WH Smith H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 16, 2025

There are 10 speakers on the call.

Operator

Good morning, everyone. I'm Carl Cowling, group CEO, and I'm here with Max Isard, our Group CFO. As usual, we'll provide an update on our performance for the six months ending the 02/28/2025, and we'll also run through the highlights of the first half for the group. So turning to Slide three. Before we go into the detail of the first half, I thought it'd be helpful to give an overview of the group's position following the announcement that we have sold our UK High Street business and as we look ahead as a pure play global travel retailer.

Operator

Firstly, this is a really important milestone for the group, and we are now in our strongest ever position to enhance growth, profit, and cash flow as well as capitalize on the substantial space growth opportunities that exist across each of our key travel markets. It allows myself and the management team to concentrate on a simplified travel focused group, alleviating any distraction from an increasingly divergent business and enables us to focus on enhancing the group's future growth prospects and value creation. So, it's a very exciting time, and we have a clear and successful strategy focusing on four key areas of growth as you can see on the screen. Turning to the next slide. On

Speaker 1

the screen, you can

Operator

see how our business has evolved over the past decade into the global travel retailer we are today and the strong platform that has been created. This clearly highlights how our travel divisions have been the growth engine of the group, representing 75% of group revenue and 85% of group trading profit today and generating annualized profit growth of over 10% over the past ten years. Through our clear growth strategy, including the two acquisitions we made in The U. S, we've created a strong platform. And with the ongoing strength in our UK travel division and the scale of the growth opportunities in both North America and the rest of the world, we are in our strongest ever position to deliver enhanced growth as we move forward.

Operator

And already, this is a business that operates in 32 countries worldwide. Turning to the next slide. Following the sale of the High Street business, the geographical mix of the group will change with a greater proportion of revenue being generated in North America, the world's largest travel retail market, and the focus of the business will increasingly be on air travel. As I've said, the growth opportunities are substantial. Firstly, passenger numbers are forecast to grow by more than double over the next two decades driven by both population and economic growth.

Operator

We are also seeing significant investment in airport infrastructure, creating destinations for travelers. Next, as landlords look to converge trends in travel retail, we are in a strong position to execute and further roll out our one stop shop format. So these factors combined with the four pillars of our growth strategy gives us every confidence into the year ahead and beyond. We have a clear and robust strategy with operations in attractive high growth markets, a strong balance sheet, and we are well positioned to generate substantial growth and with that value for our shareholders. So this is a really exciting time for the group.

Operator

Turning now to an update on the first half. And during the half, we delivered a strong performance in Travel, delivering profits of £56,000,000 up 12% on last year. All our Travel divisions continue to perform well with consistent like for like revenue growth, and we continue to innovate and grow across each of our three divisions. Our strong track record of winning new tenders, particularly in The U. S.

Operator

Continues, and we now have a new store pipeline of over 90 stores due to open across the globe with more than 70 of these in North America. And I'm delighted to announce this morning that we've won six stores at a major East Coast airport in The US. During the half, we have also successfully opened 30 new travel stores across all three divisions, and we see further good space growth opportunities across our markets. This, coupled with growing passenger numbers, gives us the confidence to invest for future growth. You will remember that we announced a £50,000,000 share buyback in September, reflecting the strong ongoing cash flow and the receipt of the pension fund buyout cash return, and we have completed £27,000,000 of the buyback as of yesterday.

Operator

Today, the Board is declaring an interim dividend of 11.3p, reflecting the Board's confidence in the future growth prospects of W. H. Smith. Before I hand over to Max to go through the numbers, in light of the current economic uncertainty, I thought it'd be helpful to touch on current trading and let you know that we are trading broadly in line with our first half performance. Our business in The U.

Operator

S, where there is understandably a lot of focus, continues to deliver positive like for like revenue growth despite a softening in passenger numbers. However, as you will hear later in the presentation, our spend per passenger is strong and continues to gain momentum, and therefore, our outlook remains unchanged for the full year. So we are in a strong position to navigate this period of uncertainty. I'll now hand over to Max.

Speaker 1

You, Paul, and good morning, everyone. It's been a busy start to my time here at W. A. Smiths with the refinance, the sale of our High Street, and time spent broadening my understanding of the business and looking at how we invest our capital. I'm delighted to be here today to take you through our first half financial results.

Speaker 1

As usual, all the numbers I am going to refer to today are pre IFRS 16, and there are some bridges to IFRS 16 in the appendix. Turning to my first slide and starting with the financial highlights. Our travel business has had a strong start to the year. Total travel revenue, which is 75% of group revenue, increased by 6% in last year to 712,000,000. Travel headline trading profit increased by 12% to 56,000,000, driven by the growth in UK trading profit of 3,000,000, 1 million from North America, and 2,000,000 from rest of the world.

Speaker 1

Travel trading profit margin also increased up 40 basis points to 7.9%. So for the group as a whole, we have had a good start to the year with total group revenue up 3% on 2024 to 951,000,000. Group headline profit before tax was broadly in line with last year at 45,000,000, and headline EPS was down 2% to 23.8p, reflecting lower profit from the High Street division in line with market expectations. Our balance sheet is in a strong position with leverage at the February of 1.7 times versus 1.8 times last year. We have today declared an interim dividend of 11.3p per share, which reflects the strong travel business performance and our strong cash generation.

Speaker 1

As before, we expect the interim dividend to reflect about one third of the full year dividend. Turning now to analysis of revenue. Total group revenue for the half was 951,000,000. This increase of 3% in last year was driven by all three divisions in travel, and current trading remains good. Across our global travel divisions, we have seen good momentum in the first half with like for like revenue up 6% year on year, and on a constant currency basis, total revenue is up 8%, reflecting a strong operational performance and the increase in passenger numbers.

