CONNECT GROUP PLC ANNUAL REPORT AND ACCOUNTS 2019 · 2019-12-16 · 16 Financial Review 22...
Transcript of CONNECT GROUP PLC ANNUAL REPORT AND ACCOUNTS 2019 · 2019-12-16 · 16 Financial Review 22...
CONNECT GROUP PLC ANNUAL REPORT AND
ACCOUNTS 2019
CONNECT GROUP ANNUAL REPORT 2019
2 AYearinReview4 Chairman’sStatement6 GroupStrategyand
BusinessModel8 ChiefExecutive’sReview11 KeyPerformanceIndicators12 OperatingReview16 FinancialReview22 PrincipalRisks26 StatementofViability28 CorporateResponsibility
Connect Group PLC Annual Report 2019
INSIDE THIS ANNUAL REPORT
Strategic Report
Governance
32 IntroductiontoGovernance34 BoardofDirectors36 CorporateGovernance44 AuditCommitteeReport51 NominationsCommitteeReport54 Directors’RemunerationReport75 Directors’Report–Other
StatutoryDisclosures79 Directors’Responsibilities
02 32ForregularupdatesontheperformanceandgovernanceoftheGroupvisit:www.connectgroupplc.com
CONNECT GROUPANNUALREPORT2019S
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STRATEGIC REPORT 1
Financial Statements
Connect Group PLC is a specialist distributor and a leading player in newspaper and magazine wholesaling and mixed freight deliveries. Our business model is founded on the delivery of great service, scale efficiencies and unmatched value for customers.
Our Values
80 IndependentAuditor’sReporttothemembersofConnectGroupPLC
86 GroupIncomeStatement87 GroupStatementof
ComprehensiveIncome88 GroupBalanceSheet89 GroupStatementof
ChangesinEquity90 GroupCashFlowStatement91 NotestotheAccounts132 Glossary–Alternative
PerformanceMeasures134 CompanyBalanceSheet135 StatementofChangesinEquity136 NotestotheCompanyBalance
Sheet139 ShareholderInformation
80
Welcome to the Connect Group PLC Annual Report 2019.
In a challenging year, the Group has focused on building the underlying strength of its core operations, with priorities that balanced improvements in profitability, continued investment and prudent capital management.
Gary Kennedy Chairman
Makeinformeddecisionsandactquickly.Beagileinthewayweworktogetheranddeliverforourcustomers
Beimaginative,adventurousandcurious.Developinspirationalideasandinnovativesolutions
Shareyourthoughtsfreelyandalwaysstayopentonewideas.Listentoothers,bepositiveandengageincommunications
Safe,reliableandresponsible.Takeprideinourworkanddotherightthingforourcustomersandeachother
Havefunandbehelpful.Enjoyworkingtogethertodelivergreatperformance
Beinclusive,honestandrespectfultoeveryone,whatevertheirroleorexperience
CONNECT GROUPANNUALREPORT2019
CONNECT GROUP ANNUAL REPORT 2019OUR VALUESS
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A Year in Review
LOOKING BACK ON A CHALLENGING YEAR
The Group continues to deliver substantial
profit and cash, achieving a reduction in
net debt after meeting the investment needs
of the business.
Total Group revenue
£1,467.9m2018: £1,534.3m
Statutory (loss) before tax
£(37.6)m2018: £(35.5)m
Free cash flow
£8.3m2018: £20.2m
Net debt
£73.9m2018: £83.4m
Adjusted profit before tax
£23.2m2018: £28.4m
Adjusted earnings per share
7.9p2018: 9.3p
Dividend per share
1.0p2018: 3.1p
Financial highlightsConnect Group PLCisaspecialistdistributorandaleadingplayerinnewspaperandmagazinewholesalingandmixedfreightdistribution.Weconnectoursupplierstotheircustomerswithnetworksthatprovidescaleefficienciesandmarketexpertisewhichaddsvalueacrossthesupplychain.Ourbusinessmodelsarefoundedonanunmatchedabilitytomeettheneedsofourcustomerstostandardsthatotherdistributorswouldstruggletoachieve.
www.connectgroupplc.com
Smiths News,theUK’slargestnewswholesalerreachesmorethan25,500retailersacrossEnglandandWales.Operatingsevendaysaweek,wedeliversupplies,collectandprocessreturnsandusetechnologytoforecastdemandandmanageproductsefficiently.Servingafixedbutfragmentedcustomerbase,thedensityofourcoverageisunprecedented,andthespeedofturnaroundiscriticaltooneoftheUK’sfastestphysicalsupplychains.SmithsNewshaslong-termandexclusivedistributioncontractswithitsmajorpublishers,underpinningahighlypredictablebusinessmodelinwhatisauniquelyspecialisedsector.SmithsNewsincludestwoadjacentbusinesses,DMDandInstore,whichprovidecomplementaryservicesforpublishersandretailers.
www.smithsnews.co.uk
Tuffnellsisaleadingspecialistinmixedandirregularfreight,servingsmallandmedium-sizedenterprisesacrosstheUK.Whetheritisaparcelorapalletload,Tuffnellshassolutionsforthedeliveriesthatothersfinddifficulttomake.Withamixoflocalandnationalclients,ournetworkoffersarangeoftimeddeliveriesthatcomplementsourcapabilityinspecialistdistribution.
www.tuffnells.co.uk
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 3
In a challenging year the Group’s performance was driven by a strong recovery in Smiths News, offset by significantly weaker trading in Tuffnells.
Operational headlines• Costsavingsoffsettingimpact
ofdecliningsales• SwiftremovaloflegacyPassMyParcelcosts• Serviceimprovementsreducing
rectificationcosts• Majorcontractrenewalssecured• Pathwaytofuturenetworkefficiencies
Revenue £m
Operating profit £m
Revenue £m
Operating profit £m
OutlookWithawell-establishedandsuccessfulbusinessmodel,SmithsNews’primaryfocusisongreatserviceandthedeliveryofefficienciesthataimtooffsetthedeclineinsalesofnewspapersandmagazines.
Operational headlines• Legacycostandserviceissuesimpacting
performance• Revenuequalityimprovementsoffsetby
lossofvolume• Networkandtrunkingreviewunderway• Strategicreviewofthebusinessunderway
OutlookAfteranextremelychallengingyear,weareimplementingastrategicreviewtodeterminethemostappropriatestructureandstrategyfortheTuffnellsbusinessand,morewidely,toconsideritsroleandfutureintheGroup.Intandemwiththisreview,Tuffnellswillcontinuetofocusonimprovingthequalityofitsrevenue,leanerandmoreflexiblecoststructures,newcustomerwins,increasedvolumesandimprovementstoservice.
2019
2019
2019
2019
2018
2018
2018
2018
164.6
(14.1)
1,303.3
43.6
175.2
(5.0)
1,361.6
38.9
Business overview
CONNECT GROUP ANNUAL REPORT 2019OUR VALUESS
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Chairman’sStatement
These headline results have been achieved
in the context of widespread change and
restructure, impacting all areas of the Group.
CHALLENGE AND PROGRESS – LAYING THE FOUNDATION FOR RECOVERY
Inachallengingyear,theGrouphasfocusedonbuildingtheunderlyingstrengthofitscoreoperations,withprioritiesthatbalancedimprovementstoprofitabilityandcontinuedinvestmentandprudentcapitalmanagement.TheperformanceofSmithsNewsandtherestructureofourcentralfunctionshavegonewell,howeveroverallprogresswasseverelyhamperedbyaworseningofTuffnells’performanceinachallengingandcompetitiveenvironment.OverallGroupAdjustedprofitbeforetaxisthereforebelowlastyear,albeitonlymarginallybehindmarketexpectations.WhileweareconfidentthatSmithsNewscannowdeliversustainablypositivereturns,inthelightof
itscontinuingunderperformanceandfutureinvestmentneeds,wehavedeterminedtoconductastrategicreviewofTuffnells,encompassingitsimmediatestrategy,andlonger-termroleandprospectsintheGroup.
GroupAdjustedprofitbeforetaxforcontinuingoperationsof£23.2misdownby18.3%(FY2018:£28.4m)andAdjustedearningspershareisdown15.1%to7.9p(FY2018:9.3p).Freecashflowforcontinuingoperationswas£8.3m(FY2018:£20.2m)andtheGroup’snetdebtclosedtheyearat£73.9m(FY2018:£83.4m).
GiventheunderperformanceofTuffnellsandinconsiderationofitsfutureprospectsintheGroup,animpairmentof£45.5m
hasbeenmadetothegoodwill,tangibleandintangibleassetsofthebusiness.Asaconsequence,theStatutorylossbeforetaxof£37.6misadverseby5.9%(FY2018:lossof£35.5m),andStatutoryearningspershareisalossof12.9p(FY2018:lossof15.5p).
TheGroup’soverallperformanceshouldbeviewedinthecontextofwidespreadchangeandrestructure,impactingallareasofthebusiness,ourcolleaguesandcustomers.Intheautumnof2018,havingcompletedtherationalisationofourportfolio,wereturnedaccountabilityforSmithsNewsandTuffnellsfromtheformerintegratedstructure,tooneofdistinctbusinessunitssupportedbyasuiteofsharedcentralservices.Thenewstructurewasintroducedintandemwithclearprioritiesthatwoulddriverecoverybyrefocusingonourcorestrengthswhilebeingopentonewandmoreefficientwaysofworking.
ItispleasingtoreportthesignificantlyimprovedperformancefromourlargestbusinessSmithsNews,whichreturnedAdjustedoperatingprofitof£43.6m(FY2018:£38.9m)upby12.1%.Acombinationofsustainablecostefficienciesandtherapidremovaloflegacycostsfromexitedbusinesspropositionshascontributedtothisresult.But,perhapsmostimportantly,thefocusedmanagementstructure,ledbyJonathanBunting,hasreturnedSmithsNewstoitsformerstability,restoringitsreputationfordeliveringunmatchedserviceandefficiency.Theacceleratedrenewalofourcontractswiththemajornewspaperandmagazinepublishershasalreadysecuredover80%ofourcurrentrevenuesthroughto2024.Thisisafurther
Gary KennedyChairman
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 5
boosttoconfidence,givinguscertaintyofourterritoriesandanenviablepredictabilityofrevenuesandcashflow.SmithsNewshasanexcellenttrackrecordinfindingsavingstomitigatethegradualdeclineinsales–whilethisinevitablybecomesmorechallengingovertime,asakeypriorityandfreeofotherdistractions,wewouldhopetomaintainsimilarprogressoverthelifetimeofourcontracts.
DawsonMediaDirect(DMD),theGroup’sspecialistairlineandtravelpointbusiness,hasforanumberofyearsworkedcloselywithSmithsNews.Thisyear,thebusinesslostasignificantcontractwithBritishAirwaystocompetitivetenders.Wehavethereforetakenactiontomitigatetheimpactand,followinginternalreview,DMD’soperationandmanagementhavebeenfullymergedintoSmithsNews,fromwhereitcancontinuetomakeapositivecontribution.
Tuffnells’Adjustedoperatinglossof£14.1m(FY2018:£5.0m)wasseverelyimpactedbytheflow-throughoflegacyweaknesseswhichmeantwebegantheyearwithasignificantlyworseningrunrateofconsignmentvolume,customerattrition,costsandoperationalperformance.Thepositionwasexacerbatedbyuncertaintyinthewidereconomicenvironmentand,asthemarkettightened,hasledtoafurtherlossofsales.
AsatSmithsNews,thereintroductionofadedicatedmanagementteamhasimprovedfocusandcontrols,butitisnowclearthatthepotentialsolutionsinTuffnellswilltakelongertoflowthroughtoresults,anddisappointinglytheanticipatedfirstsignsofperformanceimprovementwerefurtherdelayedinthesecondhalfbyanespeciallychallengingfinalquarter.
ItisclearthattherecoveryofTuffnellsremainstheGroup’smostpressingchallenge.WecontinuetobelievethattheoperationalperformanceofTuffnellscanbeimproved,withtheimmediateprioritybeingtoidentifymeasurestoreducecostsandimproveoperationalflexibility.However,inthelightofitscontinueddragonoverallGroupprofit,thestrategicreviewwillalsodeterminethemostappropriatestructureandstrategyforthebusiness,andmorewidelytoconsideritsroleandfutureintheGroup.
Supportingthestrategicreview,MichaelHoltwilltaketheroleofExecutiveChairmanofTuffnellsforthedurationoftheprocess.Michaelhasbeenanon-executivedirectoroftheGroupsinceOctober2018;withalifetimeofexperienceinthedistributionandlogisticssector,heisfullyqualifiedtoprovideinsightanddirectionthatwillcomplementthe
currentmanagementteam.Meanwhile,andintandemwiththereview,wewillcontinuetopursueefficienciesandgreaterflexibilityofworkinginresponsetothechallengingtradingenvironment.
Efficienciesinourcentralfunctionshavemadegoodprogressanddeliveredanimportantcontributiontoouroverallresults.Aleanercentre,withasimplifiedmanagementstructurehasalsoimprovedvisibilityofcostsandtheirallocationacrosstheGroup.Workinginsupportofthebusinessunits,thecentralfunctionshavereducedcostsinareassuchasRecruitment,TechnologyandPeople–aswellasimprovingthequalityofinformationwhichunderpinsaccountabilityforperformanceatanoperationallevel.Theongoingdevelopmentofanoffshoresharedservicecentrefortheprovisionofselectedtechnology,customerexperienceandfinanceservices,willyieldsignificantcostbenefitinfutureyears.
DespitethechallengesinTuffnells,whichlimitedprogressintheyear,theGroupgeneratedpositiveFreecashflowof£8.3m(FY2018:£20.2m),closingtheyearwithnetdebtof£73.9m,equivalentto1.9Xnetdebt/EBITDA.TheplannedSaleandLeasebackof16Tuffnellsdepotsdidnotproceedintheyearashopedbut,inthefirstthreemonthsofFY2020,wereachedagreementcoveringsixdepots,generatingnetreceiptsof£9.9m,whichhavebeenusedtofurtherreduceborrowing.Furthermore,cashcontributionstothedeficitrepairplanoftheGroup’slargestdefinedbenefitpensionscheme(inSmithsNews)havenowceased(FY2018:£3.3m),followinganinsuranceledbuy-inprocessinOctober2018.
Duringourrecoveryperiod,weareholdingcapitalmanagementasapriority,whilebeingmindfuloftheneedforallstakeholderstoshareinourprogress.Thisyear,wehavenotmetourperformanceobjectivestotriggervariablepayawardsforouremployees.However,inthelightofourunderlyingprogressandafterconsiderationofourfutureprospects,theBoardhasproposedandrecommendedafinaldividendforFY2019of1.0ppershare,payableinFebruary2020.Lookingahead,wecontinuetoexpectFreecashflowfromoperationstobesufficienttofundinvestmentneeds,contributetoareductioninnetdebt,andprovideanattractiveyieldtoshareholders.
ThesupportofmycolleaguesontheBoardandExecutiveTeamhasbeenessentialtoaddressingtheopportunitiesandchallengesacrosstheGroup.Iamgratefulfortheirconstructivequestioningandthoughtfuljudgementaswecontinuetodeliveraturnaroundbasedonbuildingasustainablybettercorebusiness.JosOpdeweeghwhojoinedasChiefExecutiveOfficerinSeptember2018madeameaningfulcontributiontothedirectionandimplementationofthisstrategy,beforeleavingtheGroupinNovember2019.IamdelightedthatJonathanBunting,whohasledtheSmithsNewsbusinessforovertenyears,hasagreedtotakeuptheroleofInterim
ChiefExecutiveOfficerofConnectGroupPLC.HisindustryexperienceanddeepknowledgeofouroperationswillbeinvaluableasweconductthestrategicreviewanddeterminethefutureleadershiprequirementsoftheGroup.
Thisyear,theBoardcompletedanexternallyfacilitatedthree-yearlyevaluationprocesswhichconcludedthattheBoardanditsCommitteesareworkingeffectively,butalsoprovidedhelpfulfeedbackforimprovement.Furtherdetailsoftheevaluation’sprocessandfindingscanbefoundintheCorporateGovernancereportonpage41.
Lookingtotheyearahead,ourcorestrategyremainsuncomplicatedandunchanged:aresolutefocusonbuildingsustainablybetterbusinesses,underpinnedbyprudentcapitalmanagement.Inthisregard,therecoveryofSmithsNewsandtheimprovementstoourunderlyingfinancialpositionprovideuswithastrongerplatformtoaddressourmostpressingchallenge–theturnaroundofTuffnellsandtheremovalofitsdragonouroverallperformance.Werecognisethereisstillmuchtobedoneandthat,inparticular,theoutcomeofitsstrategicreviewwillbecriticaltothelong-termdeliveryofimprovedshareholdervalue.Iamconfidentthatthiscombinationoffocusedpriorities,widerstrategicreviewandcontinuedprudentcapitalmanagementistherightwayforward,andlookforwardtoreportingonprogressinduecourse.
Finally,Iwouldalsoliketothankallourcolleaguesfortheirunderstandingandunstintingcommitmentinthefaceofwhathasbeenademandingprogrammeofchangeandrenewal.Itistheirdailyeffortswhichunderpinallthatwehaveachieved,andIamalwaysimpressedbytheirdeterminationtodeliverthehigheststandardsofservice,ofteninchallengingcircumstances.AstheGroupcontinueswithitsrecovery,theireffortswillbevital,andIlookforwardtothemsharinginthebenefitsofoursuccess.
Gary KennedyChairman
During our recovery period we are holding capital management as a priority.
CONNECT GROUP ANNUAL REPORT 2019OUR VALUESS
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Group Strategy and Business Model
BUILDING SUSTAINABLY BETTER BUSINESSES
Our strategy is to build the capability of Smiths
News and Tuffnells, through actions and
investments that will deliver sustainable
value over time.
Our strategyTheGroup’sstrategyisfoundedonthedeliveryofmarketleadingservicestoourcorecustomergroups.Weoperateasaleadingplayerintwodistinctmarkets,sharingcentralservices,whichprovidefurtherefficienciesandenhanceourspecialistexpertise.Inbothourmarkets,westrivetoofferthebestvalueroutetomarket,providinghighqualityservicesthataredifficultandcostlyforotherstoreplicate.Bydoingso,weaimtoestablishlong-termpartnershipswithourcustomersandavoiddisintermediationinoursupplychains.
TheGroupremainsprimarilyfocusedinitscoreoperations,workingtoenhancecapabilityandinvestingtobuildsustainablybetterbusinesses.Aleancentralservicemodelensuresscaleeconomiesforthoseservicesthatcanbeshared,withouthindrancetothesmoothrunningoffrontlineoperations.TheGroupisalerttothepotentialforadjacentserviceswhichcanleverageitscoreskillsandplanstopursuetheseovertime,applyingstrictinvestmentcriteriawhichdeliveranappropriatebalancebetweenriskandreturn.
Morebroadly,ourstrategycontinuestofocusonimprovementtotheunderlyingfinancialstrengthoftheGroup,targetingareductioninnetdebt,whilemaintainingourcommitmenttomeetingtheinvestmentneedsofthebusinessandprovidinganattractiveyieldforshareholders.
Our business modelTheGroup’sbusinessmodelaimstodeliverserviceexcellence,scaleefficienciesandvalueforcustomers.Asaleadingplayerinourmarkets,wedeveloplong-termpartnerships,combiningcoreserviceswithbespokesolutionsthatenhanceourroleandvalueacrossthesupplychain.
Ourmarketsarecharacterisedbyalargenumberofsuppliers,complextomanageproductrangesandadiverseanddispersedcustomerbase.Thiscombinationofcustomerandproductfragmentationlimitsdisintermediationinoursupplychainsandsupportstheroleofanindustrydistributionspecialistprovidingavaluableservicetobothsuppliersandcustomers.
TheGroup’stwocorebusinessesservedistinctandspecialisedcustomergroups:SmithsNewsistheUK’slargestnewspaperandmagazinewholesaler;Tuffnellsfocusesonmixedfreightandtimesensitivelogistics,specialisingindeliveriesofirregulardimensionandweight(IDW).
Supportingtheseoperationsarearangeofsharedcentralservicesthatprovidefurtherefficienciesandvalueforcustomers.Wehavealong-termcommitmenttoinvestinginsystemsandinfrastructurewhichmaintainourcompetitiveadvantageandenhancetheserviceweoffer.
> 25,500 customers> 39 depots> Tracking and scanning> Returns collections> 364 day operation
> 36 depots> Specialists in IDW> Online parcel tracking> Collections and
deliveries
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 7
Workingefficientlyisthekeytoourcompetitiveadvantage.Withnationalcapabilityandhighmarketsharewecandeliverservicesasstandardthatwouldotherwiserequireapremium,helpingtoreinforceourpartnershipswithcustomers.Ourefficiencyisunderpinnedbyaculturethatactivelyseeksoutimprovementsthatcanbesharedacrossthesupplychain.
TheGroupoffersarangeofdistributionservicesthatcanbetailoredtocustomerneeds.Fromtimesensitiveordifficultdeliveries,tostockholdingandinformationservices,weprovidetheexpertiseandpracticalknow-howthatourcustomerstrusttosupporttheirbusiness.
Valueiscriticaltoourcustomersandhenceourbusinessmodel.Weaimtodeliverthemostcosteffectiveroutetomarket,sharingourinfrastructureandcapabilityacrossmanythousandsofcustomerssothatallcanbenefit.Weunderstandthatvaluecomesindifferentforms,andassuchweofferarangeofpricedservicesfromtherelativelysimpleandregular,tooneoffandmorecomplexdeliveries.
Bysharingandconsolidatingtheroutetomarket,bothourpublishersandretailersbenefitfromahighquality,efficientdailyservice.Wehavelong-termcontractswithallthemajornationalpublishersaswellaswiththemajorityofregionalpressinourterritories.Thismeanswecaninvestforthelong-termandworkwithourpartnerstofindnewefficienciesacrossthesupplychain.
SmithsNewsistheUK’slargestnewswholesaler,workingtouniquelychallengingandultratime-sensitivedemands.Visiting25,500customers364daysayear,thevastmajorityofourdeliveriesandcollectionsarecompletedbefore6.30am.Withover225years’experienceweareaworldleaderinwhatisacomplexandhighlyspecialisedservice.
SmithsNewsalsooffersadjacentservicesforcustomersandsuppliers,includingairlineandtravelpointdistribution,andanextensivefieldmarketingservicespecialisinginnewspapers,magazinesandotherfast-movingcategories.
Ourwidermarketinsightisessentialtobothpublishersandretailers,addingvaluetotheentiresupplychain.Inadditiontodailydeliveries,wecollectandprocessunsoldcopies,providingneartorealtimesalesandmarketingdataonadailybasis.Ouruniqueviewacrosstheentireproductrangeisenhancedbyintelligentinformationsystems,enablingustoforecastandswiftlyrespondtochangingtrendsandspikesindemand.
With36depotscustomers,Tuffnellshaslocalexpertisecombinedwithnationalreach.Thenetworkconfigurationfacilitatesbothadirectcarrierserviceanda‘hubandspoke’capabilityformoredisperseddistribution.
Tuffnellsisaspecialistproviderofparcelfreightservicesforsmallandmediumsizedenterprises,withparticularexpertiseinitemsofirregulardimensionandweight.Ournetworkoflocaldepotsmeansweworkcloselywithourcustomers,offeringarangeofservicesthatcanbeflexedtomeettheirparticularneeds.
Usingsmartsystemsweenhanceourcoreserviceforsuppliersandtheircustomers–addingvaluewithtrackandtracetechnology,electronicproofofdelivery,back-officesystemsintegrationandacustomerwebsiteinterface.Werecognisethatformanypartners,‘timeismoney’–ourgoalistoensuredeliveriesarecompletedasquicklyandefficientlyaspossible.
> 25,500 customers> 39 depots> Tracking and scanning> Returns collections> 364 day operation
> 36 depots> Specialists in IDW> Online parcel tracking> Collections and
deliveries
Services
Services
Services
Efficiency
Efficiency
Efficiency
Value
Value
Value
CONNECT GROUP ANNUAL REPORT 2019OUR VALUESS
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Chief Executive’s Review
In developing and enacting our plans, we have paid close
attention to the interests of all stakeholders.
EFFICIENT, KNOWLEDGEABLE AND SERVICE-DRIVEN
Ayearago,performanceoftheGroupwasnegativelyimpactedbyacombinationofweakeningtradeandoperationaldisruption.Despitethebesteffortsofourpeople,thestrategytointegrateourcorebusinesseshadnotdeliveredthehopedforresults.BySeptember2018,itwasclearthatwhileSmithsNewsandTuffnellswerebothspecialistdistributors,theyweretwodistinctbusinesseswithlimitedopportunitytoleveragesynergiesacrosstheircombinednetworks.
Ourfirstprioritywastoreturnfocusandaccountabilitytothecoreoperationswhilstatthesametimeresettingourapproach,allowingustoleveragetheknowledgeandskillsofthoseclosesttocustomerstodelivermoreefficientbutstillexcellent
Jonathan BuntingInterimChiefExecutiveOfficer
service.WiththefullsupportoftheBoard,andtheunstintingcommitmentofcolleaguesacrossthebusiness,wecontinuetomakeprogress.
Focus and accountabilityInOctober2018,weintroducedanewbusinessunitstructure.SmithsNewsandTuffnellswerereturnedtodedicatedmanagementteams,withaccountabilityforsales,operationalserviceandthefinancialperformanceoftheirfrontlineoperations.Thesearesupportedbyaleancentralsharedservicesmodel,workinginserviceofthebusinessestoprovidebothexpertiseandeconomiesofscaleinareassuchasIT,People,FinanceandBusinessTransformation.
Bymovingaccountabilitynearertoourcustomers,wesoughttoensurethosewiththemostrelevantinsightandexpertiseareabletotakeownershipoftheissuestheyarebestplacedtoaddress.Asaconsequence,wehaveenhancedserviceandcostcontrolinSmithsNews,returningthebusinesstoitsformerstabilityandconfirmingtheconfidenceofourpublisherswiththeawardofcontractsthatsecureourrevenuesandfootprintthroughtoatleast2024.TheGroupfunctionsarealsonowdeliveringamorecustomercentricsuiteofservices,firmlyfocusedonhelpingouroperatingbusinessestosucceed.InTuffnells,progresshasbeenslower;whilewehavemadesomestepsinimprovingthequalityofrevenueandtherealignmentofcoststructures,thereremainsasignificantwaytogotowardsrecovery.InthelightofitscontinueddragontheoverallGroup,wehavethereforeinitiatedastrategicreviewofTuffnellstodeterminethemostappropriatestructureandstrategyforthebusiness,andmorewidelytoconsideritsroleandfutureintheGroup.
Indevelopingandenactingourplans,wehavepaidcloseattentiontotheinterestsofallstakeholders,seekingtoensurethatchangesaresustainableanddeliverbenefitsovertime.Forexample,wehaveworkedtofindcostsavingsthatarecompatiblewithimprovementstoservice,whilemaintainingnecessarycapitalinvestmentinthecontextofawiderprudentapproachtocapitalmanagement.Inevitably,wehavehadtomakesomedifficultdecisions,notleastinthedepartureofanumberofcolleaguesaswehaverestructuredoperations.
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 9
Efficient Head Office FunctionsThestreamliningofourheadofficefunctionshasdeliveredfurthersavingsforthebusinessunitsandtheGroupcentre,whilealsoimprovingservicethroughamorecustomercentricapproach.Amongahostofinitiatives,notableprogressthisyearincludestheoff-shoringofselectedtechnology,customerexperienceandfinanceservices;theconsolidationofthePeoplefunctionintoasinglecentreofexpertise;andtherestructureofourfinanceteams.
Standard Operating ModelWorkingtobestpracticeprincipleswehavesoughttodefine,measureandimprovetheflowofgoodsandeffortacrossournetworks.Startingwithourdepots,inbothSmithsNewsandTuffnells,wehaverefinedoperatingprocedurestodelivermoreconsistentserviceandensurebestpracticeisfollowedthroughbothnetworks.Afurtherreviewofnationaltrunkingandoverallnetworkstructureisnowunderway.
CultureInconsultationwithcolleagues,wehaveintroducednewworkplacevaluesinserviceofamoreentrepreneurialandcustomerfocusedculture.Inaddition,wehavesupportedthechangeprogrammewithinitiativestoencourageswifter,evidence-based,decisionmakingthatisfocusedonmeetingcustomerneedsandbusinessgoals.Wehavemadegoodprogresstooininvolvingandlisteningtofrontlinecolleagues,introducingacascadeofemployeeforumsthatincludesrepresentationfromthenon-executivedirectorsandtheExecutiveTeam.Colleaguesareencouragedtogiveviewsandfeedbackwhichcanbeusedtorefineourstrategyandpriorities.FurtherdetailsareincludedintheCorporateResponsibilityreportonpage28.
However,wehavealwaysbeenguidedbytheunderlyingprincipleofbuildingasustainablefuture,onthebasisofrobustbusinessmodelsandcompetitivecustomerfocusedoffers.
Performance and progressSmithsNewsSmithsNewshasdeliveredgoodresults.Adjustedoperatingprofitof£43.6misup12.1%(FY2018:£38.9m)drivenbystrongcostcontrol,theswiftremovaloflegacycosts,andarenewedfocusonservice.Lookingahead,therenewalofourpublishercontractsonimprovedtermsprovidessuretyforthebusinessandgivesusenviablepredictabilityoffuturerevenues.SmithsNewsisawell-managedbusinessandtheclearmarketleaderinitssector.Ourprimaryfocusisonsustainingthisposition,deliveringgreatserviceandsecuringefficienciesthatoffsettheslowandstructuraldeclineinthesalesofnewspapersandmagazines.
TuffnellsTuffnellshadadifficultyear,returninganAdjustedoperatinglossof£14.1m(FY2018:lossof£5.0m)andweacknowledgethattheturnaroundofitsprofitabilityremainstheGroup’smostsignificantchallenge.Ourimpairmentofthegoodwill,tangibleandintangibleassetsby£45.5mreflectstherealitythatitsturnaroundaspartoftheGroupwilltaketimetoachieve.Meanwhile,thedecisiontoconductastrategicreviewofthebusinesswillensureweconsideralloptionsforthebestinterestsofthebusinessanditsstakeholders.
WhiletheperformanceofTuffnellswasseverelyimpactedbythecarrythroughofoperationaldisruptionandcustomerattritionfromtheprioryear,theirimpactwasexacerbatedbyaninsufficientlyflexibleoperatingmodelandunderlyingcostbase.Theactionswetooktoaddresstheseweaknesseshaveledtoagradualimprovementtounderlyingmetricsofthebusiness,however,theywereoffsetbyweakerthananticipatedsalesvolumesinthesecondhalfoftheyear.
Lookingahead,weareconfidentthatthefurtheractionswearetakingwillhelptostabiliseTuffnells’performance,whilethestrategicreviewdeterminestheactions,necessaryinvestmentandoptimumstructureforasustainablerecovery.
We are now delivering a more customer centric suite of services, firmly focused on helping our operating businesses to succeed.
Tuffnells ProfitabilityDespitemuchgoodworkinsecuringcostefficienciesandimprovementstorevenuequality,wewerenotagileenoughinrespondingtolowervolumes.Performancewasfurtherimpactedbycontinuedweaknessanddisruptivecompetitioninthemarket,compoundedbyanespeciallychallengingfinalquarter.Lookingahead,inadditiontoconductingastrategicreviewofthebusiness,wearefocusedonfurtherimprovementtocustomerattraction,revenuegenerationandquality,theflexibilityofoperationsandthereviewofournetwork’slong-haultrunkingarrangements.
Cost Savings in Smiths News Thereturnofaccountabilityforcostsatbusinessunitlevelhasre-establishedwhatisoneofthecoreskillsofSmithsNews.ThelegacycostsoftheclosureofPassMyParcelwereswiftlyremovedandsavingswerefoundintheyeartooffsettheimpactofthedeclineincoresales.Wehaveon-goingplanstomaintainthemomentumofthiscorebusinessmodeloverthelifetimeofourcontracts.
Smiths News ContractsTheacceleratedrenegotiationofourpublishercontractsonimprovedtermsisalmostcomplete.Wehavesecuredagreementsencompassing80%ofourcurrentrevenuesthroughtoatleast2024,andweareconfidenttheoutstandingcontractswillfollowshortly.Theseagreementsunderpinourongoingplansfornetworkandprocessefficiencies,andtogetherwitharelativepredictabilityofsales,givetheGroupanenviablevisibilityofrevenuesandcashflowsinourlargestbusiness.
