Final Results

FOR THE YEAR ENDED 31 AUGUST 2023

A year of strong growth

Strong start to the new financial year with Total Travel revenue* up 16%

• Strong performance with Group revenue up 28% to £1,793m (2022: £1,400m)

o Total revenue in Travel UK up 36%; North America up 32%; Rest of the World ('ROW') up 99%

• Headline profit before tax and non-underlying items† up 96% to £143m (2022: £73m)

o Total Travel trading profit† of £164m (2022: £89m)

o High Street trading profit† of £32m (2022: £33m)

• Headline diluted EPS before non-underlying items† up 93% to 80.3p
• New store pipeline of over 110 stores‡ won and yet to open in Travel, including over 60 in North America
• Investing for growth with capex in the current financial year expected to be around £140m
• Proposed final dividend of 20.8p per share making full year dividend of 28.9p per share, reflecting strong trading and cash generation combined with confidence in future prospects
• Strong balance sheet with leverage now at 1.4x with further strengthening expected
• Strong start to the new financial year with continued momentum across our Travel markets. Total revenue in the first 9 weeks to 4 November 2023 up 13% in Travel UK; up 15%* in North America and up 27%* in ROW

Carl Cowling, Group Chief Executive, commented:

"This has been another year of significant progress for the Group. Our Travel divisions have all seen strong growth with Travel UK total revenue up 36%, North America up 32% and ROW up 99%, and I am very pleased with the start to the new financial year.

"Our global travel business is growing in all our key markets. It is highly scalable with multiple medium and long term growth opportunities and we are seeing great results from sharing our expertise and innovation across our different geographies. Our North American business is benefitting from our forensic approach to space management which has always been a key feature of our UK Travel operations. In the same way, the ability of our North American business to provide bespoke retail formats is now being successfully harnessed outside of the US.

"WHSmith is a highly cash generative business. In 2024, we expect to invest a further £140m which will drive further growth and at the same time we expect our leverage to fall within our target range.

"These results would not be possible without the extraordinary efforts of our entire team across the globe, and I would like to offer my sincere thanks for their support.

"The Board's decision to propose an increase to the final dividend to 20.8p per share, making a full year dividend of 28.9p per share, reflects the good performance, the Group's cash generation and our confidence in the future given the multiple growth opportunities that exist for WHSmith.

"We have started the new financial year well with total revenue in Travel UK up 13%, North America up 15%, and ROW up 27%. With good trading and very positive prospects, despite the uncertainty in the economic environment, we are confident in the Group's outlook for the new financial year."

* On a constant currency basis

† Pre-IFRS 16

‡ Pipeline as at 31 August 2023

Group financial summary:

Headline

1 Alternative Performance Measure (APM) defined and explained in the Glossary on page 44.

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 2023 and 31 August 2022 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 44. 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.

WH Smith PLC's Preliminary Results 2023 are available at whsmithplc.co.uk.

GROUP OVERVIEW

The Group has had another very successful year with Total Travel generating Headline trading profit1 of £164m (2022: £89m), Headline Group profit before tax and non-underlying items1 up 96% to £143m (2022: £73m) and Headline diluted EPS before non-underlying items1 up 93% to 80.3p (2022: 41.7p). The new financial year has started well with good momentum across all our Travel markets.

The pace of winning new business in Travel remains strong. Across the UK, North America and Rest of the World we won 92 stores in the year and now have over 110 stores won and due to open, of which we expect over 100 to open this financial year whilst closing 22 stores as we focus on better quality space.

Travel is well positioned to continue to create value through the structurally advantaged markets in which it operates and the considerable opportunities to win and open additional stores. Analysis from the International Air Transport Association ('IATA') suggests that passenger numbers will return to 2019 levels during calendar year 2024 and will continue to grow in low single digits each year thereafter in the medium term.

We utilise our forensic approach to retailing to drive average transaction value (''ATV') growth and space management to increase the spend per passenger in our stores. This, combined with scalability in the significant opportunities to win and open new stores, gives us the confidence to continue to grow revenue, profit, cash generation, and through operational gearing, grow our EBIT margins.

We have made substantial progress and saw significant growth in the year, 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 Internationalising 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 £140m);

o Productivity and efficiencies

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

In the year, Travel was approximately 75% of Group revenue and 85% of Headline Group profit from trading operations. Both of these measures will increase as we continue to grow Travel which reinforces that we are now a global travel retailer.

Group revenue

Revenue (% change) Year to 31 August 2023

3 Constant currency

4 Includes internet businesses

Total Group revenue at £1,793m (2022: £1,400m) was up 28% compared to the prior year.

In Travel, we saw a strong performance across all our markets with Total Travel revenue up 43% and up 27% on a like-for-like1 ('LFL') basis. This was driven by strong performances in all three Travel divisions, with Travel UK up 36% on a total basis, North America up 32%, and ROW up 99%.

We saw a consistently good performance in High Street throughout the year, with the Christmas trading period flat year on year on a LFL basis.

Passenger numbers have recovered strongly during the year and momentum has continued into the new financial year.