Speaker 1

All three divisions saw strong revenue growth in the half. High Street, including our Internet business, performed in line with plan, generating revenue of 239,000,000. Now let's look at travel in a bit more detail on the next slide. So here, you can see the key drivers of the travel revenue growth, with strong like for like growth contributing 39,000,000 or 6 percent and net space growth contributing 14,000,000 or 2%. Our North America business is subject to change in sterling to US dollar exchange rates.

Speaker 1

The first half was impacted by 7,000,000 compared to the prior year due to stronger sterling across the period. We have also we also have a small comparison headwind from the 2024 leap year. The effect of an additional day's trading in our statutory reported revenue last year amounts to around 4,000,000. Turning now to the travel segmental analysis. Now starting with The UK, revenue was up 7% on both a total and like for like basis with good momentum in all three channels, particularly in air.

Speaker 1

Air was up 9% on a like for like basis, and hospitals were up 4% like for like, and rail also up 4% like for like. In North America, total revenue was up 5% on a constant currency basis driven by air, which grew 9%. Total like for like air sales were up 4%. Our Travel Essentials format, which accounts for over 50% of revenue in North America, was the key driver of this performance, with total revenue on a constant currency basis up 20% and up 8% on a like for like basis as we continue to increase our spend per passenger. We continue to see good opportunities to win and open more travel essential stores in air.

Speaker 1

Our smaller North America Air business, In motion, has seen some improved performance with like for like revenue down just 1%, and Resorts was down 3% like for like, impacted by the Super Bowl annualization with the event being held in New Orleans compared to Las Vegas last year and store closures across two major hotels in Las Vegas as previously signposted. The rest of the world has delivered a good performance with total revenue up 15% on a constant currency basis and up 9% like for like. We are well positioned to benefit from further opportunities as we continue to establish ourselves in key markets. So turning to the income statement. Headline profit before tax was 45,000,000, down 1,000,000 on last year, reflecting the reduction in profits from the high street business.

Speaker 1

Travel delivered a profit of 56,000,000 compared to 50,000,000 last year, and Travel generated nearly 80% of group profit from trading operations. In Travel UK, profit improved by 8% from 37,000,000 to 40,000,000 due to higher revenue, improved margins, and tight cost control. North America, now our second largest division by profit, delivered a profit of 15,000,000, up 1,000,000 on last year. In North America, we've increased revenue and improved margins, and at the same time, we've invested in our store estate to support growth. Rest of the world delivered a profit of 1,000,000 compared to a loss of 1,000,000 last year, reflecting investment returns from our new stores as we continue to build the business in this division.

Speaker 1

High Street delivered a profit of 15,000,000 as expected, and it's worth noting that following the announced sale of the High Street business, this will be the last time we fully report on the High Street operations. And at the year end, the High Street business will be presented as a discontinued operation. Overall then, group profit from trading operations was 71,000,000. Central costs are broadly flat year on year, and tight control of this area will remain a key focus. Financing costs at 12,000,000 includes noncash accretion of 4,000,000 relating to the convertible bond, so that results in headline profit before tax of 45,000,000.

Speaker 1

So our travel business is performing well, and we have a significant opportunity to grow space and increase revenue each year into the medium term, which, together with our forensic approach to retailing and tight cost control will also drive our profitability. Turning now to non underlying items. As you'll see on the screen, we have recognized a number of non underlying items in the period, and a significant proportion of these items relate to the High Street business, and two thirds are also noncash. We have continued to invest in our multiyear IT transformation program and anticipate full year spend to be around 15,000,000, And we have also completed a number of operational efficiency programs to deliver cost savings and support our business performance. Turning to the High Street costs, and these include $37,000,000 of noncash impairments and onerous lease provisions following the strategic review of the store portfolio, and this includes $15,000,000 of goodwill associated with the High Street division eight million dollars of store closure costs 3,000,000 relating to the rationalization of our UK distribution centers, which we began in 2024 and is now complete, and 6,000,000 relating to the disposal of the UK High Street business, which will be cash settled in the second half.

Speaker 1

The total transaction and separation costs are anticipated to be around 25,000,000 to 30,000,000, the majority of which will be incurred in the second half of this year. Overall, the cash impact of non underlying items in the half is 25,000,000, and this includes some timing related spend from previous periods. So turning now to the group free cash flow. We are a cash generative business, and as we become increasingly travel focused, this will continue to grow. There are three key points to note on the free cash flow for the first half.

Speaker 1

First, we generated 94,000,000 of operating cash flow with 80% of this generated in travel as the travel business increased in profitability in the period, reinforcing the point on cash generation that I've just made. Second, the investment made in the business with CapEx in the half of fifty million, including the new store opening program. We opened 30 new stores, including a further 10 in North America, and we anticipate our investment for the current year to be around 110,000,000, which includes opening over 60 new stores, reflecting both the opportunities we have plus our confidence in the markets in which we operate. And we're getting good returns on these investments, generating ROCE ahead of our cost of capital in each of the three divisions. Third, as expected, working capital was an outflow of 87,000,000, which mostly relates to the new store setup and opening costs and the seasonality of the business as travel continues to grow.

Speaker 1

Taking into account the working capital cadence and the level of operating cash flows generated in the second half, we expect to generate a substantial free cash inflow for the full year. Turning now to the net debt. Net debt at the end of the half was $454,000,000, comprising of the convertible bond of 315,000,000, drawdown on the RCF of a hundred and 78,000,000 and cash of 39,000,000, which gives the group a rolling twelve month net debt to headline EBITDA leverage of 1.7 times compared to 1.8 times last year. In addition to the free cash flow, we had an outflow of 89,000,000 on nontrading items. The largest of these related to distribution to shareholders, the 29,000,000 for the full year 24 final dividend payment and 23,000,000 for the current share buyback.