Progress Against Priorities
InNovember2018,wepublishedalistofprioritiesthatwouldsupplementthenewlyintroducedBusinessUnitmodel,helpingtodriveperformanceimprovementacrosstheGroup.
AsummaryoftheprogressmadeinFY2019isgivenbelow.
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For more information on our performance and strategy see pages 12 to 15
Chief Executive’s Review cont.
GroupCentralServicesByrefocusingourcentralfunctions,includingFinance,ITandPeople,wehaveembracednewwaysofworking,supportingthebusinessunitswithimprovedanalytics,projectmanagementexpertiseandanefficientdivisionofrolesandresponsibilities.
Examplesofprogressthisyearinclude:theoff-shoringofselectedtechnology,customerexperienceandfinancefunctions;theconsolidationoftheFinancefunctionfromitspreviouslydevolvedstructure,benefitinginformationflow,businessanalyticsandcontrol;andourPeopleteamsworkingtirelesslytoimproverecruitment,culture,engagementandcommunicationwithourcolleagues.
Network optimisationdeliveringefficienciesinbothSmithsNewsandTuffnells,whileimprovingserviceandcoverageforcustomers.03
Tuffnells Strategic Review determiningthenecessaryactionsandinvestmentforasustainablerecoveryofTuffnells,whileevaluatingtheirimpactontheoverallGroupandlong-termshareholdervalue.Revenuegenerationandcostsavinginitiativeswillbepursuedintandemwiththereview.
01
Smiths News cost savingsachievingsustainableefficienciesthataimtooffsetthemarginimpactofanydeclineincoresales.
02
Optimising head office functions optimisingourcentralcostsinlinewiththenewGroupstructure.04Capital discipline continuingtoreducenetdebtwhilemeetingtheinvestmentneedsofthebusinessanddeliveringattractivereturnsforshareholders.
05
06 Leveraging and energising our people harnessingtheskillsandcommitmentofcolleaguesasweaddressimmediatechallengesandcontinueourpathtoperformancerecovery.
FurtherdetailsoftheGroup’soperatingperformancecanbefoundintheOperatingReviewonpage12.
Strategy and directionOurapproachisfoundedonbuildingsustainablybetterbusinesseswhichcanthriveundertheumbrellaoftheGroup.
SmithsNewsandTuffnellsareleadingplayersintheirmarkets,offeringscaleefficiencies,enhancedbyapassionforserviceandspecialistexpertisewhichcompetitorsfinddifficulttomatch.Thesearethecorestrengthswemuststrivetoenhance,ensuringwecontinuetoofferthebestvalueroutetomarketforourcustomers.
Ourcorestrategyisthereforetobuildourcapabilitythroughactionsandinvestmentsthatwilldeliversustainablevalueovertime.Whileweremainalerttowidermarketdevelopmentsandpotentialadjacentopportunities,wedonotcurrentlyplantodiversifyintonewsectors.
Webelievetheinterestsofallstakeholdersarebestmetthroughacombinationofimprovementstoourexistingoperationsandaprudentapproachtocapitalmanagement,withthegoalofstrengtheningtheunderlyingfinancialpositionoftheGroup.ThestrategicreviewofTuffnellswillbeconductedinthiscontext,balancingtheprospectsforrecoverywiththerequirementsforongoinginvestmentandtheiroverallimpactontheGroupandshareholdervalue.
SummaryOurplansforanoverallperformanceimprovementwillrequireswift,butevidence-baseddecisionsandawillingnesstoadoptnewwaysofworking.Inwhatremainsachallengingtradingenvironment,Ihavenodoubtthatcolleaguesacrossthebusinesswillrespondwithcharacteristicpositivity.Already,theyhaveembracedthereturntomorefocusedbusinessunitsanddemonstrate,onadailybasis,apassionfortheirbusinessesandadeterminationtosucceed.Iamgratefulfortheirsupportinaddressingthesetbacksandachievingtheprogresstheireffortssorichlydeserve.
Lookingahead,ourrecoveryplanswillcontinuetobalanceaprudentapproachtounderlyingfinanceswithclearoperationalprioritiesthatdeliverlong-termvalueforallstakeholders.Ihavenodoubtthatourmarketswillcontinuetobringacombinationofchallengesandopportunities,butIbelievewearesignificantlybetterplacedtomeetthesethanwewereayearago,andamlookingforwardtoreportingonprogressoverthenext12months.
Jonathan BuntingInterimChiefExecutiveOfficer
Priorities FY2020 TheGroup’sprioritieshavebeenrefreshedforthecomingyear.Theseprioritieswilldriveouractions,takingfirstpriorityonresourcesandtheattentionoftheleadershipacrossthebusiness.
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 11
Total RIDDORS
422018: 50
Key Performance Indicators
2019
2019
2019
1,467.9
23.2
28.4
48.0
50.4
56.5
1,534.3
1,594.3
1,645.8
1,875.1
7.9
9.3
15.5
16.2
19.7
2018
2018
2018
2017
2017
2017
2016
2016
2016
2015
2015
2015
Total Group Revenue £m
Adjusted profit before tax £m
Adjusted earnings per share p
2019
2019
2019
8.3
20.2
28.7
36.2
34.1
1.9
1.0
1.8
3.1
1.2
9.8
1.7
9.5
1.9
9.2
2018
2018
2018
2017
2017
2017
2016
2016
2016
2015
2015
2015
Dividend per share p
Free cash flow £m
Net debt: EBITDA
Financial Performance
Non-Financial Performance
TheGroupanditsbusinessesmonitorarangeofnon-financialKPIswhichreflectthedaytodayoperatingneedsofthebusiness:
Required delivery time compliance
96%2018: 95.4%
On time delivery
Key
95.5%2018: 94.2%
Parcels returned to depot
2.7%2018: 2.8%
Pack accuracy
99.5%2018: 99.3%
SmithsNews
Tuffnells
Group
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Operating Review
FOCUSED OPERATIONS THROUGH ONGOING CHALLENGES
Smiths News had a strong year, benefiting
from the return to focused management
and the removal of legacy costs and resultant losses
in Pass My Parcel and distractions
inherent in the former integration strategy.
IntroductionInayearofconsiderablechange,wehaveresolutelyfocusedonourplansforasustainablerecoveryoftheGroupinthemedium-term.SmithsNews,ourlargestbusinessandthemajorcontributortoourcashflows,hadastrongyear,andourplansforcentralcostefficienciesareontrackwithfurtheropportunitiesunderway.Tuffnells,however,hadachallengingyear,withitsperformancehamperedbyaflowthroughoflegacyissues,compoundedbyweakeningmarketconditions.
WhiletheGrouphasmadesignificantprogressagainstmanyofitsrecoverytargets,theunderperformanceofTuffnellshasmateriallyimpactedouroverallperformanceand,asaconsequence,wehavefallenshortinourambitionforstakeholders.WearethereforeimplementingastrategicreviewofTuffnellstodetermineboththefurtheractionsrequiredforasustainablerecoveryand,morewidely,toassessitsfutureroleandprospectsintheGroup.
Followingmanagementchangesannouncedon6November2019,ChiefExecutiveOfficerJozef(Jos)OpdeweeghhassteppeddownfrombothhisexecutiveroleandasadirectoroftheBoard;JonBunting(CEO,SmithsNews),hasbecomeInterimChiefExecutiveOfficeroftheGroup;andMichaelHolt(non-executivedirector)hasagreedtotemporarilybecomeExecutiveChairmanofTuffnellsfortheperiodoftheTuffnellsstrategicreview.
Financial headlinesGroupAdjustedprofitbeforetaxforcontinuingoperationsof£23.2misdownby18.3%(FY2018:£28.4m)andAdjustedearningspershareof7.9pisdown15.1%(FY2018:9.3p).
Followinganimpairmentof£45.5mtothegoodwill,tangibleandintangibleassetsofTuffnells,theStatutorylossbeforetaxis£37.6m(FY2018:lossof£35.5m)andStatutoryearningspershareisalossof12.9p(FY2018:lossof15.5p).
TheGroupgeneratedFreecashflowfromoperationsof£8.3m(FY2018:£20.2m),helpingtoreducenetdebtby£9.5mto£73.9m(FY2018:£83.4m).
Sincetheyearend,theGrouphascompletedthesaleandleasebackofsixTuffnellsdepotsfor£9.9mtheproceedsofwhichhavebeenusedtofurtherreducetheGroup’snetdebtfromthatreportedattheyearend.Wecontinuetoinvestigateopportunitiesforremainingdepots,but,withstrongunderlyingfinances,ourcapitalmanagementstrategyisnotdependentonfurthertransactions.
AftercarefulconsiderationoftheGroup’soverallperformanceintheyearandinlightofbothongoingconfidenceinfuturepositivecashflowsandtheimmediateprioritiesofthebusiness,theBoardhasrecommendedafinalandfullyeardividendforFY2019of1.0p(FY20183.1p,down2.1p).
Smiths NewsSmithsNewshadastrongyear,benefitingfromthereturntofocusedmanagementandtheremovaloflegacycostsandresultantlossesinPassMyParcelanddistractionsinherentintheformerintegrationstrategy.Adjustedoperatingprofitof£43.6misup12.1%(FY2018:£38.9m),drivenbystructuredcostcuttingwhichmorethanoffsetthemarginimpactofdecliningsales.Theacceleratedrenewalofpublishercontractsrepresenting80%ofourrevenuesatcurrentvalues,providescertaintyforourterritoriesthroughtoatleast2024,allowingustoplanfurthernetworkefficienciesthatwillhelpmeettheongoingchallengeofoffsettingtheimpactoffallingsales.
Newspaperandmagazinesalescontinuetodeclineinlinewithlong-termtrendsuponwhichourefficiencyplansarebased.Newspaperrevenueof£826.8mwasdown2%,withpricecontinuingtohelpoffsetvolumedeclines;magazinecategoriesweredownby8%,and6%onalikeforlikebasisafterexcludingWorldCupsalesinFY2018.Wecontinuetoplanonthebasisofgradualdeclineswhichweaimtomitigatethroughsupplychainsimplificationandprocessefficiencies.
Inthesecondhalfoftheyear,theoperationsandmanagementofDMDwerefullymergedintoSmithsNews.ThechangereflectsaprogressionofcloserworkingoverrecentyearsandwillhelptomitigatetheimpactofthekeycontractlossofBritishAirwayswithinDMD,whichtookeffectfromJune2019.
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 13
Lookingahead,ourstrategyforSmithsNewsisunchanged:whilewearealerttoadjacentopportunities,ourprimaryfocusisondeliveringunmatchedserviceforpublishersandretailers,andsecuringefficienciesinwhatisawell-establishedandpredictablebusinessmodel.
TuffnellsTuffnells’performancewasseverelychallengedbythecarrythroughoflegacyissues,includingcustomerlosses,poorqualityrevenuesandoperationaldisruptionfromtheprioryear.Theirimpactwasmadeworsebyaninsufficientlyflexiblecostbaseandinconsistentservicewhichresultedininefficiencyandrectificationcosts.Despitemuchprogressinaddressingtheunderlyingissues,thedeclineinconsignmentvolume,exacerbatedbyanespeciallychallenginglastquarter,hasfurtherdelayedourexpectationoffinancialperformanceimprovement.
Salesof£164.6mweredownby6.4%(FY2018:£175.2m)resultingintheAdjustedoperatinglossof£14.1m,worseningby£9.1m(FY2018:lossof£5.0m).Thedisproportionateimpactofdecliningvolumesonprofitabilityreflectsthelegacyoperatingmodel,foundedonarelativelyhighfixedcostbaseandinflexibleprocesses.Actionswetooktoreviewcustomerratesandexitfromunprofitableaccountshavebeensuccessfulinincreasingthequalityofourrevenue,butnotwithoutfurthershort-termimpactonvolume.Newrevenuegenerationatthesemoresustainableratesprovedespeciallychallenginginwhathavebeendisruptivemarkets,leadingtolossofsharetocompetitorsoverthecourseofyear.
Giventheongoingchallengestoperformanceimprovement,animpairmentof£45.5mwasmadetothegoodwill,tangibleandintangibleassetsofthebusiness.Furthermore,wehaveinitiatedastrategicreviewofTuffnellswhichwillbeledbyourChairman,GaryKennedy.
Whilethestrategicreviewwilldetermineourlong-termplansforTuffnells,weremainfocusedonaddressingimmediateissues.Swiftactionhasbeentakentofurtherreduceoperatingcoststhroughimprovedlastmilerouting,andawidernetworkefficiencyprogrammeisunderway.Thebusinesshasendedthefinancialyearwithalowercostbase,whichwillhaveapositiveimpactonanyvolumeimprovements.Ourimmediateplansarethereforefocusedonincreasingconsignmentvolumes,newcustomerwinswithoutunderminingprofitablerates,thedeliveryofleanerandmoreflexiblecostsandimprovingthequalityofservice.
Swift action has been taken to further reduce operating costs through improved last mile routing, and a wider network efficiency programme is underway.
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Operating Review cont.
TheseKPIswillspearheadourrecoveryplansintandemwiththestrategicreviewandwewillreportonprogressinduecourse.
Strategic review of Tuffnells WecontinuetobelievethattheoperationalperformanceofTuffnellscanbeimproved,withtheimmediateprioritybeingtoidentifymeasurestoreducecostsandimproveoperationalflexibility.However,inthelightofitscontinueddragonoverallGroupperformance,thestrategicreviewwillalsodeterminethemostappropriatestructureandstrategyforthebusiness,andmorewidelytoconsideritsroleandfutureintheGroup.
Tosupportthestrategicreviewandperformanceimprovementplans,MichaelHolthasagreedtobecomeExecutiveChairmanofTuffnellsforthedurationoftheprocess.Michaelhasbeenanon-executivedirectoroftheGroupsinceOctober2018;withdeepexperienceinthedistributionandlogisticssector,heiswellqualifiedtoprovideinsightanddirectionthatwillcomplementthecurrentmanagementteam.
Whilethestrategicreviewwillprimarilyfocusonthenecessaryactionsandinvestmentforamedium-termrecovery,wewillmaintainourvigorouspursuitofmoreimmediatecostsavings,networkefficienciesandqualityrevenuegenerationinresponsetotherecentdeclineinconsignmentvolumes.Throughoutthereviewperiod,weareconsciousofminimisinguncertaintyforallstakeholdersandcommittocommunicatingourprogressandconclusionsasquicklyaspossible.
Group structure and central servicesInOctober2018,theGrouphalteditsformerintegrationplans,returningoperationalmanagementtoSmithsNewsandTuffnellsunderabusinessunitstructure,supportedbysharedcentralservices.Operationally,thechangehasbeenasuccess,removingdistractionwhiledrivingownershipandaccountabilityofthetwodistinctbusinesses.Thestructureisnowwellestablishedandweenvisagenomaterialchangesaswecontinuewithourmedium-termplans.
TheestablishmentofthebusinessunitmodelwasdeliveredinparallelwiththecreationofaSharedServicesCentre,designedtostreamlinecentralfunctionsanddelivercostsavingswhileimprovingservicetotheoperatingbusinesses.Outcomesofparticularnoteinclude:theoff-shoringofselecttechnology,customerandfinanceserviceswhich,whenfullyimplemented,willdeliversubstantialsavingstooverheadsandfuturecapitalrequirements;thedevelopmentandtrialofrevisedoperatingprocedurestoensureconsistentbestpracticeinbothSmithsNewsandTuffnells;andtheconsolidationoffinancefunctionsintoasinglecentrewhichwillcommenceinDecember2019.
CurrentlyunderwayisafurtherresizingexercisetoensureourHeadOfficefunctionsreflectthereducedscopeoftheGroup.
Priorities for FY2020TheGroup’sstrategyisfoundedonbuildingthecapabilityofSmithsNewsandTuffnells,throughactionsandinvestmentsthatdeliversustainablevalueovertime.Whilewecontinuetoexploreandevaluatepotentialadjacentopportunities,wedonotplantodiversifyintonewsectors.
Thefollowingprioritieswillspearheadthenextphaseofourrecovery,backedbyacommitmenttoupdatestakeholdersonaregularbasis.
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 15
1.Tuffnells Strategic Review –determiningthenecessaryactionsandinvestmentforasustainablerecoveryofTuffnells,whileevaluatingtheirimpactontheoverallGroupandlong-termshareholdervalue.Revenuegenerationandcostsavinginitiativeswillbepursuedintandemwiththereview.
2.Smiths News cost savings –achievingsustainableefficienciesthataimtooffsetthemarginimpactofanydeclineincoresales.
3.Network optimisation –deliveringefficienciesinbothSmithsNewsandTuffnells,whileimprovingserviceandcoverageforcustomers.
4. Optimising head office functions –optimisingourcentralcostsinlinewiththenewGroupstructure.
5. Capital discipline –continuingtoreducenetdebtwhilemeetingtheinvestmentneedsofthebusinessanddeliveringattractivereturnsforshareholders.
6. Leveraging and energising our people –harnessingtheskillsandcommitmentofcolleaguesasweaddressimmediatechallengesandcontinueourpathtoperformancerecovery.
Capital managementFollowingreviewofourCapitalManagementstrategy,wehavefollowedastrictcapitaldiscipline,ensuringthatfreecashfromoperationsfundstheinvestmentneededforrecovery,withthesurplususedtoachieveareductioninnetdebtwhilemaintainingafocusonshareholderreturns.
TheGroup’soperationscontinuetogeneratestrongfreecashandweanticipatecapitalrequirementsremainingwithintheguidanceof30%-50%ofEBITDA.Netdebtat£73.9mrepresents1.9xEBITDA,beforethebenefitofproceedsfromthesaleandleasebackofselectedTuffnellsdepots.Weremaincommittedandontracktoreducingnetdebtto1xEBITDAbytheendofFY2021.
Thefinalandfullyeardividendof1.0preflectsourongoingconfidenceintheGroup’scashgenerativemodel.
Directorate changesChiefExecutiveOfficer,Jozef(Jos)Opdeweegh,hassteppeddownfrombothhisexecutiveroleandasadirectoroftheBoardwithimmediateeffect.Joshasbeeninstrumentalinthepast12monthsinhelpingtobringfocustotheGroupandmanychangeshehasledpositionuswelltomeetourambitioninmorecloselyaligningtheGroup’sperformancetoshareholders’expectations.
JonBunting(CEO,SmithsNews),whojoinedSmithsNewsin1994andwasappointedtotheBoardin2010,hassteppeduptobecomeInterimChiefExecutiveOfficeroftheGroup.InthelightofthestrategicreviewoftheTuffnellsbusinesswewillreviewthispositionattheendofthatprocess.JonwillretainaccountabilityasCEOofSmithsNewsthroughthisinterimperiod.
MichaelHolt(non-executivedirector)hasagreedfortheperiodofthestrategicreviewprocesstobecomeExecutiveChairmanofTuffnells,withresponsibilityforprovidingrelevantandcurrentinsighttoaidboththebroaderstrategicreviewandtargetedprofitrecoveryatTuffnells.Inordertoensureweretainhisexpertiseandcontributiontoourwiderstrategy,MichaelwillcontinueasadirectoroftheGroupandmemberoftheBoardalbeit,forthedurationofthisadditionalrole,hewilltemporarilyrelinquishbeingamemberofeachoftheAudit,RemunerationandNominationsCommittees.However,giventheshort-termandspecificnatureofhisinterimrole,theBoarddoesnotcurrentlyconsiderthatitwillpermanentlyimpairMichael’sfutureindependenceinaccordancewiththeUKCorporateGovernanceCode.
Summary and outlookTheGroupremainsfocusedonaturnaroundthatisfoundedonthesustainableimprovementofourcorebusinessesunderpinnedbyprudentcapitalmanagement.SalesinSmithsNewshavestartedtheyearalittleslowlybutweareconfidentthatperformancewillbebroughtbackontrackovertheremainderoftheyear.InTuffnells,tradingintheyeartodateismoredifficultthananticipatedbutisexpectedtostabiliseinH2.OuractionstoreducecostsandincreasetheflexibilityoftheoperatingmodelinTuffnellswillcontinueaswepursueawiderstrategicreviewofthebusiness.
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Despite the challenging year, management
actions to prioritise improvements to
revenue quality, cost reduction and standard
operating processes have gained traction as we enter the new
financial year.
WORKING FOR A SUSTAINABLE RECOVERY
OverviewOverallperformanceisslightlybelowmarketexpectationsaswecontinuetoaddresstheunderlyingissuesthatimpactedrevenueandcostsinFY2018andflowedthroughintothisyear.SmithsNewsre-establisheditscostsavingrhythmtoimprovemargins,whichoffsetthedelayedturnaroundinTuffnellsperformance.
ThefinancialpositionoftheGroupbenefitedfrompositiveFreecashflowintheyearof£8.3m,whichreducednetdebtatyearendto£73.9m(FY2018:£83.4m).
Continuing Adjusted results GroupContinuingAdjustedoperatingprofitof£29.5mwasdown£4.4m(13.0%)ontheprioryear,arecoveryinfinancialperformance
Tony GraceChiefFinancialOfficer
Continuing Adjusted results £m 2019 2018 Change
Revenue 1,467.9 1,534.3 (4.3%)
Operatingprofit 29.5 33.9 (13.0%)
Netfinancecosts (6.3) (5.5) (14.5%)
Profitbeforetax 23.2 28.4 (18.3%)
Taxation (3.8) (5.5) 30.9%
Effectivetaxrate 16.4% 19.4%
Profitaftertax 19.4 22.9 (15.3%)
atSmithsNewswhichwasmorethanoffsetbythechallengingturnaroundatTuffnells.
SmithsNewsAdjustedoperatingprofitwasupby£4.7mto£43.6m.Thestructuraldeclineinnewspaperandmagazinesales,andresultantmargindecline,wassuccessfullymitigatedbytherestorationandcatch-upofthenetworksavingprogrammeof£6.5m.Intheprioryear,SmithsNewsAdjustedoperatingprofitwasfavourablyimpactedbyWorldCupmagazineandstickersaleswhichgeneratedprofitsof£2.8mbutadverselyimpactedbyalossinPassMyParcelof£5.4m.TheexecutionoftheclosureofthePassMyParcelpropositionhasprogressedsmoothly.
TherevenueandprofitofDMDhasbeenabsorbedintotheSmithsNewsresultsfollowingthelossoftheBritishAirwayscontractfromJune2019,reflectingthedecisiontofullyintegratetherespectiveoperationsandmarketingfunctions.Revenueof£24.1mwasdown£2.4m(9.1%)andAdjustedoperatingprofitreducedby£0.4m(13.3%)to£2.6m,drivenprimarilybythelossoftheBritishAirwayscontractfromJune2019andtheannualisedimpactoftwopublishercontractlosses.
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 17
Statutory continuing results£m 2019 2019 2018 2018 Change
Revenue 1,467.9 1,534.3 (4.3%)
Operating(loss)/profit:
SmithsNews 36.3 27.7 31.0%
Tuffnells (67.6) (57.7) (17.2%)
Operating(loss)/profit (31.3) (30.0) (4.3%)
Netfinancecosts (6.3) (5.5) (14.5%)
Lossbeforetax (37.6) (35.5) (5.9%)
Taxation 5.9 (2.6) n/a
Effectivetaxrate 16.2% (7.3%)
Lossaftertax (31.5) (38.1) 17.3%
Earnings per share£m
Continuing Adjusted Continuing Statutory2019 2018 2019 2018
Earnings/(loss)attributabletoordinaryshareholders(£m) 19.4 22.9 (31.5) (38.1)
Basicweightedaveragenumberofshares(millions) 246.4 246.0 246.4 246.0
BasicEarnings/(loss)pershare 7.9p 9.3p (12.9p) (15.5p)
Dilutedweightednumberofshares(millions) 247.1 246.7 247.1 246.7
DilutedEarnings/(loss)pershare 7.9p 9.3p (12.9p) (15.5p)
Dividend 2019 2018
Dividendpershare(paid&proposed) 1.0p 3.1p
Dividendpershare(recognised) nil 9.8p
TuffnellsreportedanAdjustedoperatinglossof£14.1m,anincreaseof£9.1montheprioryear(FY2018:£5.0mloss).Performancewashinderedbythecarry-overofcustomerlossessufferedinthesecondhalfoftheprioryear,whilstthesecondhalfofFY2019sawfurtherpressurefromacontinuingcompetitivemarketresultinginlowerconsignmentvolumes.
Despitethechallengingyear,managementactionstoprioritiseimprovementstorevenuequality,costreductionandstandardoperatingprocesseshavegainedtractionasweenterthenewfinancialyear.
Aspartofthestrategicgoaltostreamlineheadofficeservices,anoffshoresharedservicecentrehasbeenestablishedwithanoutsourcingpartner,tomanagecustomerservice,technologyandfinancefunctions.Arestructuringprovisionof£2.5mwasmadeatyearend.
Netfinancechargesof£6.3m(FY2018:£5.5m)wereupontheprioryear.Includedwithinnetfinancechargesare:interestcostsonborrowingincurredintheperiodof£5.1m(FY2018:£4.1m),anincreaseyear-on-yearastheannualisedinterestmarginchargewashigherunderthenewfacility;financeleaseinterestof£0.1m(FY2018:£0.6m);amortisationofbankarrangementfeesof£0.5m(FY2018:£0.5m);andpensioninterestcostsof£0.2m(FY2018:£0.2m).
Adjustedprofitbeforetaxwas£23.2m,down18.3%onlastyear.
Taxationof£3.8mresultedinaneffectivetaxrateof16.4%,effectivetaxratewaslowerthanlastyeardrivenbymovementsindeferredtaxandtaxprovisionintheprioryear.
Statutory continuing results GroupStatutorycontinuinglossbeforetaxof£37.6misanincreaseontheprioryearby£2.1m(FY2018:£35.5mloss),primarilydrivenby:anincreaseintradinglossesatTuffnellsof£9.1m,impairmentchargerelatingtogoodwillandassetsofTuffnellsof£45.5m(FY2018:£46.1m);amortisationofacquiredintangiblesof£6.8m(FY2018:£7.1m);PassMyParcelexitcostsof£0.3m(FY2018:£6.7m);andnetworkandreorganisationcostsof£6.4m(FY2018:£3.1m).
Atthedivisionallevel,SmithsNewsstatutoryoperatingprofitof£36.3m,wasup31.0%onprioryearafter£7.3mofAdjustedItemswhichincluded£5.7mnetworkandre-organisationcosts;Tuffnellsstatutoryoperatinglosswas£67.6mdown£9.9mafterimpairmentofgoodwill,tangibleandintangibleassetsof£45.5mandamortisationofacquiredintangiblesof£6.6m.
Theeffectivestatutoryincometaxrateforcontinuingoperationswas16.2%(FY2018:7.3%),asthetaximpactofAdjustedItemswas£9.9m(FY2018:£2.9m).
Statutorycontinuinglossaftertaxof£31.5misdownby£6.6m(FY2018:£38.1mloss),andStatutorycontinuinglosspershareof12.9pisup2.6p(FY2018:15.5ploss).
AsaconsequenceoftheTuffnellsimpairment,thenetliabilitiesonthebalancesheethaveincreased£28.4mtoareportednetliabilityat31August2019of£74.3m(FY2018:£45.9m).FollowingacorporaterestructuringinJuly019,theConnectGroupPLCCompanyentitybalancesheetcontinuestohavedistributablereservesof£131.5mtoallowfuturedividendpayments.
Earnings per shareEarningsattributabletoshareholdersonacontinuingAdjustedbasisof£19.4mresultedinanAdjustedEPSof7.9p,adecreaseof1.4ponlastyear,drivenbyarecoveryinSmithsNewsmarginsandnetworkrestructuringprogramme,butoffsetbychallengingtradingconditionsinTuffnells.
Thefullydilutedweightednumberofshareswas247.1m(FY2018:246.7m).Fullydilutedsharesincludesa0.7mdilutedshareadjustmentforemployeeincentiveschemes(FY2018:0.7m).
IncludingAdjusteditems,statutoryearningspershareisup2.6pto12.9p(losspershare)(FY2018:15.5plosspershare).
DividendAftercarefulconsiderationoftheGroup’soverallperformanceintheyearandinlightofbothongoingconfidenceinfuturepositivecashflowsandtheimmediateprioritiesofthebusiness,theBoardhasresolvedtorecommendafinaldividendof1.0p,leavingthefullyeardividendas1.0ptobepaidinFebruary2020,areductionof2.1por67.7%(FY2018:3.1p).
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Smiths News (including DMD)
ThereturntofocusedaccountabilityhasrestoredstabilitytotheGroup’slargestbusiness.
Revenuewas£1,303.3m(FY2018:£1,361.6m)down4.3%.Newspaperandmagazinesaleshavecontinuedtoperforminlinewithlong-termtrends,witharelativelystrongerperformancethanexpectedfromnewspapershelpingtooffsetweakermagazinesales.Newspapersalesof£826.8mweredown2%,withpriceincreaseshelpingtooffsetvolumedeclines.Combinedsalesofallmagazinecategoriesweredownby8%,onalike-for-likebasistheyweredown6%afterexcludingthebenefitoftheFIFAWorldCupalbumandstickersalesinFY2018.
Goodprogresshasbeenmadewiththeacceleratedrenewalofpublishercontracts,withnewagreementssecuring98%ofSmithsNews’magazinerevenuesand80%ofitstotalcurrentrevenues,foranaveragecontractextensionoffiveyears.Allourexistingterritorieshavebeenretained,providingthenecessarycertaintytounlocksupplychainefficienciesoverthecontractperiods.
Adjustedoperatingprofitof£43.6m(FY2018:£38.9m)wasup£4.7m(12.1%).ThenewGroupstructurewithtwoseparateaccountablebusinessunitsinSmithsNewsandTuffnells,hasrestoredamorefocusedapproachbytheSmithsNewsmanagementteam.Therestorationandcatch-upoftheSmithsNewsnetworksavingprogrammegenerated£6.5mofsavingsintheyearwhichmitigatesthedeclineinrevenuefromnewspaperandmagazinesales.Networksavingsweregeneratedfromfinalmileroutereductionsandtheclosureofasingledepotattheendofthefinancialyear.TheexecutionofthedecisiontoclosePassMyParcelinthesecondhalfofFY2018hasprogressedsmoothlyandexitcostswereinlinewithexpectedprioryear-endprovisions.AdjustedoperatingprofitintheprioryearwasfavourablyimpactedbytheWorldCupsalesandprofitsof£2.8m,butoffsetbyPassMyParcellossesof£5.4m.Thesehavebeentheprimarydriversintheimprovementofoperatingmarginintheyearto3.3%.
InJanuary2019,theGroupdisposedofitsvendingcoffeebusinessknownasJack’sBeans.Thissalewasinlinewiththestrategytodivestofnon-coreassets;thebusinessmadeanegligiblecontributionandtherewillbenoimpactonfinancialperformanceintheyear.
TherevenueandprofitofDMDhasbeenabsorbedintotheSmithsNewsresults,reflectingthewayinwhichthebusinessisnowmanagedfollowingthedecisiontointegratetherespectiveoperationsandmarketing.Revenueof£24.1mwasdown£2.4m(9.1%)andAdjustedoperatingprofitreducedby£0.4m(13.3%)to£2.6m,inpartdrivenbythelossoftwopublishercontractsandtheBritishAirwayscontractfromJune2019.CostsweremitigatedbypromptactiontorestructuretheoperationalstructureintotheSmithsNewsSloughdepot.
Tuffnells
Tuffnellshadaparticularlychallengingyear,achievingtotalrevenueof£164.6mdown6.1%,(FY2018:£175.2m),andreturninganAdjustedoperatinglossof£14.1m,down£9.1m(FY2018:£5.0mloss).
LossesweredrivenbyanumberoflegacyissuescarriedoverfromFY2018whichaffectedconsignmentvolumesandoperatingcostefficiency.Inwhatbecameanincreasinglycompetitivemarket,variabilityinservicestandardsandcustomerattritionamongthecustomerbase,ledtoafurtherlossofvolumes,whichcontinuedintothesecondhalfoftheyear,butataslowerrate.ThedeclineinparcelvolumescombinedwithahighproportionofoperatingcostsatadepotlevelbeingfixedresultedincontinuinglossesinthesecondhalfofFY2019.Separately,operationalcostsrosefromincreasesinnationallivingwageandhighersub-contractorratesfurthersqueezedmargins.Thedeclineinmarginswasaddressedbymanagementactionsto:improverevenuequalitywithtargetedpricerises;andchangestofinalmiledeliveriesataregionalleveltoensureoptimumroutingandamalgamationofrounds.
Despitethechallengingperiod,webelievethatmanagementactionsaretherightonesforasustainablerecovery.Wecontinuetoprioritiseimprovementstorevenuequality,costreductionandstandardoperatingprocesses–theseactionsarebeginningtoachievetractionasweenterthenewfinancialyear.
