Glossary on page 47 for a definition of Alternative Performance Measures.

WH Smith PLC

Group Statement of Comprehensive Income

For the year ended 31 August 2022

£m	Note	2022	2021
Profit/(loss) for the year		53	(80)
Other comprehensive income/(loss):
Items that will not be reclassified subsequently to the income statement:
Actuarial losses on defined benefit pension schemes	15	-	(1)
		-	(1)
Items that may be reclassified subsequently to the income statement:
Gains on cash flow hedges
- Net fair value gains		3	-
Exchange differences on translation of foreign operations		71	(13)
		74	(13)

Other comprehensive income/(loss) for the year, net of tax		74	(14)
Total comprehensive income/(loss) for the year		127	(94)

Attributable to equity holders of the parent		120	(96)
Attributable to non-controlling interests		7	2
		127	(94)

WH Smith PLC

Group Balance Sheet

As at 31 August 2022

£m	Note		2022	2021
Non-current assets
Goodwill	10		471	406
Other intangible assets	10		72	67
Property, plant and equipment	11		219	174
Right-of-use assets	12		446	328
Investments in joint ventures			2	2
Deferred tax assets			55	57
Trade and other receivables			9	6
			1,274	1,040
Current assets
Inventories			198	135
Trade and other receivables			87	45
Derivative financial assets			1	-
Cash and cash equivalents	8		132	130
			418	310
Total assets			1,692	1,350
Current liabilities
Trade and other payables			(365)	(265)
Bank overdrafts and other borrowings	8		(20)	-
Retirement benefit obligations	15		-	(1)
Lease liabilities	13		(131)	(108)
Current tax liability			(1)	-
Short-term provisions			-	(2)
			(517)	(376)

Non-current liabilities
Retirement benefit obligations	15		-	(2)
Bank loans and other borrowings	8		(404)	(415)
Long-term provisions			(14)	(12)
Lease liabilities	13		(446)	(362)
			(864)	(791)
Total liabilities			(1,381)	(1,167)
Total net assets			311	183

Shareholders' equity
Called up share capital		29		29
Share premium		316		316
Capital redemption reserve		13		13
Translation reserve		43		(27)
Other reserves		(244)		(240)
Retained earnings		138		82
Total equity attributable to equity holders of the parent		295		173
Non-controlling interests		16		10
Total equity		311		183

WH Smith PLC

Group Cash Flow Statement

For the year ended 31 August 2022

£m	Note	2022	2021
Operating activities
Cash generated from operating activities	9	213	113
Interest paid¹		(26)	(13)
Net cash inflow from operating activities		187	100
Investing activities
Purchase of property, plant and equipment		(70)	(37)
Purchase of intangible assets		(13)	(7)
Acquisition of subsidiaries, net of cash acquired		-	1
Net cash outflow from investing activities		(83)	(43)
Financing activities
Distributions to non-controlling interests		(1)	-
Issue of new shares for employee share schemes		-	1
Purchase of own shares for employee share schemes		(7)	(2)
Proceeds from issuance of convertible bonds	8	-	327
Repayment of borrowings	8	-	(267)
Financing arrangement fees		-	(8)
Capital repayments of obligations under leases	8	(96)	(86)
Net cash outflow from financing activities		(104)	(35)

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

Opening cash and cash equivalents		130	108
Effect of movements in foreign exchange rates		2	-
Closing cash and cash equivalents		132	130

¹ Includes interest payments of £11m on lease liabilities (2021: £5m).

WH Smith PLC

Group Statement of Changes in Equity

For the year ended 31 August 2022

£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 2021	345	13	(27)	(240)	82	173		10	183
Profit for the year	-	-	-	-	47	47		6	53
Other comprehensive income:
Cash flow hedges	-	-	-	3	-	3		-	3
Exchange differences on translation of foreign operations	-	-	70	-	-	70		1	71
Total comprehensive income for the year	-	-	70	3	47	120		7	127

Employee share schemes	-	-	-	(7)	9	2		-	2
Non cash movement on non-controlling interests	-	-	-	-	-	-		(1)	(1)
Balance at 31 August 2022	345	13	43	(244)	138	295		16	311

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 15)	-	-	-	-	(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 8)	-	-	-	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

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

1. Basis of preparation

Whilst the information included in the consolidated financial statements has been prepared in accordance with UK-adopted International Accounting Standards in conformity with the requirements of the Companies Act 2006, 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 2021 have been delivered to the Registrar of Companies and those for 2022 will be delivered following the Company's Annual General Meeting. The Annual Report for the year ending 31 August 2022 and this full year results statement were approved by the Board on 10 November 2022. The auditors have reported on the Annual Report for the years ended on 31 August 2022 and 2021 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 2022 has 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 2021 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 2022. The Group has considered the below new standards and amendments and has concluded that they are either not relevant to the Group or they do not have a significant impact on the Group's consolidated financial statements.

Amendment to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16

Interest rate benchmark reform - Phase 2

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:

Amendments to IAS 16	Proceeds before intended use
Amendments to IAS 37	Onerous contracts - cost of fulfilling a contract
Narrow scope amendments to IAS 1 and IAS 8

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 (APM's)

The Group has identified certain measures 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, Headline EBITDA, Net debt/funds and Headline net debt/funds and free cash flow. These APMs are set out in the Glossary on page 47 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 2022

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 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, these 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 Group overview describes the Group's financial position, cash flows and borrowing facilities and also highlights the principal risks and uncertainties facing the Group. 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.