Speaker 1

Cash spend relating to non underlying items was 25,000,000, predominantly relating to IT and supply chain transformation projects and operation efficiency programs across the business. And we also had the 75,000,000 cash receipt in relation to the pension surplus following the buyout in September 2024. We expect net debt at the end of this year to be around 400,000,000, and we have a strong balance sheet, and our leverage ratios continue to fall as our profits grow. Following completion of the sale of the High Street, we aim to return leverage to within the target range of 0.75 to 1.25 times EBITDA by the August 2026. Let's now move on to our refinancing.

Speaker 1

As recently announced, we have successfully completed a refinancing of the group's convertible bond. The new refinancing includes 200,000,000 of USPP notes, which represent WH Smith's debut issue in the USPP market. The notes have a maturity of seven, ten, and twelve years and have been issued on investment grade terms. In addition, we have a hundred and 20,000,000 of three year bank term debt with two uncommitted one year extensions. Based on the resulting new financial structure and the delayed draw terms to coincide with the convertible bond maturity in May 2026, we would expect the income statement interest charge to increase from 4.6% to 6.3% by the end of full year '27.

Speaker 1

The refinance strengthens our balance sheet, extends our debt maturity profile, and diversifies our capital structure. And so turning to my final slide. Looking forward, we remain focused on maintaining an efficient balance sheet and on our disciplined approach to capital allocation. As has always been the case, our first pillar of our policy is to invest in the business where returns are ahead of our cost of capital. The growth opportunities available to our travel business are significant, whether it's opening new stores, refurbishing our existing estate, or winning better quality space.

Speaker 1

Secondly, our commitment to a progressive dividend policy is well established, and we seek to grow our dividends at least in line with EPS growth with a target dividend cover of around two and a half times. As you've already heard, we have today announced that the board has declared an interim dividend of 11.3p. We also have a strong track record of making selective value creating acquisitions, and we continue to look at opportunities when they arise. Finally, we have a long track record of returning excess cash to shareholders via buybacks. And as at the April 15, we have completed 27,000,000 of the 50,000,000 share buyback announced in September 2024.

Speaker 1

So to conclude, we've had a good first half with strong revenue and profit growth in our travel business. As Carl has mentioned, whilst we are mindful of the economic uncertainty, the group continues to trade broadly in line with our first half performance. We have a resilient business, and we are well positioned to benefit from the growth opportunities in Travel Retail and deliver attractive shareholder returns. I will now hand back to Carl to talk you through the operational performance of the business.

Operator

Thanks, Max. And starting with Travel UK, our largest division, we have had a strong half across each of our channels. We continue to deliver high levels of like for like growth. Like for like revenue was up 7%, reflecting ATV growth, increased spend per passenger, and growth in passenger numbers. Profits were up 8% to £40,000,000 We see further good growth opportunities in this division as we continue to invest, and we aim to open around 10 to 15 new stores in The U.

Operator

K. Each year. Turning now to our airport performance in The UK. We have delivered a really good performance across our UK air channel with like for like revenue growth of 9% in the half. Our one stop shop format is delivering strong results, driving profitability and highlighting significant opportunities for the future.

Operator

We continue to expand this format, and we have recently refitted stores at Manchester and Stansted by significantly increasing the space dedicated to health and beauty ranges. In addition, our stores at Edinburgh and Newcastle airports have seen a complete refit to our one stop shop format, and we are seeing good results. Across both Edinburgh and Newcastle, we have designed stores encompassing everything you would expect from WH Smith as well as a broader and improved product range, including health and beauty, tech, and food to go. You may remember we launched a new food range ahead of the summer peak last year, Smith's Family Kitchen. I'm pleased to say that this is performing very well, and we continue to expand our ranges and improve our offer for customers, which now includes pastries and bakery items.

Operator

By widening our offer and creating a fast convenient shopping experience, customers are putting more items in their baskets, which in turn increases our spend per passenger and drives ATV. The exciting part here is that this one stop shop format is highly scalable and not only applicable for our larger stores in air, but also our smaller stores, so we see plenty of opportunities for the future. Turning to the next slide. The hospital channel is the second largest by revenue behind Air, and it has delivered a good performance in the half with like for like revenue up 4%. Our ongoing success in hospitals illustrates our ability to generate increased profitability from our stores by improving our retail proposition.

Operator

For example, tailoring our product offer to the specific requirements of hospital staff, patients and visitors by providing an increased range of food, health and beauty, and tech accessories. During the first half of the year, we opened two stores, and more recently, we've opened our second Smith's Family Kitchen Cafe at Greater Manchester Hospital. You can see a picture of this on the screen. Whilst it's still very early days of this format, customer reaction has been positive, and we're in discussion with the hospital trusts on how we can work together to improve their F and B offer. We expect to open a further eight stores in the second half, and we see plenty more opportunities to continue to grow our space and improve the retail proposition under our broad suite of brands and new formats.

Operator

We currently have 147 stores across more than 100 hospitals, and we see scope for at least one of our formats in up to 200 further hospitals. Turning to Rail. And here, we delivered a good performance with like for like revenue up 4%. In line with our other channels, we continue to focus on investing in new formats and improving our ranges across many of our stores, including the refurbishment of some of our mainline rail stores such as Kings Cross and Charing Cross Stations to provide an improved customer proposition. During the half, we also refitted stores at Glasgow, Queen Street and York.