Smiths News (including DMD) Adjusted figures £m
2019 2018 Change
Revenue 1,303.3 1,361.6 (4.3%)
Operatingprofit 43.6 38.9 12.1%
Operatingmargin 3.3% 2.9% 40bps
Tuffnells Adjusted figures £m
2019 2018 Change
Revenue 164.6 175.2 (6.1%)
Operating(loss)/profit (14.1) (5.0) (182.0%)
Operatingmargin (8.6%) (2.9%) n/a
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 19
Adjusted Items ContinuingoperationsTheGroupincurredatotalof£50.9mofAdjustedItemsonacontinuingbasis,aftertax(FY2018:£61.0m).
AdjustingitemsaredefinedintheaccountingpoliciesinNote1andintheglossary.Inthedirectors’opiniontheimpactofremovingtheseitemsfromtheAdjustedprofitgivethetrueunderlyingperformanceoftheGroupandcomprises:
(a)Networkandre-organisationcostsTheseareanalysedasfollows:
• ExecutiveTeamredundanciesof£0.9m.
• Outsourcingof£3.2m.
• DMDrestructureof£1.2m.
• Otherredundancyandre-organisationcostsof£1.1m.
Executive Team redundancies Costsof£0.9mhavebeenincurredrelatingtotherestructureoftheGroup’spreviousexecutiveteam(FY2018:£nil).Thesecostsareconsideredtobeadjustinggiventhesizeandtheyenablecomparabilitybetweenyearswithequivalentcostsoftheexecutiveteam.
Outsourcing central functionsOfthecurrentyearcost£3.2mrelatestotheoff-shoringofselectedtechnology,customerservicesandfinancefunctions.Thisprocesshasbeencommunicatedtoemployees.The£3.2mcomprisesaprovisionof£2.5mrelatedtoexpectedredundancycostsaspartofthistransitionand£0.7mrelatedtolegalandsetupcosts.Furthercostsoftheoffshoringareexpectedtobeincurredduringthenextfinancialyear.Thesecostsareconsideredadjustingastheimpactofthe
Adjusted Items£m 2019 2018
Networkandre-organisationcosts a (6.4) (3.1)
Property b – 0.7
Saleandleasebackcosts c (0.7) –
Amortisationofacquiredintangibles d (6.8) (7.1)
Pension e (2.2) –
BrierleyHillinsuranceclaim f (0.2) –
ImpairmentofTuffnellsassets g (45.5) (46.1)
PassMyParcelexitcosts h 0.3 (6.7)
Impairmentoftangibleassets i – (1.1)
NMWregulatorycompliance j 0.2 (0.5)
IPRsettlementincome k 0.5 –
Total before taxation (60.8) (63.9)
Taxation 9.9 2.9
Total after taxation (50.9) (61.0)
transitiontoanoffshoredcentralfunctionisconsideredaoneoff.Therunningcostsoncethecentreisfullyoperationalwillbetreatedasnon-adjusting.
DMD restructure costs InMay2019,DMD’sbiggestcontractwithBritishAirwayswasended.Assoonasnoticewasgiven,thebusinesssetaboutachangeprogrammetorightsizetheoperations,closesitesandreduceteamstoreflectthelossofthiscontract.Thiswasdesignedtoensurethebusinesswasabletocontinuetodeliverprofitsinfuturewithitssmallercustomercontractbase.Intotal,costsof£1.2mhavebeenincurredorprovided.
Thesecostsareconsideredtobeadjustinggiventhesizeandtheyenablecomparabilitybetweenyearswithequivalentcostsofthedaytodayoperationsofthebusiness.
Other redundancy and re-organisation costs£1.1mhasbeenincurredinredundancyandotherreorganisationinstreamliningtheSmithsNewsandTuffnellsbusinesses(FY2018£nil).Thisisnetofareleaseof£0.4mofredundancyprovisionsmadeintheprioryearbutnotincurred.
Theprioryearincludedabortiveintegrationcostsof£1.6mwithregardtotheintegrationprogrammeannouncedattheendofthepreviousfinancialyear.
Costsassociatedwiththere-organisationprogrammesareconsideredadjustingitemsgiventheyarepartofastrategicprogrammetodrivefuturecostsavingsandaresignificantinvaluetotheresultsoftheGroup.
(b)PropertyDuringtheprioryeartheGroupmadethestrategicdecisiontotransferthevacantSloughdepottotheTuffnellsbusiness,resultinginacreditfromthereleaseofitsonerousleaseprovision.OnerouschargesonpropertyarechargedthroughAdjustedItemsastheyformpartoftheGroup’sstrategicrestructuringprogramme.ThereversalofchargeshasalsobeenmadeinAdjustedItemsforconsistency.
(c)SaleandleasebackcostsInJanuary2019,theGrouptookthedecisiontoselltheTuffnellsfreeholdandlongleaseholdpropertyportfolioandleaseitback.DuringtheyeartheGroupincurred£0.7mofcostsrelatedtothesaleandleasebackprogramme.TheGroupsubsequentlyannouncedthesaleofsixpropertieson23September2019.Giventhemagnitudeandone-offnatureofthetransactionasawholeitisconsideredtobeanadjustingitem.
(d)AmortisationofacquiredintangiblesAchargeof£6.8m(FY2018:£7.1m)hasbeenrecognisedrelatingtoamortisationofacquiredintangiblesinTuffnells.Thisisconsideredanadjustingitemasitallowscomparisonbetweensegmentsand,therefore,consistencyintheperformanceoftheGroupataconsolidatedlevel.
(e)PensionSmithsNewsincurredprofessionalcostsof£2.1m,asaresultoftheWHSmithPensionTrust(oneoftheGroup’sdefinedbenefitpensionschemes)enteringintoaninsurancebackedannuity‘buy-in’oftheSchemeassets,withinthesectionoftheTrustsponsoredbySmithsNews,whichminimisestheGroup’sexposuretofuturepensionobligations.ThesepensionchargesarenotconsideredtobepartofnormaloperationsduetotheirsizeandnatureandarethereforeconsideredtobeanAdjustedItem.
Thereisafurther£0.1minrelationtoequalisationofGuaranteedMinimumPayments(GMP)oftheTuffnellsParcelsExpresspensionscheme.Thisisconsideredtobeanadjustingitemasitwasduetoaoneoffchangeintheinterpretationofthelawrelatingtopreviouslyrecognisedcost;thisisconsideredoutofcontrolofmanagementandthechargerelatestoserviceinpriorperiodsandthereforeisconsideredanadjustingitem.
(f)BrierleyHillinsuranceclaimTheGroupincurred£0.2mofinsurancesettlementcoststhisyearinrelationtoafatalityatTuffnells’BrierleyHilldepotthatoccurredinJanuary2016.TheGrouphadpreviouslyrecognisedthecostofthefineandlegalcostsinrelationtothis.Giventhemagnitude,one-offnatureandtoensureconsistenttreatmentwithpreviouslyreportedcostsitisconsideredtobeanadjustingitem.
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(g)ImpairmentofTuffnellsintangibleandtangibleassetsManagementreviewedthecarryingvalueoftheTuffnellsbusinessunitandconcludedthatanimpairmentchargeof£45.5m(FY2018:£46.1m)isrequired.Thiscomprises:goodwill£6.0m(FY2018:£46.1m),acquiredintangibles£26.4m(FY2018:nil),otherintangibles£0.4m(FY2018:nil)andproperty,plantandequipment£12.7m(FY2018:nil).
TheimpairmentofGoodwillhasnotaximpact,theimpairmentofacquiredintangibleshasresultedinthereleaseof£4.5mdeferredtaxliabilityasacredittoAdjustedItemsincometax.Adeferredtaxassetof£2.5mhasbeenrecognisedwhichhascreditedAdjustedItemsincometaxasaresultoftheimpairmentoftheotherassets.
ItisconsideredadjustingduetoitssignificantvalueandaidscomparabilitybetweenyearstoshowtheunderlyingperformanceoftheGroup.
(h)PassMyParcel(PMP)exitcostsFollowingareviewofthePMPpropositionon23May2018,theBoarddecidedtoclosethebusinessunitandasaresultachargeof£6.7mwasbookedintheprioryear.Thiswassplit£4.7mofcontractlossesand£2.0mofimpairmentofassociatedassets.
Managementconcludedthatlossesonwindingdownthedivisionrepresentedanonerouscontractwithacostof£4.7mrecognised.ThisrepresentedtheforecastexcessofcostsoverincomefromthedatetheGrouptookthedecisiontoclosethedivision.Ofthisbalance,£2.5minprovisionswasheldattheyearended31August2018tocovertheremainingcoststocloseallcontracts.In2019,£2.2mofcostswereincurredandbookedagainstthisprovision.Theremaining£0.3moftheprovisionhasbeenreleasedthisyear.
Afurther£2.0mofimpairmentchargessplit£1.0mtangibleand£1.0mintangiblewererecognisedtowriteoffthenon-currentassetsrelatingtothedivision.
(i)ImpairmentoftangibleassetsIn2018,theGrouptookthedecisiontoconsiderthesaleoftheJack’sBeansdivisiontofocusonitscorebusinesses.BidsreceivedindicatedthatthenetbookvalueoftheJack’sBeansassetswereoverstatedandsotheywereimpairedby£1.1m.TheGroupsubsequentlydisposedoftheassetsforproceedsequivalenttotheirrevisednetbookvalueinJanuary2019.Giventhemagnitude,theone-offnatureandtheGroup’sstrategytofocusonitscorebusinessesitwasconsideredtobeanadjustingitem.
(j)NMWregulatorycomplianceTheGrouphasbeenindiscussionwithHMRCregardinganhistoricalunderpaymentinrelationtoamisapplicationofnationalminimumwagelegislationinTuffnells.Aprovisionamountingto£1.3mwasmadeintheprioryearfinancialstatements.Ofthisbalance,£0.5mrelatedspecificallytotheestimatedfine.The£0.5mfinewasclassifiedasadjustinginFY2018.
TheunderpaymentsandfineswereallsettledduringFY2019.Theremaining£0.2mofthe£0.5mfineprovisionhasbeenreleasedinFY2019.Thereleasewasalsorecognisedasanadjustingitemtobeconsistentwithpriorperiodsandduetoitsone-offnatureandmagnitude.
(k)IPRsettlementincomeTheGroupreceivedaone-off£0.5mofincomeinrelationtothesettlementofanIPRdisputeconcerningtheproposeduseofasimilarbrandtooneoftheGroup’sbrands.Thisisconsideredadjustinggivenitssizeandone-offnature.
Free cash flow FreecashflowgenerationremainsoneoftheGroup’skeystrengths.Freecashflowincludesfinanceleasepayments,AdjustedItems,interestandtax;butitexcludespensiondeficitrecoverypayments.
Wecontinuetofocusoncashperformanceintheperiod,withtheGroupgenerating£8.3minFreecashflow,adecreaseof£11.9m(58.9%)ontheprioryear.
AdjustedEBITDAof£38.8mcomparedtoFY2018of£45.8m,isdownby£7.0m15.3%,drivenbymixedtradingperformance,recoveryinSmithsNewsEBITDAmarginoffsetbyhighertradinglossesatTuffnells.Depreciationandamortisationwaslowerby£2.6mfromacombinationofTuffnellspropertiesbeingtreatedasheldforsalefromJanuary2019andprioryearwriteoffofPassMyParcelassetswhicharenolongerdepreciated.
Theincreaseinworkingcapitalintheperiodwas£3.9m(FY2018:decrease£7.7m)drivenbyadecreaseinprovisionsandunfavourabletimingofweeklyreceiptandmonthlypaymentcyclesrelativetotheyear-enddate.
Financial Review cont.
Free cash flow£m 2019 2018
Operatinglosscontinuing(includingAdjustedItems)
(31.3) (30.0)
AdjustedItems 60.8 63.9
Depreciation&amortisation 9.3 11.9
AdjustedEBITDA 38.8 45.8
Workingcapitalmovements (3.9) 7.7
Capitalexpenditure (8.6) (8.5)
Financeleasepayments (2.8) (3.8)
Netinterestandfees (5.1) (5.8)
Taxation (2.6) (6.5)
Other 0.8 (0.4)
Free cash flow (excluding Adjusted Items)
16.6 28.5
AdjustedItems–casheffect (8.3) (8.3)
Free cash flow 8.3 20.2
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 21
Pensionfundingreducedto£1.6m(FY2018:£4.7m).Thereductionof£3.1mresultedfromdeficitrepaircontributionstoWHSmithPensionTrustnolongerbeingrequiredfromOctober2018followingthecompletionoftheannuitybackedpension’buy-in’.Pensiondeficitrepairpaymentsareconsideredasanon-Freecashflowitem.
Freecashflowgeneration(afterAdjustedItems)intheyearwenttowardstherepaymentofdebtastherewerenodividendpaymentsintheyear(FY2018:£24.1m).
Wehaveabankfacilitycommitmentof£175mwithsixrelationshipbankswhichrunsfromOctober2017toJanuary2021.Thefacilitycomprisesofatermloanof£50mwithnoamortisationandanRCFfor£125m.
Pension schemesTheGroupoperatestwodefinedbenefitschemes,bothclosedtonewentrantsandWHSmithPensionTrustclosedtofutureaccrual.
ThelargestschemeacrosstheGroupistheSmithsNewsdefinedbenefitpensionscheme(theWHSmithPensionTrust)whichasat31August2019hadanIAS19surplusof£24.0m(31August2018:£154.5m).However,asthepensionschemeisclosedtofutureaccrual,thisIAS19surpluscannotbeusedtoreducefuturecontributionsorasafundingholiday,andasaresulttheGrouphasnotrecognisedthissurplusonthebalancesheet.TheSmithsNewssectionoftheWHSmithPensionTrustcompletedtheactuarialtriennialvaluationasat31March2018andconcludeditnolongerrequiredfunding.
SmithsNewshadpreviouslyagreedwiththeWHSmithPensionTrustascheduleofcashcontributionsof£3.3mperannumtoMarch2020.InOctober2018,theTrustenteredintoaninsurancebackedannuitytothe‘buy-in’oftheschemeassetswithinthesectionoftheTrustsponsoredbySmithsNews.This‘buy-in’annuityisrecognisedasaplanassetandthedifferenceinvalueisconsideredanactuarialre-measurement.Further,theschemesactuarytotheTrusteesnotifiedtheGroupthatno
furtherdeficitrepaircashcontributionswillneedtobemade.AsaresulttheIFRIC14deficitrepairliabilityhasbeenreleasedat31August2019£nil(31August2018:£6.7m).
Pension‘buy-in’costsof£2.2mwererecordedwithinAdjustedItemsduringtheyear.
TheTuffnellsdefinedbenefitschemeIAS19deficitat31August2019was£2.9m(31August2018:£2.2m).ThetriennialactuarialvaluationoftheTuffnellsParcelsExpressschemeasat1April2016wasaschemedeficitof£4.3m.Deficitrecoverycontributionshavebeenagreedandremainat£0.3mperannum.
Thetotalcashcontributionforbothdefinedbenefitschemes,whichincludepensionadministrationfeesanddisclosedwithinthecashflowstatement,amountedto£1.6mforFY2019(FY2018:£4.7m).
Discontinued operations Therewerenodiscontinuedoperationsintheyear.
Intheprioryearon14February2018,theGroupcompletedthesaleoftheBooksbusinessatalossof£10.5m.ThisrepresentedAdjustedoperatingprofitfortheGroupof£1.8mandAdjustedprofitbeforetaxof£1.7minFY2018.
Going concern TheGroupmeetsitsday-to-dayworkingcapitalrequirementsthroughitsbankfacilitiesof£175m,agreedinOctober2017,withatermtoJanuary2021.TheGroup’sforecasts,takingintoaccounttheBoard’sfutureexpectationsoftheGroup’sperformance,indicatethatthereissufficientheadroomwithinthesebankfacilitiesandtheGroupwillcontinuetooperatewithinthecovenantsattachingtothosefacilities.
Consideringtheprincipalrisksdiscussedinthisreport,thedirectorshaveareasonableexpectationthattheGroupandtheParentCompanyhaveadequateresourcestocontinueinoperationandmeetitsliabilitiesastheyfalldueforaperiodofatleast12monthsfromthedateofapprovalofthefinancialstatementsandfortheperiodofthethree-yearviabilityassessment.Thus,theGroupandtheParentCompanycontinuetoadoptthegoingconcernbasisinpreparingitsconsolidatedfinancialstatementsandincludesdisclosureregardingitsthreeyearviabilityassessmentbasedontheprincipalrisks.
Net debt £m 2019 2018
Opening net debt (83.4) (82.1)
Freecashflow 8.3 20.2
Financeleasecreditormovement 2.8 3.2
Pensiondeficitrecovery (1.6) (4.7)
Dividendpaid – (24.1)
Disposalproceeds – 12.9
Discontinueddisposalproceedstorepayoverdraft – (12.7)
Discontinuedoperationscashflow – 3.9
Closing net debt (73.9) (83.4)
Capitalexpenditureintheyearwas£8.6m(FY2018:£8.5m)anincreaseof£0.1m.Newandexistingdepotandnetworkinvestmentswere£2.6m(FY2018:£2.1m).Fleetinvestmentwas£1.7m(FY2018:£1.7m).Technologyandequipmentinvestmentwas£4.3m(FY2018:£4.7m).
Financeleasepaymentsof£2.8m(FY2018:£3.8m)havedeclinedby£1.0masexistingITfinanceleasearrangementsareexpiring.
Netinterestandfeesof£5.1m(FY2018:£5.8m)hasdecreasedby£0.7m.Themovementcomprisesincreasedinterestcashcostsfromahighermarginonthefacilityof£0.9m,offsetbytheprioryearcashpaymentofabankarrangementfeeof£1.6mpaidonthenew£175mbankfacilityconcludedinOctober2017.
Cashtaxcostsof£2.6m(FY2018:£6.5m)havedecreasedintheyearreflectingthecashlagfromdecliningprofitsinthecurrentandprioryear.
ThetotalnetcashimpactofAdjustedItemswas£8.3m(FY2018:£8.3m).Thiscomprised:£4.0m(FY2018:£6.8m)ofnetworkreorganisationandrestructuringcosts;pensionbuy-incosts£2.0m(FY2018:£nil)andresolutionoflegacyregulatorymatters£2.0m(FY2018:£nil)
Net debt Netdebtclosedtheperiodat£73.9m,ofwhich£2.5m(FY2018:£5.3m)relatestofinanceleases.
Netdebtreducedcomparedtotheprioryear,howevertheGroup’snetdebt/EBITDAratioroseto1.9x,(FY2018:1.8x)duetothedeclineinEBITDA.Thereductioninnetdebtby£9.5mwasdrivenpredominantlybyFreecashflowgenerationof£8.3mfromrestoredSmithsNewsEBITDAgrowthandtheircashgenerationwhichremainedsufficienttooffsetthedeteriorationinEBITDAfromTuffnellsasitmetitstradingchallenges.
Theintra-monthworkingcapitalcashflowcycleatSmithsNewsgeneratesaroutineandpredictablecashswingofaround£40mwhichutilisestheRevolvingCreditFacility(RCF)of£125m.Thisresultsinapredictablefluctuationofnetdebtduringthecourseofthemonthcomparedtotheclosingnetdebtposition.
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Principal Risks
A CLEAR FRAMEWORK FOR MITIGATING RISK
The Group has a clear framework in place tocontinuously identify
and review the principal risks.
TheGrouphasaclearframeworkinplacetocontinuouslyidentifyandreviewboththeprincipalandemergingriskstotheGroup.TheAuditCommitteereportdescribeshowwemanageriskfromBoardlevelandthroughouttheGroup.Furtherdetailscanbefoundonpages44to50.
Keyrisksareplottedonriskmapswithdescriptions,owners,andmitigatingactions,reportingagainstalevelofmateriality(principallyrelatingtoimpactandlikelihood)consistentwithitssize.TheseriskmapsarereviewedandchallengedbytheExecutiveTeamandAuditCommitteeandreconciledagainsttheGroup’sriskappetite.Aspartoftheregularprincipalriskprocess,areviewofemergingrisks(internalandexternal)isalsoconductedandalistofemergingrisksismaintainedandrolled-forwardtofuture
discussionsbytheExecutiveTeamandAuditCommittee.Whereappropriate,theseemergingrisksmaybebroughtintotheprincipalriskregisters.Additionalriskmanagementsupportisprovidedbyexternalexpertsinareasoftechnicalcomplexitytocompleteourbottom-upandtop-downexercises.
AspartoftheBoard’songoingassessmentoftheprincipalandemergingrisks,theBoardhasconsideredtheperformanceoftheGroup,itsmarkets,thechangingregulatorylandscapeandtheGroup’sfuturestrategicdirectionandambition.Principalriskspreviouslyreportedhavebeenreviewedindetailandtheyhavebeenrefinedandmademorespecificcomparedtotheprincipalrisksreportedinthe2018AnnualReport.Tworisksthatwereseparatelyidentifiedinthe2018
Principal risks Change Potential impact Mitigating actions and assurances
1.Deteriorationofthemacro-economicenvironment–Theriskofvolatilityand/orprolongedeconomicdownturncausesadeclineindemandforourservicesincludingtheuncertaintyassociatedwithEUExit,impactscurrentand/orprojectedbusinessperformanceabovethatincludedinthebusinessplanningandreviewprocessandtheabilityoftheGrouptoaccessthedebtcapitalmarkettorefinanceitsexistinglevelsofdebtatcommerciallyprudentlevelsoratall.
Reductionsindiscretionaryspendingmayimpactsalesofnewspapersormagazinesand/orseeareductioninparcelvolumes.UncertaintyfromEUExitmayaffectthebusinessinboththeshortandmedium-termontradearrangements,futurecapitalinvestmentstrategies,debtrefinancingandresourcingcosts.
• Annualbudgetsandforecaststakeintoaccountthecurrentmacro-economicenvironmenttosetexpectationsinternallyandexternally,allowingfororchangingobjectivestomeetshortandmedium-termfinancialtargets.
• AthoroughEUExitplanningexercisehasbeenundertakenandaccountabilityfortheassociatedactionsandriskshasbeenassignedtotherelevantExecutiveTeammembers.
• TheGroupcontinuestobesignificantlycashgeneratingwhichsupportsopportunitiesforrefinancingandinvestment.
• TheGroupwillcontinuetoexploreSale&LeasebackopportunitiesfortheTuffnellspropertyportfolioasameansofreducingnetdebt,andwillseparatelylookatrefinancingopportunitiesandtiminginthemarket.
AnnualReporthavebeenabsorbedintoprincipalrisks2and4inthisAnnualReport:
• failuretoadequatelymonitorfinancialperformanceand/ordelaysintheGroup’sfinancialperformancerecovery;and
• inadequateprocessesinplacetosupportPeopleinitiatives.
Risksarestillsubjecttoongoingmonitoringandappropriatemitigation.
Thetablebelowdetailseachprincipalbusinessrisk,thoseaspectsthatwouldbeimpactedweretherisktomaterialise,ourassessmentofthecurrentstatusoftheriskandhoweachismitigated.
Key to risk
NewNochange NewriskDecreasedIncreased
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 23
Principal risks Change Potential impact Mitigating actions and assurances
2.Failuretorefine,executeand/ormonitortheGroup’sstrategyanddirection–TheriskofnotestablishingbusinessplansandaclearvisionfortheGroupimpactsemployeeengagement,financialreturns,externalconfidenceandstakeholders’perception.
Salesand/orprofitexpectationsmaynotbemetand/ortheCompany’sreputationandstakeholders’supportforarecoveryplanmaybechallenged.
Thechangemanagementculturerequiredintheshort-termforrestructuringmayresultinreducedperformanceandfinancialreturns.
• Thestrategyanddirectionisbeingdefinedandwillbesupportedbyaclearplanforexecutionandbudget.Accountabilityatleadershiplevelisclearlydefined.
• Performancetothebusinessplanandbudgetisreviewedregularlyusingabalancedframework.Thisensureseffectiveandtimelymonitoringofperformancewithactiontobetakenintheeventofshortfallstoexpectations.
• Financialandoperationalmetricsareconsideredalongwithriskassessmentsandmanagementimpactbeforeremedialactionistaken.
3.FailingtoachieverecoveryoftheTuffnellsbusiness,includingaddressingchallengesincustomerservicelevels,revenues,operationalefficiencyandcashand/ornotadaptingtothecompetitiveenvironment–TheriskthattheturnaroundofTuffnellsmaytakelongerandrequiregreaterinvestmentand/orgeneratelowerreturns.
Theriskofnotmaintainingcustomerservicestandardsand/ornotunderstandingoradaptingtonewtechnologies,competitorsanddemographicswhichdrivechangeincustomerbehaviourand/orthatresultindeepandexpeditedstructuralmarketchanges.
ImpactongrowthandprofitabilitywithinTuffnellsifconsistentservicestandardsarenotunderstoodandaddressed,and/oriforganisationalefficiencygoalsand/orcommercialopportunitiesarenotmet.
• ImprovedcontrolandinsightofTuffnells’financialperformancehasledtomoretimelyactionbothregionallyandnationallytorespondtochangingrevenueandcostdrivers.Tradingperformanceismonitoredinrealtime.
• TheTuffnellsturnaroundplanismonitoredthroughthePMOSteeringCommitteealthough,overall,thereisstillfurtherprogresstomakeagainsttheturnaroundplan.
• Theteamhasbeenstrengthenedwithrelevantindustryskillsandtherearevarious‘changeprogramme’initiativesunderwaytoimprovebusinessefficiency.
• Moreworkisplannedtounderstandthechangesincustomerexpectationsandtoimprovecustomerservice,inparticulararoundtheoperatingmodel,themanagementinformation,supportingtechnology,ITinfrastructureandsafeworkplace.Dataanalyticsarenowavailable,supportingamoreforensicapproachtocustomerprofitabilitymodellingandcostforecastingatdepotlevel.
• AvarietyofsalesandoperationalKPIsarebeingtrackedtobenchmarkTuffnells’customerofferingandexperiencetothemarketplace.CombinedinvestmentisbeingmadeacrosstheTuffnellsbusiness,includingtalent,fleet,properties,andnetworkoptimisation.
4.Capacityandcapabilitytodeliverthescaleofchange–TheriskthatlackofcapacityandbandwidthtomanagenumerouschangeprojectsmayhinderthetransformationalchangeorleadtothebreakdownofkeycontrolsrequiredacrosstheGrouptoimprovefinancialperformance.
New ImpactontheabilitytoaddressthestrategicprioritiesandtodelivertheforecastperformancefortheGroup.
• ThroughtheestablishmentofTheConnectWay(theGroup’sleanprocessmanagementandcontinuousimprovementprogramme),sixsigmablackbeltexpertiseandtheintroductionofcoreprojectmanagementskillsareinplacetoleadandprojectmanagethenumerouschangeprogrammesunderwayacrosstheGroup,withallprojectsnowbeingmanagedthroughPMO.
• EachprojecthasitsownriskregisterwithprogressshowingasaRAGstatus.APMOSteeringCommitteemeetsweeklyastheoversightbodytomonitorprogress,resourceadequacyandotherconstraints.ThisCommitteealsoconsidersnewprojectsandreprioritisestheprojectportfolioasneeded.
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5.Failingtoattract,engageandretaintalentwithinahighperformanceandvalues-basedculture–TheriskthatwedonotattractorretainthepeopleandtheskillsweneedtotaketheGroupforwardandthatemployeesarenotmotivatedtowards,oraredisengagedfrom,thetaskinhand.
Riskthatthelevelofchangeaffectsstaffandretentionlevels.
ImpactontheabilitytoaddressthestrategicprioritiesandtodelivertheforecastperformancefortheGroup.
• Weseektooffermarketcompetitivetermstoensuretalentremainsengaged.
• Weundertakeworkforceplanning;performance,talentandsuccessioninitiatives;learninganddevelopmentprogrammes;andpromotetheGroup’scultureandcorevalues.
• Retentionplansarebeingreviewedtoaddresskeyriskareas,andattritionacrosseachbusinessisregularlymonitored.
• Regularsurveysareundertakentomonitortheengagementofemployees.
6.Increasedlabourmarketconstraintsandcosts–Theriskoflegislativechangesorinterpretation,coupledwiththeEUExitandpoliticaluncertainty,drivesdemographicorlegislativechangesorinterpretation,impactingtheabilitytorecruitandretainwarehouseanddeliverycontractors,resultinginhigherattritionriskinwarehousinganddistributionand/orincreasingliabilitiesandcosts.
Intheeventofanylegalclaimastoworkerstatusbyconsultants,subcontractorsoragencyworkers,thebusinesscouldbeliableforincreasedcosts(PAYEandundeclaredNationalInsurancecontributions)andliabilities(suchasemployeerights).Theinabilitytopassonsuchstatutoryincreasestoourcustomerscouldimpactprofitability,andaffectthecostoffutureefficiencyprogrammes.TheimplicationsofEUExitincludeadecreasingpoolofavailable,suitablyqualifiedemployeesandsubcontractors.
• TheGroupregularlyreviewsitslegaltermsofengagementwithcontractorsandconsultantsandhasappropriatecontractualandoperationalarrangementsinplace.Self-employeddeliverycontractorshaveclearlyarticulatedagreementswhichdefinetaskstheyarecontractedtoprovide,whetherpersonallyorbyasubstitute.
• KnownincreasestoemploymentcostassociatedwithNationalLivingWage/ApprenticeshipLevy/AutoEnrolmenthavebeenfactoredintolatestbudgets.Futurechangesinthisareaasaresultofpoliticalchanges/decisionsandthefullimpactofEUExitonemploymentrisksareunknownatthecurrenttimebutarebeingtracked.
• CommercialcontractsacrossSmithsNewspermittherenegotiationoflong-termsupplyagreementsintheeventofchangesinlawwhichimpactthestatusoftheGroup’sself-employeddeliverycontractors.
• Legaldevelopmentsaremonitoredtoensurethatthebusinessmaintainscompliancewithlegislationandbestpractice.
• Workforceplanninginitiativesincludingapprenticeshipandtrainingprogrammes,suchasWarehousetoWheels,aresupportingthelongertermmitigationofdrivershortage.
• Contractorprocesses,includingmonitoringcompliance,arewellestablishedinSmithsNews.Workison-goingtostrengthenprocesseswithinTuffnells.
Principal Risks cont.
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 25
7.Failingtomeethighhealth&safetystandards–Theriskofaninadequatehealth&safetyframeworkandinsufficientlyenforcingahealth&safetycultureresultsinseriousinjurytoemployeesand/orthepublic,and/orabreachofrelevanthealth&safetylegislation.
Theriskoffailingtoadheretoexternallawsandregulationsbyemployees,sub-contractorsandthirdpartiesresultinginabreachofourTransportOperatorLicenceconditions.
Inadditiontothedangertostafforthepublic,theimpactofaHealth&Safetyfailurenegativelyimpactsoperations,profitabilityand/orcorporatereputation,togetherwiththeriskofpossibleenforcementaction.
Theriskoftransportcompliancefailuresmayimpactconsistentservicestandardsand/ortheabilitytodelivertheforecastperformancefortheGroup.
• SafetyisakeypriorityoftheGroup.Health&SafetyperformanceisreviewedbytheBoard,AuditCommitteeandExecutiveTeam.
• AdedicatedHealth&Safetyteamexecutesimprovementprogrammes,undertakesauditsandpromotesasafetyculture.
• TheGroupcontinuestoinvestinHealth&Safetyimprovements,includingtheroleofHealth&Safetydirectorandbettermanagementreporting.
• WithinSmithsNewstheriskisconsideredtobewellmanagedandtheambitioncontinuestopromoteconsistencyinstandardsandculture.
• DedicatedTransportComplianceteamsexistspecificallyfocusedontransport-relatedcompliance.Improvementprogrammeshavebeenunderwaytoensurecontinuedlegalcompliance,operationalefficienciesandtominimisemistakes.Managementinformationisinplacetomonitorcomplianceonanongoingbasis.