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 2024. Based on this assessment, which is outlined below, it is appropriate to adopt the going concern basis of accounting in preparing these financial statements.

In making the going concern assessment, the directors have modelled a number of scenarios for the period to February 2024. The base case scenario is consistent with the Board approved 2023 Budget and the three year plan. Under this scenario the Group has significant liquidity and comfortably complies with all covenant tests to February 2024.

As a result of inherent uncertainties due to the impact of Covid-19 and challenges in the macroeconomic

environment, a severe but plausible scenario has also been modelled which assumes a 10 per cent reduction in revenue versus base case across all our businesses (Travel UK, North America, Rest of the World and High Street). We have also assumed a 5 per cent increase in labour costs against base case and a 50 per cent increase in energy costs against base case where energy costs have not been fixed. Apart from an equal reduction in turnover rents in our Travel businesses, we have not assumed any decrease in other variable costs.

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.

The covenants on the above facilities are tested half-yearly. The covenant test at 31 August 2022 is based on minimum liquidity. The covenant tests as at 28 February 2023, 31 August 2023 and 28 February 2024 are 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.

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.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

1. Basis of preparation (continued)

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, and other non-current assets and inventory valuation.

Critical accounting judgements

Non-underlying items

The definition of non-underlying items is shown on page 25. The classification of items as non-underlying requires 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.

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 the pre-tax discount rate. Due to the effects of the 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 11 and 12 respectively.

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.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

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 which comprise four reportable segments - Travel UK, North America, Rest of the World within the Travel division, and High Street.

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 47 (Note A2).

Revenue

£m	2022	2021
Travel UK	521	195
North America	288	166
Rest of the World¹	118	40
Total Travel	927	401
High Street	473	485
Group revenue	1,400	886

¹ Rest of the World revenue includes revenue from Australia of £40m (2021: £20m). No other country has individually material revenue.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

2. Segmental analysis of results (continued)

b)	Group results

		2022				2021
£m	Headline before non-underlying items¹ (pre-IFRS 16)		Headline non-underlying items¹ (pre-IFRS16)	IFRS 16	Total	Headline before non-underlying items¹ (pre-IFRS 16)	Headline non-underlying items¹ (pre-IFRS16)	IFRS 16	Total

Travel UK trading profit/(loss)	54		-	6	60	(32)	-	3	(29)
North America trading profit/(loss)	31		-	2	33	6	-	(4)	2
Rest of the World trading profit/(loss)	4		-	(1)	3	(13)	-	(4)	(17)
Total Travel trading profit/(loss)	89		-	7	96	(39)	-	(5)	(44)
High Street trading profit	33		-	12	45	19	-	17	36
Group profit/(loss) from trading operations	122		-	19	141	(20)	-	12	(8)
Unallocated central costs	(24)		-	-	(24)	(19)	-	-	(19)
Group operating profit/(loss) before non-underlying items	98		-	19	117	(39)	-	12	(27)
Non-underlying items (Note 4)	-		(12)	(8)	(20)	-	(49)	(16)	(65)
Group operating profit/(loss)	98		(12)	11	97	(39)	(49)	(4)	(92)
Finance costs	(25)		-	(9)	(34)	(16)	-	(8)	(24)
Profit/(loss) before tax	73		(12)	2	63	(55)	(49)	(12)	(116)
Income tax (expense)/credit	(12)		3	(1)	(10)	26	9	1	36
Profit/(loss) for the year	61		(9)	1	53	(29)	(40)	(11)	(80)

¹ Presented on a pre-IFRS 16 basis. Alternative Performance Measures are defined and explained in the Glossary on page 47.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

2. Segmental analysis of results (continued)

c)	Other segmental items

	2022
	Non-current assets¹			Right-of-use assets
£m	Capital additions	Depreciation and amortisation	Impairment	Depreciation	Impairment

Travel UK	30	(16)	-	-	-
North America	22	(11)	-	-	-
Rest of the World	13	(2)	-	-	-
Total Travel	65	(29)	-	-	-
High Street	25	(15)	(2)	-	-
Unallocated	-	(3)	-	-	-
Headline, before non-underlying items (pre-IFRS 16)	90	(47)	(2)	-	-
Headline non-underlying items (pre-IFRS 16)	-	(3)	(6)	-	-
Headline, after non-underlying items (pre-IFRS 16)	90	(50)	(8)	-	-
Impact of IFRS 16	-	-	-	(81)	-
Non-underlying items (IFRS 16)	-	-	-	-	(8)
Group	90	(50)	(8)	(81)	(8)

	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 (pre-IFRS 16)	44	(48)	(2)	-	-
Headline non-underlying items (pre-IFRS 16)	-	(3)	(18)	-	-
Headline, after non-underlying items (pre-IFRS 16)	44	(51)	(20)	-	-
Impact of IFRS 16	-	1	-	(84)	-
Non-underlying items (IFRS 16)	-	-	4	-	(28)
Group	44	(50)	(16)	(84)	(28)