Operator

By increasing the space to more food to go and health and beauty products across these stores, we have increased our spend per passenger. Moving on now to our North America division on the next slide. North America is our most exciting growth opportunity, the world's largest travel retail market, and we see excellent prospects to further grow our airport business here. We continue to invest and reengineer our Travel Essentials airport business, which is driving higher growth and profitability. Total revenue in the half on a constant currency basis was up 5% with like for like revenue up 3%.

Operator

We delivered profits of £15,000,000 up 7% year on year. We also see good opportunities to win and open more stores, delivering good returns as we aim to grow our market share to around 20% by 2028. At that point, we would expect to be operating around 500 stores and for our overall Air business to be around 85% of the total North American division, higher growth and profitability. Turning to the next slide. As a reminder, our Air business is the largest and fastest growing part of our North American division and combines our travel essentials and in motion businesses, and this is where we are investing most of our capital.

Operator

Our approach to growing our air business in North America is similar to The UK, but it's at a much earlier stage of development. Around 80% of air travel in The US is also domestic. During the first half, we've continued to focus on improving the quality and efficiency of our estate and driving profitability by applying the retail disciplines from our UK stores. Using the data from around 200 stores, we are actively analyzing our space to enhance our ranges, introduce new categories, and review space allocation, and I'll come on to this. Over 90% of our new store pipeline growth is in travel essentials.

Operator

In our travel essentials business, we grew like for like revenue by 8% in the half, and we see lots of further opportunities for improvements in sales and profitability by applying our retail expertise. Overall, while it takes time to implement these changes in The U. S, they're delivering encouraging early results. Turning to the next slide. Of the initiatives we are taking, we are strongly focused on increasing spend per passenger.

Operator

In the first half, we've seen strong spend per passenger growth of around 5%. By focusing on areas of growth we can control, we are in turn able to mitigate the potential weakening in passenger numbers. It's also worth remembering that we have a very low average transaction value. We are not retailer. So our focus is on increasing conversion, growing ATV, and broadening our ranges so people put more items in their baskets, all of which we expect to continue.

Operator

Of the changes in our offer, they are predominantly our food and drink categories. This means increasing the space allocated to fresh food and snacking and investing in more chillers across key stores with more to come. At the same time, as has the case in The UK, we're developing our health and beauty category, and this is set to become a more important part of our business. Using these principles, as I have said, we are delivering superior returns in spend per passenger. And while this is really encouraging, we know there is much more to go for.

Operator

In addition, we are working on rolling out our central supply chain to support improved availability and sales, which also reduces back of house activity. This has been trialed successfully in New York and expanded across the whole of the East Coast, again, supporting our spend per passenger growth. So we are confident we will continue to grow our like for like sales in Travel Essentials and are excited by the opportunities that exist. Turning to the next slide. I thought it'd be helpful to demonstrate why we're confident in our ability to continue to win market share in The U.

Operator

S. By highlighting some of our recent successes. As I've already said, we are targeting a 20% market share by 2028. On the screen, you can see some of our most recent wins across The U. S.

Operator

At Portland, Dallas and Albuquerque airports, and we can now confirm that in addition to Orlando, where we were awarded preferred bidder status for five stores, we have won six stores as a major East Coast airport. This is a significant win for us as we continue to grow our space and cements our position as a leading travel essentials operator on the East Coast. And as I've said many times before, the scale of the opportunities in the North American market is what excites me the most within this division. During the first half, we opened 10 new stores, and we are on track to open around 25 in the year, including openings at Dallas, Portland, and Washington, and we're seeing good returns. And this takes us to a new store pipeline of over 70 stores already won and due to open.

Operator

However, as you can see on the screen, with a light blue bar showing the scale of the opportunity in each of the top 25 airports alone, there's still a lot to be optimistic about, and we have every confidence that we'll continue to win new business given the number of tenders we're participating in and our current success rate. So as we continue to target our 20% share by 2028, we would expect our overall Air business at that point to be around 85% of the total North American division, which will drive higher growth and profitability. Turning now to our Rest of the World business. Here, our approach is clear, to build scale in our existing markets and to continue to enter new countries using our three operating models of directly run, joint venture, and franchise, and over time leverage our fixed cost base to grow net margins. We have delivered a good performance in the first half with profits increasing year on year and like for like revenue up 9% versus last year.

Operator

We're in a strong position and we continue to make good progress entering new markets. During the half, we opened 17 stores across airports in Australia, Spain and The UAE. As you would expect, we are focusing on driving ATV and spend per passenger across these stores by doing similar work to that in The UK by expanding our categories and introducing a broader offer for customers to include tech accessories, health and beauty and food. We have also opened three in motion stores across Copenhagen Airport, offering a world class range of electronic products for the traveling customer as well as experiential zones for brands to showcase their latest product launches. The opportunities are significant.

Operator

And where we're opening new stores, we are pleased with their performance, and we tend to track significantly ahead of the previous incumbent. Turning to the next slide. I thought I'd highlight our Australian business where we now operate over 60 stores. Here, our focus is on winning new travel essential stores across Air. As we do in The U.

Operator

S, we've taken the learnings from our UK business, and we've applied our retail disciplines, including design, marketing, and category development to improve the customer proposition. However, we also have a sizable hospital business. If you take Alfred Hospital in Melbourne as an example, we've recently won all the F and B space serving hospital businesses and staff from the main food court. In addition to our established long shot cafe brand, we've introduced two new brands here, selling a wide range of hot and cold food and barista coffee. We have also, for the first time, introduced self-service screens where customers can order and pay easily and quickly, and this has proven very popular.

Operator

So this is an important gateway for the group as we look to focus on growing our food credentials, and we can use the learnings from this business as we look to grow and adapt our food proposition across the globe. Turning to our next and final slide. This is the start of a new era for WH Smith as a pure play global travel retailer. As I've explained, we are in a strong position to operate in exciting high growth international markets. Travel is a highly scalable business.