Inadditiontomonitoringtheprincipalrisks,theBoardalsocontinuestomonitorandreviewtheemergingriskstotheGroupandthelikelihoodandmaterialityoftheirrespectiveimpactontheGroup’sfinancialperformance.KeythemesfortheGroup’semergingrisksareasfollows:
• tighteningdebtcapitalmarketandtheabilityoftheGrouptorefinanceitsexistingdebtwhichmayleadtofinanciallossandinabilitytooperatethebusinessnormally;
• majorincidentsfollowinganaturaldisasterleadingtosignificantdisruptionofservicesand/orinabilitytooperatethebusinessnormally;
• failureinthesuccessfultransitionand/oron-boardingofselectedservicestothesharedservicecentreinIndiawhichmayleadtoservicedisruptionand/orinabilitytooperatethebusinessnormally;
• lackofmaintenanceofanadequateITinfrastructureasaresultoftechnologicalchangeleadingtolossofinnovationability,lesseningagilitytoserveourcustomers,lossofbusinessdataandintegratedmanagementreporting;and
• cybersecurityriskleadingtosignificantbusinessdisruption,datatheft,regulatorynon-compliance,reputationaldamageandfinanciallossthroughfinesorinabilitytooperatethebusinessnormally.
Risk severity assessment
15
32 46
7
Low Mid High
Key to risk
NewNochange NewriskDecreasedIncreased
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Statement of Viability
ROBUST ASSESSMENT OF PRINCIPAL RISKS
1 How Connect Group assesses its prospectsConnectGroup’sbusinessactivitiesandstrategyarecentraltoassessingitsfutureprospects.These,togetherwithfactorslikelytoaffectitsfuturedevelopment,performanceandposition,aresetoutintheStrategicReportonpages2to31.ThefinancialpositionoftheGroup,itscashflowsandliquidityarehighlightedintheFinancialreviewonpages16to21.TheGroupmanagesitsfinancingbystructuringcoreborrowingsandtheavailabilityoffacilitiesfordrawdown.TheGroup’sprospectsareassessedprimarilythroughitsbusinessplanningprocess.Thisincludesanannualreviewwhichconsidersprofitability,theGroup’scashflows,committedfundingandliquiditypositionsandforecastfuturefundingrequirementsovertheassessmentperiodofthreeyears.ThemostrecentwassignedoffinSeptember2019,anditispartoftheBoard’sroletoconsidertheappropriatenessofanykeyassumptions,takingintoaccounttheexternalenvironmentandbusinessstrategy.
2 The assessment periodThedirectorshavedeterminedthatthethreeyearstoAugust2022isanappropriateassessmentperiodoverwhichtoprovideitsviabilitystatement.ThisperiodisconsistentwiththatusedfortheGroup’scorporateplanningprocessasdetailedabove,andreflectsthedirectors’bestestimateofthefutureprospectsofthebusiness,includingthenatureandpotentialimpactoftheprincipalrisksthatfacethebusiness.TheBoardnotedinconsideringtheappropriateassessmentperiodthattheGroup’scurrentbankingfacilitiesareduetoexpireinJanuary2021.TheBoardexpectstorefinanceduring2020oncommercially
reasonabletermsforaperiodthatisconsistentwiththethree-yearplanandreflectstheexpressedintentiontobringnetdebt:EBITDAto1xbyendofFY2021.TheBoardalsoconsideredwhethertherearespecificforeseeableeventsrelatingtotheprincipalrisksthatcouldoccurbeyondthethree-yearperiodthatshouldbetakenintoaccountwhensettingtheassessmentperiodandconcludedtherewerenone.IntheBoard’sassessmentofviability,thescenarioshaveassumedthatexternaldebtisrepaidasitbecomesdue,orwillberefinancedasandwhenrequired(seeNote20onpage119).
3 Assessment of viabilityIngeneratingitsplantheBoardhasconsideredtheoverallstrategyoftheGroup,theprincipalrisksanduncertaintiesinherentwithinthebusiness,aswellasmakinganumberofkeystrategicplanningassumptionswhicharenotedbelow:
1.NosignificantimpactontradingasaresultoftheEUExitorotherpoliticalchange;
2.ModestrevenuegrowthinTuffnellsintheassessmentperiod;
3.DeliveryofmarginimprovementinTuffnells,drivenbyefficienciesbothinoperatingandoverheadcostsintheassessmentperiod;
4.Continueddeclineinsalesofprintedmediaduringtheassessmentperiod,offsetbyoverheadefficienciesintheassessmentperiod;
5.RetentionofmajorcontractsinSmithsNewsatrateswhichmaintainacceptablemargins;
6.Nomajorchangesinworkingcapitalprofile;
7. SuccessfulrenewalofbankingfacilitiesinJanuary2021;and
8.Nosignificantacquisitionsordisposalsintheassessmentperiod.
Inmakingthisstatement,thedirectorshavecarriedoutarobustassessmentoftheprincipalrisksfacingtheGroup,includingthosethatwouldthreatenitsbusinessmodel,futureperformance,solvencyorliquidity.Thisincludedtheavailabilityandeffectivenessofmitigatingactionsthatcouldrealisticallybetakentoavoidorreducetheimpactoroccurrenceoftheunderlyingrisks.Inassessingthelikelyeffectivenessofsuchactions,theBoardconsideredtheconclusionsfromtheirregularreviewofriskmanagementandinternalcontrolsystems(asdescribedonpages42to50).
Tomaketheassessmentofviability,stressscenarioshavebeentestedoverandabovethoseinthebusinessplan,baseduponanumberoftheGroup’sprincipalrisksanduncertainties(asdocumentedonpages22to25).Thescenarioswereoverlaidintothebusinessplantoquantifythepotentialimpactofoneormoreofthesecrystallisingovertheassessmentperiod.Whilsteachoftheprincipalriskshasapotentialimpactandhasbeenconsideredaspartoftheassessment,onlythosethatrepresentseverebutplausiblescenarioswereselectedformodellingthroughthebusinessplan(shownright).
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 27
Asnotedabove,thescenarioshaveassumedthatexternaldebtisrepaidasitbecomesdue,orwillberefinancedoncommerciallyreasonableratesoveranagreedperiodonsimilarcovenantterms,asandwhenrequired.TheBoard’sintentionistoseektore-financeduring2020withourexistingbanksyndicate.Anynewrefinancedfacilitytermisexpectedtomatchtheperiodoftheviabilityassessmentandbeatanadequateleveltosupportourintentiontoachieveanetdebt:EBITDAratioof1xbyendofFY2021.Theavailabilitytorefinancecanbeinfluencedbywidermacro-economicfactorsatanypointintime.
ThescenariosabovearehypotheticalandsevereforthepurposeofcreatingoutcomesthathavetheabilitytothreatentheviabilityoftheGroup;however,multiplemeasuresareinplacetopreventandmitigateanysuchoccurrencesfromtakingplace.
Ineachofthestressscenarios1-5,theGroupwouldbeabletocontinueoperatingwithinexistingdebtcovenantsandliquidityheadroom.Scenario6requiredsuchanextremesetoffactorsinunisonthatitisconsideredtobeaveryremotelikelihoodandthereforedoesnotrepresentarealisticthreattotheviabilityoftheGroupbutratherillustratesthefactorsthatwouldresultinabankingcovenantbreach.Thedirectorsconsideredmitigatingfactorsthatcouldbedeployedtocounterthenegativeeffectsofthecrystallisationofeachoftheserisks.Themainactionsincludedreducinganynon-essentialcapitalexpenditureandoperatingexpenditureonprojects,aswellasnotpayingdividendsorbonuses.
TheBoardalsoconsideredtheimpactoftheEUExitonthebusinessanddoesnotforeseeanysignificantnegativeimpactwhichwillimpactontheviabilityassessment.
4 Viability statementTakingintoaccounttheGroup’sandParentCompany’scurrentpositionandprincipalrisksanduncertainties,thedirectorsconfirmthattheyhaveareasonableexpectationthattheGroupandParentCompanywillbeabletocontinueinoperationandmeetitsliabilitiesastheyfalldueoverthethreeyearstoAugust2022.
5 Going concernThedirectorsalsoconsidereditappropriatetoadoptthegoingconcernbasisinpreparingtheGroupandparentFinancialStatementswhichareshownonpages86to135.
Scenario modelled Link to principal risks
Scenario 1Customerattritionasaresultofpoorcustomerservicelevelsandnotadaptingtothecompetitiveenvironment
WehaveassumedcustomerattritioninTuffnellsequalsnewcustomers,resultinginrevenuebeingflatthroughouttheassessmentperiod.
Risk1&3:Failuretoachievedesiredcustomerexperienceandservicelevels.
Scenario 2Majorpublisherbusinessfailure
ThebusinessplanassumesallmajorpublisherswillcontinuetotradewithSmithsNewsoverthethree-yearassessmentperiod.Wehavemodelledascenariothatreflectsoneofthemajorpublishersgoingoutofbusinessormovingtoadigitalonlymarket.
Risk1:Failingtooptimiseprofitabilityinthenewsbusiness.
Scenario 3Forecastsavingstargetsarenotmet
ThebusinessplanassumesbothoperationalandoverheadefficienciesinTuffnellsaspartofdeliveringitsturnaround,aswellasoverheadsavingsinSmithsNewsthroughouttheperiod.Wehaveassumedonly20%oftheseimprovementsareachieved.
Risk1&3:Failingtomonitorfinancialperformanceand/ordelaysintheGroup’sfinancialperformancerecovery.
Scenario 4Changestothegigeconomy
TheGroupoperatesabusinessmodelthatusesamixofemployedoperatives,subcontractorsandagencystaff.Ifemploymentlaworpracticesaresubjecttochangewhichrendersthemixunworkableinfuture,thenthiswouldpotentiallyleadtoincreasedcost.Wehavemodelledscenariosthatchangethismixandleadtoincreasedcost.
Risk6:Increasedlabourmarketconstraintsandcosts.
Scenario 5MajorHealth&Safetyincidents
WeconsideredthefinancialandreputationalimpactofaseriesofHealth&Safetyincidents,modellinganincreasedcostandregulatoryfinessuchasfromtheHealth&SafetyExecutive.
Risk7:Failingtomeethighhealth&safetystandards.
Scenario 6Reversestresstest–revenueloss,marginerosionandworkingcapitaloutflowincombinationtocovenantbreach
Thiscombinesanextremeseriesoffactorsinunison,toillustratewhatwouldresultinacovenantbreach. Multiplerisksincombination.
1
1
1 3
3
6
7
1 7–
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Corporate Responsibility
SUSTAINABLE BUSINESS THROUGH CONTINUAL IMPROVEMENT
The Group operates to a well-established
foundation of responsible practice,
with governance focusing on four key
areas: Governance & Sustainability,
Environment & Community,
Workplace & Conduct and Marketplace.
Governance and sustainabilityThekeyareasoffocusintheGroup’sCorporateResponsibility(CR)programmeareeachownedandmanagedbyarelevantexecutivedirectorwithsupportfromspecialistteamsattheGroupcentrewherenecessary.Targetsandprioritiesareagreedforeachbusiness,withprogressreviewedthroughouttheyear,includingregularupdatestotheBoard.Inpractice,thedaytodayresponsibilityiswidelyshared,withtargetsintegratedintooperationalbusinessesandcrossfunctionalinvolvementininitiativesbeingthenorm.Toensurethatallstakeholdersshareanawarenessofourapproachwepublishourpoliciesand,whererelevant,buildtheseandfuturegoalsintooursupplieragreements.
TheGrouphaschosentoseektocomplyearlywiththerequirementsofthe2018editionoftheUKCorporateGovernanceCodeincludingthoseaspectsrelatingtoCR.FurtherdetailsaresetoutbelowandintheCorporateGovernancereport.
Environment and communityTheGroup’senvironmentalimpactismostsignificantlyinfluencedbyourvehicleemissions;energyconsumptionatourlocations;andwasteandrecyclingofproductandpackaging.Theserepresentourprimaryareasoffocusforenvironmentalimpactimprovement.
Fuelusedbyfleetandcontractorsaccountsforthemostsubstantialportionofourtotalemissions.AsubstantialproportionofthevehiclefleetwasupgradedtoEuro6standardsinFY2018andinFY2019,ourCompanycarfleethasbeenreducedby65vehicles.Ourpriorityoverthenext12monthsistosecurefurtherfuelefficiencies,achievedthroughacombination
ofdrivertrainingandareviewofthetrunkingnetworkwhichmovesproductsbetween‘hubandspoke’locations.Aprojectisunderwaytodeterminehowwecanbestreducethenumberoftrunkingjourneys,whilemaintainingservice,throughimprovedroutingandvehicleoptimisation.
TheGrouphasmaderegularprogressinreducingitsenvironmentalimpactthroughaseriesofdepotconsolidations,theintroductionofsmartmeteringtomonitorelectricityandgasconsumption,andtheconversionofallourlargerlocationstoLEDlighting.Whilemanyofthemostsignificantopportunitieshavenowbeentaken,wecontinuetomonitorutilityusageandmakeimprovementsonanon-goingbasis.
CarbonReductionCommitment(CRC)TheCRCmeasureselectricityandgasusageinlargeandmediumsizedcompanies.InthereferenceperiodtotheendofApril2019the
Group’sactivitiesaccountedforatotalof3,640tonnesofCO2,areductionof41%onthepreviousyear.ThereductionisinpartaconsequenceofthereducedsizeoftheGroup,butalsoreflectsourongoingactionsonlighting,meteringandenergymonitoring.
CarbonEmissionsdataTheGroup’sCarbonEmissionsisreportedfortheyear1January2018to31December2018,consistentwiththeperiodwearerequiredtoreportandauditfortheGovernment’sEnergySavingOpportunitySchemeandtheCarbonReductionCommitment.TheGrouppreviouslyreporteditscarbonemissionsdatausingtheperiod1Marchto28Februaryannually,andthesefiguresareprovidedforabenchmarkcomparison.TheGroupwillpublishitsGreenhouseGasemissionsforthefullcalendaryearof2019withappropriatecomparisons,ontheCompany’swebsitesearlyin2020.
Carbon Reduction Commitment (CRC) 2017/18 2018/19 Change
Electricity(tonnesCO2) 4,675 2,789 -40%
Gas(kWh)(tonnesCO2)* 1,466 851 -42%
Emissions(tonnesCO2) 6,141 3,640 -41%
Fuel type/scope1 March 2017 – 28 Feb 2018 (Tonnes of CO2e)
1 January 2018 – 31 Dec 2018 (Tonnes of CO2e)
Scope1 41,145 85,829
Scope2 5,793 3,979
Scope3 38,879 10,584
Total 87,717 100,395
* Excludingsmallmeters.
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 29
Newspaper and magazine recycling
CommunityTheGroup’scommunityactivityisspearheadedbyour‘PassitOn’Campaign,supportinghomelesspeopleacrosstheUK.InFY2018,theprogrammewasextendedtoincludeasummercampaignratherthanfocusingsolelyonChristmasandthiswasrepeatedinsummer2019.Highlightsincludedover10,000itemsbeingdonatedanddistributed,withmorethan70colleaguesvolunteeringsignificanttimebeyondworkinghourstoensurethecampaignransmoothly.TheprogrammeandourwiderCRstrategywerehighlycommendedattheHRExcellenceAwardsinJune2019.
Inadditiontoourflagshipcampaigns,manyteamsandindividualscontinuetosupportcausesthatareimportanttothem.Wherepossible,weprovidesupportwithworkplaceflexibility,publicityandfinancialsupport.Weoffercolleaguestime-offforuptofivedaysayearinordertovolunteerforcommunitycausesandencouragemanagerstobeaccommodatingandflexibleintheirassessmentofrequests.
Workplace & ConductThisyearwehavetakenmeasurestoimprovecolleagueengagement,withactiveinvolvementfromtheBoardandExecutiveTeam,sponsoringaseriesofinitiativestorevisitandimproveourvalues,culture,andcommunicationprocesses.
ColleagueforumsColleagueforumshavebeenestablishedacrosstheGroup,withanextensivecascadestructuretoensurecommunicationisbothswiftandcomprehensive,withissuesandresponsesaddressedpromptly.
TheBoardhastakenanactiveroleinshapingthepurposeandconsideringtheoutputsoftheforums.KeyoutputsfromtheNationalColleagueEngagementForumincludeconstructivediscussionsonourHealth&SafetypoliciesandtheGroup’s‘SafetyFirst’initiative;adesireforgreaterunderstandingofexecutiveandcolleaguereward;proposalsforimprovedtwo-waycommunicationchannelsbetweenfrontlinecolleaguesandbusinessleaders;andtheendorsementofproposalstointroducemoreflexiblebenefitstructures.
NotesThedatacollectedforthisreportisinrespectoftheperiod1January2018to31December2018.Thedataincludesallmaterialemissionsdefinedassourcesrepresentingover1%offootprint.
Usinganoperationalcontrolapproach,theGrouphasassesseditsboundariestoidentifyactivitiesandfacilitiesforwhichithasresponsibilityforthegreenhousegas(GHG)emissionsfromScope1and2.TheGroupreportsonselectedScope3emissions,namely,thesubcontractedmileageofSmithsNewsandTuffnells(wherepossibletoobtain)andemployeebusinesstravel.TotalGHGemissionswerecalculatedfollowingISO-14064-1:2006methodologyandusingDEFRA(2016and2012)emissionsfactors.
Scope1(gasandfuel)emissionsrelateprimarilytotheconsumptionofgastoheattheGroup’sdepotsandthefuelconsumedbyourCompanycarsandcommercialvehiclefleet.Scope2emissionsconsistoftheelectricityusedinourofficesanddepots.
Greenhouse Gas Emissions Intensity Ratios
IntensityratiosReporting year
CO2e tonnesper £1mturnover
CO2e tonnesper
employee
CO2e tonnesper square
metre ofpremises
1January2018–31December2018 66.28 20.73 0.62
1March2017–28February2018 51.26 16.26 0.41
98%of unsold copies are recycled
• Alllocationsholdatleastonecolleagueforummeetingeverymonthheadedbytheirmanager–thisamountsto80meetings,generatingfeedbackandideas,andprovidingopportunitiestocommunicate.
• Regionalforumsareheldquarterly,headedbyRegionalDirectors.
• NationalforumsarealsoheldquarterlyforSmithsNews,TuffnellsandOfficelocations.
• ANationalColleagueEngagementForumisanadditionalmeetingheldquarterlyandchairedbynon-executivedirectorMichaelHolt,whohasbeennominatedbytheBoardtopromotecolleagueengagementasameansofensuringthattheviewsandinsightofinternalstakeholdersarefullyconsidered.
Whilethereisstillmuchworktobedone,wearepleasedtohaveestablishedfoundationswhichareconsistentwithournewvalues,cultureandstrategy.
CompanyvaluesNewCompanyvalueswerelaunchedinautumn2018,supportedbyworkshops,communication,managementandcolleagueforums,amountingtoasignificantandsustainedefforttocreateamoreentrepreneurial,fasterpacedandopenculture.Thenewvaluesweredesignedtoencouragethesebehavioursamongallofourcolleagues,guidingthewayweworktogetherandwithourpartners.
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Corporate Responsibility cont.
Inclusion&DiversityTheGroupiscommittedtopursuingimprovementsingender,ageandethnicdiversity.Whilerecognisingthatthesewilltaketimetoachieve,weareputtinginplacestructurestohelpensureregularprogressismaintained.
Insupportofthisgoal,the‘EveryoneIn’programmewaslaunchedinFebruary2019.Theprogrammeisguidedbyaregularforumofcolleaguesacrossthebusinesswiththeexpresspurposeofhelpingtocreateamoreinclusiveculture,welcomingdiversityandallowingallcolleaguesto‘bethemselves’atwork.InitiativestodateincludesupportforthenationalMentalHealthandCarersweeks,andhighprofileupskillingsessionsformanagersonthebenefitsofinclusionanddiversity.
ColleaguecommunicationWehavesignificantlyincreasedcolleaguecommunicationacrossthebusinesswithgreateractiveparticipationfromtheExecutiveTeamandtheBoard.Initiativesinclude,amongothers:theestablishmentofcolleagueforums,regulartownhallmeetingstoexplainstrategyandperformancetobothSmithsNewsandTuffnells,anewstaffnewspaper,improvementstoandeasieraccesstotheGroup’scolleagueintranet,andBoardmembervisitstooperatinglocations.
TheGroup’sall-colleagueengagementsurveyhasbeenrevisedinlinewiththenewstrategyandwasrelaunchedinSeptember2019.Theresultswillbeanimportantmeasureoftheeffectivenessofactionstakentoimproveculture,communicationandengagement.TheBoardwillplayanactiveroleinreviewingresultsanddeterminingtheappropriateactionplansandpriorities.
Workplaceresponsibility,diversityandhumanrightsTheGroupiscommittedtoresponsiblepracticethroughouttheworkplaceandembedsthisinitspoliciesandprocedures.Regularreviewsensurethatupdatesaremadeinresponsetobusinessinitiativesandlegislation;anysignificantchangesarenotedanddiscussedwiththeExecutiveTeamandtheBoard.Health&SafetyperformanceisreviewedregularlybytheBoardandExecutiveTeamthroughouttheyear.
TheGroupworkstoensureaculturethatisfreefromdiscriminationandharassmentinanyform.Properconsiderationisgiventopeoplewithdisabilitiesand,shouldemployeesdevelopadisabilitywhileworkingfortheGroup,everyeffortismadetocontinuetheiremploymentandprovideretrainingifrequired.Wearecommittedtoacultureandenvironmentinwhichworkplaceconcernscanberaisedandaddressedwithoutrecrimination;wesupplementthiswithconfidentialwhistleblowingproceduresthatarewellcommunicatedthroughouttheorganisation,includingaconfidential‘speak-up’line.AllconcernsraisedarecarefullyinvestigatedandanysignificantmattersarebroughttotheattentionoftheBoard.
TheGroupactivelysupportsdiversityintheworkplaceinallitsformsandiscommittedtoimprovingthebalanceofgendercompositionovertime.Thegendercompositionasat31August2019canbeseeninthetablebelow.
TheGroupsupportsthehumanrightsofouremployeesandourpoliciesarebuiltonacommitmenttomutualrespect,fairnessandintegritythroughouttheGroup.Theseprinciplesarereflectedinourvalues,whichareintegraltoourEmployeeRelationspoliciesand,morebroadly,totheways
inwhichweworktogether.TheGrouphasinplaceethicaltradingstandardsandacommitmenttocombattingmodernslavery,eachofwhichareendorsedbytheBoard,andwhichweexpectoursupplychainpartnerstoadheretoinourcommercialrelationships.Inthelastyear,wehaveincreasedoureffortstocombatmodernslaveryandhumantrafficking,strengtheningourdiligenceproceduresintheareasweconsidertobeofgreatestrisk,including:employeerecruitmentandon-boarding;contractorappointmentandmanagement;procurementandoutsourcing;andbyraisingawarenessofanti-slaveryandhumantraffickingthroughwidespreadcommunicationofpoliciesandmanagerguidelines.TheGroup’sfullAnti-SlaveryandHumanTraffickingStatement(September2019)isavailableonlineatwww.connectgroupplc.com/modern-slavery-statement
Male % Female % Total
Allemployees 3,613 77 1,081 23 4,694
BoardofDirectors 6 86 1 14 7
SeniorManagers* 30 83 6 17 36
* ComprisestheExecutiveTeam(excludingtheExecutiveBoardDirectors)andtheirdirectreportsasrecommendedbytheHampton-AlexanderReview,withresponsibilityforplanning,directingorcontrollingtheactivitiesoftheCompany,orastrategicallysignificantpartoftheCompany.
Toencourageemployeestoraiseanymattersofconcern,theGroupoperatesaconfidential‘speak-up’line.AllconcernsarecarefullyinvestigatedandanysignificantmattersarebroughttotheattentionoftheBoard.
GenderpaygapreportingTheGroup’soverallgenderpaygapintheyearto31August2018hasreducedfrom9%to5.1%.Thisprogresswasnotfullymirroredinthepaymentofbonuses,withthemeangenderbonusgapincreasingfrom17%to35.9%,whilethemediangenderbonus
The Group works to ensure a culture free
from discrimination and harassment in any form.
All concerns are carefully investigated and any significant matters are brought to the attention of the Board.
CONNECT GROUP ANNUAL REPORT 2019 STRATEGIC REPORT 31
gapimprovedfrom-84%to-45.4%.Arangeoflegacyfactorsimpactthesefigures,mostnotablythenumberandvalueofbonusespaidinFY2018aswellasthepercentageofwomenandmenreceivingabonusinprioryears,bothofwhichinfluencethecalculationofthemeanbonusgap.
TheGrouphasputconsiderableeffortintoensuringtheseresultsarecommunicatedinanopenandtransparentwaytocolleaguesandotherstakeholders.DetailswerepublishedontherelevantGovernmentwebsitesduringFY2019,supplementedbycolleaguecommunicationsthatexplainedtheresults,whattheymeanandtheactionswearetaking.
Our2018GenderPayGapreportcanbefoundatwww.connectgroupplc.com/working-responsibly/a-responsible-business
Marketplace TheGroupiscommittedtoworkingacrossitssupplychainsinpursuitofhighstandardsandsustainablebestpractice.Seniorcolleaguescontributetoanumberofindustrybodiesandforumsandwearealeaderintransparencyandtheadoptionofrelevantvoluntarycodes.
Inthenewsindustry,thePressDistributionForumconductedareviewofitsretailerComplaintsProcessembodiedinthePressDistributionCharter.Weplayedanactiveroleinthisprocessandarenowworkingtothenewstandardswhichfacilitateamoretransparentmeasureofanyissuesraisedbyretailers.Underthenew(stricter)measures,theindustryhasseenasignificantyearonyearreductionofStage1andStage2complaintswithissuesrelatingtoSmithsNewsdownby63%yearonyear.ThePressDistributionReviewPanelnotedinitsindependentAnnualReport(2018)thatthetotalnumberofservicebreachesacrosstheindustryreachingStage2wasonly294,ofwhichonly41wereescalatedtoStage3.Furthermore,itcommentedthatthesefiguresneedtobeplacedinthecontextofthesheerscaleofopportunitiesforcomplaint,whichatitssimplestcanamounttoasinglemisseddeliveryforasingleproduct.Thereare,thereportnotes,over396milliondeliverycomplaintopportunities,confirmingthatthelevelofbotherrorsandcomplaintsisatinypercentageoftotalactivity.
Morerecently,inJuly2019thenewsindustryannouncedanautomaticservicefailurepaymentschemeincaseswherethedailynewsisdeliveredovertwohourslate,irrespectiveofinbounddeliverytimes.SmithsNewshasadoptedthenewschemefromSeptember2019.
AcrosstheGroup,wehavebeenreviewingourprocurementproceduresagainstbestpractice,developingasuppliercodethatwillincludetherequirementforsupplierstoupholdtherelevantCRstandardsincludingcompliancetoourmodernslaveryandanti-briberypolicies.OurpreferredsupplierswillneedtobeabletoevidencetheirupholdingofboththesestandardsandanyadditionalCRrequirements
2019Smiths
News Tuffnells Group
SpecifiedInjuries 4 11 15
Injuriesresultinginover7daysabsencefromwork 3 24 27
AllRIDDOR 7 35 42
Prior years 2018 2017 2016 2015
SpecifiedInjuries 11 10 10 10
Injuriesresultinginover7daysabsencefromwork 38 41 41 52
AllRIDDOR 49 51 51 62
thatmayberelevant.Forcategories,suchaspackaging,stationeryandwasteweplantointroducespecificcompliancechecks.Weaimtohavethecodefullyinplacebytheendofthecalendaryear.
Health & SafetyTheBoardiscommittedtoachievingthehigheststandardsofHealth&Safety,ensuringtheappropriateresourcesareavailableforimprovementstoourculture,performanceandpractice.EachofSmithsNewsandTuffnellsissupportedbyspecialistHealth&Safetyteamsthatprovideguidance,trainingandsupportinrelationtoitsparticularrisksandpriorities.AHealth&SafetyreportisprovidedtotheBoardonastandingitembasis;andtheAuditCommitteeandBoardeachconductregularreviewsofincidents,trendsandoverallperformance.TheresultisacontinualfocusonHealth&Safetyatalllevels.
ReportingofInjuries,DiseasesandDangerousOccurrencesRegulations(RIDDOR)TheGrouphasseenapleasingimprovementinitsHealth&Safetyperformanceacrosstheyear.OverallRIDDORreportableincidentsaredownby14%withincidentsdownby60%inSmithsNewsandupby6%inTuffnells.WeareconfidentthattheincreaseinTuffnellsreflectsoccasionalvariationsinstatisticalreporting,ratherthanasignificanttrendasthetotalnumberofincidentsinTuffnells(includingminorincidentsandnearmissesthatarenotrecordedasRIDDOR)declinedby7.5%overthesameperiod.
OthermeasuresandtrainingInFY2019,theGroupadoptedameasureof‘LostTimeIncidents’asanadditionalkeyindicatorfortrackingsafetyintheCompany.UnlikeSpecifiedInjuries,a‘LostTimeIncident’isnotdependentontheseverityoftheinjury,soeachrecordcouldrepresentaslittleasoneday’sabsence.Thisbestpracticeapproachisaimedatencouragingarigorousawareness
ofallrisks,regardlessoftheirseverity,reinforcingapositivesafetyculture.Atotalof149LostTimeIncidentswererecordedacrosstheGroup(FY2018:147),thoughbroadlyflatonlastyear,thetotalisreflectiveofthedrivetoincreaseawarenessanda‘zeroexceptions’cultureofreportingofminorincidentsandnearmisses.WiththesupportoftrainedHealth&Safetypractitionerswereviewallrecordedaccidents,nearmissesandanyconcernsraisedbycolleaguesinpursuitofcontinualimprovementtoourprocessesandperformance.
AnindicationoftheimprovingHealth&SafetyenvironmentistheawardbyRoSPAofnineGoldawardsacrossSmithsNewsandTuffnellsdepots,withfurthersilverawardsatourBrierleyHillandHaydocklocations.Giventhecomplexityoftheoperationsthesearesignificantachievementsandsetastandardwhichweareworkingtoachieveacrossthenetwork.
Insupportofapositivesafetycultureweadditionallylauncheda‘SafetyFirst’campaigninouroperatinglocations.Recognisingthatbehavioursarecriticaltolong-termimprovement,wehavemaintainedourinvestmentintraining,withprogrammesintheyearincludingManualHandlingTrainingforallcolleaguesandouragencypartners,andtherolloutofvideotrainingonsafesystemsofwork.
ApprovalThisStrategicReporthasbeenapprovedbytheBoardandsignedonitsbehalfby:
Gary KennedyChairman5November2019
Specified Injuries Over 7 days
Tuffnells
Smiths News
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Introduction to Governance
As Chairman of the Board, I am pleased to present our Corporate
Governance report for the year ended
31 August 2019.
A COMMITMENT TO GOOD GOVERNANCE
AgainstabackdropofchangeandtransformationacrosstheGroupduringFY2019,wehavemadegreatstridesinresettingourmostimportantcorebehavioursbylaunchingtheGroup’snewValueswhichareexpectedof,andpromotedby,allofourcolleagues.WearedelightedthattheseValueshaveresonatedsostronglywithourpeopleandareincreasinglyembeddedwithinoureverydayconductandculture.MoreinformationonourValuescanbefoundwithintheCorporateResponsibilityreportonpages28to31.
Alongsidethisculturalshiftandatatimewhenwehavecontinuedtoexperiencechallengestoourtradingprofile,wehavere-energisedthewayinwhichweinteractwithourkeystakeholderswitharenewedvigourtolistenandengagewithourcolleagues,customers,suppliers,communitiesandshareholders.Thisisevidencedinmanywaysvia:
• ournewnetworkofcolleagueforums,includingourNationalColleagueEngagementForumattendedbyMichaelHolt(asdesignatednon-executivedirector)asameansofgivingtheBoarddirectaccesstotheimportantviewsandvoiceofourfrontlineandcorporatecentrecolleagues(furtherinformationcanbefoundinourCorporateResponsibilityreportonpages28to31),
• ournewdiversityandinclusionawarenessprogrammes(informationonournewDiversity&InclusionpolicycanbefoundinourNominationsCommitteereportonpage51),
• ourthoroughCapitalMarketsstrategysessionheldinJanuary2019;and
• ourextensiveconsultationwithinstitutionalshareholdersinrelationtoourproposedupdateddirectors’remunerationpolicy,assummarisedbyourRemunerationCommitteeChaironpage54,andwhichshareholdersareinvitedtoapproveatour2020AnnualGeneralMeeting(AGM).