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 2022

3. Group operating profit

		2022			2021
£m	Note	Before non-underlying items	Non-underlying items	Total	Before non-underlying items	Non-underlying items	Total

Revenue		1,400	-	1,400	886	-	886
Cost of sales		(538)	-	(538)	(358)	-	(358)
Gross profit		862	-	862	528	-	528
Distribution costs¹		(588)	-	(588)	(419)	-	(419)
Administrative expenses		(161)	-	(161)	(140)	-	(140)
Other income²		4	-	4	4	-	4
Non-underlying items	4	-	(20)	(20)	-	(65)	(65)
Group operating profit		117	(20)	97	(27)	(65)	(92)

¹ During the year there was an underlying impairment charge of £2m (2021: £2m) for property, plant and equipment and other intangible assets included in distribution costs. Other impairment charges related to Covid-19 are included in non-underlying items. See Note 4.

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

£m	2022	2021
Cost of inventories recognised as an expense	538	358
Write-down of inventories in the year³	2	7
Depreciation of property, plant and equipment	37	36
Depreciation of right-of-use assets
- land and buildings	78	80
- other	3	4
Amortisation of intangible assets	13	14
Impairment of property, plant and equipment	7	16
Impairment of right-of-use assets	8	28
Impairment of intangibles	1	-
(Income)/expenses relating to leasing:
- expense relating to short-term leases	17	14
- expense relating to variable lease payments not included in the measurement of the lease liability	29	27
- income relating to Covid-19 rent reductions	(5)	(23)
Other occupancy costs	59	27
Staff costs	293	232
Government grant income	-	(11)

³ Write-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 2022

4. Non-underlying items

Items which are not considered part of the normal operating costs of the business, are non-recurring or are considered exceptional because of their size, nature or 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 Financial Review on page 12.

£m	2022	2021
Amortisation of acquired intangible assets	3	3
Costs related to cyber incident	4	-
Store impairments
- property, plant and equipment	5	14
- right-of-use assets	8	28
Write-down of inventories	-	5
Restructuring costs	-	9
Costs associated with refinancing	-	6
Costs associated business combinations	-	2
Other	-	(2)
Non-underlying items, before tax	20	65
Tax credit on non-underlying items	(4)	(12)
Non-underlying items, after tax	16	53

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

Amortisation of acquired intangible assets

Amortisation of acquired intangible assets primarily relates to the MRG and InMotion brands (see Note 10).

Costs related to cyber incident

Costs of £4m incurred due to a cyber security incident in relation to one of the Group's websites include impairment of

software assets of £1m, third party consultancy support and legal and other costs.

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

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 latest view of the recovery from Covid-19, to the carrying values at 31 August 2022. As a result of this exercise, a charge of £13m (2021: £42m) was recorded within non-underlying items for impairment of retail store assets, of which £5m (2021: £14m) relates to property, plant and equipment and £8m (2021: £28m) relates to right-of-use assets. Refer to Note 11 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 47.

A tax credit of £4m (2021: £12m) has been recognised in relation to non-underlying items.

Other prior year non-underlying items

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

5. Finance costs

£m	2022	2021
Interest payable on bank loans and overdrafts	9	10
Interest on convertible bonds	14	4
Interest on lease liabilities	11	10
	34	24

6. Income tax

£m	2022	2021
Tax on profit/loss	6	-
Standard rate of UK corporation tax 19% (2021: 19%)
Adjustment in respect of prior years	-	(1)
Total current tax expense/(credit)	6	(1)
Deferred tax - current year	8	(11)
Deferred tax - prior year	-	(4)
Deferred tax - adjustment in respect of change in tax rates	-	(8)
Tax expense/(credit) on profit/loss before non-underlying items	14	(24)
Tax on non-underlying items - current tax	-	-
Tax on non-underlying items - deferred tax	(4)	(12)
Total tax expense/(credit) on profit/loss	10	(36)

Reconciliation of the taxation charge/(credit)

£m	2022	2021
Tax on profit/loss at standard rate of UK corporation tax 19% (2021: 19%)	12	(22)
Tax effect of items that are not deductible or not taxable in determining taxable loss	-	1
Unrecognised tax losses	(1)	(1)
Differences in overseas tax rates	(1)	(1)
Adjustment in respect of prior years	-	(5)
Adjustment in respect of change in tax rates	-	(8)
Total income tax expense/(credit)	10	(36)

The effective tax rate, before non-underlying items, is 17 per cent (2021: 47 per cent). The effective tax rate is lower than the prior year rate and the UK corporation tax rate of 19 per cent primarily due to the recognition of brought forward previously unrecognised tax losses and the prior year effective tax rate included a credit arising on the UK tax rate change which was substantively enacted on the 24 May 2021 from 19 to 25 per cent.

The UK corporation tax rate is 19 per cent. In the Spring Budget 2021, 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 has been factored into 31 August 2021 year end financial statements.