Operator

The opportunities for future space growth are considerable across the 32 countries in which we operate, with North America our most exciting opportunity for growth as you've heard. At the heart of our business is the ability to innovate and with that drive spend per passenger growth. While we're mindful of the economic environment, our simplified business has a highly attractive financial profile. We have delivered a good first half performance, and we're in a strong position to continue to deliver growth. That's it for me.

Operator

We'll now take your questions, starting with those of you in the room.

Speaker 2

Richard Chamberlain, RBC. Maybe I can start with three, if that's all right. On The U. S. Business, Karl, the space contribution to sales came in a little bit lower I think than market was expecting in the first half.

Speaker 2

And I just wondered is that to do with the sort of timing phasing of some openings? Second one, I guess for you, Max. Sorry if I missed it, but which I think you said a third of the non underlying cash items are onethree of them are cash. Is that right? Which items are cash related?

Speaker 2

And then maybe you could also just give an update on how much

Speaker 1

of

Speaker 2

Asia China sourcing you guys do, obviously, a very topical theme at the moment. I imagine it's not very much now your shot of high street and stationary and so on, but, yeah, that would be helpful. Thank you.

Operator

Well, I'll take question one and three. And, Max, if you if you take number two. Yes. I mean, we haven't had as many openings as you might imagine in our first half, but we have got a really huge store pipeline. We've got 70 stores that are won and due to open over the next two years, but there's quite a few in the second half and quite a few in the first half of next year.

Operator

So that pipeline in America is ever growing and there's some really sizable wins in there from some significant airports. So we I would say we're well on track towards our 20% market share target over the next four years. I'm really pleased with where we are. And we're awaiting the results from another couple of quite significant tenders. And we know of two quite significant tenders that we're about to enter into.

Operator

So there's a lot to go after there. I'll let you take the non underlying and then I'll do China sourcing.

Speaker 1

So in terms of non underlying, as you say, we've had kind of £70,000,000 of total non underlying costs, 25,000,000 of those relate to cash. And of the $25,000,000 broadly speaking, kind of $15,000,000 links to what I consider kind of transformation type items, so the operational efficiency that we've done to drive cost savings through the business, the IT transformation and the supply chain transformation linked to our High Street business as well. So you've then got kind of the remainder is a flow through of the cash linked to items that we had last year. And probably, in my mind, the slightly more interesting follow on is, so what should I expect in the balance of year? And what I've indicated already is that the transformation the IT transformation, we should be expecting around $15,000,000 for the full year, so another 10,000,000 or so on what we've already got.

Speaker 1

And the separation and transaction cost linked to the High Street sale is broadly speaking another 25,000,000 to $30,000,000 So we've still got a step up in terms of cash non underlying in the second half.

Operator

In terms of China sourcing into America, in terms of directly sourced policy, it's tiny for us as in around 1%, so very manageable. In terms of the primary source for a lot of our suppliers, of course, a lot of it does come from China. We've run a number of emotion stores there. What those suppliers seem to be very good at though is they've got a number of different sources for those products. They've got factories across The Philippines into Vietnam.

Operator

So whilst it's quite turbulent over there at the moment, actually we think we're going to navigate our way through it quite well. We've got good stock holdings of all of the key accessories. And the thing to remember about WH Smith and the in motion business is it's quite low ticket value. If you take in motion products, it's all the stuff that you need to enable your hardware. It's all of the bulk standard stuff leads, chargers.

Operator

They're all needs based things. So I think we're very much better sheltered, if you will, than other retailers. And we will have the opportunity to source from a number of different wholesalers within The U. S. So whilst it's a bit of a surprise, I think we'll navigate our way through it well.

Speaker 3

Good morning. Jonathan Pritchard at Peel Hunt. Actually, two on the High Street, funnily enough. Just how disproportionate was the amount of time that yourself, Karl and senior executives were spending on the High Street relative to its contribution? And just how excited are you about being able to focus more on travel?

Speaker 3

And just casting my mind back, some of the great and the good at W. A. Smith have sort of earned their stripes at High Street, learning their stuff on space allocation and profit maximization, etcetera. Do you feel a little bit as though that might be lost with the departure of High Street? That might be something that, as a group, you might just have lost?

Speaker 3

And then just thirdly, just to sort of wax lyrical on the economics really, just how defensive is that core travel range? You know, does history tell us that that people do despite the fact that they're small ticket items? Do people try to dial out that sort of thing in in tougher economic times, or are they genuinely defensive, you believe?

Operator

Right. Well, in terms of time on the high street, I guess the thing that has changed each and every year over the last decade is the businesses have become more divergent. And our travel business is around food to go, tech accessories, health and beauty. And High Street remains being about stationary really in carts. And the engine room of the business and how we govern the business and how we think about the business and synergies be it IT, be it kind of how we organize our people increasingly for two very, very different businesses.

Operator

So in terms of being able to focus really on what we do around our supply chain, our IT, how we organize ourselves, It will be a lot simpler having a travel business because even though we operate in 32 countries, broadly the strategy across each of those countries is very similar. So from that point of view, it does make us a much simpler business. A lot of our DNA was forged from the high street, a fight to survive twenty years ago that then sort of fueled our way of doing business in travel. But I think that DNA has really been overtaken in travel. And we have a number of new initiatives now that I think really lead the way in our travel business in terms of using AI for pricing, in terms of how we think about ranging, space allocation.

Operator

It's all very cutting edge in travel. So I think all of our innovation really comes from our Travel UK division. And then we sort of home those things that really work and then spread those into our other divisions. And so Travel UK is sort of the hub of where all of our kind of our forensic approach comes from and then we spread it out into other markets. In terms of your point about are we really sheltered?