Group profit

Total Travel delivered a Headline trading profit1 in the year of £164m (2022: £89m) with all three divisions growing significantly: Travel UK increased by £48m to £102m; North America increased by £18m to £49m; and ROW increased by £9m to £13m.

High Street delivered a Headline trading profit1 of £32m (2022: £33m), in line with expectations.

Headline Group profit from trading operations1 for the year was £196m (2022: £122m) with Headline Group profit before tax and non-underlying items1 up 96% to £143m (2022: £73m).

The Group profit before tax, including non-underlying items and on an IFRS 16 basis, was £110m (2022: £63m) in the year.

Group balance sheet

The Group has a strong balance sheet, is highly cash generative and has substantial liquidity.

The Group has the following cash and committed facilities as at 31 August 2023:

5 Cash and cash equivalents comprises cash on deposit of £34m and cash in transit of £22m

6 Draw down of £84m as at 31 August 2023

In June 2023, we completed the refinancing of the Group's borrowing facilities with a new 5 year sustainability-linked revolving credit facility ('RCF'). The Group also has a £327m convertible bond with a maturity of 7 May 2026 which has a fixed coupon of 1.625%.

As at 31 August 2023, Headline net debt1 was £330m (2022: £296m) and the Group has access to c.£350m of liquidity. Leverage at the year end was 1.4x Headline EBITDA1. We expect to be within our leverage envelope of between 0.75x and 1.25x Headline EBITDA1 by the end of this financial year.

Group cash flow

The Group generated an operating cash flow1 of £235m in the year (2022: £155m) demonstrating the cash generative nature of the business. Capex was £122m (2022: £83m) as we continued to invest in new stores, IT, energy efficient chillers and other store equipment. As expected, we had a working capital outflow of £64m in the year (2022: £10m). This mainly relates to investment in new stores, the recovering Travel business and some timing. Most of the outflow was in the first half. This year, we expect a much smaller outflow mainly relating to opening new stores. In total, there was a free cash inflow in the year of £20m (2022: £41m). This year we would expect, subject to investment opportunities, an increase in free cash generation, and net debt to be around £310m.

Capital allocation policy

• investing in our existing business and in new opportunities where rates of return are ahead of the cost of capital; this year, we expect capex of c.£140m
• paying a dividend. We have a progressive dividend policy with a target dividend cover, over time, of 2.5x; the Board is proposing a full year dividend of 28.9p per share
• undertaking attractive value-creating acquisitions in strong and growing markets; and
• returning surplus cash to shareholders via share buy backs.

The Board has proposed a final dividend of 20.8p per share in respect of the financial year ended 31 August 2023, which together with the interim dividend, gives a full year dividend of 28.9p per share. This reflects the cash generative nature of the business and our confidence in the future prospects of the Group. Subject to shareholder approval, the dividend will be paid on 1 February 2024 to shareholders registered at the close of business on 12 January 2024.

TOTAL TRAVEL

Total Travel revenue was £1,324m (2022: £927m), up 43% compared to the previous year, generating a Total Travel Headline trading profit1 in the year of £164m (2022: £89m).

In Travel, our initiatives position us well for future growth:

• Space 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 opened 118 stores and we now have a store pipeline of over 110 stores. Going forward, we expect to win, on average, around 50 to 60 stores a year. There are significant space growth opportunities across all our Travel markets.

ATV growth

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 good 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 such as premium food ranges. Throughout the year, we have continued to focus on identifying further opportunities where we can reposition our traditional news, books and convenience ('NBC') format to a one-stop-shop travel essentials format. The results from our one-stop-shop stores have been positive.

Cost and cash management

We remain focused on cost efficiency and productivity, for example, by investing in more energy efficient chillers in-store and increasing the number of self scan tills, particularly in North America.

TRAVEL UK

Travel UK, our largest division, has delivered a year of significant growth and we continue to have good opportunities to grow this division further.

Air passenger numbers still remain below pre-pandemic levels and we are confident that, as passenger numbers continue to recover, this division will see an ongoing improvement in profitability as we leverage our fixed cost base. All our channels in Travel UK have performed strongly during the year with total revenue growth of 36% versus last year. We have started the new financial year strongly with all three channels delivering good growth.

Revenue (% change) Year to 31 August 2023

Total revenue in the year was £709m (2022: £521m) which, together with improved margins, resulted in a Headline trading profit1 of £102m (2022: £54m).

We are investing in our UK store portfolio while also identifying new and better quality space opportunities across each of our channels. During the year, we have made excellent progress opening 20 new stores, including 6 at airports, 8 in hospitals and 3 in rail. We see this annual space growth of around 15 new stores in Travel UK extending into the medium term. We closed 19 small and less well located stores in the year. This year, we expect to open over 15 new stores in the UK, of which 12 are already contracted, and close 4 stores.

Air

Air, which is the biggest channel in Travel UK, delivered a strong performance with total revenue up 48% and LFL revenue up 37% on the prior year.

We continually develop our retail formats to better address the changing requirements of airport landlords and customers.