The OECD has published a framework for the introduction of a global minimum effective tax rate of 15 per cent, applicable to large multinational groups. On 20 July 2022, HM Treasury released draft legislation to implement these 'Pillar 2' rules with effect for accounting periods beginning on or after 31 December 2023. The Group is reviewing these draft rules to determine any potential impact.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

7. Earnings per share

a)	Earnings/(loss)

£m	2022	2021
Profit/(loss) for the year, attributable to equity holders of the parent	47	(82)
Non-underlying items (Note 4)	16	53
Profit/(loss) for the year before non-underlying items, attributable to equity holders of the parent	63	(29)

b)	Weighted average share capital

Millions	2022	2021
Weighted average ordinary shares in issue	130	131
Less weighted average ordinary shares held in ESOP Trust	-	-
Weighted average shares in issue for earnings per share	130	131
Add weighted average number of ordinary shares under option	2	-
Weighted average ordinary shares for diluted earnings per share	132	131

c)	Basic and diluted earnings/(loss) per share

Pence	2022	2021
Basic earnings/(loss) per share	36.2	(62.6)
Adjustment for non-underlying items	12.3	40.5
Basic earnings/(loss) per share before non-underlying items	48.5	(22.1)

Diluted earnings/(loss) per share	35.6	(62.6)
Adjustment for non-underlying items	12.1	40.5
Diluted earnings/(loss) per share before non-underlying items	47.7	(22.1)

Diluted earnings 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 incurred a loss in the year ended 31 August 2021, the impact of its potential dilutive ordinary shares was excluded as they would have been anti-dilutive.

As at 31 August 2022 the convertible bond has no dilutive effect as the inclusion of these potentially dilutive shares would improve earnings per share (31 August 2021: improve loss per share).

The calculation of earnings per share on a pre-IFRS 16 basis is provided in the Glossary on page 47.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

8. 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 2021	(132)	(283)	-	(470)	(885)	130	(755)
Other non-cash movements	-	(9)	-	(184)	(193)	-	(193)
Other cash movements	-	-	-	107	107	-	107
Currency translation	-	-	-	(30)	(30)	2	(28)
At 31 August 2022	(132)	(292)	-	(577)	(1,001)	132	(869)

£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)

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

8. 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 47.

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

In the prior year, 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.

The Group has in place a four 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 2022, the Group has drawn down £nil on this facility (2021: £nil).

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. Instalments due within the next 12 months are recorded in current liabilities.

Transaction costs of £1m (2021: £1m) relating to the term loan are amortised to the Income statement through the effective interest rate method. Transaction costs of £1m (2021: £1m) relating to the RCF were capitalised in the previous financial year and are amortised to the Income statement on a straight-line basis.

Convertible bonds

In the prior year, the Group issued £327m of guaranteed senior unsecured convertible bonds due in 2026. The bond of £327m covers a five-year term beginning on 7 May 2021 with a 1.625 per cent 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 per cent 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 was 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 was 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 2022

9. Cash generated from operating activities

£m	2022	2021
Group operating profit/(loss)	97	(92)
Depreciation of property, plant and equipment	37	36
Impairment of property, plant and equipment	7	16
Amortisation of intangible assets	13	14
Impairment of intangible assets	1	-
Depreciation of right-of-use assets	81	84
Impairment of right-of-use assets	8	28
Non-cash change in lease liabilities	(5)	(23)
Share-based payments	9	6
Gain on remeasurement of leases	(4)	(3)
Other non-cash items (incl. foreign exchange)	(12)	(2)
(Increase)/decrease in inventories	(56)	14
(Increase)/decrease in receivables	(42)	4
Increase in payables	88	24
Pension funding	(2)	(3)
Income taxes paid	(6)	-
Income taxes refunded	-	10
Movement on provisions (through utilisation or income statement)	(1)	-
Cash generated from operating activities	213	113

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

10. Intangible assets

£m	Goodwill	Brands and franchise contracts	Tenancy rights	Software	Total
Cost:
At 1 September 2021	406	42	13	102	563
Additions	-	-	-	13	13
Disposals	-	-	-	(2)	(2)
Foreign exchange	65	8	-	1	74
At 31 August 2022	471	50	13	114	648
Accumulated amortisation:
At 1 September 2021	-	7	8	75	90
Amortisation charge	-	3	-	10	13
Impairment charge	-	-	-	1	1
Disposals	-	-	-	(2)	(2)
Foreign exchange	-	2	-	1	3
At 31 August 2022	-	12	8	85	105
Net book value at 31 August 2022	471	38	5	29	543

Cost:
At 1 September 2020	418	43	13	96	570
Acquisitions	(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

Goodwill of USD $70m (£60m) relating to the acquisition of InMotion in 2018 is expected to be deductible for tax purposes in the future.

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

£m	2022	2021
Travel UK	295	253
North America	132	113
Rest of the World	29	25
Total Travel	456	391
High Street	15	15
	471	406

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

10. Intangible assets (continued)

Included within Tenancy rights are certain assets that are considered to have an indefinite life of £4m (2021: £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 Group 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. 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.

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 11.9 per cent (2021: 10.4 per cent).

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

The immediately quantifiable impacts of climate change and costs expected to be incurred in connection with our net zero commitments, are included within the Group's budget and three year plan which have been used to support the impairment reviews, with no material impact on cash flows.

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 (2021: £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 inherent uncertainties due to challenges in the macroeconomic environment and the continued recovery from Covid-19, 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.

Furthermore, outputs of quantitative climate change scenario analysis have also been taken into consideration in the sensitivity analysis, and has shown that climate change is not considered to be a key driver in determining the outcome.