Operator

Well, of course, can't predict what happens with consumer confidence, but we are very we are a very low average ticket value. If you take Heathrow Airport, our average ticket value is is less than £12. People largely are buying stuff that they need for their journey, something to eat, something to eat on the plane, something to entertain their kids, something to kind of power their electrical products, deodorant, those sort of things. And I think those are going to be right at the end of people's list when it comes to kind of conserving cash. People may be less likely to go into a restaurant.

Operator

They could be more likely to get a meal deal and go on to a plane. So history has taught us that we're able to weather these storms better than other retailers. And whilst now we have a big tech business in In motion, in The U. K, we sell Apple hardware products. But actually in of the world in America, we don't sell any hardware.

Operator

It is all about tech accessories. And that market has always proved to be very stable.

Speaker 4

Morning. Rich Taylor from Barclays. Two questions, please. Firstly, on The U. S.

Speaker 4

Business. Just trying to get an idea of how far you are through the process of applying your space management analysis to that estate. I know you've said you're adding food and beverage, health and beauty and so on. But what proportion of the estate has benefited so far from this? And also linked to this, what sort of reception you're getting from landlords to realize that the ownership structure is different?

Speaker 4

And then secondly, thanks, Max, for your answer on non underlying items. But just to understand, once the £10,000,000 or so in H2 and the £25,000,000 or so from fees are spent, are there any other things that we should think about into FY 2026 and beyond in terms of items to consider? Thank you.

Operator

In terms of your space management question, it is very different in America. American Landlords, they agree to award a win on a tender, are very fixated on the look of the store and what the layout is of that store. So unlike perhaps other markets where we want to change the space, we do have to seek their permission. We do have to take them through the process and take them through the journey. So it tends to be quite a bit slower in America.

Operator

So we're well on the way with that journey. We've got lots of proof points. It can just sometimes be a bit bureaucracy. But at the end of the day, you're typically saying to a landlord partner, this is what your customers are saying. This is what they want to buy in our stores over the last two years.

Operator

This is where the stores are really busy. Why don't we give a bit more space to that area and take a bit of space from an area where the customers don't want to shop within? So it's a very logical argument, but it just takes a bit of time. So on the good side, we've already refitted a number of stores, so we're seeing benefit, but we still have a lot to go after. And these things tend to be an iterative process as they've always been in The U.

Operator

K. You go back twelve years in The U. K, we'd only have one chiller for food. Now we've got 20 chillers in a typical airport store for food and for drinks. So these things kind of move over time as the consumer gets used to the proposition.

Operator

Yes. Max, non underlying.

Speaker 1

Non underlying, yes. So in terms of next year, it's too early to be fully committed in terms of what do we expect. But the IT transformation is a program, as we've said already, that is spread over two to three years. I'd be expecting next year for the $15,000,000 to be dropping down to around 10,000,000 and then probably half of that again in the year after. And we've got some other areas that we're looking at, in particular around kind of rightsizing the High Street business.

Speaker 1

So there'll be some cash costs associated with that in 2026 as well, maybe around $5,000,000 And then there's always there's other items that may come up and be considered for treatment in that way the year after, but probably a bit early to say in terms of that at this stage. Maybe a placeholder around kind of 20,000,000 to £30,000,000 which I think is what we said previously as well for a more typical year.

Speaker 4

Sorry, the 20,000,000 to 30,000,000 is for FY 'twenty six.

Speaker 1

For 2026%.

Speaker 5

Thank you. You. Good morning. Warwick O'Kynes, BNP Paribas, Exane. Just firstly, could you talk a bit more about the multiyear IT transformation?

Speaker 5

As you said, it's two to three years, but at what point do you start to see benefits? When are and what exactly are those? And then secondly sorry, naive question. What are these high street business rightsizing in 2026 costs? Why do they perpetuate?

Speaker 5

And maybe just more broadly, I know The U. K. Rail business and the high street business have obviously been very different locations. Do you see any greater opportunities for rail with with the absence of the high street business to compete with?

Operator

Do you want to say the first?

Speaker 1

First two. Yeah. So in terms of the IT transformation costs, that is broadly linked to the upgrade of all of our IT infrastructure across the business, in particular where we've got areas of kind of core IT infrastructure that are, if you like, coming to end of life, and so we've been investing in that through the kind of early part of this year, actually latter part of of twenty twenty four through this year. So we've got things like data migration, transition of kind of our information security that we've been continuing to invest in, as you'd expect. Most organizations are doing that.

Speaker 1

We've also got modernization of our store systems and making sure that we get the operational benefits of those. And already, we're starting to see some of the benefits. And at the back end of this year and into '26 and beyond, we're going to continue to see effectively the operational benefits as well as the cost efficiencies that come from that. So we're really confident in the spend that we're putting into the business, and it gets a lot of scrutiny, Carl, and I chair a monthly IT portfolio forum to look at these type of things. So it's very well considered and very kind of deliberate investment.

Speaker 1

And in terms of the rightsizing of the High Street, I think when we presented the High Street plan or the sale of the High Street just a couple of weeks ago, we talked about rightsizing the business and the central cost savings to be delivered as part of So the non underlying £5,000,000 I'm referring to or broadly £5,000,000 is linked to that.

Operator

In terms of rail, it operates in a very similar respect to air. And customers traveling through rail, they want they want snacks. They want food. They want tech accessories. They want health and beauty.

Operator

The only slight similarity with the High Street business in different to Air is that there there's quite a good cards business. But unfortunately, it's very last minute cards business. While our record day for Valentine's Day was on Valentine's Day, our record day for Mother's Day was on Mother's Day. But that's the only difference. That's the only similarity is the cards business.