Our one-stop-shop for travel essentials format continues to generate significant opportunities across all channels and improve profitability. We have a very strong customer proposition which is tailored to each location and channel. Next week, we will open our largest UK Travel store. This is a 6,000 sq ft flagship one-stop-shop for travel essentials store at Birmingham International airport, further developing this format. This new store will be tailored to the requirements of the landlord and provides passengers with a bespoke, localised customer experience by drawing on our experience from North America. The store will offer everything you would expect from a WHSmith, as well as a broader product range, large health and beauty and tech zones, and coffee.

By extending our categories such as health and beauty, tech and food to go, we are able to provide time-pressed customers with all their travel essentials under one roof with a fast and convenient shopping experience. This enables us to expose both new and existing customers to a broader range of categories, which has resulted in an increase in sales per square foot, a higher ATV and spend per passenger. This delivers superior returns with improved margins and attractive economics for our landlords.

Hospitals

The hospital channel, our second largest channel in Travel UK by revenue, continued its very strong growth with total revenue up 32% and LFL revenue up 26% in the year.

This is a growing channel for us with significant opportunities to continue to increase our space and improve the retail proposition using our broad suite of brands. During the year, we opened 8 new stores, including Royal Liverpool and Royal Sussex hospitals. Looking ahead, we have a good pipeline of opportunities in this channel, where we see scope for at least one of our four formats (WHSmith, Marks & Spencer Simply Food, Costa Coffee, and our proprietary coffee brands) in up to 200 further hospitals.

We are excited by the opportunity to grow our coffee offer. By using our expertise in localisation from our North American business, we have recently won two new stores in Sheffield hospitals under a new coffee concept. Working with local artists and roasteries, we have designed a bespoke store with a local coffee offer.

Rail

Our Rail channel is our smallest channel in Travel UK representing around 15% of revenue. It is an attractive market and has proven to be resilient, delivering a good performance in the year despite the ongoing impact of industrial action.

We have seen a very encouraging return of passengers with leisure and weekend passengers recovering the fastest. We know from our segmentation and return on space analysis that leisure is our most valuable customer segment.

We continue to invest in Rail in new formats and in new opportunities to meet landlord and customer needs. During the year, we successfully completed the refit of our London Paddington store to a one-stop-shop format, extending our health and beauty ranges from 1 metre of space to 8 metres of space and allocating more space to tech. This has been very well received by customers and driven strong sales.

curi.o.city

In line with our strategy to develop our retail formats, we have recently launched a new premium souvenir and gifting brand, curi.o.city. This new concept demonstrates how we are able to adapt, innovate and create a bespoke, localised brand and product offer. In addition to providing a new shopping experience for travellers, this format also offers an incremental sales opportunity in locations where we already have a WHSmith store by selling high margin categories such as souvenirs and fashion stationery, freeing up space in our traditional news, books and convenience stores. We now have 6 stores open at London Gatwick airport, Bristol airport, St Pancras station and Selfridges in Birmingham and Manchester.

It is still early days, but we also see opportunities outside the UK with 2 curi.o.city stores also due to open in Dubai later this year.

As at 31 August 2023, Travel UK had 588 stores (2022: 587).

NORTH AMERICA

In North America we also saw a good performance as passenger numbers continued to recover. We opened a further 43 stores and closed 14 stores increasing market share and improving the quality of our space. Total revenue was up 32% for the year and up 17% in the second half.

This performance was driven by our core MRG airport business (which is now approximately 50% of the revenue of our North American division) which performed strongly across the year and continues to do so. We are seeing passenger number growth and strong demand for our travel essentials categories.

In our smaller businesses we saw a lack of new launches in the electricals market in the second half which impacted InMotion (and this has continued into this financial year) and in our Las Vegas resorts business we were up against a strong 2022 summer performance when there was an exceptional number of vacationing visitors.

Overall, our North American business is trading well with total revenue in the first 9 weeks of the financial year up 15%3 and is as such well placed for growth this year and beyond.

Headline trading profit1 was £49m (2022: £31m), reflecting the strong recovery in passenger numbers, improved margins and a small beneficial impact of currency. The Group is exposed to movements in the GBP:USD exchange rate. A 5 cent move in this rate results in a c.£2m to £3m movement in annual Headline trading profit1. Current company compiled consensus suggests an average exchange rate of GBP:USD of 1.25.

Our North America business has become an increasingly significant part of the Group and is now our second largest division in profit terms, after Travel UK. The growth prospects are substantial and we are excited by the significant opportunities to grow this business further. Over the last two years, we have won an additional 62 new stores.

The US is the largest travel retail market in the world with annual revenue of c.$3.8bn7. Our analysis of the North American market shows that there were a total of approximately 2,000 news and gift and specialty retail stores across the top 70 airports, giving our North America business a market share of c.13%8. During the year, we have improved our rate of winning new tenders and anticipate a large amount of space to come onto the market over the medium term. As a consequence, we are in a strong position to significantly grow our North America market share to around 20% over the next five years.

We have applied our forensic approach to retailing from the UK to the North American market and are seeing good results. This includes, space management, category development to change the mix to higher margin products such as food to go, enhanced promotional activity and increased operational efficiencies, for example, self-scan tills which we are rolling out across the estate.