Separately,wehaveengagedwithasmallnumberofshareholderswhovotedagainstmyre-electionasChairmanatour2019AGMinordertounderstandtheirconcernsovermyperceived‘over-boarding’inlightofmyotherchairmanships.TheBoardhasconsideredtheseconcernsandhasconcludedthatIhavesufficientcapacitytomeetmycommitmenttotheCompany,particularlygiventhatoneofmychairmanshipsrelatestoGreenREITPLC(arealestateinvestmenttrust),whichduetothenatureofitsbusinessconstitutesconsiderablylesstimecommitmentthanatypicaltradingbusiness,apositionformallyrecognisedrecentlybyLegal&GeneralInvestmentManagementwhodesignatedsucharoleasbeingequivalenttoonerole(comparedwitha‘tworole’equivalentforaBoardChair)outofamaximumoffivepermittednon-executiveroles.Nevertheless,IcanalsoreportthatIintendtoresignastheChairmanofGreenREITPLCfollowingconclusionofitsformalsalesprocessandtherecentannouncementforitssaletoasubsidiaryofHendersonParkRealEstateFund.FurtherdetailsonthisprocesscanbefoundinourCorporategovernancereportonpage36.
Buildingonourcommitmentofleansixsigmaprocessmanagement,continuousimprovementandtransformation,wearesatisfiedwiththecontinuedfocusandimprovementintheriskmanagementprocessandthestrengtheningofourinternalcontrolenvironmentasoverseenbyourAuditCommitteeandreportedonpage44.WewillcontinuewiththisfocusintoFY2020.Duringtheyear,asexplainedonpage34,weinitiatedatenderforexternalauditservicesandwearepleasedtorecommendBDOLLPasournewauditor.Iwouldliketoexpress,onbehalfoftheBoard,ourgratitudetotheformerDeloitteauditteamfortheirrobustandprofessionalauditservicestotheCompanysincedemergerfromWHSmithPLCin2006.
TheBoardremainscommittedasithasalwaysdonetodrivinggoodgovernanceprinciplesthroughourGroupandforthisreasonwehavesoughttocomplyayearearlierthanrequiredwiththeupdated2018editionoftheUKCorporateGovernanceCode(the‘Code’).SetoutwithintheCorporategovernancereportonpages36to43,wedetailourcomplianceduringtheyearwiththenewCodeandwelookforwardtocontinuingourcommitmenttogoodgovernancethroughtheyearahead.
Gary KennedyChairman
CONNECT GROUP ANNUAL REPORT 2019 GOVERNANCE 33CONNECT GROUPANNUALREPORT2019
Governance frameworkWeoperatewithinacleargovernanceframework,whichisoutlinedinthediagrambelow.OurriskmanagementframeworkalongwiththeprincipalrisksisdescribedintheStrategicreportonpages22to26.
—remunerationofdirectorsandseniormanagersandoversightofworkforcepayarrangements;
—annualevaluationoftheBoardanddirectors,consideringitscompositionandtheeffectivenessofdirectorsworkingtogethertopromotethelong-termsustainablesuccessoftheCompany,generatingvalueforshareholdersandcontributingtowidersociety;and—corporateresponsibility.
TheScheduleofMattersReservedfortheBoardisavailableonourwebsitewww.connectgroupplc.com
Audit Committeepromotesgovernanceandaccuracyoffinancialreporting—monitorstheinternalandexternalauditors
Nominations CommitteemakesrecommendationstotheBoardforexecutiveandnon-executiveappointmentsandsuccessionplanning—promotesemployeeengagementanddiversity
Remuneration Committeedeterminesdirectors’andseniormanagementremunerationstrategyandpolicy—overseestheimplementationofremunerationpolicy
Approvals CommitteeresponsibleforapprovingdelegatedBoardmatters
Disclosures CommitteemonitorsandoverseestheCompany’scompliancewiththeMarketAbuseRegulationandtheconsiderationofinsideinformationproceduresanddisclosures
Chairman ResponsibleforrunningtheBoard
AssetoutinthedivisionofresponsibilitiesbetweenChairmanandChiefExecutiveOfficeravailableonourwebsitewww.connectgroupplc.com
Chief Executive OfficerResponsibleforleadingourbusinessesandfordeveloping&implementingstrategy
AssetoutinthedivisionofresponsibilitiesbetweenChairmanandChiefExecutiveOfficeravailableonourwebsitewww.connectgroupplc.com
Executive TeamTheExecutiveTeamfocusesonthedevelopmentandimplementationofstrategy,financialandoperationalperformance,commercialdevelopments,successionplanningandorganisationaldevelopment.
Read more on pages 44 to 50
Read more on pages 51 to 53
Read more on pages 54 to 74
BoardTheBoardisresponsibleforoverseeingtheGroup’sstrategyandperformanceandmanagesbusinessrequirementsthroughaformalscheduleofmattersreservedforitsdecision.Suchmattersinclude:
overallstrategicdirectionandmanagement,includingacquisitionsanddisposals;—approvalofappointmentstotheBoardfollowingrecommendationbytheNominationsCommittee;—approvaloflong-termobjectivesandcommercialstrategy;—approvaloftheannualoperatingandcapitalexpenditurebudgets;—approvalofmajorcapitalexpenditure;—approvalofmaterialagreements;—changesrelatingtotheCompany’scapitalstructure;—approvalofthefinancialstatementsandaccounts;—dividendandtreasurypolicies;—control,auditandriskmanagement;
Board of Directors – changes in FY2019On1October2018,MichaelHoltjoinedtheBoardasanon-executivedirector.
On5November2018,TonyGrace,whohadjoinedtheGrouponaninterimbasisinJune2018,wasappointedtotheBoard,followingasuccessfulinduction.
On5November2019,JosOpdeweeghsteppeddownasadirectorandChiefExecutiveOfficerandwasreplacedbyJonathanBuntingasInterimChiefExecutiveOfficer.Inaddition,MichaelHoltagreed,forthelimitedperiodoftheTuffnellsstrategicreview,tobecomeExecutiveChairmanofTuffnells.
6+
M
60+
1
2
2
1
3
1
2
1
1
2
2
3-5
F
50-59
0-2
40-49
executivenon-executive
Tenure (years)
Gender
Age
Key
GOVERNANCE 33
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Board of Directors
AN EXPERIENCED AND CONFIDENT TEAM
Mark WhitelingSeniorindependentnon-executivedirector
Jonathan BuntingInterimChiefExecutiveOfficer(andCEOofSmithsNews)
Michael HoltIndependentnon-executivedirector
Gary KennedyChairman
Denise CollisIndependentnon-executivedirector
Tony GraceChiefFinancialOfficer
N N N
A A A
N
R
R R R
D
AP
D
AP
Key to Committee membershipA AuditandRiskN NominationsandGovernanceR RemunerationD DisclosureAP Approvals
Member
Chair
CONNECT GROUPANNUALREPORT2019
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Mark WhitelingSeniorindependentnon-executivedirector
Year of appointment2017
Skills and experienceMarkhasgainedextensivefinanceandoperationalexperienceataseniorlevelwithinanumberofdiverseorganisations.HebringsrecentandrelevantfinancialexpertiserequiredtoleadtheAuditCommittee.
MarkwasmostrecentlytheChiefFinancialOfficerofInterservePLCandhaspreviouslybeentheDeputyChiefExecutiveOfficerandChiefFinancialOfficerofPremierFarnellplc.Hewasanon-executivedirectorofFutureplcuntilDecember2014andtheSeniorIndependentDirectorofHoggRobinsonGroupPLCuntilJuly2018,inbothcasesactingaschairoftherespectiveAuditCommitteesaswellasservingontheirNominationandRemunerationCommittees.
Other current appointments• None.
Denise CollisIndependentnon-executivedirector
Year of appointment2015
Skills and experienceDeniseholdsawealthofbusinessexperiencewithaparticularfocusonpeopleandtalentmanagement,development,retentionandreward.ShethereforehastherelevantknowledgeandexperiencerequiredtoleadtheRemunerationCommittee,apositionshehasalsoheldwithSThreePLCsinceSeptember2016.
DenisewasChiefPeopleOfficeratBupa,theglobalhealthcarebusiness,fromMay2010untilDecember2014.Priortothat,shewastheGroupHRDirectorfor3iGroupplcandapartneratEY.ShehasalsoheldseniorHRrolesatanumberofotherleadingorganisationsincludingStandardCharteredBankandHSBC.
Other current appointments• SThreePLC,seniorindependentnon-executive
director,chairofRemunerationCommitteeandmemberoftheAuditCommitteeandNominationCommittee.
• BritishHeartFoundation,chairofRemunerationCommitteeandmemberofNominationCommitteeandAdvisoryCouncil.
Michael HoltIndependentnon-executivedirector
Year of appointment2018
Skills and experienceMichaelpossesseshighlyrelevantcommercialandoperationalexperiencegainedwithinthelogisticsanddistributionindustry.Duetohisdetailedunderstandingofthesector,itsopportunitiesandchallenges,MichaelisanimportantindependentvoiceandsoundingboardinthedevelopmentandexecutionoftheGroup’slong-termstrategy.
Michaelwas,mostrecently,ChiefOperatingOfficerofFedExExpress,EuropeuntiltheendofSeptember2018andheldanumberofotherseniorexecutiveroleswithFedExCorporationsince2006.Priortothat,MichaelheldseniorexecutiverolesatanumberofleadinglogisticsorganisationsincludingANCGroup,wherehewasinstrumentalinleadingtheturnaroundofthebusinessfromapositionofloss-makingtoindustryleadingmarginsandstrongprofitrecoverypriortoitssuccessfulsaletoFedExin2006.
On5November2019,inlightoftheGroup’sannouncementthatastrategicreviewoftheTuffnellsbusinesswouldtakeplace,MichaelHolthasagreed,forthelimitedperiodofthestrategicreview,tobecomeExecutiveChairmanofTuffnells,withresponsibilityforprovidingrelevantandcurrentinsighttoaidboththebroaderstrategicreviewandtargetedprofitrecoveryatTuffnells.Fortheperiodofthistemporaryrole,MichaelwillrelinquishbeingamemberofeachoftheAudit,RemunerationandNominationsCommittees.Inaddition,forthepurposesofthe2018editionoftheUKCorporateGovernanceCode,Michaelwillnolongerbeconsidered‘independent’.However,giventheshort-termandspecificnatureofhisinterimrole,theBoarddoesnotcurrentlyconsiderthatitwillpermanentlyimpairMichael’sfutureindependenceinaccordancewiththeUKCorporateGovernanceCode.
Other current appointments• None.
Gary KennedyChairman
Year of appointment2015
Skills and experienceGaryhasextensiveexperienceofBoardchairmanshipwithinlistedcompaniesandbringstotheGroupadeepunderstandingofbusinessoperationsandfinance.Garyuseshisexperienceandknowledge,toleadtheBoardinreviewingandapprovingmanagement’splansforthedevelopmentoftheGroup’sstrategyandoperationalperformance.AsChairoftheNominationsCommittee,Garyisalsoresponsibleforleadingtheassessmentofthecapabilitiesandskillsoftheexecutiveandnon-executiveleadership,andforsuccessionplanningthroughtheGroup’stransformationprogramme.
GarywasformerlyGroupDirectorofFinanceandEnterpriseTechnologyatAlliedIrishBanksplcfrom1997to2005,followingexecutivepositionsatNortelNetworksandDeloitte.Hehasalsopreviouslybeenanon-executivedirectorofElanCorporationplcandIrishBankResolutionCorporationLimited.HeservedontheBoardoftheIndustrialDevelopmentAuthorityofIrelandfortenyearstoDecember2005.
Other current appointments• GreencoreGroupplc,Chairman.• GreenREITplc,Chairman.
Jonathan BuntingInterimChiefExecutiveOfficer(andChiefExecutiveOfficerofSmithsNews)Year of appointment2010
Skills and experienceJonathanhasdeepcommercialandoperationalleadershipskills,combinedwithextensiveexperiencegainedwithinthenewspaperandmagazinedistributionindustry,experiencewhichiscriticalforthelong-termdevelopmentandexecutionoftheGroup’sstrategicplans.
JonathanjoinedWHSmithNewsin1994.Herosethroughtheorganisationinavarietyofsalesandmarketingmanagerialrolesbeforebeingpromotedtotheexecutivemanagementteamin2001.InApril2014,JonathanbecameManagingDirectoroftheConnectNews&MediadivisionandsubsequentlyChiefOperatingOfficerinSeptember2017,apositionwhichspannedboththeTuffnellsandSmithsNewsbusinesses.Witheffectfrom1October2018,followingadecisiontore-establishbusinessunitleadership,JonathanassumedtheroleofChiefExecutiveOfficerofSmithsNews,includingresponsibilityforDMDandon5November2019becameInterimChiefExecutiveOfficerfollowingthedecisionforJosOpdeweeghtostepdownasadirectorandChiefExecutiveOfficer.
Other current appointments• None.
Tony GraceChiefFinancialOfficer
Year joined2018
Skills and experienceTonybringsextensive,recentandrelevantfinanceandbusinesstransformationexperiencetotheGroup.TheseskillsareessentialinensuringtheGroupcomplieswithitsaccounting,financialreporting,financialandriskmanagementpoliciesandprocesses,aswellaslegalandregulatoryrequirementsduringitsbusinesstransformationphase.
TonywasmostrecentlyChiefFinancialOfficeratYodelDeliveryNetworkandhaspreviouslyheldseniorfinanceandoperationalrolesatVirginMediaandTelewest.
Other current appointments• None.
Stuart MarrinerCompanySecretary&GeneralCounsel
Skills and experienceStuartjoinedthebusinessinOctober2008andisresponsibleforbusiness,legalandregulatorysupportacrosstheGroup.PriortojoiningtheCompany,hehadspentfouryearsasacorporatefinancesolicitor,includingextensiveperiodsonsecondmentwithSomerfieldStoresandPunchTaverns.StuartwasappointedasCompanySecretaryandGeneralCounselon1September2011andcontinuestoleadthelegalandCompanysecretariatteams.
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Directors’ attendance ThefollowingtableshowstheattendanceofdirectorsatBoardandCommitteemeetingsheldduringtheyear.
ScheduledBoardmeetings
AdditionalBoardmeetings1
Committeemeetings
Audit Nominations Remuneration
Number of meetings 10 5 4 2 6
GaryKennedy 10 5 2 6
DeniseCollis 10 5 4 2 6
MichaelHolt2 9 4 4 2 5
MarkWhiteling 10 4 4 2 6
JonathanBunting3 9 4
TonyGrace4 7 4
JosOpdeweegh5 10 5
1. TherewerefiveadditionalBoardmeetingsheldduringtheyear,oneofwhichwasinrelationtotradingperformance,oneinrelationtotheGroup’sbankingfacilities,oneinrelationtotheconsiderationoftheawardofpublishercontractsinSmithsNewsandtwoinrelationtotheproposedsaleandleasebacktransaction.Forcompleteness,therewerealsotwoBoardsub-committeemeetingsheldduringtheyear,oneofwhichwasinrelationtotheapprovaloftheFY2018fullyearpreliminaryfinancialresultsandoneinrelationtotheHY2019interimfinancialresults.
2. MichaelHoltjoinedtheBoardon1October2018andattendedallBoardandcommitteemeetingsoccurringafterthatdate.On5November2019,MichaelHoltagreed,forthelimitedperiodoftheTuffnellsstrategicreview,tobecomeExecutiveChairmanofTuffnellsand,inlightofthis,tostepdownfromeachoftheAudit,RemunerationandNominationsCommitteesforthedurationofhisroleasExecutiveChairmanofTuffnells.
3. JonathanBuntingwasabsentfromonemeetingduetoillness.4. TonyGracejoinedtheBoardon5November2018andattendedallBoardmeetingsoccurringafterthatdate,withtheexceptionofoneduetoan
unavoidablepre-arrangeddiaryconflict.5. On5November2019,JosOpdeweeghsteppeddownasadirectorandChiefExecutiveOfficerandwasreplacedbyJonathanBuntingasInterim
ChiefExecutiveOfficer.
Board activities in FY2019ThefollowingtablesummarisesthemattersconsideredbytheBoardduringFY2019andnotestheconsiderationgiventokeystakeholdergroupsinitsdeliberations.OneoftheprimaryareasoffocusfortheBoardatanytimeistheimpactanydecisionoractiontakenmayhaveonkeystakeholdergroupsrepresentedwithintheBoard’scommondutyunders172oftheCompaniesAct2006.TheBoardremainsmindfulofthelevelsofengagementithasatsuchtimeswithkeystakeholdergroupsandhowtheirrespectiveviewsmaybeincorporatedintorelevantdecision-making.BoardmaterialsanddiscussionsthereforeseektoappropriatelyconsidertheimpactandviewsofkeystakeholdergroupswhilstalwaysensuringtheneedtopromotethesuccessoftheCompanyforthebenefitofitsmembersasawhole.
Corporate Governance
GOVERNANCE FRAMEWORK
Long-term
Customers
Colleagues
Community
Shareholder
Environment
Suppliers
Businessconduct
Key to stakeholder icons
CONNECT GROUP ANNUAL REPORT 2019 GOVERNANCE 37
Matters considered by the Board in the year Stakeholder impactStakeholder and s172 Companies Act considerations
BusinessReview,Performance&Strategy
• RegularupdatesfromtheChiefExecutiveOfficer,theCEOofSmithsNewsandtheCEOofTuffnells.
• ApprovingtheGroup’sstrategyandcapitalallocationprogrammetogetherwithupdatesontheproposedsaleandleasebackofupto16freeholdandlongleaseholdpropertieswithinTuffnells.
• ApprovalofkeypublishercontractsinSmithsNews.• Integrationandtransformationprojectupdates
includingtheestablishmentoftheoffshoresharedservicecentre.
• DisposaloftheJack’sBeansbusinessinJanuary2019.
TheconsiderationandapprovaloftheGroup’sstrategyandcapitalallocationprogrammeisanexampleinthisareawheretheBoardhashadregardtoitsdutyunders172,includingensuringregardistobemadetotheinterestsofkeystakeholdergroupsandthelikelyconsequencesofanydecisioninthelong-term.
Priortosettingthecapitalallocationstrategy,theBoardconsideredtheinterestsofkeystakeholdergroups:
• Shareholders/Lenders–adoptingaprudentanddisciplinedapproachtocapitalmanagement,wherefreecashfromoperationsisexpectedtofundinvestmentneededfortheGroup’srecovery,withsurplususedtoreducenetdebtwhilealsomaintaininganattractivetotalshareholderreturn.
• Customers–deliveringsustainableimprovementstothecorebusinesses,underpinnedbytheintroductionofleanprocessmanagementandcontinuousimprovementprinciplestodriveefficiencysavingsandimprovedcustomerexperience.
• Employees/Community–ensuringtherightinvestmentinsupportofhygieneandrecreationalfacilitiesatoursites,andpromotingrewardandbenefitsthataremarketcompetitive.
Financial
• RegularupdatesfromtheChiefFinancialOfficeronfinancialperformanceandlegalandregulatorymatters.
• ApprovaloftheGroup’sbudgetandbusinessplan.• Approvalofthehalfyearandfullyearreports,
includinggoingconcernandviabilityassessments.• Approvaloftheissuanceoftradingupdatesduring
theyear.
FollowingtheannouncementoftheCompany’sfullyearandinterimfinancialresults,formalpresentationsaremadetoinstitutionalshareholderandanalystsbytheChiefExecutiveOfficerandChiefFinancialOfficercoveringarangeofkeyissuesaffectingtheCompany’sperformance.
Similarly,thecascadeanddisseminationofsuchinformationisalsosharedwiththeCompany’sworkforcethrough,interalia,‘TownHall’meetingshostedbytheExecutiveTeamandviaacascadeof‘keymessages’aspartoftheGroup’semployeeengagementforums,whichfacilitatetheviewsofcolleaguesandcanbereportedtotheBoard.
InternalControls&RiskManagement
• RegularupdatesfromtheAuditCommitteeChair.• PeriodicupdatesonHealth&Safetyprogress,
particularlywithinTuffnells.• ApprovalofGroup-widepoliciesandterms
ofreference.
‘SafetyFirst’isakeyconceptpromotedbytheGroupinallactivitiesacrosstheorganisation.Itensuresthatthewell-beingandsafetyofourcolleaguesisforemostinallthatwedo.ThesuccessofthisandourGroup-widepoliciesisademonstrationofhowweinteractwithourcommunity,ourstakeholdersandensurethatwedeliverimprovedcustomerexperience.
Governance
• Reviewandapprovalofthevalues&culture.• UpdatesfromtheNationalColleague
EngagementForum.• Regularupdatesandtrainingfromthe
Company’sbrokersandadvisers.
FeedbackfromcolleagueshashelpedtoshapeandembedacrosstheorganisationtheGroup’scorevalues–quick,open,friendly,creative,trustedandfair.
Inthecourseofitsactivities,theBoardisalwaysmindfulofhoweffectivelythedirectorsworktogetherandoftheeffectivefunctioningoftheBoardinpromotingthelong-termsustainablesuccessoftheCompanyandgeneratingvalueforshareholdersandcontributingtowidersociety.AnoverviewoftheexternalBoardevaluationprocesscanbefoundonpage41.
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Corporate Governance cont.
Compliance with the UK Corporate Governance CodeThissectionoftheAnnualReport,togetherwiththeAuditCommitteereportonpages44to50,theNominationsCommitteereportonpages51to53andtheDirectors’Remunerationreportonpages54to74,describeshowtheCompanyhasappliedthemainprinciplescontainedwithintheUKCorporateGovernanceCode(the‘Code’).TheCompanyconfirmsthat,throughouttheyearended31August2019,ithascompliedfullywiththeprinciplesandprovisionsofboththe2016editionoftheCodeand,notwithstandingthatthe2018editionoftheCodeisapplicableonlytoaccountingperiodsbeginningonorafter1January2019,the2018editionoftheCodealso.
Giventheincreasingrigourofthe2018editionoftheCode,theBoardhastakenthedecisiontoseektocomplywiththe2018editionoftheCodeayearearlierthanformallyrequired.Accordingly,setoutinthefollowingtableisademonstrationofourcompliancewiththe2018editionoftheCode,whichincludescross-referencestootherpartsoftheAnnualReporttoassistwithreviewingcompliance.CompliancewithSection5(Remuneration)issetoutintheRemunerationreportonpages54to74.
Acopyofthe2016and2018editionsoftheCodecanbefoundontheFinancialReportingCouncil’swebsiteatwww.frc.org.uk.
1. Board leadership and Company purpose
A.Boardleadership
AdescriptionofhowtheBoardoperates,includinganoverviewofthetypesofdecisionsreservedfortheBoardandthosedelegatedtomanagementaresetoutonpage33.
B.Companypurpose
TheGroup’spurposeandstrategyissetoutindetailintheStrategicReportonpages2to31.Duringtheyear,weimplementedaculturalchangeprogrammeacrosstheGroupthroughtheresettingandintroductionofourValues.ManagementregularlyreviewandpromotealignmentwiththeValuesacrosstheGroup.TheValuesareexplainedinmoredetailwithinourCorporateResponsibilityreportonpage28to31.
C.Objectivesandcontrols
TheGroup’sobjectivesandKPIsaresetoutwithintheStrategicReportonpages2to31.TheBoardreceivesregularupdatesacrossabroadrangeofinternalKPIsandperformancemetrics.TheGrouphasaclearframeworkinplacetocontinuouslyidentifyandreviewtheriskstothebusinessasexplainedfurtherwithinourprincipalandemergingrisksonpages22to25.
D.Engagement
AnoverviewofhowtheGroupengageswithitsstakeholdersissetoutwithintheCorporateResponsibilityreportonpages28to31.
TheBoard,asawhole,iskeptfullyinformedoftheviewsandconcernsofmajorshareholdersandotherkeystakeholders.TheChiefExecutiveOfficerandChiefFinancialOfficerregularlyupdatetheBoardateachBoardmeetingofkeystakeholderinterestsandviewsthatmayhavebeenreceivedinthereportingperiod.Further,followingmeetingswithmajorshareholders,independentfeedbackisprovidedtotheBoardbytheCompany’sadvisersandbrokers.
Inordertofacilitateengagementwithinvestors,followingtheannouncementoftheCompany’sfullyearandinterimfinancialresults,formalpresentationsaremadetoinstitutionalshareholdersandanalystsbytheChiefExecutiveOfficerandChiefFinancialOfficercoveringarangeofkeyissuesaffectingtheCompany’sperformance.ThepresentationsareavailabletoviewontheCompany’swebsiteatwww.connectgroupplc.com.Similarly,thedisseminationofsuchinformationisalsosharedwithcolleaguesthrough,interalia,‘TownHall’meetingshostedbytheExecutiveTeamandviaacascadeof‘keymessages’aspartoftheGroup’semployeeengagementforums,whichfacilitatetheviewsofcolleaguesandcanbereportedtotheBoard.
Inaddition,duringtheyearaspartofourinvestorrelationsactivity,meetingswereheldwithmajorinstitutionalshareholdersandfinancialanalyststodiscussbusinessperformanceandstrategy.Thisincludedatradingandstrategycapitalmarketspresentationon22January2019.
Separately,institutionalshareholdersalsometorengagedwiththeChairman,RemunerationCommitteeChairandCompanySecretaryatvarioustimesintheyeartodiscussmattersofgovernanceandremunerationpolicy,withathoroughinvestorconsultationexerciseundertakenwithourlargestshareholderstoinformtheCompany’snewdirectors’remunerationpolicytobepresentedtoshareholdersforapprovalatthe2020AGM.
Finally,otherkeystakeholderinterestshavebeenrepresentedandconsultedthroughadhocpresentationsmadebytheChiefExecutiveOfficerandChiefFinancialOfficertolenders(inparticular,ontheGroup’scapitalallocationstrategy)andwiththeworkforce–seesection5belowforfurtherdetails.
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E.Workforce
Duringtheyear,group-wideemployeepoliciesandmanagerguidelineswereupdatedinlinewiththenewValuesandrelaunchedacrosstheGroup.
Toencouragecolleaguestoraiseanymattersofconcern,theGroupoperatesaconfidential‘speakup’whistleblowingline.Wecontinuetoraiseawarenessamongcolleaguesofthisfacilityandmoregenerallytoencourageacultureofappropriatelycalling-outconcerns.
1. Business model and risks
TheGroup’sbusinessmodelandprincipalandemergingrisksaresetoutinmoredetailintheStrategicReportonpages6and22onwards.
2. Cultural alignment
Duringtheyear,weimplementedaculturalchangeprogrammeacrosstheGroupthroughtheintroductionofourValuesandourdiversityandinclusioninitiativecalled‘EveryoneIn’.Thisprogrammeisguidedbyaregularforumofcolleaguesfromacrossthebusinesswiththeexpresspurposeofhelpingtocreateamoreinclusiveculture,welcomingdiversityandallowingallcolleaguesto‘bethemselves’atwork.InitiativestodateincludesupportforthenationalMentalHealthandCarersweeks,andhighprofileupskillingsessionsformanagersonthebenefitsofinclusionanddiversity.
Weregularlymonitorcolleagueengagementandculturethroughour‘WhatMatters’employeesurveysand,thereafter,theBoardwillplayanactiveroleinreviewingresultsanddeterminingtheappropriateactionplansandpriorities.Furthermore,thesurveyresultsalsohelptoinformfuturedecisionmaking–furtherdetailsofwhicharesetoutintheCorporateResponsibilityreportonpages28to31.
Managementregularlyreceivewhistleblowingandemployeerelationsreportsondeviationsinstakeholderbehaviours,takingcorrectiveactionwhererequired.
Weundertakeworkforceplanning;performancereview,talentandsuccessioninitiatives;andlearninganddevelopmentprogrammes.OurapproachtoworkforceremunerationissetoutinmoredetailwithinourDirectors’Remunerationreportonpages54to74.
3. Shareholder engagement
Werecognisetheimportanceofcommunicatingwithourshareholders.BoththeChairman,theSeniorIndependentDirectorandCommitteechairsseektoengagewithmajorshareholdersandmakethemselvesavailableduringtheyeartoattendmeetingswithmajorshareholders.
Duringtheyear,theChairoftheRemunerationCommitteeengagedandconsultedwithourlargestshareholdersaswellasthreeprominentproxyadvisoryservicefirmsinrelationtotheproposedFY2020-2022directors’remunerationpolicy.
Asoutlinedabove,theBoardreceivesregularinvestorrelationsreports.
4. Votes against proposed resolutions
TheBoardacknowledgesasignificantnumberofvotescastatthe2019AGMbyasmallnumberofshareholdersagainstresolution6forthere-electionofGaryKennedy,Chairman(equatingto22.0%ofthevotesreceived).TheCompanyhassoughttoengagewiththeshareholdersconcernedandpublishedonitswebsiteinMarch2019anupdatestatementontheactionstaken.Afinalsummaryoftheoutcomeisprovidedwithinsection15below.
5. Stakeholder views – workforce
TheemployeeengagementmechanismstheBoardusestounderstandtheviewsofstakeholdersinclude:
• theGroup’slocalandregionalemployeeengagementforumswhichtakeplaceonamonthlyorquarterlybasisrespectively;• adesignatednon-executivedirector(MichaelHolt)whoinformallyupdatestheBoardfollowingattendanceattheNationalColleagueEngagement
Forum,establishedandlaunchedduringtheyearasameansofgivingtheBoarddirectaccesstotheimportantviewsandvoiceofourfrontlineandcorporatecentrecolleagues.KeyissuesdiscussedintheyearincludedconstructivediscussionsontheGroup’sHealth&Safetypoliciesandits‘SafetyFirst’initiative;proposalsforimprovedtwo-waycommunicationchannelsbetweenfrontlinecolleaguesandbusinessleaders;andtheendorsementofproposalstointroducemoreflexiblebenefitstructures.Inaddition,theChairoftheRemunerationCommitteeattendedoneofthemeetingstoengagewithparticipantsonthestructureofremunerationacrossthebusinessandspecificallyontherewardofexecutivedirectors;
• ‘TownHall’meetingshostedbytheExecutiveTeam;• ‘listeninglunches’withtheChairmanand/orChiefExecutiveOfficer;and• newsworthyitemsandupdatesontheGroup-wideintranet‘TheAngle’,and/orpublishedintheGroup’smonthlynewsletters(‘GetConnected’)
tofrontlineandcorporatecentrecolleagues.
AnoverviewofhowtheGroupengageswithallstakeholdersissetoutwithintheCorporateResponsibilityreportonpages28to31andanoverviewofhowstakeholderviewsaretakenintoconsiderationinboarddiscussionsanddecisionmakingissetoutintheBoardactivitiestableonpages36and37.
6. Whistleblowing
Toencouragecolleaguestoraiseanymattersofconcern,theGroupoperatesaconfidential‘speakup’whistleblowingline.Wecontinuetoraiseawarenessamongcolleaguesofthisfacilityandmoregenerallytoencourageacultureofappropriatelycalling-outconcerns.TheBoardregularlyreceiveswhistleblowingandemployeerelationsreportswhichdetailtheinvestigationandfollow-upofallnotifications.
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7. Conflicts of interest
TheBoardconfirmsthataformalsystemforthedeclarationofconflictsofinterestscontinuestobeinplaceand,aspartofsuchsystem,theCompany’sarticlesofassociationpermitthedirectorstoconsiderand,ifthoughtfit,authorisesituationswhereadirectorhasaninterestthatconflicts,ormaypossiblyconflict,withtheCompany’sinterests.Indecidingwhethertoauthoriseaconflictorpotentialconflict,thenon-conflicteddirectorsmustactinawaytheyconsiderwouldbemostlikelytopromotetheCompany’ssuccessandtheymayimposelimitsorconditionswhengivingtheirauthorisation,orsubsequently,iftheythinkitisappropriate.AnyauthorisationgivenisrecordedintheBoardminutesandtheBoardsubsequentlymonitorsandreviewspotentialconflictsofinterestonaregularbasis.
8. Unresolved concerns
NounresolvedconcernsabouttherunningoftheCompanyoraproposedactionwereraisedbyanydirectorinthereportingperiod.
2. Division of responsibilities
F.Chairman
TheresponsibilitiesoftheChairman,asdescribedonpage33,aresetoutinwritingandagreedbytheBoard.
G.Divisionofresponsibilities
AstatementofhowtheBoardoperates,includinganoverviewofthetypesofdecisionsreservedfortheBoardandthosedelegatedtomanagement,asdescribedonpage33,aresetoutinwritingandagreedbytheBoard.
H.Non-ExecutiveDirectors
TheBoardissatisfiedthattheexternalcommitmentsoftheChairmanandthenon-executivedirectorssetoutintheirbiographiesdonotconflictwiththeirdutiesandcommitmentstotheCompanyandthatanynewcommitmentsaredisclosedtotheBoard.