Operator

So everything that we do in Rail over the next few years will be broadening health and beauty, broadening food and broadening tech accessories.

Speaker 6

Good morning. It's Charlie from HSBC. A few questions from me, if you don't mind. Number one, could you just quickly chat in your outlook, what does that contain for your expectations for domestic U. S.

Speaker 6

Flight demand? Appreciate that sort of numbers out there from Delta American and an acronym that just suddenly left my mind at the worst possible moment of sort of down 10%, fifteen %. What is that is that in your outlook at all? The second is, what are your contingency plans for tariffs within In motion in The U. S.

Speaker 6

Sorry, within your tech sales in The U. S, do you expect to pass prices through? Thirdly, are you what are you expecting for resorts for the year? Are you expecting to see a return to positive LFL? Is that what you've budgeted for?

Speaker 6

And then my final two are much more incidental, so I apologize. For funkypigeon.com, I appreciate we've now had Mother's Day. We've now had the sort of the what I'm trying to say, the peak trading period for the sort of larger comparative of Moonpig at nil EBITDA for the year, are you expecting an incrementally higher number than the 6,000,000 we saw last year? And then finally, and I apologize, five questions outrageous, Are is our margins in hospitals in Australia lower as they are in The UK versus the rest of the portfolio? Thank you, and apologies for so many questions.

Operator

Blimey. So there's a lot of varying views on what's going to happen with air traffic in The U. S, and nobody really knows yet. I mean, there's so many different views. I mean, it's a large country and domestic travel in The U.

Operator

S. Accounts for more than 80% of the total traffic. And it tends to be quite resilient. What we're focused on is making sure that we have got the absolute strongest plans for spend per passenger to mitigate any potential downside. And in a world where that did happen and where people do tighten their belts, I think our offer can be a lot stronger than any of our kind of retail and F and B competitors within an airport environment because we can provide something in the moment at actually quite a reasonable price.

Operator

So history has taught us that if we act accordingly, the effects on us will be a lot lower than other retailers. That's what we're going to do. We're going to focus on making sure we've got the best food offer, the best accessories offer. And again, similarly to The UK, the average ticket price in The U. S.

Operator

Is less than $20 across our entire air estate. So I think we're well positioned. In terms of the contingency for tariffs, I think we're in a good place there. The vast, vast majority of all of our products are low ticket value tech accessories. It's leads.

Operator

It's power banks. Even the headphone market is largely a replacement market. So it's very needs based. So as long as we have got a very good offer in line with what a U. S.

Operator

Customer would understand it to be, we're going to be in a good place. A lot of electrical accessories are also made outside of China, in Vietnam, in The Philippines. So there's a number of different sourcing options. So I think we'll be able to mitigate a lot of the impact. Where tariffs do come through, I think we will be able to pass that on in pricing because it will be as a percentage, it might be quite high, but it's on quite a low ticket price.

Operator

So I think it will land well in the market. In terms of resorts, I mean, first thing I'd say about resorts is in many ways in even a year's time, I doubt we'll be talking about resorts because it's becoming a much smaller part of the business. We're not spending lots of money opening stores in Las Vegas. We've opened one store we'll open one store in total this year. The sales are okay.

Operator

There's always an ebb and flow of customers there. The prognosis for Las Vegas in the medium and long term is good. There's lots of sports events, so traffic into Vegas will be good. Our focus a bit like in Motion is on maximizing the margin. We accessories in Vegas and therefore growth of profitability is where we're really focusing.

Operator

In terms of Funky Pigeon, the way that we're thinking about that at the moment kind of stabilization of profits from last year. I don't think we're expecting anything particularly different in terms of what we're looking at. And then hospital margins in Australia, don't want to misquote myself, do you know, off the top of your head. Mean, the hospital margins in the margin in hospitals in Australia is very good and would probably be the strongest because it's largely an F and B business. The difference between our hospital business in Australia to The U.

Operator

K. Is it's less about product and more about food. So it's a bit of an F and B operation. And it's something that we've always historically had, but it's quite a good growth business from that point of view. But I couldn't give you the exact I haven't got the exact margin off the top of my head.

Speaker 7

It's Harry Gowers from JPMorgan. Just two questions, if I can. I appreciate it's quite a short period and obviously impacted by the timing of Easter as well. But is there any more color that you could provide on The U. S.

Speaker 7

Like for like performance in H2 to date? And then second question, just on The U. S. Spend per passenger growth in H1 of 5%. Are you confident that can continue into H2?

Speaker 7

Or do you start to lap any initiatives or introductions of new categories over the course of the year? Thanks.

Operator

So in terms of our current like for likes, we're in a good place. And the the only reason we're not being more specific is there is a complete dislocation in terms of timing because it's Easter this weekend coming, and Easter was, what, three or four weeks ago last year. So there there there there's there's two strong weeks coming up. So it's all it's sort of all dislocated from that point of view. What I can say though is if you look at the stub period up till now, like for likes in The U.

Operator

S. Continue to be positive. Our spend per passenger, I've got more confidence in its ability to maintain and grow in a positive direction because we're putting more initiatives in place. And the initiatives aren't sort of necessarily clever initiatives around pricing or promotions. They're about giving more space to categories that we know consumers want.

Operator

So we know that we'll get a shift of sales into those categories. And it's not rocket science. It's going to be giving more space to drinks, more space to sandwiches, more space to stacking, and we know that works. So I think in our Travel Essentials business in The U. S.

Operator

That we know that we've got good momentum of and our like for likes there in the first half are 8%. We know that we've got the ability to carry on growing that spend per passenger. So I think we feel really confident. We can't give you a prediction on passenger numbers, but I think our ability to trade above those passenger numbers is good for a number of reasons.