We continue to grow our North American business at pace, opening 43 stores in the year at Newark, Phoenix, Orlando, Nashville, Washington Ronald Reagan, Jacksonville, Kansas City, Salt Lake City and Los Angeles airports. In Kansas City airport, we have won 85% of the retail space comprising 8 stores, all of which are open. We are seeing strong returns.

We still have a very strong pipeline of new store openings. In the year ending 31 August 2023, we won 40 stores, including stores at Salt Lake City, Boston, San Diego, Portland, Oakland and Las Vegas airports, as well as 11 stores in Canada, across Calgary and Edmonton airports. We expect to open over 50 stores in this financial year and close 6.

Including the 43 store openings in the year, we now have 231 stores in Air (including 123 InMotion stores), 95 stores in Resorts, and 1 in Rail.

REST OF THE WORLD

We saw a good recovery in the year from the ROW division with total revenue up 99% and LFL revenue up 53% on the prior year.

Our strategy for this division is clear: to continue to enter new countries, better understand the market, build our presence from a small base, build global supplier relationships and drive operational leverage to deliver higher returns. The scalability of the Group's retail formats is now evident having entered 28 new countries since we opened our first international stores in 2008 and we see significant market share opportunities for the division.

Utilising our expertise from our North America division to localise our retail offer, combined with our current low market share, 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 will continue to use our three operating models of directly run, joint venture and franchise, in order to maximise value and win new business.

We have also had another very successful year in winning new stores with 30 new stores won across the division.

During the year, we opened 55 new stores, including stores in Belgium, Italy, Malaysia, Norway, Spain and Sweden. We closed 28 mainly small, franchised stores.

7 2019 ACI Factbook, increased by CPI

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

Outside of the NBC market, we continue to see good opportunities to win new business in the tech accessories market under our InMotion brand. InMotion is now a globally recognised brand with interest coming from all over the world. During the year, we have won 3 InMotion stores in Italy. We have won a total of 13 InMotion stores outside of the UK and North America, of which 10 are open. We remain well positioned to benefit from further opportunities as more space becomes available.

We now have 338 stores of which 50% are directly-run, 9% are joint venture and 41% are franchise. During the current financial year, we expect to open 40 stores and close 12 stores.

Total Travel stores

During the year, we opened 118 stores in Travel. As at 31 August 2023, our global Travel business operated from 1,253 stores (2022: 1,196). As part of our strategy to improve the quality of our space, we closed 61 stores in the year, largely smaller, less well located stores. Excluding franchise stores, Travel occupies 1.1m square feet. See page 15 for analysis of store numbers by region.

HIGH STREET

During the year, High Street delivered a good performance with Headline trading profit1 of £32m, in line with expectations (2022: £33m), and revenue of £469m (2022: £473m). We managed the business tightly, keeping focused on costs and cash generation.

The strategy we have in place in our High Street business is as relevant today as it has ever been with a focus on delivering robust and sustainable cash flows and profits.

We utilise our space to maximise returns in ways that are sustainable over the longer-term. We have extensive and detailed space and range elasticity data for every store which we use to allocate space in categories.

Driving efficiencies remains a core part of that strategy and we continue to focus on all areas of cost in the business. During the year, we have delivered savings of £15m and we are on track to deliver savings of £21m over the next 3 years, of which £10m are planned in the current financial year. These savings come from right across the business, including rent savings at lease renewal (on average 50% over the last 12 months) which continue to be a significant proportion, marketing efficiencies and productivity gains from our supply chain.

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 where rents are falling. 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.480 leases due for renewal over the next 3 years, including over 100 where we are holding over and in negotiation with the landlord. The store closure process is cash neutral.

As at 31 August 2023, the High Street business operated from 514 stores (2022: 527) which occupy 2.5m square feet (2022: 2.5m square feet). 13 stores were closed in the year (2022: 17).

Funkypigeon.com delivered, as expected, total revenue of £32m (2022: £35m) and Headline EBITDA1 of £5m (2022: £8m). We continue to see opportunities to grow the platform further, growing revenue and profits over the medium term.

ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE ('ESG')

We have excellent sustainability credentials and we continue to make good progress. We are one of the top performing specialty retailers in Morningstar's Sustainalytics ESG Benchmark and, during the year, we were awarded an AA from MSCI ESG ratings. In addition, we were included, once again, in the Dow Jones World Sustainability Index, awarded an A rating in CDP's annual climate leadership survey as well as being rated as Prime by ISS.

We have set our target to achieve net zero by 2050 and are working with our supply chain to help reduce emissions across our value chain.

The need for literacy support is as important as ever and we continue to invest in our partnership with the National Literacy Trust. Over the course of the next year, we will be sponsoring a new reading hub in Swindon as part of their Early Years Matter campaign.

We have made excellent progress in the year to further support our colleagues' journeys. We now have 5 employee networks focusing on Pride, gender, parents and carers, disability, and race and culture. All of these networks are sponsored by members of our Executive team and are encouraging an open and honest forum for colleagues to drive positive change within the business.

In addition, we have launched a new mentoring scheme in the year focused on fostering female talent within our organisation.