I.FunctioningoftheBoard
BoardmeetingsarestructuredtoenabletheBoardtodischargeitsduties;thisisachievedbywayofanannualagendaplannerwhichisreviewedandupdatedateachBoardmeeting.Inpreparationformeetings,supportingpapersarecirculatedinatimelymanner,withasufficientlevelofdetailandsupplementaryinformationfortheBoardtotakedecisions.TheBoardreceivesregularupdatesonmatterssuchasstrategy,financial,operationalandmanagementreporting,Health&Safety,investorrelationsandcorporategovernance,inadditiontoadhocmattersforconsiderationsuchasmaterialtransactions.
AlldirectorshaveaccesstoindependentprofessionaladviceattheCompany’sexpenseaswellastheadviceandservicesoftheCompanySecretary.
9. Independence of Chairman
TheChairmanwasindependentonappointmentinMarch2015.
ThedivisionofresponsibilitiesbetweentheChairmanandChiefExecutiveOfficer,asdescribedonpage33,aresetoutinwritingandagreedbytheBoard.
10. Independence of Non-Executive Directors
DuringFY2019,theBoardconsidersthatallnon-executivedirectorswereindependentasidentifiedassuchwithinthedirectorbiographiesonpage35.However,asnotedwithinMichaelHolt’sbiography,on5November2019,MichaelHoltwastemporarilyappointedasExecutiveChairmanofTuffnellsforthelimitedperiodofthestrategicreviewofTuffnells.Forthepurposesofthe2018editionoftheUKCorporateGovernanceCode,Michaelwillnolongerbeconsidered‘independent’.However,giventheshort-termandspecificnatureofhisinterimrole,theBoarddoesnotcurrentlyconsiderthatitwillpermanentlyimpairMichael’sfutureindependenceinaccordancewiththeUKCorporateGovernanceCode.Allothernon-executivedirectorscontinuetobeindependent.
11. Board independence
Excludingthechair,halfoftheBoardwereindependentnon-executivedirectorsduringthereportingperiod.However,inlightofMichaelHolt’stemporaryappointmentasExecutiveChairmanofTuffnellson5November2019asnotedabove,duringFY2020atleasthalftheBoardwillnolongerbemadeupofindependentnon-executivedirectorsforthelimitedperiodofMichael’stemporaryappointmentasExecutiveChairmanofTuffnells.
12. Senior Independent Director
MarkWhitelingbecameSeniorIndependentDirectoron23January2018.
TheSeniorIndependentDirectorleadstheannualappraisaloftheChairman’sperformance.
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13. Performance of Executive Directors
TheRemunerationCommitteereceivesregularupdatesandreportsfrommanagementontheachievementofobjectivesandregularlychallengesmanagementonitsperformance.
TheChairmanheldthreemeetingsduringtheyearwiththenon-executivedirectors,withouttheexecutivesbeingpresent.
14. Role responsibilities
TheresponsibilitiesoftheChairman,ChiefExecutiveOfficer,SeniorIndependentDirectorandtheTermsofReferencefortheCommitteesaresetoutinwriting,agreedbytheBoardandareavailableonourwebsitewww.connectgroupplc.com.
TheBoardheldtenscheduledmeetingsduringtheyearassetoutinthedirectors’attendancetableonpage36.
15. External commitments
TheBoardissatisfiedthattheexternalcommitmentsoftheChairmanandthenon-executivedirectorsdonotconflictwiththeirdutiesandcommitmentstotheCompanyandthatanynewcommitmentsareapprovedbytheBoard.
Asnotedatsection4above,theBoardacknowledgesanumberofvoteswerecastatthe2019AGMbyasmallnumberofshareholdersagainstresolution6forthere-electionofGaryKennedy,Chairmanduetoaperceptionof‘over-boarding’inlightoftheChairman’sotherchairmanships.TheBoardhasconsideredtheseconcernsand,onthebasisthattheChairmanhas,todate,madehimselfavailableasrequiredforallCompanymatters,theBoardhasconcludedthathehassufficientcapacitytomeethiscommitmenttotheCompany,particularlygiventhatoneofthechairmanshipsrelatestoGreenREITPLC(arealestateinvestmenttrust),whichinlightofthenatureofitsbusinessconstitutesminimalengagementandtimecommitment.Separately,theBoardisalsoawarethatGaryKennedyintendstoresignastheChairmanofGreenREITPLCfollowingconclusionofitsformalsalesprocessandtherecentannouncementofitssaletoasubsidiaryofHendersonParkRealEstateFund.Inaddition,theBoardhasdeterminedthattheChairman’sknowledgeofthebusinessandhisextensiveexperiencebringsmanybenefitstotheGroupandthathistimeavailabilityandattentionhavebeenwithoutquestionandhavenotbeenadverselyimpactedbyhisotherBoardcommitments.
16. Company Secretary
AlldirectorshaveaccesstoindependentprofessionaladviceattheCompany’sexpenseaswellastheadviceandservicesoftheCompanySecretary.
3. Composition, succession and evaluation
J.Boardappointments
AdescriptionoftheworkoftheNominationsCommitteeissetoutonpage51.TheCommitteereceivesanannualupdateonsuccessionplanningfortheBoardandseniormanagement.
K.Boardmembership
AdescriptionoftheworkoftheNominationsCommitteeissetoutonpage51.
L.Boardevaluation
AperformancereviewoftheBoard,itsCommittees,theChairandindividualdirectorsiscarriedoutannuallyandanexternallyfacilitatedevaluationiscarriedouteverythreeyears.
Thisyear,anexternalevaluationoftheBoardanditsCommitteeswasconductedbyEquityCommunicationsandconsistedof:ascopingexercisewiththeChairmanandCompanySecretarytodiscusstheextentandstructureoftheevaluationexercise;thedevelopmentofanapproximateagendaforcirculationtodirectorsaheadoftheirone-on-oneinterviewstopromptinitialthoughtprocesses;additionalquestionpromptsforthefacilitatortoaidfeedbackanddiscussion;andaseriesofindividualdirectorinterviewsconductedwiththeexternalfacilitator.
Awrittenreportsummarisingandanalysingtheresponsestotheevaluationexercise,alongwithsuggestedactionpointsandrecommendations,wereconsideredbytheBoardatitsJuly2019meeting.TheevaluationconfirmedtheconclusiondrawnfrompreviousevaluationsthattheBoardoperateseffectively.TherewereanumberofactionsthatwereagreedtoensurethattheBoard,itsCommitteesandindividualdirectorscontinuetoworkeffectively,including:greaterfocusonthedevelopmentofcohesivestrategicgoals;considerationofBoardcadencetoensurefrequentface-to-facemeetingsduringbusierperiodsandtohelpfosterstrongerrelationshipsamongstBoardmembers;increasingrelianceonaccurateandtimelydatatohelpdriveanalyticaldecisionmaking;balancingthefocusofreportingbetweenhistoricalresultsandfuturestrategicaims;anddeepeningthenon-executivedirectors’understandingoftheGroup’sbusinessesandthosebusinesses’respectivestrengthsandopportunities.
TheexternalBoardevaluationprocesswassupplementedbyaninternalreviewofindividualdirectors’performance.One-to-onediscussionswereheldbetweentheChairmanandeachdirectortodiscusstheircontributionandperformanceduringtheyearalongwithanytrainingneeds.Ameetingofthenon-executivedirectorswasledbytheSeniorIndependentDirector,inwhichtheperformanceoftheChairmanwasdiscussed.Followingtheperformanceevaluationsforthedirectorsasoutlinedabove,eachdirectorwasconfirmedascommittedandeffectiveinperformingtheirdutiesandareaccordinglyproposedforre-electionassetoutintheNoticeofAnnualGeneralMeeting.
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17. Nominations Committee
TheBoardhasestablishedaNominationsCommitteeanditstermsofreferenceareavailableatwww.connectgroupplc.com.MembershipandadescriptionoftheworkoftheCommitteeissetoutonpage51includingitsapproachtosuccessionanddiversity.
18. Director re-election
TheCompany’sArticlesofAssociation(theArticles)requirethatdirectorsofferthemselvesforre-electioneverythreeyearsandthatnewdirectorsappointedbytheBoardofferthemselvesforelectionatthenextAnnualGeneralMeetingfollowingtheirappointment.However,itistheBoard’spracticethatalldirectorsstandforre-electionattheAnnualGeneralMeeting.
Followingtheperformanceevaluationsforthecontinuingdirectors,eachdirectorwasconfirmedascommittedandeffectiveinperformingtheirdutiesandareaccordinglyproposedforre-electionwithfulldetailsofthereasonssetoutintheNoticeofAnnualGeneralMeeting.
19. Chair tenure
TheChairmanwasappointedin2015.TheNominationsCommitteereceivesanannualupdateonsuccessionplanningfortheBoardandseniormanagement.
20. Recruitment agencies
Externalrecruitmentagenciesaregenerallyusedfortheappointmentofnon-executivedirectors.
21. Board evaluation
Asdescribedabove,aperformancereviewoftheBoard,itsCommittees,theChairandindividualdirectorsiscarriedoutannuallyandanexternallyfacilitatedevaluationiscarriedouteverythreeyears.ThisyearwehaveundertakenanexternallyfacilitatedevaluationconductedbyEquityCommunicationswhohavenootherconnectionwiththeCompanyoranydirectors.
22. Board evaluation actions
AspartoftheannualBoardevaluationprocess,theChairmandiscussesandagreeswitheachdirectortheirneedsfortraininganddevelopment.Ongoingtrainingresourcesavailabletothedirectorsinclude:annuallistedcompanycomplianceboardtraining,membershipoftheDeloitteAcademyandotheropportunitiesforpromotingcontinuingprofessionaldevelopment,atrainingandguidanceresourceforboardsanddirectors;aprogrammeofheadofficeandbusinessvisits;andregularupdatesfromtheCompanySecretaryongovernance,regulatoryandlegislativechangesaffectingthebusinessand/ortheirdutiesasadirector.
23. Work of the Nominations Committee
AdescriptionoftheworkoftheNominationsCommitteeissetoutonpage51.
4. Audit, risk and internal control
M.Independenceofinternalandexternalaudit
TheBoardhasestablishedanAuditCommitteetooverseetheindependenceandeffectivenessoftheInternalAuditfunctionandtheexternalauditorandtoreviewthecontentandintegrityoftheGroup’sexternalreporting.
N.Fair,balancedandunderstandableassessment
TheBoardisresponsibleforthepreparationandapprovaloftheAnnualReportandfinancialstatementsandconsidersthem,takenasawhole,tobefair,balancedandunderstandableandthattheyprovidetheinformationnecessaryforshareholderstoassesstheGroup’spositionandperformance,businessmodelandstrategy.
Thefair,balancedandunderstandableassessmentissetoutintheFinancialReviewonpages16to21.
O.Riskandinternalcontrol
TheBoardconfirmsthatthereisaprocessforidentifying,evaluatingandmanagingtherisksweface.AdescriptionoftheworkoftheAuditCommitteeinrelationtoriskandinternalcontrolissetoutonpages45to46.
24. Audit Committee
TheBoardhasestablishedanAuditCommittee,themembershipofwhichissetoutinthedirectorbiographiesonpage35.Atthebeginningofthereportingperiod,theChairmansteppeddownasamemberoftheCommittee.
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25. Role and responsibilities of the Audit Committee
ThetermsofreferencefortheAuditCommitteeareavailablefromourwebsitewww.connectgroupplc.com.AdescriptionoftheroleandresponsibilityoftheAuditCommitteeissetoutonpages44to46.
26. Work of the Audit Committee
AdescriptionoftheworkoftheAuditCommitteeissetoutonpages44to46.
27. Fair, balanced and understandable assessment
TheBoardisresponsibleforthepreparationandapprovaloftheAnnualReportandfinancialstatementsandconsidersthem,takenasawhole,tobefair,balancedandunderstandableandthattheyprovidetheinformationnecessaryforshareholderstoassesstheGroup’spositionandperformance,businessmodelandstrategy.
Thefair,balancedandunderstandableassessmentissetoutintheFinancialReviewonpages16to21.
28. Principal and emerging risks
Theprincipalrisksassessmentissetoutonpages26and27.EmergingrisksareidentifiedaspartoftheGroup’sriskmanagementframework,furtherdetailsofwhichissetoutintheAuditCommitteereportonpages45to47.
29. Effectiveness of risk management and internal controls
AdescriptionoftheworkoftheAuditCommitteeinrelationtomonitoringtheeffectivenessofriskmanagementandinternalcontrolissetoutonpages45to47.
30. Going concern assessment
TheGoingConcernStatementisincludedwithintheFinancialReviewoftheStrategicReportonpage21.
31. Viability assessment
TheViabilityStatementisincludedwithintheFinancialReviewonpage26.
ApprovalThisreportwasapprovedbytheBoardandsignedonitsbehalfby:
Gary KennedyChairman5November2019
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Key objectivesTopromoteeffectivegovernanceoftheGroup’sfinancialcontrols,accountingandreporting,includingtheadequacyofrelateddisclosures;theperformanceofboththeInternalAuditfunctionandtheexternalauditor;andtooverseetheGroup’sriskmanagement,internalcontrolsystems(includingwhistleblowingreportingprocesses),andcomplianceframeworkandactivities.
Responsibilities TheroleandresponsibilitiesoftheCommitteearesetoutinitstermsofreference,whichareavailableontheCompany’swebsitewww.connectgroupplc.comandfromtheCompanySecretaryonrequest.Thetermsofreference,whichaddressallmatterssetoutinDisclosureandTransparencyRule7.1andthe2018editionoftheCode,arereviewedannuallybytheCommitteeandreferredtotheBoardforapproval.
TheprincipalresponsibilitiesoftheCommitteeare:
• monitoringtheintegrityofthefinancialstatementsoftheCompany,includingitsAnnualandInterimReports,tradingstatements,preliminaryandinterimfinancialresultsannouncementsandreviewingsignificantfinancialreportingissuesandjudgementswhichtheycontain;
• keepingunderreviewtheadequacyandeffectivenessoftheCompany’sinternalfinancialandnon-financialcontrols,includingmonitoringandreviewingtheeffectivenessoftheInternalAuditfunction;
• reviewingtheGroup’sassuranceandriskmanagementframeworkandprovidingoversightandinputintotheGroup’sriskstrategy,appetiteandriskmanagementmitigations;
• reviewingthecontentoftheAnnualReportandtheGroupFinancialStatementsandadvisingtheBoardwhether,takenasawhole,theyarefair,balancedandunderstandableandprovidetheinformationnecessaryforshareholderstoassesstheCompany’sposition,performanceandprospects,togetherwithitsbusinessmodelandstrategy;
• reviewingtheregulatorycomplianceframeworkandthesystemsandcontrolsforthepreventionoffraudandcorruption,taxevasion,modernslaveryandbribery;
• ensuringtheCompanymaintainssuitablearrangementsforemployees,customers,contractorsandotherexternalpartiestoraisemattersofconcerninconfidence(whistleblowing);
Audit Committee Report
The Committee has continued to play a
pivotal role within the governance framework.
PROMOTING AND SUPPORTING ROBUST GOVERNANCE
Mark WhitelingAuditCommitteeChair
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• consideringandmakingrecommendationstotheBoardastotheappointment,reappointmentorremovaloftheexternalauditorandtheapprovaloftheirremunerationandtermsofengagement;
• assessingtheexternalauditor’sindependenceandobjectivityandtheeffectivenessoftheauditprocess;
• reviewingthepolicyontheengagementoftheexternalauditortosupplynon-auditservices;and
• reportingtotheBoardonhowithasdischargeditsresponsibilities.
IfthereisadisagreementwiththeBoardand/orexecutivemanagementonanyoftheCommittee’sresponsibilitiesthatcannotberesolved,theCommitteeretainstherighttoreporttheissuetoshareholdersaspartofitsreportontheCommittee’sactivities.
Inaddition,theCommitteeseekstoidentifymattersinrespectofwhichweconsiderthatactionorimprovementbytheCompanyisneeded,andappropriaterecommendationsaremadetotheBoardastothestepswhichshouldbetakentopreserveandpromotetheintegrityoftheCompany’sinternalcontrolsframework.
OverviewIampleasedtopresentthisyear’sreportontheactivitiesoftheAuditCommittee,wheretheCommitteehascontinuedtoplayapivotalrolewithinthegovernanceframeworkinkeymattersrelatingtointernalcontrol,riskmanagementandfinancialreporting,particularlyinthecontextoftheGroup’srecenttradingprofileandtransformationprogramme.
OnekeyeventconsideredbytheCommitteeintheyearrelatedtotheCommittee’stenderforexternalauditservicesandsubsequentrecommendationfortheappointmentofBDOLLP(BDO)astheCompany’sauditorinplaceofDeloitteLLP,whohadadvisedthattheywouldlooktostepdownfollowingconclusionofthe2019AnnualGeneralMeeting.OnbehalfoftheCommitteeI’dliketoextendmysincereappreciationtotheDeloitteauditteamfortheirsteadfastandrobustauditservicessincetheCompany’sdemergerfromWHSmithPLCin2006.
Lookingtothefuture,theCommitteewasdelightedwiththethoroughaudittenderprocessthatwasconductedandtheverycredibleresponsesreceivedfromshortlistedauditfirms.InrecommendingBDOforappointment,theCommitteeconcludedthatitsstrongcredentialscoupledwithitsleadingproposition,itsenrichingpartner-ledengagementanditsmarket-leadingauditquality,ashighlightedbyindependentanalysisconductedbytheFinancialReportingCouncil,identifiedBDOasthestandoutfirm.Intheperiodsinceitsengagement,theCommitteeispleasedwiththescopeandmannerofBDO’sinduction,therobustnessofitsaudittodateandtheeffectivenessoftheexternalauditprocessgenerally.
Separately,anothersignificantmilestoneachievedinthereportingperiodincludedpositiveprogressmadeinouroverallriskmanagementandinternalcontrolenvironmentasdescribedinmoredetailbelow.Thiswasidentifiedinlastyear’sAnnualReportasakeyactivityforFY2019inlightofthereinforcedfocusontheGroup’sriskmanagementframeworkandinternalcontrolprocesseswhichhadbeeninitiatedinthelatterpartofFY2018andtheCommitteewelcomesthecontinuedfocusandimprovementintheriskmanagementprocessandthestrengtheningofinternalcontrolsduringtheyear.
TheCommitteenotesthatithasatalltimesduringthereportingperiodactedinaccordancewithitstermsofreferenceandconfirmsthatithasensured,throughongoingmonitoringandreview,theindependenceandobjectivityoftheexternalauditor.
Membership AllmembersoftheCommitteewhoservedduringtheyearwereindependentnon-executivedirectors.Inordertocomplyearlywiththe2018editionoftheCode,GaryKennedysteppeddownasamemberoftheCommitteeon31August2018andnowattendsCommitteemeetingsbyinvitationonly.Additionally,on1October2018,wewelcomedMichaelHoltasamemberoftheCommittee.
Givenmyqualificationasacharteredaccountantandmyextensivefinancialexperience,includingmyformerrolesasChiefFinancialOfficerofeachofInterservePLC(untilMarch2019)andPremierFarnellplc(untilJune2016),IamconsideredbytheBoardtohaverecentandrelevantexperiencetochairtheCommitteeinaccordancewiththerequirementsofthe2018editionoftheCode.EachoftheothermembersoftheCommitteehasextensiveandhighlyrelevantbusiness,commercialandoperationalexperience.
How the Committee operatesTheCommitteemetfourtimesduringtheyearaspartofourscheduletoconsidermattersplannedaroundthefinancialcalendar.AllCommitteememberswereinattendanceateachofthemeetingsand,attheinvitationoftheCommittee,representativesoftheexternalauditors(DeloitteLLP(until18February2019)andBDO(from15March2019))andtheinternalauditorsattendedmeetingstogetherwiththeexecutivedirectorsandothermembersoftheexecutivemanagementteamfromtimetotimetopresentreportsspecifictotheirareasofresponsibility.
AsChair,IregularlyengagewiththeexternalauditorandwiththeHeadofInternalAuditbothaheadofCommitteemeetingsandalsoaspartofaregulardialoguewehaveonissuesrelevanttotheCommittee,ineachcaseinordertoensurethateachoftheirindependentviews,opinionsandcommentsarereflectedwithintheCommittee’sdeliberationsanddealings.Separately,theCommitteealsoseekstocollectivelymeetregularlywithboththeexternalauditorandseparatelywiththeHeadofInternalAuditwithouttheexecutivesbeingpresent.Intheyear,theCommitteemetoncewithrepresentativesfromDeloitteandoncewithrepresentativesfromBDOwithoutmanagementpresentandheldtwoseparateprivatemeetingswiththeHeadofInternalAudit.
Risk management and internal control frameworkTheCommitteeisresponsibleforkeepingunderreviewtherobustnessandeffectivenessoftheCompany’sriskmanagementandinternalcontrolsystems.
TheBoardhasoverallresponsibilityforoursystemofinternalcontrol,includingriskmanagementandforreviewingitseffectiveness.TheGroup’sriskmanagementandinternalcontrolsystemisdesigned,however,onlytomanageormitigateratherthaneliminaterisk,astakingonmanageableriskisaninherentpartofundertakingtheGroup’scommercialactivities,andcanonlyprovidereasonableandnotabsoluteassuranceagainstmaterialmisstatementorloss.
Wehavedeveloped,andintheyearmadefurtherenhancementsto,theframeworkofinternalcontrolsacrosstheGroupincludingfinancial,operationalandcompliancecontrols.Enhancementsintroducedintheyearincludeimprovedfinancialforecastingandbudgetarymanagementprocesses,anewe-payrollsystemandarevisedpurchasetopaysystemtogetherwithimprovementsintherespectivecontrolframeworks,robustprogrammemanagementgovernancecontrolsledbySixSigmaprinciplesdeployedacrosskeystrategicprojects(includingoffshoringcertaintransactionalactivitiesfromacrosstheGrouptoanewserviceproviderinIndia),thedeploymentofnewgovernancepolicies,greaterlevelsofreportingandaccurateoversightofkeyperformanceindicators(bothfinancialandnon-financial)relevanttothelong-termsuccessoftheGroupandthedevelopmentofoperationalandcompliancecontrolsinbothSmithsNewsandTuffnellsaspartofthetransformationgovernanceframework.Together,theseenhancementsprovidemoreaccurateandinsightfulinformationandhavebeenassessedbyourInternalAuditfunctionashavingachievedamorematureandimprovedlevelofawarenessandoversightfromacrosstheGroup.
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Inaddition,theprocessesforidentifying,evaluatingandmanagingtheprincipalbusinessrisks(andemergingrisks)thatweface,includingthosethatwouldthreatentheGroup’sbusinessmodel,futureperformance,solvencyorliquidity,havebeenrefreshedandrenewedthroughouttheyearunderreview.TheseprocessesaccordwiththeFinancialReportingCouncil’sGuidanceonRiskManagement,InternalControlandRelatedFinancialandBusinessReporting(the‘FRCGuidance’)andwecontinuetodevelopsuchprocessestoensurethattheyremainrelevanttothechangingcompositionandmarketcompetitivenessoftheGroupandthelandscapeofthesectorsinwhichweoperate.
InlightoftheriskmanagementprocessesdeployedwithintheGroupand,inparticular,mindfulofthededicatedreviewoftheprincipalriskenvironmentundertakenbytheBoardandtheAuditCommittee,theBoardissatisfiedthatithascarriedoutarobustassessmentoftheprincipalandemergingrisksthatweface,includingthosethatwouldthreatenthebusinessmodel,futureperformance,solvencyorliquidityoftheGroup,asrequiredbythe2016and2018editionsoftheCode.Thestructureissetoutbelow.Furtherdetailsofourriskmanagementframework,alongwithourevaluationoftheprincipalrisksandhowtheyarebeingmonitoredaresetoutintheStrategicReportonpages4to31.
ThesystemofinternalcontrolwhichhasbeeninplacefortheyearunderreviewanduptothedateofapprovaloftheAnnualReportandaccountsalsoincludes:
Financialcontrols• asystemofbudgetingand
planning,togetherwithmonitoringandreportingtheperformanceofthebusinessestotheBoard.Monthlyresultsarereportedagainstbudgetandprioryear,andforecastsforthecurrentfinancialyearareregularlyrevisedinthelightofactualperformance.Thesecoverprofits,cashflows,capitalexpenditureandbalancesheets;
• appraisalofallmajorinvestmentprojects;
• adedicatedpurchasetopaysystem,includingarevised“nopurchaseorder.nopay”policyapproachintroducedattheendofthereportingperiod;
• keycontrolsovermajorbusinessrisks,includingreviewsagainstperformanceindicatorsandexceptionreporting;
• monthlyreportingoftreasuryactivitiesandrisks,forreviewbyseniorexecutives;and
• AnnualReportscoveringtreasurypolicy,taxcompliance,pensions,informationandcybersecurityandinsurance,eachforreviewbytheBoardortheAuditCommittee.
Operationalcontrols• keyperformanceindicatorsto
monitoroperationalactivity,includingcustomerservicelevels;
• independentcustomersatisfactionsurveys;and
• businessrecoveryplanstoenablethebusinessestocontinuewithminimumdisruptiontocustomersintheeventofadisasterevent.Periodically,businesscontinuityplanningisreviewedbyInternalAuditaspartofitsannualauditplanningprocess.
Peopleandenvironmentcontrols• monitoringemployee
engagementandsharingpolicyupdatesutilisingouremployee-wideintranet,obtainingfeedbackfromlocalmanagementmeetings,andfrequentsitevisitsbytheExecutiveTeamtoencourageopendialogueandexchangeofgoodpractice;
• aCodeofBusinessConductwhichtakesintoaccounttheinterestsofallstakeholders;
• aWhistleblowingPolicyandassociatedspeak-uplinewherebyemployeescanreportinconfidenceincidencesofsuspectedfraudorothermalpractices;
• anewe-payrollsystemintroducedinthesecondhalfoftheyear,togetherwithimprovementsintherespectivecontrolframeworks;and
• acorporateresponsibilityprogrammewhichsetsouttheCompany’sactivitiesongovernance&sustainability,environment&community,workplace&conductandmarketplace.
Health&Safetycontrols• aHealth&SafetyPolicy,the
implementationofwhichisactivelymonitoredateachBoardmeeting,andthepolicyisreviewedannuallybytheBoard;
• Health&SafetyRiskManagementteams,workingtoassessHealth&Safetyrisksandintroducesystemstomitigatethem.DetailsofmajorbusinessincidentsarereportedtoInternalAuditandtheAuditCommittee,andallnotifiedaccidentsareinvestigated;
• reportsonHealth&SafetymattersincludingtheReportingofInjuries,DiseasesandDangerousOccurrenceRegulations(RIDDOR)whicharebothprovidedandpresentedtotheBoardonaregularbasis;and
• acommitmentbytheCompanytoensurethatitspersonnelmeethighstandardsofintegrityandcompetence.TheCompany’ssystemscoverrecruitment,traininganddevelopmentofpersonnel,andthecommunicationofCompanypoliciesandproceduresthroughouttheorganisation.
Compliancecontrols• robustprogrammemanagement
governancecontrolsinfluencedbySixSigmaprinciplesdeployedacrosskeystrategicprojects;
• regulatoryandcompliancepolicies(includinganEnvironmentalPolicy,anAnti-CorruptionPolicyandanEthicalTradingPolicy)eachofwhichisreviewedannuallybytheBoard;
• anITSecurityPolicytoprotecttheCompany,itsemployeesandaffiliatesfromillegalordamagingactionsbythirdparties;
• oversightofouradherencetotherequirementsoftheModernSlaveryAct,andannualapprovaloftheModernSlaveryStatement;and
• acomprehensiveDataProtectionPolicysettingstrictguidelinesfortheuseandretentionofconfidentialcustomer,supplierandemployeedata,andreflectinga‘privacybydesign’approachaswellasthelegalrequirementsundertheGeneralDataProtectionRegulations(‘GDPR’).
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Internal Audit functionTheCommitteeisresponsibleformonitoringandreviewingtheeffectivenessoftheInternalAuditfunctioninthecontextoftheoverallriskmanagementsystem.
Ourriskmanagementandinternalauditarrangementsarecurrentlyundertakenbyanexternaloutsourcedprovider.Duringtheyear,theCommitteereviewedthecontinuingsuitabilityandappropriatenessoftheexternalproviderandconcludedthatthisarrangementensuresmaximumflexibilityforthecontinuingauditprogrammeaswellasaccesstospecialistexpertiseandskills.Accordingly,theCommitteeintendstocontinuewiththecurrentoutsourcedarrangementbuttokeepthisengagementunderreviewaswedeterminethefutureshapeoftheGroupinlightoftheGroup’srecenttradingprofile,itstransformationprogrammeandrecentchangesintheexecutiveteamandhowbesttoutilisetheInternalAuditfunction.
Infulfillingitsresponsibilities,intheyeartheCommitteereviewedthefollowingmattersinrelationtotheInternalAuditfunction:
• thescope,resourceandplannedactivitiesofInternalAuditandtheadequacyofauditcoverage;
• InternalAudit’sstrategy,workplans,statusreportsagainstplannedactivityandbusinessincidentsreports;
• asummaryofthereportsontheresultsofindividualauditreviews,significantfindings,managementactionplans,andtimelinessofresolution;and
• theperformanceoftheInternalAuditfunction.
Committee’sactivitiesduringtheyearSetoutoverthenextpagesisasummaryofthemajoractivitiesoftheCommitteeintheyear.
Financial reportingDuringtheyearwereviewedreportsfromtheChiefFinancialOfficerandtheexternalauditoronmattersofsignificanceinrelationto,andthecontentof,thefinancialstatementsforthefullyearto31August2019andconsideredreportsfromtheChiefFinancialOfficerinrelationtothehalfyearto28February2019toensurethattheyeachincludedthenecessaryinformationtoprovideshareholderswithafairandbalancedassessmentoftheCompany’sposition,performanceandprospects,aswellastheGroup’sbusinessmodelandstrategy.Inundertakingthisreview,weconsideredapaperpreparedbytheChiefFinancialOfficeroutliningtheworkundertakenbyexecutivemanagementandthekeyestimatesandjudgementsmadeinpreparingthefinancialstatements.TheCommitteeconcludedinitsrecommendationtotheBoardthatitwassatisfiedthat,takenasawhole,theAnnualReportisfair,balancedandunderstandable.
ThesignificantissuesandkeyjudgementsconsideredbytheCommitteeinrelationtotheFY2019GroupFinancialStatementsaresetoutbelow.Inlightofthesesignificantissuesandkeyjudgementsincludedbelow,theCommitteehasconsideredwhethereachoftheseareasisakeyjudgementorestimateand,therefore,whetheritshouldbedisclosedwithinNote1(5)totheGroupFinancialStatements.ItwasconcludedthatthemattersincludedwithinNote1(5)reflectthekeyjudgementsandestimations.
Risk management and internal control frameworkTheBoardisresponsiblefortheoverallstrategicdirectionandmanagementandundertakesanannualreviewofitsriskappetite,outputsofwhichareconsideredwhenconductingtheannualbusinessplanningandstrategyprocess.FulldetailsoftheBoard’sresponsibilitiesaresetoutintheformalscheduleofmattersreservedforitsdecision,whicharesummarisedonpage33.
TheBoardhasestablishedanorganisationalstructurewithclearlydefinedreportinglinesandcontrolsatalllevelsofmanagement,identifyingtransactionsrequiringapprovalbytheBoardorbytheApprovalsCommittee.
TheInternalAuditfunctionassistsinmaintainingadequatefinancialcontrolsbyreviewingthedesignandoperationaleffectivenessofcorefinancialprocessesandcontrolsaspartoftheinternalauditplanapprovedbytheAuditCommitteeannuallyandrefreshedatregularintervals.
InternalAuditpresentsitsfindingstotheExecutiveTeam,andallinternalauditshaveanexecutivesponsorassigned.
TheApprovalsCommittee,whichcomprisestheChiefExecutiveOfficerandChiefFinancialOfficerisauthorisedbytheBoardtoapproveroutinematterswithinagreedfinanciallimits.
TheAuditCommitteeassiststheBoardinthedischargeofitsdutiesregardingtheCompany’sfinancialstatements,accountingpoliciesandthemaintenanceofpropersystemsofriskmanagementandinternalcontrol.
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Significant issues and key judgements
Area Matterconsidered Outcome
Carryingvalueofgoodwill,intangiblesandtangibleassets
TheCommitteeconsideredthecarryingvalueofCashGeneratingUnits(CGU)followingayearofunderperformanceagainstbudgets.
TheCommitteereviewedtheforecastandsensitivityanalysiswhichmanagementhadpreparedtoassesswhethertherehadbeenanyimpairmentinthevalueinuseoftheGroup’sCGUs.