Speaker 8

Morning. Fintan Ryan here from Goodbody. Two questions please. Firstly, on The U. K.

Speaker 8

Spend per passenger, can you give us a sense of how that's evolved in H1 so versus that 5% in The U. S. And particularly across the three channels of air, hospital and rail? How much of that is pricing have you taken already? And so like what can what pricing are you expecting in the second half, particularly with labor cost increases?

Speaker 8

And then secondly, I guess sort of related to the last question. As you lean more into food and beverage and health and beauty sales within your travel footprint, what would you think is the best in class in terms of sales mix, food and beverage, health and beauty? Where is your best operations of with those categories currently trending? And given that in your hospital footprint, you're already doing stand alone food and beverage offerings, would you consider in new tenders or within your other air and rail travel state to open more stand alone food and beverage concessions? Thank you.

Operator

In terms of UK spend per passenger, sat next to the architect of it actually. Air is broadly similar to America, but the difference with our UK business is 5%, six % spend per passenger on top of 56% on top of and we what we're really, really good at, if you don't mind me blowing some smoke at you, Andrew, is continuously layering on initiatives to continue to grow our spend per passenger. And we always have a pipeline of 20 initiatives. We're constantly doing testing and learning. So what Andrew will be doing in a number of stores now is testing different ranging mechanics, testing different pricing promotion mechanics, working out what works, rolling out to a further 20 stores and then kind of exploding it out to the store estates.

Operator

And we've got a continuous run of initiatives that do that. We see similar growth in hospitals and rail. In hospitals, it's all about food. In hospitals, it's all about giving doctors, nurses, patients, visitors a better food offer. And we've still got a lot more that we can do there to improve that offer.

Operator

We're also improving our health and beauty offer within hospitals. Myself and Andrew were down in St. Thomas' hospital last week where we've completely refitted our health and beauty offer and we've seen a huge uplift. So we're taking things like that and rolling it out. So I think we're very confident in our ability to continue to grow our spend per passenger in The U.

Operator

K. Across all three formats. And history would suggest we're really consistent in doing that. In terms of F and B, we looking at tenders and opportunities, particularly in air. We run coffee houses now in airports.

Operator

We run Costa Coffee in an airport. We are opening a food offering and a coffee offering in Manchester airports. So that's something that we're always looking at. And the blend in terms of a one stop shop between how customers shop and how customers think when they're grabbing a bit of food or a book, customers increasingly want everything very convenient. They want to be able to grab a hot coffee or a hot sandwich at the same time.

Operator

And so you'll see more and more of that from us in terms of our general offer, improving our food offer, having more push button coffee in our stores, increasingly barista coffee in our stores and then looking at a more advanced food range where we can include hot food. So you'll see a lot more of that from us.

Speaker 9

Morning. Tim Barrett from Deutsche Numis. One question Sorry to keep on about this, but modeling the High Street exit, it sounds like about €10,000,000 net inflow this year, 6,000,000 next year. Just in terms of the balance, that tax asset, when do you think that will come through?

Speaker 9

The second question is around closures, just whether you had a figure for the full year to net off against the 60 openings. And last question, slightly broader. Any more thoughts about efficiencies following The U. K. Budget, so the national insurance changes coming in?

Speaker 1

Should I take the first two? Yes. Thanks, Tim. So in terms of the High Street, as you say, the gross cash flow, expecting £52,000,000 so £36,000,000 to be settled on completion, which should happen through the summer, dollars 6,000,000 then deferred for $12,000,000 following completion. And then the $10,000,000 of deferred tax assets, that's going to be on an as realized basis.

Speaker 1

So that could run out for a number of years in terms of where the $10,000,000 is going to be. And then as you say, you've got the 25,000,000 to $30,000,000 of separation and transaction costs, and that's around $10,000,000 of transaction costs and around kind of $49,000,000 of separation costs, which is going to effectively take another kind of six to twelve months, as much of that as we can we're going to put through this year. In terms of closures overall and maybe just stepping back into openings as well. So we've opened 30 stores in the first half and again, very much focused on improving the quality of our store estate, 43 closures in the first half. Around half of those relates to franchise small franchise stores, and 15 of those actually linked to a particular partner that we've had in India where they've been going through some liquidation challenges, let's say, since COVID.

Speaker 1

So not too concerned with the loss of those stores overall in terms of profitability or sales. And then we've had closures, I would say, the full year expecting kind of early 50s with openings overall in the 60s. So net kind of 10 for the year, but with around or around 20 of those closures being in that small franchise part.

Operator

In terms of efficiencies, we're always looking at ways of improvement. And actually the when we touch on the non underlying costs and all of the IT transformation that we're doing, we're doing that in mind with making the whole payment process in our stores much easier, much simpler, allowing customers to be able to transact direct in terms of cell scanning tools in a much easier way without having to have interventions. And also an IT system that allows a smooth transition of stock from the source all the way through our supply chain and into stores with less intervention from staff. So those are the real efficiencies that we're going to see coming through this year and next year in terms of making our business model much simpler and having less interventions. And therefore, we should be able to maintain our payroll ratios.

Speaker 9

Thank you.

Operator

I think that's it. Don't know. Are there questions from the ceiling?

Speaker 1

You.

Speaker 3

We currently have no questions, so I hand back to Karl Cowling for closing remarks.

Operator

That's because the questions in the room are so thorough. I was wondering whether Robert Moorhead might be online asking a quick question. Look, thank very much, everyone, for coming. I hope we've given you a real flavor of what's going happen over the next six months. So thank you very much and look forward to updating you in November.

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Earnings Conference Call
WH Smith H1 2025
00:00 / 00:00