FINANCIAL REVIEW

The Group generated a Headline profit before tax and non-underlying items1 of £143m (2022: £73m) and, after non-underlying items and IFRS 16, a Group profit before tax of £110m (2022: £63m).

Headline

9 Excluding non-underlying Finance costs disclosed below

Unallocated central costs increased in the year reflecting higher share-based payment charges and investing as the business recovers.

Headline net finance costs before non-underlying items1 (pre-IFRS 16) for the year were £26m (2022: £25m).

Cash spend in relation to finance costs were £10m lower at £16m.

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.

Lease interest of £19m arises on lease liabilities recognised under IFRS 16, bringing the total net finance costs before non-underlying items under IFRS 16 to £45m (2022: £34m).

IFRS

Tax

The effective tax rate1 was 19% (2022: 17%) on the profit for the year. Net corporation tax payments in the year were £13m (2022: £6m). Based on current legislation, we expect the tax rate in the current year to be 25%.

Earnings per share

Calculation of Headline earnings per share

Headline

pre-IFRS 16 1

10 Before non-underlying items

The above measures are calculated on a pre-IFRS 16 basis.

The diluted weighted average number of shares in issue used in the calculation of Headline diluted EPS1 assumes that the convertible bond is not dilutive.

Profit attributable to non-controlling interests primarily represents the joint venture partner share of profit in relation to airport contracts in the US. As at 31 August 2023 the profit attributable to non-controlling interests of £9m (2022: £6m), is c.18% (2022: 19%) of North America Headline trading profit1.

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. Most do not impact cash.

• 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.

The impairment review compared the value-in-use of cash-generating units, based on managements' assumptions regarding likely future trading performance, to the carrying values at 31 August 2023. As a result of this exercise, a non-cash charge of £4m (2022: £5m) was recorded for impairment of retail store assets on a pre-IFRS 16 basis, and £19m (2022: £13m) on an IFRS 16 basis which includes an impairment of ROU assets of £15m (2022: £8m). This non-cash impairment to the ROU asset primarily results from the difference between the Incremental Borrowing Rate ('IBR') used to establish the ROU asset and the WACC rate used to discount the future cash flows of certain stores in Spain.

Provisions for onerous contracts

A charge of £3m (on an IFRS 16 basis) has been recognised in the income statement in non-underlying items to provide for the unavoidable costs of continuing to service a non-cancellable contract, in certain locations where revenue recovery to pre-Covid-19 levels has not been observed. On a pre-IFRS 16 basis this charge is £5m.

Finance costs relating to the discount unwind on previously recognised provisions for onerous contracts has also been recognised in non-underlying items.

Other

Other non-underlying items include: non-cash amortisation of acquired intangible assets of £3m (2022: £3m) primarily related to the MRG and InMotion brands; costs associated with pensions £1m related to the pension scheme's purchase of a bulk annuity insurance policy as described in Note 16; and finance costs associated with refinancing £1m to derecognise the carrying value of unamortised fees in respect of the extinguished term loan and revolving credit facility. Other non-underlying items in the prior year also included costs of £4m incurred due to a cyber security incident in relation to one of the Group's websites. This included impairment of software assets of £1m, third party consultancy support and legal and other costs.

A tax credit of £5m (2022: £4m) has been recognised in relation to the above items (£2m pre-IFRS 16 (2022: £3m)).

The cash spend relating to non-underlying items in the 2023 financial year was £9m and mainly related to activity announced in 2020 and 2021.

Cash flow

Free cash flow1 reconciliation

pre-IFRS 16 1

11 Excludes cash flow impact of non-underlying items

The Group generated an operating cash flow1 of £235m in the year (2022: £155m) demonstrating the cash generative nature of the business. Capex was £122m (2022: £83m) as we continued to invest in new stores, IT and energy efficient chillers and other store equipment. As expected we had a working capital outflow of £64m in the year (2022: £10m). This mainly relates to investment in new stores, the recovering Travel business and some timing. Most of the outflow was in the first half. This year we expect a much smaller outflow mainly relating to opening new stores. In total, there was a free cash inflow in the year of £20m (2022: £41m). This year we would expect, subject to investment opportunities, an increase in free cash generation.

Net corporation tax payments in the period were £13m (2022: £6m).

Capex was £122m (2022: £83m) which includes the additional spend from opening 118 stores around the world.

Reconciliation of Headline net debt1

Headline net debt1 is presented on a pre-IFRS 16 basis. See Note 9 of the Financial statements for the impact of IFRS 16 on net debt.

As at 31 August 2023, the Group had Headline net debt1 of £330m comprising convertible bonds of £301m, £1m of finance lease liabilities and net overdrafts of £28m (2022: £296m, convertible bonds of £292m, term loans of £132m (net of fees), £4m of finance lease liabilities and net cash of £132m).

Headline 1

pre-IFRS 16

In addition to the free cash flow, the Group paid £9m 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. The other outflows related to the dividend £22m (2022: £nil) being the final dividend from 2022 and the interim dividend from 2023. In addition, we spent £8m (2022: £7m) on own shares for the Group's share schemes. Other includes non-cash accretion on the convertible bond, and payments to non-controlling interests.