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 2022

11. Property, plant and equipment

	Land and buildings
£m	Freehold Properties		Leasehold improvements		Fixtures and fittings	Equipment and vehicles	Total
Cost or valuation:
At 1 September 2021		18		290	196	110	614
Additions		-		32	29	16	77
Disposals		-		(3)	(1)	(1)	(5)
Foreign exchange		-		10	8	2	20
At 31 August 2022		18		329	232	127	706
Accumulated depreciation:
At 1 September 2021		10		206	140	84	440
Depreciation charge		-		19	11	7	37
Impairment charge		-		4	2	1	7
Disposals		-		(3)	(1)	(1)	(5)
Foreign exchange		-		4	3	1	8
At 31 August 2022		10		230	155	92	487
Net book value at 31 August 2022		8		99	77	35	219
Cost or valuation:
At 1 September 2020		15		272	198	108	593
Additions		3		12	15	7	37
Acquisitions		-		(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

Impairment of property, plant and equipment

For impairment testing purposes, the Group has determined that each store is a separate CGU. CGU's are tested for impairment at the balance sheet date if any indicators of impairment have been identified. The identified indicators include loss-making stores, stores earmarked for closure, and under-performance of individual stores versus forecast as a result of slower than expected recovery from Covid-19.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

11. Property, plant and equipment (continued)

Impairment of property, plant and equipment (continued)

For those CGUs where an indicator of impairment has been identified, property, plant and equipment and right-of-use assets have been tested for impairment by comparing the carrying amount of the 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.

The value-in-use of CGUs is calculated using discounted cash flows derived from the Group's latest Board-approved budget and three-year plan, taking into account the projected recovery from Covid-19, and reflects historic performance and knowledge of the current market, together with the Group's views on the future achievable growth for these specific stores. Cash flows beyond the forecast 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 immediately quantifiable impacts of climate change and costs expected to be incurred in connection with our net zero commitments, are included within the Group's budget and three year plan which have been used to support the impairment reviews, with no material impact on cash flows. The useful economic lives of store assets are short in the context of climate change scenario models therefore no medium to long-term effects have been considered.

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 recovery 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 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 11.9 per cent (2021: 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 £18m, which is their carrying value at year end. The Group has recognised an impairment charge of £7m (2021: £16m) to property, plant and equipment, £1m (2021: £nil) to software and £8m (2021: £28m) right-of-use assets. Impairments of £14m (2021: £42m) have been presented as non-underlying items in the current year (see Note 4), and impairments of £2m (2021: £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 the continued recovery from 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 charge of changes in key assumptions. The most significant assumption is the revenue assumption. The impact of a 10 per cent reduction in revenue in the relevant CGUs, with no change to subsequent forecast revenue growth rate assumptions, has been modelled. This would result in a £15m increase in the impairment charge of retail store assets in the year ended 31 August 2022.

Other changes in assumptions, including an increase or decrease of 1 per cent in the discount rate, have been modelled and have shown that any reasonably possible changes would not lead to a significant impact on the impairment charge.

The impairment assessment has also been performed on a pre-IFRS 16 basis. See Glossary on page 47.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

12. Right-of-use assets

£m	Land and buildings	Equipment	Total

At 1 September 2021	319	9	328
Additions	160	-	160
Modifications and remeasurements	25	-	25
Disposals	(2)	-	(2)
Depreciation charge	(78)	(3)	(81)
Impairment charge	(8)	-	(8)
Effect of movements in foreign exchange rates	24	-	24
Net book value at 31 August 2022	440	6	446

£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

Impairment of right-of-use assets

Right-of-use assets of £8m (2021: £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 11, Property, plant and equipment.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

13. Lease liabilities

£m	Land and buildings	Equipment	Total
At 1 September 2021	463	7	470
Additions	159	-	159
Modifications and remeasurements	18	-	18
Disposals	(4)	-	(4)
Interest	11	-	11
Payments	(103)	(4)	(107)
Effect of movements in foreign exchange rates	30	-	30
At 31 August 2022	574	3	577

£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	2022	2021
Analysis of total lease liabilities:
Non-current	446	362
Current	131	108
Total	577	470

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, 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 2022

13. 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 £5m for the year ended 31 August 2022 (2021: £23m).

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 12. Interest expense incurred on lease liabilities is presented in Note 5.

The total cash outflow for leases in the financial year was £150m (2021: £123m). This includes cash outflow for short-term leases of £16m (2021: £14m) and variable lease payments (not included in the measurement of lease liability) of £28m (2021: £18m). The total future income from sub-leasing the right-of-use assets is £1m (2021: £1m).

14. Contingent liabilities and capital commitments

£m	2022	2021
Bank guarantees and guarantees in respect of lease agreements	51	31

Contracts placed for future capital expenditure approved by the directors but not provided for in these financial statements amount to £30m (2021: £26m).