TheCommitteeagreedwithmanagement’sconclusionthattheTuffnellsbusinessshouldbeimpairedtoreflectthesignificantdeteriorationinitsvalueinuse;theimpairmentbeingappliedagainstthecarryingvalueoftheGroup’sgoodwill,intangibleandcertaintangibleassetsintheTuffnellsbusiness.
TheCommitteealsoagreedwithmanagement’sviewthatonthebasisthatthefairvaluelesscoststosellofcertainTuffnellspropertiesandfleetassetswasinexcessoftheirnetbookvalue,itwasnotnecessarytoimpairtheseassets.
TheCommitteealsoreviewedtheassumptionsregardingthevalueinuseoftheotherCGUsandagreedthattheywereappropriatelyrecognisedandmeasuredandthevalueinuseremainedsignificantlyabovecarryingvalueforthoseCGU’s.
CarryingvalueofinvestmentsheldbyConnectGroupPLCinitssubsidiaries
TheCommitteeconsideredthecarryingvalueoftheinvestmentsheldbyConnectGroupPLCfollowingayearofunderperformanceagainstbudgets.
TheCommitteereviewedandagreedwithmanagement’sconclusionthattherewasimpairmentinthevalueoftheseinvestmentsinConnectGroupPLC.Thisreviewusedthesamevalueinusecalculationspreparedforallbusinessesnotedabove.
AdjustedItems TheCommitteeconsideredtheappropriatenessofthemeasureofAdjustedprofits,qualityofearnings,andtheclassificationandtransparencyofitemsseparatelydisclosedassuch.
TheCommitteewassatisfiedthatthepresentationofAdjustedprofitsprovidedareasonableviewoftheunderlyingperformanceoftheGroupandthattherewastransparentandconsistentdisclosureoftheitemsshownseparatelyasAdjustedItems.
Provisions TheCommitteereviewedtheprovisionsasatyearendandtheappropriatenessoftheadditions,utilisationandreleasesmadeintheyear.ThekeyprovisionsestablishedintheyearrelatedtorestructuringprovisionsrelatingtotheoffshoringofcertainoftheGroup’scentralfunctionsandspecificoperationalrestructuringprojects.
TheCommitteeagreedthattheprovisionsheldwereappropriatelyrecognisedandmeasuredandthatreleaseswereconsistentwiththemannerinwhichtheoriginalprovisionshadbeenmade.
Heldforsaleassets TheCommitteereviewedtheaccountingclassificationofthefreeholdandlongleaseholdpropertiesinTuffnells.
TheCommitteewassatisfiedwithmanagement’sjudgementthatthesepropertiesmetthecriteriasetoutinIFRS5tobeheldforsaleinJanuary2019andthattheseconditionscontinuedtobemetatthebalancesheetdate.
Retirementbenefitobligation
TheCommitteereviewedtheproposedaccountingtreatmentforthe‘BuyIn’fortheSmithsNewsDefinedBenefitPensionScheme.
TheCommitteereviewedtheassumptionsusedfortheIAS19calculationofsurplus/deficitandthetotalIFRIC14liabilityrecognisedonthebalancesheetforfutureactuarialdeficitreductioncontributions.
TheCommitteesatisfieditselfthattheactuarialmeasurementapproachthatresultsintheIFRIC14gainbeingmatchedagainstthelossappropriatelyreflectsthe‘factpattern’thatledtothe‘BuyIn’
TheCommitteesatisfieditselfthattheassumptionsusedwerereasonable.
Revenuerecognition TheCommitteereviewedtherecognitionofrevenueacrosstheGroup.
TheCommitteesatisfieditselfthattheGrouphadappropriatelyrecognisedrevenuesinaccordancewithitscontractualobligationduringtheperiod,payingattentiontoperiodendcut-offandthelevelofexpectedcustomerreturns.
TheCommitteealsosatisfieditselfthattherequirementsofIFRS15‘Revenuefromcontractswithcustomers’adoptedthisfinancialyearhavebeenmetandreflected.Aspartofthisreview,theCommitteespecificallyconsideredandagreedwithmanagement’sjudgementthatSmithsNewswasactingasprincipalinitstradingactivityinrespectofthenewsandmagazinesmarket.
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Adoption of new accounting standards TheGrouphasadoptedIFRS9‘FinancialInstruments’andIFRS15‘RevenuefromContractswithCustomers’bothofwhichareeffectivefortheperiodbeginningon1September2018.TheimpactofbothstandardsisexplainedinthenotestotheGroupFinancialStatements.Atthebalancesheetdate,theonlynewstandardinissuebutnotyeteffectivethatwillhaveamaterialimpactonfinancialreportingisIFRS16‘Leases’.IFRS16isexpectedtohaveamaterialimpactonthevalueofleaseliabilitiesandrightofuseassets.Anassociatedfinancechargeanddepreciationchargewillreplacetheexistingoperatingleasecharge,andasaresultthereisexpectedtobeanimpactonoperatingprofitinfutureperiods,buttherewillbenoimpactontheunderlyingcommercialperformanceoftheGrouporthecashgenerated.Thereisalsoexpectedtobeanimpactonclassificationswithincashflows.AppropriateresourceshavebeenassignedtoensurethereadinessofsystemsandfinancialreportingrequirementswithregularreportingtotheCommittee.TheimpactofIFRS16isexplainedinthenotestotheGroupFinancialStatements.
GoingConcernandViabilityAssessmentTheCommitteealsoreviewedapaperpreparedbytheChiefFinancialOfficertosupporttheGoingConcernandViabilityAssessmentreferredtoonpage27and,ontheassumptionthatexternaldebtiseitherrepaidasitbecomesdueinJanuary2021,orwillberefinancedoncommerciallyreasonableratesoveranagreedperiodonsimilarcovenantterms,concludedinitsrecommendationtotheBoardthattheprofitandcashforecastssupportedtheviewthatthebusinesscanmeetitsliabilitiesastheyfalldueforaperiodofatleast12monthsfromthedateofapprovaloftheGroupFinancialStatementsandthethree-yearperiodoftheViabilityAssessment.TheFinancialReviewonpages16to21setsoutfurtherdetailsontheprocessappliedinrelationtothisassessment.
RiskmanagementTheCommitteereceivedregularreportsontheCompany’slegal,taxation,treasury,fraudprevention,whistleblowing,informationsecurityanddataprotection,insuranceactivitiesandrelatedpoliciesandproceduresforthepromotionoftheCommittee’sgoals.Additionallyduringtheyear,theCommitteeoversawtheGroup’sassessmentofitsexpectedexposuretotherisksarisingfromtheUK’sproposedexitfromtheEU(‘Brexit’),whichhadbeenundertakenbytheInternalAuditor.ThesummaryfindingsofthereviewwereconsideredbytheCommitteewiththeactionsarisingprogressedbymanagement.
GiventhelackofclarityaroundthenatureandtimingoftheUK’sexitarrangements,theCommitteesubsequentlyencouragedmanagementtoensurethatdetailedandthoroughplansforaworstcase‘nodeal’scenariowereinplacepriorto31October2019.Accordingly,aBrexitsteeringcommitteewasestablishedinordertomeetonaregularbasistodiscussthekeyimpactsoftheBrexitdecisionandreporttotheExecutiveTeamandtheCommittee.TheCommitteeissatisfiedthattheGroupcontinuestoseekwaystomitigatepotentialrisksand,inthemeantime,hasconcludedthatthedirectimpactofBrexittotheGroupisexpectedtobemutedbuttheindirectimpactongeneralconsumerconfidenceandmarketuncertaintytohavegreatersignificanceacrosseachofourbusinesses.WewillcontinuetomonitortherisksanduncertaintiesarisingfromBrexitwithintheGroup’sexistingriskmanagementandcontrolprocessasoutlinedonpages22to25.
Inlinewithusualprocedures,arefreshoftheGroup’sprincipalandemergingriskswascarriedoutatthehalfandfullyear,takingintoaccountthecontinuingenvironmentofconsiderablechangeandtransformationwithintheGroup.Thereviewwasconductedthroughdiscussionwithacrosssectionoftheexecutiveandseniormanagementteamsandthenon-executivedirectors,whowereaskedtoconsiderthekeyrisks(inplaceandemerging)andchallengestothebusiness(byreferencetotheexistingprincipalrisks);thecurrentmanagementactivitiesandcontrolsthathelpaddresstheserisks;andfutureactionsthatmaybetakentofurthermitigatetherisks(whereappropriate).Thereviewidentifiedthatformalriskmanagementactivitieshaveimprovedduringtheyearandthereisageneralalignmentaroundthenatureofrisks,theriskownership,thedirectionoftravelandanyriskmitigatingactions.
InternalcontrolsAsoutlinedinourFY2018report,InternalcontrolhealthcheckswereconductedinFY2018inordertoidentifyareasofpriorityandfocus.Keyinternalcontrolthemeswereidentifiedandthereviewresultedintherecommendationofanumberofmitigatingactions,eachofwhichwereprogressedbymanagementasameansofstrengtheningandrebasingtheinternalcontrolenvironment.WearepleasedwiththeprogressmadeontheGroup’sinternalcontrolenvironmentandcontinuetocloselymonitortheimprovementsmade.
Furtherdetailsoftheprincipalrisks,anyemergingrisksandhowtheyaremanagedandmitigatedcanbefoundonpages22to25.
Whistleblowing,briberyandfraudWeoperateaconfidentialtelephonehotlinewherebyemployeescanreportinconfidencesuspectedincidencesoffraud,briberyornon-compliancewithCompanypolicies,practicesorbreachesoflaw.AllsuchincidencesareassessedandcategorisedaccordingtoseverityandriskbytheEmployeeRelationsteamandaninvestigatingmanagerappointed,withthefindingsreportedtotheCommitteeoncompletionofaninvestigation.
Duringtheyear,theCommitteereceivedquarterlyreportsonincidencesofwhistleblowing,suspectedfraud,databreaches,briberyorothermalpracticesreportedacrossthebusinessandseparatelyInternalAuditre-establishedtheGroup’sfraudriskmanagementframeworktoimprovetheidentificationof,andmitigatingactionstopreventandreport,incidencesoffraud.
External auditorUnderitstermsofreference,theCommitteeisresponsibleforassessingthescope,fee,objectivityandeffectivenessofexternalauditsandformakingarecommendationtotheBoardregardingtheappointment,reappointmentorremovaloftheexternalauditoronanannualbasis.Further,inaccordancewithArticles16and17oftheEUAuditRegulation,theCompanyisrequiredtocompleteacompetitivetenderprocessfortheexternalauditeverytenyearsandmandatorilyrotateauditfirmevery20years.
FollowingtheconclusionofaformaltenderprocessinJanuary2019,theBoardapprovedtheappointmentofBDOastheCompany’sauditorfromtheconclusionofthe2019AnnualGeneralMeetinguntiltheirre-appointmentbyshareholdersatthe2020AnnualGeneralMeeting.Followingtheconclusionofthetenderprocess,DeloitteresignedastheCompany’sauditor.
TheCompanyhasaformalpolicyonitsrelationshipwiththeexternalauditorwhichtheCommitteehasreviewedandupdatedduringtheyear.Thepolicyincludesfinancialapprovallimitsfornon-auditservicesandrestrictionsonthenatureofworkthatcanbeperformedtoensurethattheexternalauditor’sobjectivityisnotimpaired.Mypriorapprovalisrequiredifthecostofnon-auditworkislikelytoexceed£20,000perannumorwherethemaximumcombinedspendislikelytoexceed70%oftheannualauditfeeforthefinancialyear.Furthermore,variousregulatoryauthorities,includingtheAuditingPracticesBoardandtheInstituteofCharteredAccountantsofEnglandandWales,haveidentifiedcommonnon-auditserviceswhichmaypresentahigh
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riskofconflictandthreattoexternalauditorindependence.Consequently,theCommitteehasadoptedamandatoryprohibitionontheexternalauditor’sengagementinrelationtothefollowingservicesunlessitcanbeclearlyshowntopresentnothreattoexternalauditorindependenceanditisinthebestinterestsoftheGroup:
• workrelatedtothemaintenanceofaccountingrecordsandtheinitialpreparationoffinancialstatementsthatwillultimatelybesubjecttoexternalaudit;
• managementof,orsignificantinvolvementin,internalauditservices;
• financialinformationsystemsdesignandimplementation;
• actuarialservices;• investmentadviceand
bankingservices;• secondmentstomanagement
positionsthatinvolveanydecision-making;
• legalservices;• custodyofassets;• taxadvisory,includingtax
planningandcompliance;• valuationservicesofapublic
nature;and• anyworkwhereamutualityof
interestiscreatedthatcouldcompromisetheindependenceoftheexternalauditor.
NofeeswerepaidtoDeloitteduringtheyearinrespectofnon-auditservices.However,feespaidtoBDOduringtheyearinrespectofnon-auditservicessupportfortheCompany’sinterimfinancialresultsamountedto£30,000.TheCommitteeconsidered,andwassatisfiedthat,itwasappropriateforBDOtoundertakethisworkandthatdoingsodidnotaffecttheirindependence.DetailsofthetotalfeespaidtoDeloitteandBDOduringtheyearinrespectofauditandnon-auditservicesareshowninNote3totheGroupFinancialStatements.
Assessment of the effectiveness of the external auditorTheCommitteealsoregularlyundertakesareviewoftheeffectivenessoftheexternalauditor.AdedicatedsessionisthentypicallyheldtocollatetheviewsofeachmemberoftheCommittee,theChiefFinancialOfficerandtheGroupFinancialControlleronmatterssuchastheexternalauditor’sprocessesforinternalreviewofaccountingjudgements,includingunderstandingofthekeyissues;theexpertiseandtechnicalknowledgewithintheexternalauditteamstoauditeffectivelytheCompany;thescope,deliveryandexecutionoftheauditplan;andtherobustnessandperceptivenessoftheexternalauditor.
AftertheconclusionoftheFY2018audit,theCommitteeevaluatedtheperformanceofDeloitteandconcludedthattheexternalauditprocessinFY2018hadbeeneffective.FollowingDeloitte’sdecisiontoresignasauditorandBDO’ssuccessfulappointmentinFebruary2019,theCommitteeexpectstoconductathoroughassessmentofBDO’sfirstyearasexternalauditorfortheGroupandtoensurethatanyareasidentifiedforimprovementinitsfirstauditarecommunicatedtoBDOforaction.Thiswillbereportedinnextyear’sAnnualReport.
Duringthefinancialyearunderreview,theCompanyhadnointeractionwiththeFRC’sCorporateReportingReviewTeamoritsAuditQualityReviewTeam.
ApprovalThisreportwasapprovedbytheAuditCommitteeandsignedonitsbehalfby:
Mark WhitelingAuditCommitteeChair5November2019
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Key objectivesToleadtheprocessforBoardappointmentshavingdueregardtoBoarddiversity,toensureorderlysuccessionplanningsoastomaintainanappropriatebalanceofskillsandexperienceontheBoardandtomaintainaprogressiverefreshingoftheBoard.
ResponsibilitiesTheroleandresponsibilitiesoftheCommitteearesetoutinitstermsofreference,whichareavailableontheCompany’swebsite,www.connectgroupplc.com,andfromtheCompanySecretaryonrequest.ThetermsofreferencearereviewedannuallybytheCommitteeandthenreferredtotheBoardforapproval.
TheprincipalresponsibilitiesoftheCommitteeare:
• reviewingthestructure,size,compositionandbalanceoftheBoardincludingtheskills,knowledge,experienceanddiversityofthedirectors;
• ensuringplansareinplacefororderlysuccessionplanningfordirectorsandseniormanagementandoverseeingthedevelopmentofadiversepipelineforsuccession;
• establishandpromoteemployeeengagementwiththeBoardtoensurethatworkforceviewsarecollectedandconsidered;and
• identifyingandnominatingcandidatestofillBoardvacancies.
OverviewIampleasedtopresentthisyear’sreportontheactivitiesoftheNominationsCommittee.TheCommitteehashadaproductiveperiodduringtheyearwhichincludedtherecommendationforthepermanentappointmentofTonyGrace(ChiefFinancialOfficer)totheBoardwitheffectfrom5November2018asreportedinlastyear’sAnnualReport,establishingtheGroup’scolleagueengagementmechanisms,consideringtheresultsandactionplansarisingfromthe2018group-widecolleaguesurvey,overseeingtheresettingandlaunchofourGroup’scultureandvaluesaswellasapprovingandoverseeingtheimplementationofournewDiversityandInclusionpolicy.
MembershipDuringtheyear,DeniseCollis,MarkWhitelingandMichaelHolt(witheffectfrom1October2018)weremembersoftheCommittee.AllmembersoftheCommitteewhoservedduringtheyearwereindependentnon-executivedirectors,excludingmyselfasIamdeemedbythe2018Code,byvirtueofmyChairmanshipoftheBoard,nottoberegardedasindependentbutpermittedtoactasChairoftheCommittee.
How the Committee operatesTheCommitteemettwiceduringtheyearandallCommitteememberswereinattendanceateachofthemeetings.AttheinvitationoftheCommittee,certainexecutivedirectorsattendedthemeetingsfromtimetotime.
Nominations Committee Report
The committee recognises the
benefits of diverse skill sets, capabilities,
backgrounds and experience.
LEADING WITH A PROGRESSIVE APPROACH
Gary KennedyNominationsCommitteeChair
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SetoutbelowisasummaryofthemajoractivitiesoftheCommitteeintheyear.
ChiefFinancialOfficerappointmentAsreportedinlastyears’AnnualReport,followingDavidBauernfeind’sdecisiontoresignfromtheBoardasChiefFinancialOfficeron30April2018andthesubsequentdecisiontostepdownwithimmediateeffecton12June2018,theCommitteeoversawthesearchandappointmentofTonyGraceasChiefFinancialOfficer,initiallyprovidinginterimcoverand,thereafter,followingrecommendationbytheCommittee,permanentlywitheffectfrom5November2018.
TheCommitteeengagedBlackwoodRecruitmentLLPtoassistinthissearchprocessandconfirmsthatBlackwoodRecruitmentLLPhasnootherconnectionwiththeCompanyorthedirectors,thatallselectiondecisionswerebasedonmeritandthatallrecruitmentactivitieswerefairandnon-discriminatory.
Non-executivedirectorappointmentFollowingthedepartureofAndrewBrentfollowingconclusionofthe2018AGMon23January2018,theCommitteeidentifiedthatitwouldseektheappointmentofanadditionalnon-executivedirectorwho,followingareviewoftherequiredskills,knowledge,experienceanddiversitytoenhancethecompositionoftheBoard,wouldideallypossessrelevantindustryexperienceapplicabletotheTuffnellsbusinessandthelogisticsanddistributionsector.MichaelHoltwasidentifiedasastandoutcandidatebut,duetootherworkcommitmentsasChiefOperatingOfficerofFedExExpress,EuropeuntiltheendofSeptember2018,hisappointmentwasdeferreduntil1October2018whentheCommitteerecommendedthatMichaelHoltbeappointedtotheBoardandtheBoardacceptedtherecommendation.Accordingly,MichaelHoltwasdulyappointedasnon-executivedirectoron1October2018andsubsequentlyalsobecametheGroup’sdesignatednon-executivedirectorontheNationalColleagueEngagementForumestablishedandlaunchedduringtheyear.
SuccessionplanningDuringtheyear,theCommitteeconsideredtheorderlysuccessionplanningforboardandseniormanagementroles,alongsidecontinuedprogressbeingmadeintheGroup’supdatedapproachtosuccessionplanning,reviewoftalentandmanagementdemographics.TheCommitteedeterminedthatthisapproachhadimprovedcapabilityacrosstheseniormanagementpopulation,withamorefavourabledistributionofgood/highperformanceacrossbothleadershiplevel3andleadershiplevel4comparedtopreviousreviews.FurtherworkalsocontinuedduringtheyearontalentmappingagainsttheGroup’snewvaluesaswellasthekeyprioritiesfortalentdevelopmentinordertoensuretheplannedsuccessionofkeyrolesandthedevelopmentofadiversepipeline.
ColleagueengagementDuringtheyear,theCommitteeoversawthecreationanddevelopmentofcolleagueforumsasameansofpromotingworkplaceengagement.Astructureoflocal,regionalandnationalforumswasestablished,withrepresentativesnominatedbyourcolleagues.Theforumstakeplacemonthlyorquarterlyasappropriateandgatherawiderangeofviewsfromourcolleaguesaswellascascadingkeystrategicinitiativesandbusinessupdatesthroughouttheorganisation.
Asnotedabove,aNationalColleagueEngagementForumwasestablishedandlaunchedduringtheyearandattendedbycertainnominatedrepresentativesfromthelocalandregionalforums,plusMichaelHolt,astheBoard’sdesignatednon-executivedirector.ThisforumisheldquarterlyandgivestheBoarddirectaccesstotheimportantviewsandvoiceofourfrontlineandcorporatecentrecolleagues.FurtherinformationontheworkofourcolleagueforumscanbefoundintheCorporateResponsibilityreportonpages28to31.
TheCommitteereceivedandreviewedtheresultsofthe2018group-widecolleagueengagementsurvey,whichwerelargelypositivegiventhecontextoftheGroup’srecenttradingprofile.Theresultsdemonstratedthatthereisanopportunitytoembrace
higherlevelsofengagementacrosstheGroup,creatingandcommunicatingavisionforthefuturestrategicdirectionoftheGroupandinvestinginthedevelopmentofourcolleagues.
Followingthereviewoftheresults,athoroughactionplanwasdevelopedalongsideFY2019internalcommunicationsplanning,withanincreasedemphasisoncolleagueengagementandtwo-waycommunications.Initiativesundertakeninpursuitoftheseresultsincludetheintroductionofquarterly‘townhall’meetingsinmultiplelocations,monthlycallswithdepotmanagementandseparatelywiththeseniorleadershipteam.Theintroductionofregularvideoupdatesfortheoperationaldepot-basedteam,reportingonprogressacrosstheGroupinthedeliveryofourkeystrategicinitiativesandsuccesseshasbeenwellreceived.Weleadallteammeetingswithafocusonour‘SafetyFirst’initiativeandourcompanyvalues,toconsistentlyunderlinetheimportanceofboth.
CultureandValuesAsanimportantstepinourtransformationalplans,significantconsultationandconsiderationoftheGroup’sstakeholderswasundertakenduringtheyeartorealignourcorporatecultureandtointroducenewreinvigoratedvaluesandcorebehaviourstobeexpectedof,andpromotedby,allcolleagues.Sixcorevalueswerelaunchedwhichemphasisetrustedserviceforourcustomers,puttingourcolleaguesandtheprinciplesoffairnessandopennessattheheartofeverythingwedo,encouragingallcolleaguestoactwithappropriatespeedandcreativityinallthatwedo,andatalltimespromotingthedeliveryofvalueforourshareholders.TheCommitteereceivedupdatesontheintegration,cascadeandengagementofthenewvaluesandispleasedwiththelevelsofprogressmadeintherealignmentofcultureacrosstheGroup.
FurtherinformationonourvaluescanbefoundintheCorporateResponsibilityreportonpages28to31.
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DiversityandinclusionTheCommitteerecognisesthebenefitsofdiverseskillsets,capabilities,backgroundsandexperiencetotheeffectivefunctioningoftheBoardandtheachievementofourobjectivesandlonger-termstrategyandacknowledgestheadditionalwidercompanybenefitsthatarisefromacomprehensivediversityandinclusionstrategy,suchascreatingandfosteringahighperformingandinclusivecultureandattractingandretainingbothcustomersandtalenttotheorganisation.
Accordingly,theCommitteeconsideredandapprovedanewDiversityandInclusionpolicywhichhasthewiderobjectiveofembeddingacultureofdiversityandinclusionthroughouttheorganisationinsupportoftheCompany’slong-termstrategy.Inordertoensurethattheobjectivesofthepolicyareachieved,aDiversityandInclusionCouncilwasestablished,withdelegatedresponsibilityto(i)agreeannualdiversityandinclusionobjectives,(ii)monitordiversitydataagainstagreedmetrics,(iii)reporttotheCommitteeontheeffectivenessoftheinitiativesthathavebeenimplementedduringtheyear,(iv)updatetheCommitteeonannualprogressmadeagainstthepolicy’sobjectives,and(v)makerecommendationsforfurtherdiversityandinclusionfocus.
Duringtheyear,theCouncilimplementedtheDiversityandInclusionpolicythroughaseriesofinitiatives,includingraisingtheawarenessandimprovingtheeducationofourmanagersonthepolicythroughacampaigncalled‘EveryoneIn’,launchingacalendarofawarenessevents,introducingsupportingcommunicationsandfocusingondiversitywithinrecruitment,talentanddevelopmentofcolleagues.InitiativestodateincludesupportforthenationalMentalHealthandCarersweeks,theestablishmentofacolleaguesassistanceandsupportprogrammeandhigh-profileupskillingsessionsformanagersonthebenefitsofinclusionanddiversity.Accordingly,theCommitteeisencouragedbytheearlyengagementandprogresswhichhasbeenmadeinachievingthediversityandinclusionannualobjectivesandwearepleasedwiththeincreasingawarenessofdiversityacrossourorganisation.
TheBoardconsidersitselfdiverseintermsofthebackground,skillsandexperienceeachdirectorbringstotheBoardandiscommittedtotargetingtherecruitmentoffemaleBoardmembersthroughexecutivesearchpartnerswhoaresigneduptotheVoluntaryCodeofConductongenderdiversity,developedinresponsetotheDaviesReport.Weencourageourrecruitmentpartnerstopresentmorebalancedcandidaterecommendationswithatleastonecredibleandqualifiedfemalecandidateprovidedwithintheshortlistfortherecruitmentprocesses.TheCommitteeisalsomindfuloftherecommendationsoftheParkerReviewandtheHampton-AlexanderReview,whenconsideringpotentialcandidatesandacknowledgesthatbybroadeningthepotentialskillsbasethroughenhancingthediversityofourbusiness,wewillimprovethequalityofourfuturedecision-making.TheCommitteealsoagreesthatimprovingtheoveralldiversity,includinggenderbalance,inleadershiprolesisgoodforcompanyperformanceandproductivity.
Femalerepresentation
2019 2018
Board 14% 17%
ExecutiveTeam 14% 25%
Furtherinformationongenderdiversity,includingtheproportionofwomeninseniormanagement(beingforthesepurposes,theExecutiveTeamandtheirdirectreportsaspromulgatedbytheHampton-AlexanderReview)andwithintheorganisationoverall,iscontainedintheCorporateResponsibilityreportonpages28to31.
ApprovalThisreportwasapprovedbytheNominationsCommitteeandsignedonitsbehalfby:
Gary KennedyNominationsCommitteeChair5November2019
Executivesearchconsultantisappointed
Followingareviewoftherequiredskills,knowledge,experienceanddiversity,detailedjobspecificationsareprepared
Comprehensiveprofilesarepreparedandconsidered,andcandidatesareshortlisted
InitialandsecondinterviewsareheldwitheachmemberoftheBoard
FollowingrecommendationbytheCommittee,theBoardappointsthenewdirector
Immediatelyfollowingappointmenttherelevantannouncementsaremadetothemarket
BoardappointmentsandsuccessionplanningTheCommitteeadoptsaformal,rigorousandtransparentprocedurefortheappointmentofnewdirectorstotheBoard:
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Shareholder letter from the Chair of the Remuneration CommitteeDear shareholder OnbehalfoftheBoard,IampleasedtopresenttheRemunerationCommittee’sreportfortheyearended31August2019.
Remuneration matters related to the Tuffnells strategic review and directorate changesInNovember2019itwasannouncedthatastrategicreviewoftheTuffnellsbusinesswouldtakeplace,accompaniedbyanumberoforganisationalchanges.
TheChiefExecutiveOfficer,JosOpdeweegh,steppeddownfromthebusinesswithimmediateeffectandwasreplacedbyJonathanBunting,whowillcombinetheroleofInterimChiefExecutiveOfficeroftheGroupwithcontinuingaccountabilityasChiefExecutiveOfficerofSmithsNews,throughtheperiodofthereview.
JosOpdeweeghhasreceivedcompensationforlossofofficeinlinewithhiscontractualprovisions.
JonathanBunting’sbasesalaryplussalarysupplementforthenewinterimrolewilltakehissalaryto£450,000(the“totalsalary”),thesamemonetaryvalueasJosOpdeweeghpriortohisdeparture.ThetotalsalarywillalsobeappliedtotheannualbonusplanandtheFY2020-2022LTIPaward,ineachcaseonapro-ratedbasis.Inaddition,forthedurationofhisinterimrole,JonathanBunting’spensioncontributionswillreducefrom20%to15%oftotalsalary,thesamepercentagepensioncontributionasforJosOpdeweegh.TheremunerationarrangementsforJonathanBuntingwillbesubjecttofurtherreviewandalignmentwithshareholderguidelines(inparticulararoundpensioncontribution)shouldtheroleofChiefExecutiveOfficeroftheGroupbecomepermanent.
Asalsoannounced,on5November2019,MichaelHolt,currentlyanon-executivedirector,becameExecutiveChairmanoftheTuffnellsbusinessfortheperiodoftheTuffnellsstrategicreviewprocess.MichaelhasdeepexperienceandexpertiseinthelogisticssectorandwillhaveresponsibilityforprovidingrelevantandcurrentinsighttoaidboththebroaderstrategicreviewandtargetedprofitrecoveryatTuffnells,supportingPeterBirks,Tuffnells’ChiefExecutiveOfficer.Forthedurationofhistimeinrole(whichisexpectedtobeonlyofashort-termnature),Michaelwillreceiveanadditionalfeeontopofhiscurrentnon-executivedirectors’fees,of£205,000perannum.Hewillnotreceiveanybenefitsorperformancerelatedpay.
Directors’ Remuneration Report
The incentive plans align to the business strategy and culture
and provide for a rounded assessment
of performance.
TRANSPARENCY AND STAKEHOLDER ENGAGEMENT
Denise CollisRemunerationCommitteeChair
CONNECT GROUP ANNUAL REPORT 2019 GOVERNANCE 55
Fulldetailsofeachofthesearrangementsareprovidedlaterinthisreport.
Review of our remuneration policyTheforthcoming2020AGMmarksthethirdanniversaryoftheapprovalofourremunerationpolicyandassuch,wearerequiredtoputanewpolicytoabindingshareholdervote.Thisalsorepresentsthethirdtimethatabindingresolutiontoapproveourremunerationpolicyhasbeenbroughttoshareholdersandwelookforwardtothecontinuinghighlevelsofshareholdersupportaswehavesecuredinthepast.Thepolicywillapplyforthefullthree-yearperiodandwillbetheframeworkforsettingthepayoftheexecutivedirectors,non-executivedirectorsandtheGroup’sExecutiveTeam.Whiletheshareholderapprovedpolicyappliestothemostseniorexecutivesinthebusiness,theCommitteehasalsoreviewedremunerationandincentivesmorewidely,takingtheseintoaccountwhensettingthispolicy.
Inpreparationforthe2020AGM,theCommitteehasreviewedthedirectors’remunerationpolicy,toensurethatitremainsalignedtothebusinessstrategyandcomplieswiththeCompaniesAct,relevantregulatoryrequirements(includingtheUKCorporateGovernanceCode)andlatestinvestorguidelines.AkeycomponentoftheCommittee’sreviewhasincludedathoroughconsultationexercisewithourlargestshareholders.Thisindicatedthatthebroadpolicyframeworkcouldbecontinuedforthenextpolicyperiod,withsomerelativelyminorrefinementstoaligntotheCodeandinvestorguidelines.Inparticular,ourshareownershipguidelinesforexecutivedirectorshaveincreasedto200%ofbasesalaryandshareholdingrequirementshavebeenintroducedtonowrequiredepartingexecutivedirectorstocontinuetoholdsharesaftertheyhaveleftthebusinessforaperiodoftwoyears.Inaddition,themaximumpolicylimitfortheannualbonushasbeenreducedfrom150%ofbasesalaryto125%ofbasesalary(withthecurrentappliedlimitremainingat100%ofbasesalary).
TheCommitteeconsidersthatthenewdirectors’remunerationpolicyisclearandassimpleaspossible,whilstincorporatingthenecessarysafeguardstoensureastronglinkbetweenperformanceandrewardand,further,ensuringthatfailurecannotberewarded.Theincentiveplansaligntothebusinessstrategyandcultureandprovideforaroundedassessmentofperformance.
Theoverallstructureofthepackageprovidesamarket-competitiveremunerationopportunitywithproportionatelevelsofpaythatvarywithperformance.Furthermore,theCommitteehasdemonstratedinrecentyearsthatitispreparedtousediscretiontoreduceaformuladrivenoutcomewhenthisdoesnotreflectbroadercompanyperformanceortheshareholderexperience.