On an IFRS 16 basis, net debt was £895m (2022: £869m), which includes an additional £565m (2022: £573m) of lease liabilities.

Fixed charges cover1

pre-IFRS 16 1

The Group had Headline net assets of £449m, £45m higher than last year end reflecting the investment in new store openings and exchange differences on translation of goodwill. Under IFRS the Group had net assets of £340m.

Total Travel stores by region

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 2022. 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 have also recognised that the ongoing global conflicts have created further uncertainty in the macro economy. A summary of the principal risks has been provided below:

All results relate to continuing operations of the Group.

WH Smith PLC

Group Statement of Comprehensive Income

For the year ended 31 August 2023

Other comprehensive (loss)/income:

Items that will not be reclassified subsequently to the income statement:

Items that may be reclassified subsequently to the income statement:

(Losses)/gains on cash flow hedges

1 Includes interest payments of £19m on lease liabilities (2022: £11m).

WH Smith PLC

Group Statement of Changes in Equity

For the year ended 31 August 2023

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2023

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 2022 have been delivered to the Registrar of Companies and those for 2023 will be delivered following the Company's Annual General Meeting. The Annual Report for the year ending 31 August 2023 and this full year results statement were approved by the Board on 9 November 2023. The auditors have reported on the Annual Report for the years ended on 31 August 2023 and 2022 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 2023 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 2022 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 2023. 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.

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:

Narrow scope amendments to IFRS 3, IAS 16 and IAS 37

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 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 and Headline net debt and free cash flow. These APMs are set out in the Glossary on page 44 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 2023

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 and transformation 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.

In making the going concern assessment, the directors have undertaken a rigorous assessment of current performance and forecasts for the 12-month period to November 2024, including expenditure commitments, capital expenditure and available borrowing facilities. The Group's borrowing facilities are described in the Group overview on page 4. The covenants on these facilities are tested half-yearly and are based on fixed charges cover and net borrowings. The directors have also considered the existence of factors beyond the going concern period that could indicate that the going concern basis is not appropriate.

As a result of uncertainty and challenges in the macroeconomic environment, this base case scenario has been stress-tested by applying severe, but plausible, downside assumptions of a magnitude and profile in line with previous experience of economic downturns. These assumptions include reductions to revenue assumptions of between 5 and 10 per cent versus the base case as appropriate by division; additional inflation in labour costs beyond that included in the base case; and margin pressures. Apart from an equal reduction in turnover-based rents in our Travel businesses, this scenario does not assume a decrease in other variable costs, and is therefore considered severe. Under this downside scenario the Group would continue to have significant liquidity headroom on its existing facilities and complies with all covenant tests throughout the assessment period.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2023

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, impairment reviews of other non-current assets and inventory valuation.

Critical accounting judgements

Non-underlying items

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

The classification of items as non-underlying requires 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 at the Group's discretion, 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. Further information in respect of the Group's intangible assets, property, plant and equipment and right-of-use assets is included in Notes 11, 12 and 13 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 year in which the sale is made. A sensitivity analysis has been carried out on the calculation of inventory provisions. 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 carrying value of inventories by £2m (2022: £2m).

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2023

Segmental analysis of results

Rest of the World revenue includes revenue from Australia of £82m (2022: £40m), Ireland £47m (2022: £30m) and Spain £46m (2022: £21m). No other country has individually material revenue.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2023

Segmental analysis of results (continued)

2 The impairment under IFRS 16 mostly relates to the Rest of the World segment

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2023

Group operating profit

1 During the year there was an underlying impairment charge of £nil (2022: £2m) for property, plant and equipment and other intangible assets included in distribution costs. Other impairment charges are included in non-underlying items. See Note 4.

2 Other income includes remeasurement of right-of-use assets, insurance recoveries and other property related income.

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 2023

Non-underlying items

Items which are not considered part of the normal operations 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 11.

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 11).

Impairment of property, plant and equipment and right-of-use assets and provisions for onerous contracts

The Group has carried out an assessment for indicators of impairment across the store portfolio. Where an indicator of impairment has been identified, an impairment review has been performed to compare the value-in-use of store cash generating units, based on management's assumptions regarding likely future trading performance, to the carrying value of the cash-generating unit as at 31 August 2023. As a result of this exercise, a charge of £19m (2022: £13m) was recorded within non-underlying items for impairment of retail store assets, of which £4m (2022: £5m) relates to property, plant and equipment and £15m (2022: £8m) relates to right-of-use assets. The majority of the impairment of right-of-use assets relates to the difference between the incremental borrowing rate used to establish the right-of-use assets and the WACC rate used to discount the future cash flows of certain stores in Spain. Refer to Note 12 for details of impairment of store cash-generating units.

The impairment recognised on a pre-IFRS 16 basis is provided in the Glossary on page 44.

A charge of £3m has been recognised in the income statement to provide for the unavoidable costs of continuing to service a non-cancellable contract. This provision will be utilised over the next three financial years.

Costs associated with pensions

Professional fees of £1m (2022: £nil) have been incurred related to the pension scheme's purchase of a bulk annuity

insurance policy as described in Note 16.