£m	2022	2021
Commitments in respect of property, plant and equipment	28	25
Commitments in respect of other intangible assets	2	1
	30	26

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

15. 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 benefit scheme, WHSmith Pension Trust and a defined contribution scheme, WH Smith Retirement Savings Plan. 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	2022	2021
WHSmith Pension Trust	-	(2)
United News Shops Retirement Benefits Scheme	-	(1)
Retirement benefit obligation recognised in the balance sheet	-	(3)
Recognised as:
Current liabilities	-	(1)
Non-current liabilities	-	(2)

WHSmith Pension Trust

In August 2022 the WH Smith Pension Trust purchased a bulk annuity insurance policy from Standard Life, part of

Phoenix Group, insuring all liabilities to pay all future defined benefit pensions to the Trust's 12,950 members and any

eligible dependants.

The insurance policy was purchased using most of the existing assets held within the Trust, without the need for the

Group to make any additional cash contributions. The bulk annuity policy matches the Trust's cash flow benefit obligations to its members, removing longevity and other demographic risks as well as investment, interest rate and inflation risks. As the purchase price of the annuity of £1.1bn was greater than the IAS 19 accounting value of the corresponding liabilities, an asset remeasurement loss of £508m has been recorded in other comprehensive income. This has been offset by actuarial gains on the liabilities due to changes in financial assumptions and experience of £337m, and gains relating to changes in amounts not recognised due to the effect of the asset ceiling of £169m.

As a result of this comprehensive risk-removal, WH Smith will not be required to make any future cash contributions into the Trust regarding defined benefit liabilities, therefore the previously recognised minimum funding liability (£2m as at 31 August 2021) has been derecognised. The prior year liability of £2m relates to the recognition of the schedule of contributions as a liability in accordance with the requirements of IFRIC 14. During the year ended 31 August 2022, prior to the completion of the buy-in transaction, the Group made a contribution of £2m to the scheme (2021: £3m) in accordance with the agreed funding schedule.

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

£m	2022	2021
Present value of the obligations	(813)	(1,172)
Fair value of plan assets	933	1,456
Surplus before consideration of asset ceiling	120	284
Amounts not recognised due to effect of asset ceiling	(120)	(284)
Additional liability recognised due to minimum funding requirements	-	(2)
Retirement benefit obligation recognised in the balance sheet	-	(2)

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 £120m (2021: £284m) available as a reduction of future contributions is £nil (2021: £nil). As a result, the Group has not recognised this IAS 19 surplus on the balance sheet.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

15. Retirement benefit obligations (continued)

Income statement

The amounts recognised in the income statement were as follows:

£m	2022	2021
Net interest cost on the defined benefit liability	-	-
Past service cost	-	-
	-	-

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

Statement of comprehensive income

Total (expense) / income recognised in the statement of comprehensive income ("SOCI"):

£m	2022	2021
Asset remeasurement (losses)/gains arising during the year	(508)	58
Actuarial (loss)/gain on defined benefit obligations arising from experience	(13)	5
Actuarial gain/(loss) on defined benefit obligations arising from changes in financial assumptions	350	(56)
Actuarial gain on defined benefit obligations arising from changes in demographic assumptions	-	1
Total actuarial (loss)/gain before consideration of asset ceiling	(171)	8
Gain/(loss) resulting from changes in amounts not recognised due to effect of asset ceiling excluding amounts recognised in net interest cost	169	(11)
Gain resulting from changes in additional liability due to minimum funding requirements excluding amounts recognised in net interest cost	2	1
Total actuarial loss recognised in other comprehensive income relating to the WH Smith Pension Trust	-	(2)
Actuarial gain recognised in other comprehensive income relating to the UNS scheme	-	1

Balance sheet

Movement in net retirement benefit liability during the period:

£m	2022	2021
At beginning of year	(2)	(3)
Contributions from the sponsoring companies	2	3
Actuarial losses on defined benefit pension schemes	-	(2)
At end of year	-	(2)

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2022

15. Retirement benefit obligations (continued)

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

%	2022	2021
Rate of increase in pension payments	3.30	3.35
Rate of increase in deferred pensions	3.30	2.55
Discount rate	4.20	1.75
RPI Inflation assumption	3.70	3.45
CPI Inflation assumption	3.30	2.55

WH Smith PLC

Glossary (unaudited)

For the year ended 31 August 2022

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

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

IFRS 16

The Group adopted IFRS 16 in the year ended 31 August 2020. 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.

Management have chosen to exclude the effects of IFRS 16 for the purposes of narrative commentary on the Group's performance and financial position in the Group Overview. The effect of IFRS 16 on the Group income statement is to front-load total lease expenses, being higher at the beginning of a lease contract, and lower towards the end of a contract, and this is further influenced by timing of renewals and contract wins, and lengths of contracts. As a result of these complexities, IFRS 16 measures of profit and EBITDA (used as a proxy for cash generation) do not provide meaningful KPIs or measures for the purposes of assessing performance, concession quality or for trend analysis, therefore management continue to use pre-IFRS 16 measures internally.