Costs associated with refinancing

A charge of £1m (2022: £nil) has been included in non-underlying items to derecognise the carrying value of unamortised fees in respect of the extinguished term loan and revolving credit facility. See Note 9.

Other prior year non-underlying items

Other non-underlying items in the prior year included costs of £4m incurred due to a cyber security incident in relation to one of the Group's websites. This includes impairment of software assets of £1m, third party consultancy support and legal and other costs.

A tax credit of £5m (2022: £4m) has been recognised in relation to non-underlying items.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2023

Finance costs

Costs associated with refinancing are included in non-underlying items (see Note 4).

Income tax expense

Blended standard rate of UK corporation tax 21.5% (2022: 19.0%)

The effective tax rate, before non-underlying items, is 19 per cent (2022: 17 per cent).

The UK corporation tax rate is 25 per cent. Up to the 1 April 2023 the corporation tax rate was 19 per cent.

On 20 June 2023, Finance (No.2) Act 2023 was substantively enacted in the UK, introducing a global minimum effective tax rate of 15%. The legislation implements a domestic top-up tax and a multinational top-up tax, effective for accounting years starting on or after 31 December 2023. The Group has applied the exemption under IAS 12 to recognising and disclosing information about deferred tax assets and liabilities related to top-up income taxes. This will be applicable for the year ending 31 August 2025.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2023

Dividends

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

The Board has proposed a final dividend of 20.8p per share, amounting to a final dividend of £27m, which is not included as a liability in these financial statements and, subject to shareholder approval, will be paid on 1 February 2024 to shareholders registered at the close of business on 12 January 2024.

Earnings per share

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2023

Earnings per share (continued)

As at 31 August 2023 the convertible bond has no dilutive effect as the inclusion of these potentially dilutive shares would improve earnings per share (31 August 2022: improve earnings per share).

The calculation of earnings per share on a pre-IFRS 16 basis is provided in the Glossary on page 44.

Analysis of net debt

Movement in net debt can be analysed as follows:

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2023

Analysis of net debt (continued)

Cash and cash equivalents

Lease liabilities

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

Term loans and revolving credit facilities

On 14 June 2023 the Group announced new financing arrangements. The Group's existing lending facilities, comprising a £250m revolving credit facility ('RCF') and a term loan were cancelled and repaid. The Group's four-year committed £133m term loan with Santander UK PLC, Barclays Bank PLC, BNP Paribas, J.P. Morgan Securities PLC and HSBC UK Bank PLC, was repaid as part of the above refinancing. Instalments of £20m were paid prior to the repayment.

This repayment was funded by drawings under new facilities consisting of a £400m RCF (the 'New RCF'). The New RCF is for a five-year term due to mature on 13 June 2028, with two uncommitted extension options of one year each, which would, subject to lender approval, extend the tenor to six or seven years if exercised. The New RCF is provided by a syndicate of banks: Barclays Bank PLC, BNP Paribas, Citibank N.A. London Branch, Fifth Third Bank National Association, HSBC UK Bank PLC, JP Morgan Securities PLC, PNC Capital Markets LLC, Banco Santander SA London Branch and Skandinaviska Enskilda Banken AB (PUBL). Utilisation is interest bearing at a margin over SONIA. As at 31 August 2023, the Group has drawn down £84m on the New RCF (2022: £nil, on the RCF).

Transaction costs of £4m relating to the New RCF have been capitalised and are amortised to the Income statement on a straight-line basis.

Convertible bonds

The Group has issued £327m (2022: £327m) guaranteed senior unsecured convertible bonds due in 2026. The bond 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). The conversion price at 31 August 2023 was £24.7032. 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 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 2023

Cash generated from operating activities

Goodwill of US$64m (£50m) (2022: US$70m / £60m) relating to the acquisition of the InMotion Entertainment Group of companies 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:

Included within Tenancy rights are certain assets that are considered to have an indefinite life of £4m (2022: £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.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2023

Intangible assets (continued)

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, 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 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 values assigned to each of the revenue, 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 risk-free rate, equity risk premium, Group size premium and a risk adjustment (beta). Country-specific discount rates were not considered to be materially different to the Group rate. The pre-tax discount rate used in the calculations was 13.2 per cent (2022: 11.9 per cent).
• The long-term growth rate assumptions are between 0 per cent and 2 per cent (2022: 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 each group of CGUs. As a result, no impairment has been recognised in respect of the carrying value of goodwill in the year (2022: £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, 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 2 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 the 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 2023

Property, plant and equipment

Land and buildings

Impairment of property, plant and equipment

For impairment testing purposes, the Group has determined that each store is a separate CGU or in some cases a group of stores is considered to be a CGU where the stores do not generate largely independent cash inflows. CGUs 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.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2023

Property, plant and equipment (continued)

Impairment of property, plant and equipment (continued)

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, 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 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. In developing these forecasts, management have used available information, including historical knowledge of the store level cash flows.