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 flows from operating activities being offset by a decrease in net cash flows from financing activities, as set out in Note A9 below. The balance sheet as at 31 August 2022 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)

For the year ended 31 August 2022

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 profit/(loss) before tax and non-underlying items	Group profit/(loss) before tax	See Group income statement and Note A1	Group profit/(loss) before tax and non-underlying items excludes the impact of non-underlying items as described below. A reconciliation from Group profit/(loss) before tax and non-underlying items to Group (loss)/profit before tax is provided on the Group income statement on page 19, and on a Headline (pre-IFRS 16) basis in Note A1.
Group profit/(loss) from trading operations and segment trading profit/(loss)	Group operating profit/(loss)	See Note 2 and Note A2	Group profit/(loss) from trading operations and segment trading profit/(loss) 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 profit/(loss) and Group profit/(loss) 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.
Earnings/(loss) per share before non-underlying items	Earnings/(loss) per share	Non-underlying items, see Note 7 and Note A4	Profit/(loss) 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 7 and on a Headline (pre-IFRS 16) basis in Note A4.
Headline EBITDA	Group operating profit/(loss)	Refer to definition	Headline EBITDA is Headline Group operating profit/(loss) before non-underlying items adjusted for pre-IFRS 16 depreciation, amortisation and impairment.
Effective tax rate	None	Non-underlying items	Total income tax charge/credit excluding the tax impact of non-underlying items divided by Group Headline profit/(loss) 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.

WH Smith PLC

Glossary (unaudited)

For the year ended 31 August 2022

APM	Closest equivalent IFRS measure		Reconciling items to IFRS measure		Definition and purpose
Income statement measures (continued)
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.
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.

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 Note A7 and 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 14, as part of the Financial Review.

WH Smith PLC

Glossary (unaudited)

For the year ended 31 August 2022

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

	2022
	pre-IFRS 16 basis			IFRS 16 Basis
£m	Headline, before non-underlying items	Headline non-underlying items	Headline	IFRS 16 adjustments	Total
Revenue	1,400	-	1,400	-	1,400
Cost of sales	(538)	-	(538)	-	(538)
Gross profit	862	-	862	-	862
Distribution costs	(604)	-	(604)	16	(588)
Administrative expenses	(160)	-	(160)	(1)	(161)
Other income	-	-	-	4	4
Non-underlying items	-	(12)	(12)	(8)	(20)
Group operating profit	98	(12)	86	11	97
Finance costs	(25)	-	(25)	(9)	(34)
Profit before tax	73	(12)	61	2	63
Income tax (charge)/credit	(12)	3	(9)	(1)	(10)
Profit for the year	61	(9)	52	1	53
Attributable to:
Equity holders of the parent	55	(9)	46	1	47
Non-controlling interests	6	-	6	-	6
	61	(9)	52	1	53

	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 year	(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)

WH Smith PLC

Glossary (unaudited)

For the year ended 31 August 2022

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

	2022
	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 profit	54	-	54	6	60
North America trading profit	31	-	31	2	33
Rest of the World trading profit/(loss)	4	-	4	(1)	3
Total Travel trading profit	89	-	89	7	96
High Street trading profit	33	-	33	12	45
Group profit from trading operations	122	-	122	19	141
Unallocated central costs	(24)	-	(24)	-	(24)
Group operating profit before non-underlying items	98	-	98	19	117
Non-underlying items	-	(12)	(12)	(8)	(20)
Group operating profit/(loss)	98	(12)	86	11	97

	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 central costs	(19)	-	(19)	-	(19)
Group operating (loss)/profit before non-underlying items	(39)	-	(39)	12	(27)
Non-underlying items	-	(49)	(49)	(16)	(65)
Group operating loss	(39)	(49)	(88)	(4)	(92)

WH Smith PLC

Glossary (unaudited)

For the year ended 31 August 2022

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

	2022				2021
£m		Headline (pre-IFRS 16)	IFRS 16 adjustments	Total		Headline (pre-IFRS 16)	IFRS 16 adjustments	Total
Profit/(loss) before tax and non-underlying items		73	10	83		(55)	4	(51)
Tax on profit		5	1	6		-	-	-
Standard rate of UK corporation tax 19.00% (2021: 19.00%)
Adjustment in respect of prior years		-	-	-		(1)	-	(1)
Total current tax charge/(credit)		5	1	6		(1)	-	(1)
Deferred tax - current year		7	1	8		(13)	2	(11)
Deferred tax - prior year		-	-	-		(4)	-	(4)
Deferred tax - adjustment in respect of change in tax rates		-	-	-		(8)	-	(8)
Tax charge/(credit) on Headline profit/loss		12	2	14		(26)	2	(24)
Tax on non-underlying items - current tax		-	-	-		-	-	-
Tax on non-underlying items - deferred tax		(3)	(1)	(4)		(9)	(3)	(12)
Total tax charge/(credit) on profit/loss		9	1	10		(35)	(1)	(36)

A4. Calculation of Headline and Statutory earnings per share

	2022			2021
millions		Basic EPS	Diluted EPS	Basic EPS	Diluted EPS
Weighted average shares in issue		130	132	131	131

	2022			2021
	Profit for the year attributable to equity holders of the parent	Basic EPS	Diluted EPS	Profit for the year attributable to equity holders of the parent	Basic EPS	Diluted EPS
	£m	pence	pence	£m	pence	pence
Headline (pre-IFRS-16 basis)
- Before non-underlying items	55	42.3	41.7	(31)	(23.7)	(23.7)
- Non-underlying items	(9)	(6.9)	(6.9)	(40)	(30.5)	(30.5)
Total	46	35.4	34.8	(71)	(54.2)	(54.2)