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). Country-specific discount rates were not considered to be materially different to the Group rate. The pre-tax discount rate used in the calculations was 13.2 per cent (2022: 11.9 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 £34m, which is their carrying value at year end. The Group has recognised an impairment charge of £4m (2022: £7m) to property, plant and equipment, no impairment to software (2022: £1m) and £15m (2022: £8m) to right-of-use assets. The majority of the impairment of right-of-use assets relates to the difference between the incremental borrowing rate used to establish the right-of-use assets and the WACC rate used to discount the future cash flows of certain stores in Spain. Impairments of £19m (2022: £14m) have been presented as non-underlying items in the current year (see Note 4).

As disclosed in Note 1, Basis of preparation, 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. As a result, the Group has applied certain sensitivities in isolation to demonstrate the impact on the impairment charge of changes in key assumptions. An increase of 1 per cent in the discount rate has been modelled and would have resulted in an increase in the impairment charge of £1m across intangible assets, property, plant and equipment and right of use assets.

The impairment assessment has also been performed on a pre-IFRS 16 basis. See Glossary on page 44.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2023

Right-of-use assets

Impairment of right-of-use assets

Right-of-use assets of £15m (2022: £8m) have been impaired in the year. This impairment charge has been presented in non-underlying items (see Note 4). The approach to impairment testing is described in detail in Note 12, Property, plant and equipment.

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2023

Lease liabilities

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 2023

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 resulted in a credit to the Income statement of £5m for the year ended 31 August 2022.

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

The total cash outflow for leases in the financial year was £181m (2022: £150m). This includes cash outflow for short-term leases of £19m (2022: £16m) and variable lease payments (not included in the measurement of lease liability) of £25m (2022: £28m).

Contingent liabilities and capital commitments

Contracts placed for future capital expenditure approved by the directors but not provided for in these financial statements amount to £27m (2022: £30m).

WH Smith PLC

Notes to the Financial Statements

For the year ended 31 August 2023

Retirement benefit obligations

WH Smith PLC has operated a number of defined benefit and defined contribution pension plans. The main pension arrangements for employees are operated through a defined benefit scheme, WHSmith Pension Trust, and a defined contribution scheme, WHSmith Retirement Savings Plan.

WHSmith Pension Trust

The WHSmith Pension Trust Final Salary Section is a funded final salary defined benefit scheme; it was closed to defined benefit service accrual on 2 April 2007 and has been closed to new members since 1996. Benefits are based on service and salary at the date of closure or leaving service, with increases currently based on CPI inflation in deferment and RPI inflation in payment.

The WHSmith Pension Trust is independent of the Group and is administered by a Trustee. The Trustee is responsible for the administration and management of the scheme on behalf of the members in accordance with the Trust Deed and relevant legislation. An Investment Committee of the Trustees to the scheme meets regularly to review the performance of the investment managers and the scheme as a whole. The Group is represented on this Committee.

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 a result of this comprehensive risk-removal, WH Smith PLC is no longer required to make any future cash contributions into the Trust regarding defined benefit liabilities. During the prior year ended 31 August 2022, prior to the completion of the buy-in transaction, the Group made a contribution of £2m to the scheme in accordance with the agreed funding schedule.

The Group does not have an unconditional right to derive economic benefit from any surplus in the scheme, as the Trustees retain the right to enhance benefits under the Trust deed, and therefore the present value of the economic benefits of any IAS 19 surplus in the pension scheme available on a reduction of future contributions is £nil (2022: £nil). Accordingly, no balance sheet asset or liability exists in relation to this scheme. The income statement impact of this scheme is limited to administrative costs only.

WH Smith PLC

Glossary (unaudited)

For the year ended 31 August 2023

Alternative performance measures

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 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 and transformation 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 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

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 2023 both including and excluding the impact of IFRS 16 is shown in Note A10 below.

Leases policies applicable prior to 1 September 2019

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.

WH Smith PLC

Glossary (unaudited)

For the year ended 31 August 2023

Definitions and reconciliations

WH Smith PLC

Glossary (unaudited)

For the year ended 31 August 2023

• Reconciliation of Headline to Statutory Group operating profit and Group profit before tax

2023

WH Smith PLC

Glossary (unaudited)

For the year ended 31 August 2023

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

2023

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

A tax credit of £5m (2022: £4m) has been recognised in relation to the above items (£2m pre-IFRS 16 (2022: £3m)).

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 13.2 per cent (2022: 11.9) and the pre-tax discount rate used in the pre-IFRS 16 calculation was 13.2 per cent (2022: 14.4).

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

A charge of £5m has been recognised on a pre-IFRS 16 basis to provide for the unavoidable costs of continuing to service a non-cancellable contract. This provision will be utilised over the next three financial years.

WH Smith PLC

Glossary (unaudited)

For the year ended 31 August 2023

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

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.

Free cash flow

Headline net debt

The table below shows Headline net debt (pre-IFRS 16). This includes lease liabilities that were previously presented as finance leases (applying the principles of IAS 17), and Group accounting policies as applicable prior to 1 September 2019, described in the Glossary on page 44), but excludes additional lease liabilities recognised on application of IFRS 16.

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 2023

Cash flow disclosure impact of IFRS 16

Balance sheet impact of IFRS 16

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

Operating lease expense

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

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 and profit before tax, as explained in Note 2 segmental analysis.

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 4 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.