IFRS 16 adjustments
- Before non-underlying items	8	6.2	6.0	2	1.6	1.6
- Non-underlying items	(7)	(5.4)	(5.2)	(13)	(10.0)	(10.0)
Total	1	0.8	0.8	(11)	(8.4)	(8.4)

IFRS 16 basis
- Before non-underlying items	63	48.5	47.7	(29)	(22.1)	(22.1)
- Non-underlying items	(16)	(12.3)	(12.1)	(53)	(40.5)	(40.5)
Total	47	36.2	35.6	(82)	(62.6)	(62.6)

WH Smith PLC

Glossary (unaudited)

For the year ended 31 August 2022

A5. Fixed charges cover

£m	Note	2022	2021
Headline net finance costs (pre-IFRS 16)	A1	25	16
Net operating lease charges (pre-IFRS 16)	A11	241	151
Total fixed charges		266	167
Headline profit before tax and non-underlying items	A1	73	(55)
Headline profit before tax, non-underlying items and fixed charges		339	112
Fixed charges cover - times		1.3x	0.7x

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

	2022		2021
£m	Headline (pre-IFRS16)	IFRS 16	Headline (pre-IFRS16)	IFRS 16
Amortisation of acquired intangible assets	3	3	3	3
Costs related to cyber incident	4	4	-	-
Impairment
- property, plant and equipment	5	5	18	14
- right-of-use assets	-	8	-	28
Other property costs	-	-	5	-
Write-down of inventories	-	-	5	5
Restructuring costs	-	-	9	9
Costs associated with refinancing	-	-	6	6
Costs associated with business combinations	-	-	2	2
Other	-	-	1	(2)
Non-underlying items, before tax	12	20	49	65
Tax credit on non-underlying items	(3)	(4)	(9)	(12)
Non-underlying items, after tax	9	16	40	53

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 £4m (2021: £12m) has been recognised in relation to the above items (£3m pre-IFRS 16 (2021: £9m)).

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 11.9 per cent (2021: 10.4 per cent) and the pre-tax discount rate used in the pre-IFRS 16 calculation was 14.4 per cent (2021: 13.9 per cent).

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

WH Smith PLC

Glossary (unaudited)

For the year ended 31 August 2022

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. In the prior year, as a result of the impact of Covid-19, the Group included a charge of £5m for stores where we anticipate that 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	2022	2021
Cash generated from operating activities	9	213	113
Interest paid		(26)	(13)
Net cash inflow from operating activities		187	100
Cash flow impact of IFRS 16	A9	(93)	(83)
Add back:
- Cash impact of non-underlying items		16	38
- Pension funding		2	3
- Other non-cash items		12	-
Deduct:
- Purchase of property, plant and equipment		(70)	(37)
- Purchase of intangible assets		(13)	(7)
Free cash flow		41	14

A8. Headline net debt

£m	Note	2022	2021
Borrowings
- Revolving credit facility		-	-
- Convertible bonds		(292)	(283)
- Bank loans		(132)	(132)
- Lease liabilities	13	(577)	(470)
Liabilities from financing activities		(1,001)	(885)
Cash and cash equivalents		132	130
Net debt (IFRS 16)	8	(869)	(755)
- Add back lease liabilities recognised under IFRS 16¹		573	464
Headline net debt (pre-IFRS 16)		(296)	(291)

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

WH Smith PLC

Glossary (unaudited)

For the year ended 31 August 2022

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 flows from operating activities being offset by a decrease in net cash flows from financing activities.

	2022			2021
£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	94	93	187	17	83	100
Net cash outflows from investing activities	(83)	-	(83)	(43)	-	(43)
Net cash (outflows)/inflows from financing activities	(11)	(93)	(104)	48	(83)	(35)
Net increase in cash in the period	-	-	-	22	-	22

A10. Balance sheet impact of IFRS 16

The balance sheet including and excluding the impact of IFRS 16 is shown below:

	2022			2021
£m	Headline (pre-IFRS 16)	IFRS 16 Adjustment	IFRS 16	Headline (pre-IFRS 16)	IFRS 16 Adjustment	IFRS 16
Goodwill and other intangible assets	544	(1)	543	474	(1)	473
Property, plant and equipment	211	8	219	167	7	174
Right-of-use assets	-	446	446	-	328	328
Investments in joint ventures	2	-	2	2	-	2
	757	453	1,210	643	334	977

Inventories	198	-	198	135	-	135
Payables less receivables	(284)	15	(269)	(237)	23	(214)
Working capital	(86)	15	(71)	(102)	23	(79)

Derivative financial asset	1	-	1	-	-	-
Net current and deferred tax assets	54	-	54	46	10	56
Provisions	(26)	12	(14)	(28)	14	(14)
Operating assets employed	700	480	1,180	559	381	940
Net debt	(296)	(573)	(869)	(291)	(464)	(755)
Net assets excluding pension liability	404	(93)	311	268	(83)	185
Pension liability	-	-	-	(3)	-	(3)
Deferred tax asset on pension liability	-	-	-	1	-	1
Total net assets	404	(93)	311	266	(83)	183

WH Smith PLC

Glossary (unaudited)

For the year ended 31 August 2022

A11. Operating lease expense

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

£m	2022	2021
Net operating lease charges	241	151

In the year ended 31 August 2020, 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 47.

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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