Theproposedchangestothenewdirectors’remunerationpolicyaresetoutonpage58.
Performance in FY2019 and incentive paymentsAtthestartofthefinancialyear,theCommitteedeterminedthat,forthethirdyearrunning,thereshouldbenoincreasestobasesalaryfortheExecutiveTeam.TheFY2019bonuswasmeasured70%onAdjustedprofitbeforetax(PBT)and30%onindividualobjectives.InwhathasprovedachallengingyearinwhichtheGrouphasfocusedonrebuildingtheunderlyingstrengthofitscoreoperationswithprioritiesthatbalancedimprovementstoprofitability,withcontinuedinvestmentandprudentcapitalmanagement,thethresholdlevelofGroupPBTwasnotachieved,andassuchnobonusispayableforFY2019undertheGroupPBTelementofthebonus.TheSmithsNewselementofthebonus(forJonathanBunting)exceededitsperformancetargetbut,duetotheGroupPBTunderpin,nobonuswasawardedforthiselement.Likewise,thepersonalelementofthebonusforallthreeexecutivedirectorsintheyearwasalsosubjecttotheGroupPBTunderpin,andreducedtozero.Overall,bonuspaymentswerezeroforthesecondyearrunning.
TheLTIPawardsgrantedinFY2017weresubjecttoAdjustedbasicEPSandaggregateoperatingcashflowperformancemeasures,weightedequallyandmeasuredoverthethree-yearperiodending31August2019.Basedonperformanceoverthisperiod,theFY2017-2019LTIPawarddidnotvestasthresholdperformancewasnotmet.
TheCommitteeconsidersthattheabsenceofincentivepaymentsfortheyearisanappropriateoutcome,withnodiscretionrequiredtochangetheformuladrivenoutcomes.
Operation of the new Remuneration Policy in FY2020Fromthedateofhisappointment,theInterimChiefExecutiveOfficerwillreceiveasalarysupplementinadditiontohisunchangedcurrentbasesalaryof£291,312,takinghistotalannualisedsalaryto£450,000,thesamemonetaryvalueasforhispredecessor.TherewillbenoincreasestobasesalaryforthecomingyearfortheChiefFinancialOfficer.
TheInterimChiefExecutiveOfficer’spensioncontributionforthedurationofhisnewrolewillbe15%oftotalsalary,areductionfromthecurrent20%.
Theannualbonusopportunitywillremainat100%ofsalary.FortheInterimChiefExecutiveOfficer,thiswillbebasedonactualbasesalaryandsalarysupplementreceivedoverthecourseoftheyear.Theperformancemeasureswillbebased70%onAdjustedGroupPBTand30%onindividualobjectiveslinkedtostrategyandleadership.TheCommitteehasreviewedtheoperationoftheGroupfinancialperformanceunderpinforthepaymentoftheindividualelementofthebonusandhasdecidedtoreplacetheformulaicapproachwithamorediscretionaryoneforFY2020.ThisisaimedatprovidinggreaterflexibilityfortheCommittee,ifdeemedappropriate,whilstensuringthattheoverallprofitabilityoftheGroupremainsakeyfactorinitsdecisionmaking.Consistentwithpreviousyears,therewillbeadiscretionaryrequirementforaminimumindividualperformanceratingtobeachievedbeforetheGroupfinancialperformanceelementmaybepaid.
TheLTIPgrantlevelsfortheFY2020-2022awardfortheInterimChiefExecutiveOfficerwillbe100%ofbasesalary.Thiswillbebasedontwomonthsbasesalaryplustenmonthsofcombinedbasesalaryandsalarysupplement.IntheabsenceofknowinganexactenddatefortheInterimChiefExecutiveOfficer’srole(althoughitisreasonablyprudenttoassumethatitwillcontinueforthemajorityofFY2020),andgiventhattheawardwillbemadeshortly(unlikethebonusawardwhichwillbeconsideredaftertheendofthefinancialyear),theRemunerationCommitteehasdeterminedthatthiswasthemoststraightforwardapproachtotake.Inaddition,theLTIPgrantfortheChiefFinancialOfficerwillbe100%ofbasesalary.However,theCommitteehasdeterminedthattheLTIPawardforallparticipantswillbebasedoneither30pashareortheactualsharepriceatthedateofgrant,whicheveristhehigher.
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Directors’ Remuneration Report cont.
TheCommitteehasreviewedtheLTIPperformancemeasuresandthealignmentofthesemetricstothebusinessstrategyandshareholders’interests.Thiswasaparticularareaoffocusintheshareholderconsultationexercise,althoughviewswerevariedandtherewasnoconsensusinanyparticulardirection.Aftercarefulconsideration,theCommitteehasdecidedtoreplacethecumulativecashflowmeasurewitharelativetotalshareholderreturnperformancemetric,comparingtheCompany’sstockmarketperformance(sharepriceplusdividends)againstthecompaniescomprisingtheFTSESmallCapIndex(intheabsenceofasufficientlyrobustdirectcomparatorgroup).WewishtoaddanelementofTSRtoprovideamoredirectincentivetomanagementtoimproveoursharepriceanddividendperformancevspeersinasustainablemannerandtoensurecommonalignmentwiththelong-terminterestsofourshareholders.TheTSRelementwillaccountfor50%oftheaward,withtheremaining50%beingbasedonAdjustedbasicEPSperformance,asinthepreviouspolicy,measuredoverthreeyearstoFY2022.ThiswillmaintainthestrongfocusonEPSvis-à-visourlong-termfinancialperformance.AlthoughcashflowhasbeenremovedasaperformancemeasurefortheLTIP,thereisastrongcashflowdisciplinethroughouttheExecutiveTeam.Inparticular,theBoardremainsmindfuloftheviewsofsomeofourshareholdersandintendstomaintainadeeplevelofoversightofongoingcashflow.
Furtherdetailsonperformancetargetscanbefoundonpages66to67.
Inrespectoftheannualbonus,50%ofanypayoutwillbedeferredfortwoyearsandanyvestedLTIPawardswillbesubjecttoatwoyearholdingperiod.Furthermore,theCommitteeretainsdiscretiontooverridetheformulaicoutcomesofthebonusandLTIP,androbust(andenhanced)clawbackandmalusprovisionswillapply.
Employee engagement on remuneration mattersAspartoftheBoard’scommitmenttobroaderstakeholderengagementIwasdelightedtomeetwithmembersofourNationalColleagueEngagementForumtoexplainourcompany-wideremunerationpolicyandoutlinehowexecutiveremunerationoperates.Aspartofthediscussion,weexploredthepaystructureatdifferentorganisationlevels,inparticularfocusingonthechecksandbalancesinplacetoensurepayforperformanceoverbothshortandlongertermtimeframes.Iwouldliketothankcolleaguesfortheirinsightfulquestions,observationsandcomments.OnbehalfoftheCommittee,IlookforwardtofurthermeetingsinthefutureinordertocontinuethedialogueandreceivevaluablefeedbackwhilstatthesametimedischargingtheCommittee’scommitmentsunderthe2018editionoftheUKCorporateGovernanceCode.Concluding remarksIwelcomeanyfeedbackonourproposedremunerationpolicyanditsapplicationandlookforwardtoseeingshareholdersattheAnnualGeneralMeetingon31January2020,wherewehopetoreceiveyoursupportforourpayarrangements.
Denise CollisRemunerationCommitteeChair
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Directors’ Remuneration PolicyAt-a-glance summary AsummaryofthepolicyanditsapplicationforFY2020isshownbelowwiththefullpolicysetoutonpages59to64.
Policy elementJonathan BuntingInterim Chief Executive Officer
Tony GraceChief Financial Officer
Annualisedbasesalaryfrom1September2019 £291,312 £295,000
Annualisedsalarysupplementfrom5November2019
£158,688 N/A
TotalsalaryforFY2020 £421,740(a) N/A
%increasefromprioryear 45%(relatedtonewinterimrole) 0%
PensionforFY2020 £65,859(being20%of£291,312for65daysandbeing15%of£450,000for301days)1
£44,250(15%)
Annualbonus(ABP) 100%ofbasesalary,plusprorataofthesalarysupplementforthedurationoftheinterimrole
100%ofbasesalary
Annualbonusmetrics AdjustedGroupPBT(70%)Individualobjectives(30%)
ABPpaymentforthresholdperformance 0%ofsalary
ABPpaymentforon-targetperformance 50%ofsalary
Deferredbonusplan(DBP) 50%ofannualbonusdeferredfor2yearsinshares
LTIP Awardof100%ofsalary,constructedastwomonthsbasesalaryplustenmonthsofbasesalaryandsalarysupplement
100%ofbasesalary
Awardwillbecalculatedbasedonasharepriceof30portheactualsharepriceatdateofgrant,whicheveristhehigher
LTIPmetrics AdjustedbasicEPS(50%)TotalShareholderReturn(50%)
LTIPpaymentforthresholdperformance 20%ofaward
LTIPpost-vestingholdingperiod 2years
Malusandclawback AppliestoawardsmadeundertheABP,DBPandLTIP
ShareholdingGuidelinesrequirement 200%ofsalary
Post-cessationofemploymentshareholdingrequirement
Lowerof200%ofsalaryorshareholdingondeparturefor2yearspost-cessation,excludingself-purchasedshares
1. FortheInterimChiefExecutiveOfficer,theprojectedfigureisbasedonthedurationoftheinterimappointmentbeinguntiltheendofFY2020.
IntroductionThisreporthasbeenpreparedonbehalfoftheBoardbytheRemunerationCommitteeinaccordancewiththerelevantprovisionsoftheCompaniesAct2006andonthebasisprescribedinTheLargeandMedium-sizedCompaniesandGroups(AccountsandReports)(Amendment)Regulations2013.Whererequired,datahasbeenauditedbyBDOLLPandisindicatedaccordingly.
Directors’ Remuneration Policy ThefollowingsectionsetsouttheCompany’spolicyonremunerationforexecutiveandnon-executivedirectors,whichwillbeputtoabindingshareholdervoteattheAnnualGeneralMeetingon31January2020.Itisintendedthatthedirectors’RemunerationPolicywillapplyforthemaximumthreeyearspermittedbytheregulationsandso,intheabsenceofaneworamendedpolicyorasotherwiserequiredbylaw,willonlybebroughtbacktotheshareholdersattheCompany’sAnnualGeneralMeetingin2023.
Theaimofthepolicyremainstofacilitatedeliveryofourlong-termstrategythroughattracting,retainingandmotivatinghigh-calibredirectorswiththenecessaryskillsandexperience.InformingthepolicytheCommitteehasadoptedtheprinciplessetoutinthe2018editionoftheUKCorporateGovernanceCode.
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Overview of remuneration policy changesFollowingadetailedreviewoftheexistingpolicyfortheexecutivedirectorsandathoroughshareholderconsultationexercise,thefollowingchangestoourremunerationpolicyareproposed:
SalaryThesalaryreviewdatewillbechangedfrom1Aprileachyearto1Septembertoalignwiththefinancialyear.
PensionNewappointmentswillreceiveapensioncontributioninlinewiththerateapplyingtothemajorityoftheworkforceatthetimeofappointment.Forexistingdirectors,thepensioncontributionhasbeenfrozenattherelevantpercentageforeachrole,withtheeffectthatanyfuturepayincreaseswillnotleadtoachangeinthemonetaryvalue.
AnnualbonusThepolicymaximumhasbeenreducedfrom150%to125%ofsalarytoalignmorecloselytothecurrentappliedbonusmaximumof100%ofbasesalary.Dividedequivalentsaccruedthroughthedeferredbonusplanwillnormallybepayableinshares,inordertoimprovealignmentofinterestwithshareholders.
TheCommitteewillhavediscretiontooverridetheformulaicoutturnofanybonusif,forexample,itisnotreflectiveofbusinessperformance,theoverallshareholderexperienceoremployeerewardoutcome.
Clawbackandmalusprovisionshavebeenbroadenedinlinewiththe2018Codetoincludecorporatefailureandseriousreputationaldamage.
Long-termincentivePlanThepolicynowexplicitlyincludesthetwo-yearpost-vestingholdingperiod,whichwasintroducedfortheFY2018-2020grantsandonwards,butnotformallypartofthepreviouspolicy.
Thechoiceofperformancemetricshasbeenmademoreflexibletopermittheuseofmetricsotherthansolelythefinancialperformanceofthebusiness,forexampleTotalShareholderReturn.
Inlinewiththebonus,discretionandclawbackandmalusprovisionshavebeenenhancedanddividendequivalentswillonlybepayableinsharesonvestedawards(otherthaninthecaseofexceptionalcircumstances,suchasdeathinservice).
ShareholdingrequirementsTheshareholdingrequirementwillbeincreasedfrom150%to200%ofsalaryforalldirectorstostrengthenalignmentofinterestwithshareholders.
Apost-cessationshareholdingrequirementwillbeintroduced.Therequirementwillbetoretainsharesworththelowerofthein-serviceshareholdingrequirementortheactualshareholdingondeparture,fortwoyearspostcessationofemployment.Sharespurchasedfromanexecutivedirector’sownfundswillnotberestrictedbythepost-cessationshareholdingrequirementinordertoencourageself-purchases.TheCommitteewillretaindiscretiontoreduceorwaivethisrequirementinexceptionalcircumstances,suchasdeathinservice.
LossofofficeFor‘goodleavers’therewillbenoearlyvestingofLTIPordeferredbonusawardsoncessationofemployment,andpost-vestingholdingperiodswillcontinuetoapplytoawardspostcessationofemployment.Awardsmayonlyvestorbereleasedearlierthanthisinexceptionalcircumstancessuchasdeathinservice.
Outplacement,legalandotherreasonablerelevantcostsassociatedwithterminationwillbepayableinadditiontoanyclaimorpotentialclaiminrelationtoatermination.
Directors’ Remuneration Report cont.
CONNECT GROUP ANNUAL REPORT 2019 GOVERNANCE 59
Executive directorsThetablebelowsetsouttheCompany’sRemunerationPolicyforexecutivedirectors:
Element Purpose Operation Maximum Performance conditions
Basesalary Providefixedremunerationwhichissufficienttorecruitandretainindividualsofthenecessarycalibre.
SalariesaresetbytheCommitteetakingintoaccount:
• theskillsandexperienceoftheindividual;
• thesizeandscopeoftherole;• marketdataforsimilarrolesin
comparablecompanies;and• performanceoftheindividual
andthebusiness.
Typically,salariesarereviewedannually,withanychangeseffectivefrom1Septembereachyear.
Thereisnoprescribedmaximumsalary.Salaryincreaseswillnormallybeinlinewithsalaryincreasesgenerallyforemployees.
LargerincreasesmaybeawardedwheretheCommitteeconsidersitappropriatetoreflect,forexample:
• significantchangesinthesizeand/orcomplexityoftheGroupand/oroftherole;or
• individualsbeingmovedtomarketpositioningovertime.
None.
Benefits Ensurethatbenefitsaresufficienttorecruitandretainindividualsofthenecessarycalibreandprovidebusinesscontinuity.
Executivedirectorsareeligibletoreceivebenefitswhichmayincludeacompanycar(orcashequivalent),privatemedicalinsuranceandpermanenthealthinsurance.
Whererelevant,otherbenefitstoreflectspecificindividualcircumstances,suchashousing,relocation,travelorexpatriateallowancesmayalsobeprovided.ExecutivedirectorsarealsoprovidedwithinsuredDeathinServicebenefits.
Thereisnoprescribedmaximummonetaryvalueofbenefits.
BenefitprovisionissetatalevelwhichtheCommitteeconsiderstobeappropriateforthenatureandlocationoftherole.
None.
Pension Contributetowardsfundinglaterlifecostofliving.
ExecutivedirectorsmayparticipateintheGroup’sdefinedcontributionpensionplan,receiveasalarysupplementoracombinationofthetwo.
UnderthetermsoftheGroup’sdefinedcontributionpensionschemes,executivedirectorsmayalsoreceivedeathinservicebenefit.
Themaximumemployercontributionorsalarysupplementforexistingexecutivedirectorsis15%ofsalaryotherthanforJonathanBunting,whosecontributionorsalarysupplementremainsatthelegacylevelof20%ofsalary.Thislevelofcontributionhasbeen‘frozen’withtheeffectthatanyfuturepayincreaseswillnotleadtoanincreaseinmonetarypensioncontributions.However,assetoutearlier,thepensioncontributionforJonathanBunting(comprisingbothbasesalaryandsalarysupplementonapro-ratedbasis)willbereducedto15%forthedurationofhisnewroleasInterimChiefExecutiveOfficer.
Foranynewexecutivedirectorsandanyexistingexecutivedirectorwhohasapermanentinternalchangeofrole,themaximumemployercontribution/salarysupplementwillbeinlinewiththecontributionavailabletothemajorityworkforceatthetime.
None.
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Element Purpose Operation Maximum Performance conditions
Annualbonus Toincentivisethedeliveryoftheannualplan.
BonuslevelsaredeterminedbytheCommitteeaftertheyear-endbasedonperformanceagainsttargetssetatthestartofthefinancialyear.TheCommitteeretainsdiscretiontoadjustbonuspayments,includingtooverridetheformulaicoutcomeoftheaward,intheeventthatperformanceagainsttargetsdoesnotproperlyreflecttheunderlyingperformanceoftheGroupand/ortherelevantbusinesses,theoverallshareholderexperienceoremployeerewardoutcome.
Halfofthebonusisdeferredintosharesfortwoyears,whichvestsubjecttocontinuedemploymentunderthetermsoftheDBP.
Clawbackanddividendequivalentprovisionsapply(seenotesbelow).
Themaximumbonusopportunityinrespectofafinancialyearis125%ofsalary.
Thethresholdpaymentlevelforthefinancialperformanceconditionis0%andupto50%ofthemaximummaybepayablefortargetperformance.
TheCompany’slargestshareholderswouldbeconsultedbeforehandifthebonusopportunityincreasesabove100%ofsalary(thecurrentlyappliedmaximumlevel).
AnnualmeasuresandtargetswillbesetbytheCommitteeatthestartofthefinancialyear.
Themajorityofthebonuswillbebasedonfinancialperformance,withtheremainingperformanceconditionattributabletopersonaland/orteamobjectivesaswellasanybehaviouralaspectsthatrequireimprovementordevelopment,suchasleadershipeffectiveness.
LTIP Toincentivisethedeliveryoflong-termshareholdervalue.
Awardsaremadeintheformofnil-costoptionsorconditionalshareawards,thevestingofwhichisconditionalontheachievementofperformancetargets(asdeterminedbytheCommittee).
Vestedawardsmustbeheldforafurthertwo-yearperiodbeforesaleoftheshares(otherthantopaytax).
TheCommitteeretainsdiscretiontoadjusttheoutturnofanLTIPaward,includingtooverridetheformulaicoutcomeoftheaward,intheeventthatperformanceagainsttargetsdoesnotproperlyreflecttheunderlyingperformanceoftheGroupand/ortherelevantbusinesses,theoverallshareholderexperienceoremployeerewardoutcome.
Clawbackanddividendequivalentprovisionsapply(seethenotesbelow).
Themaximumawardinrespectofafinancialyearis150%ofsalary.
TheCompany’slargestshareholderswouldbeconsultedbeforehandifthegrantlevelincreasesabove100%ofsalary(thecurrentlyappliedgrantlevel).
Vestingisbasedontheachievementofchallengingfinancialortotalshareholderreturn(TSR)performancetargetsmeasuredoveraperiodofatleastthreeyears.
Fortheachievementofthresholdperformancetarget,amaximumof20%oftheawardwillvest.
Directors’ Remuneration Report cont.
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Element Purpose Operation Maximum Performance conditions
Shareholdingguidelines
Toprovidealignmentofinterestbetweenexecutivedirectorsandshareholders.
Theshareholdingguidelineforexecutivedirectorsis200%ofsalary.Untilthislevelisreached,exceptforpaymentoftaxarisingontheexerciseofawardsandotherexceptionalcircumstances,executiveswillberequiredtoretain75%ofthesharesvestingundershareincentivearrangements(excludingtheapplicationoftheSharesavescheme).Inexceptionalcircumstances,executivedirectorsmayseekpermissionfromtheRemunerationCommitteetotemporarilygobelowtheirtargetholding.
Followingterminationoftheiremployment,executivedirectorswillberequiredtoretainsharesatthelowerof200%ofbasesalary,ortheactualshareholdingondeparture,fortwoyearspost-cessation.Sharespurchasedvoluntarilywillnotcounttowardsthisrequirement.
Notestothepolicytable:1 Foreaseofpresentation,thetableabovedoesnotincludeallofthespecificarrangementsrelatedtotheappointmentofJonathanBuntingasInterimChiefExecutiveOfficer.Thesearefully
documentedelsewhereintheDirectors’Remunerationreport.2 Thechangestothepolicyarehighlightedinthesectionabovethepolicytable.3 ParticipationinincentiveschemesisatthediscretionoftheCommittee.4 Legacyandmandatedpayments–theCommitteereservestherighttomakeanyremunerationpaymentsandpaymentsforlossofoffice(includingexercisinganydiscretionsavailabletoitin
connectionwithsuchpayments)notwithstandingthattheyarenotinlinewiththepolicysetoutabove:(i)wherethetermsofthepaymentwereagreedbeforethepolicycameintoeffect;or(ii)wherethetermsofthepaymentwereagreedatatimewhentherelevantindividualwasnotadirectoroftheCompanyand,intheopinionoftheCommittee,thepaymentwasnotincontemplationoftheindividualbecomingadirectoroftheCompany;or(iii)wheretheCompanyismandatedtomakethepaymentasaresultofanawardissuedbyacompetentcourt,tribunalorauthority.Forthesepurposes‘payments’includestheCommitteesatisfyingawardsofvariableremunerationand,inrelationtoanawardovershares,thetermsofthepaymentare‘agreed’atthetimetheawardisgranted.
5 Clawback–theCompanyoperatesclawbackandmalusprovisionsfortheannualbonus,DBPandLTIP.TheCommitteereservestherighttotakesuchactionasitreasonablyconsidersappropriatetoputtheCompanyandparticipantsinthesameoverallfinancialpositionastheywouldhavebeenhadcertaincircumstances(describedbelow)notoccurred.Thisincludesareductionorcancellationofvestedorunvestedshareawardsand/orareimbursementtotheCompanyofpartorallofanycashorsharepaymentswithintwoyearsofpayment.Suchcircumstancesinclude,butarenotlimitedto:(i)discoveryofamaterialmisstatementoftheCompany’sauditedresultsonthebasisofwhichthepaymentwasorwouldbedetermined;or(ii)seriousreputationaldamageoftheCompany,anymemberoftheGrouportherelevantbusinessasaresultoftheparticipant’smisconduct;or(iii)grossmisconductbytheparticipant;or(iv)corporatefailure;or(v)anyothersimilarcircumstanceoreventwhichintheviewoftheCommitteehasaseriousadverseeffectontheCompany,anymemberoftheGrouportherelevantbusiness.
6 Detailsofdirectors’servicecontractsaresetoutonpage71.
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Application of the remuneration policyThechartsbelowillustratetheapplicationoftheproposedpolicyforFY2020.Eachelement(asapercentageoftotalremuneration)andthetotalvalueshavebeensetout.
£0
£200,000
£400,000
£600,000
£800,000
£1,000,000
£1,200,000
£1,400,000
£1,600,000
£1,800,000
£1,091,750
£649,250
£354,250
£1,600,204
£967,594
£545,854
43.8%
56.2%
Minimum Target Maximum Minimum Target
Jonathan Bunting Tony Grace
Maximum
21.8%
21.8%
24.7%
31.7%
13.2%
26.4%
26.4%
14.9%
19.2% 100.0%
22.7%
22.7%
54.6%
13.5%
27.0%
27.0%
32.4%
Application of the remuneration policy
LTIP with 50% share price appreciationLTIPAnnual Bonus
Fixed Pay – Supplement from 05/11/19Fixed Pay – from 01/02/19
Notes1. Fixedpaycomprisesannualbasesalary,benefitsandpension,atcurrentratesatthedateofthisreport.However,inthecaseofJonathanBunting,
anadditionalsalarysupplementisincludedwitheffectfrom5November2019inrecognitionofhisnewroleasInterimChiefExecutiveOfficerand,consequently,bothhispensioncontributionandincentiveschemeawardsarepro-ratedasfurtherdescribedinthisreport.
2. BenefitsarethevaluereceivedinFY2019.3. Theon-targetlevelofannualbonusandLTIPis50%ofthemaximumopportunity.4. Themaximumvaluealsoshowstheimpactofanincreaseinsharepriceof50%onthevalueoftheLTIPaward.5. ThevalueofdividendequivalentsonLTIPorDBPvestedawardsareexcluded.
ApproachtorecruitmentremunerationOnappointmentofanewexecutivedirector,theCommitteewouldseektoofferaremunerationpackagewhichcansecureanindividualwiththenecessaryskills,whileseekingtopaynomorethanitbelievesisnecessarytofacilitatetheappointment.Anyremunerationpackagewouldbeinlinewiththeparameterssetoutinthedirectors’RemunerationPolicy.
WhereanindividualforfeitsoutstandingincentiveawardswithapreviousemployerasaresultofacceptingtheappointmentwithintheCompany,theCommitteemayoffercompensatoryawardstofacilitaterecruitment.TheseawardswouldbeinsuchformastheCommitteeconsidersappropriatetakingintoaccountallrelevantfactorsincludingtheform,expectedvalue,performanceconditions,anticipatedvestingandtimingoftheforfeitedawards.Theexpectedvalueofanycompensatoryawardswouldbenohigherthanthevalueforfeited.
AnyshareawardsreferredtointhissectionwillbegrantedasfaraspossibleundertheCompany’sexistingshareandincentiveplans.Ifnecessary,awardsmaybegrantedoutsideoftheseplansascurrentlypermittedundertheUKListingAuthority’sListingRules.
ContractsofserviceandpolicyonlossofofficeContractsofemploymentwithexecutivedirectorsmaybeterminatedatanytimebytheCompanyoremployeeuponupto12months’notice.Thecontractsofemploymentdonotincludeanyprovisionsforpredeterminedcompensationforearlytermination.
TheCommitteemayterminateanemploymentcontractimmediatelybymakingapaymentinlieuofnoticeconsistingofbasesalaryonlyfortheunexpiredperiodofnotice.Innormalcircumstances,suchapaymentwouldbemadeinmonthlyinstalmentsovertheperiod,subjecttoadutytomitigate,andwillbereducedbytheamountinrespectofincomereceivablefromalternativeemployment,excludingasinglenon-executivedirectorship.
Directors’ Remuneration Report cont.
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Intheeventthattheemploymentofanexecutivedirectoristerminated,anycompensationpayablewillbedeterminedinaccordancewiththetermsoftheservicecontractaswellastherulesofanyincentiveplansandpost-cessationshareholdingrequirements.Incentiveswillbetreatedinthefollowingway:
Annualbonus UnlesstheCommitteedeterminesotherwise,executiveswillnotbeeligibleforabonusiftheyareundernotice.
IftheCommitteedeterminesthattheexecutiveisa‘goodleaver’1theymaystillreceiveabonus,reducedtoreflecttheportionoftheyeartheywereinactiveemployment.
Anypaymentwouldremainsubjecttoperformanceandwouldbepaidfollowingthenormalyear-endassessmentprocess.
DBP(deferredannualbonus)
Deferredbonuswillbeinshares,awardedattheoutset,witharequirementfortheexecutivedirectorstoholdthesharesforatwoyeardeferralperiod.Thedeferredshareswouldbesubjecttoclawbackandpost-cessationshareholdingrequirementsandanyheldshareswouldbesubjecttotheexecutiveshareownershiprequirements,includingpost-cessationofemploymentobligations.
LTIP IftheCommitteedeterminesthatanexecutiveisagoodleaverLTIPawardsmayvestsubjecttoperformanceandwouldnormallybescaledbacktoreflecttheportionoftheperformanceperiodthathaselapsedonthedatethatemploymentceases.Theawardswillvestonthenormalvestingdate(otherthaninexceptionalcircumstancessuchasdeathinservicewhentheawardmayaccelerate).Thepost-vestingholdingperiodwillcontinuetoapplyforthefulltwoyearperiod.
IfanexecutiveleavestheGroupforanyotherreason,outstandingawardswouldlapse.
1. Goodleaverreasonsincludedeath,injury,disability,redundancy,retirementbyagreementwiththeCompany,theemployingentitynolongerbeingpartoftheGroup,oranyotherreasonasdeterminedbytheCommittee.
TheCommitteeretainsdiscretiontomakeadditionalexitpaymentswheresuchpaymentsaremadeingoodfaithindischargeofanexistinglegalobligation(orbywayofdamagesforbreachofsuchanobligation)orbywayofsettlementorcompromiseofanyclaimarisinginconnectionwiththeterminationofadirector’sofficeoremployment.Thedetailsandrationaleforanysuchpaymentswouldbedisclosedinthefollowingyear’sdirectors’reportonremuneration.
Externalnon-executivedirectorappointmentsItistheCompany’spolicytoalloweachexecutivedirectortoacceptonenon-executivedirectorshipofapubliclyquotedcompanyprovidedthatitdoesnotconflictwiththeinterestsoftheCompany.Executivedirectorsmayretainthefeeforsuchanappointment.
ConsiderationofpayandemploymentconditionselsewhereintheGroupTheCommitteeconsidersthegeneralbasicsalaryincreaseforemployeesthroughouttheGroupwhendeterminingtheannualsalaryincreasesforexecutivedirectors.Inaddition,theGroupperformancetargetsusedintheexecutivebonusplanarecascadedintobroader-basedannualbonusarrangementsforalleligibleemployeestoensurealignmentacrossthebonusplansandparticipatingpopulations.
AspartoftheBoard’scommitmenttobroaderstakeholderengagementtheCommitteeChairmetwithourNationalColleagueEngagementForumtoexplainthecompany-wideremunerationpolicyandoutlinehowexecutiveremunerationoperates.Thediscussionexploredthepaystructureatdifferentorganisationlevels,inparticularfocusingonthechecksandbalancesinplacetoensurepayforperformanceoverbothshortandlonger-termtimeframes.
ConsiderationofshareholderviewsTheviewsofshareholdersareveryimportanttotheCommitteeandfeedbackreceivedfromshareholdersfollowingpublicationoftheAnnualReportandattheAGMiswelcomed.ItistheCommittee’spolicytoconsultwithitslargestshareholdersandinvestorrepresentativebodiesbeforeproposinganymaterialchangestotheremunerationpolicy.Inlinewithourpolicy,theCommitteeundertookathoroughconsultationwithourlargestshareholderstoinformthepolicyreviewduringtheyear.
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Non-executive directorsThetablebelowsetsouttheCompany’sRemunerationPolicyfornon-executivedirectors:
Element Purpose and link to strategy
Operation Maximum
Chairman’sandnon-executivedirectors’fees
Toattractandretainhigh-calibreindividuals.
Feelevelsaresettoreflectthetimecommitment,demandsandresponsibilityoftherole,takingintoaccountfeespaidbysimilarlysizedcompanies.
Feesarereviewedfromtimetotimetoensurethattheyremaininlinewithmarketpractice.
Feesarepaidinequalmonthlyinstalments.
TheChairman’sfeeincludeshischairmanshipoftheNominationsCommittee.
Thereisnoprescribedmaximum.
Additionalfees Toprovidecompensationtonon-executivedirectorstakingonadditionalresponsibility.
Non-executivedirectors(otherthantheChairman)arepaidanadditionalfeefortheirchairmanshipofaBoardCommitteeoradditionalresponsibility,suchaschairingtheNationalColleagueEngagementForum,ormaybepaidadditionalfeesforsignificantadditionalworkloadorroles.
Thereisnoprescribedmaximum.
Benefits Tofacilitatetheexecutionoftherole.
TheCompanyreimbursesreasonabletravelandsubsistencecosts.
Thereisnoprescribedmaximum.
BasefeesandCommitteefeesfornon-executivedirectorswerelastincreasedin2015.
TheChairmanandnon-executivedirectorsdonotparticipateinanypensionorincentiveplans.
RecruitmentPolicyTheremunerationpackageforanewlyappointednon-executivedirectorwouldbeinlinewiththepolicyoutlinedabove.
LettersofappointmentAllnon-executivedirectors,includingtheChairman,havealetterofappointmentforaninitialthree-yearterm,subjecttoreviewthereafter.Appointmentsmaybeterminatedbyeitherpartygivingthreemonths’notice.
Directors’ Remuneration Report cont.
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Annual report on remunerationTotal remuneration payable in respect of FY2019 (audited)Thetotalremunerationforeachdirectorissetoutbelow.TotalpayinFY2019comprisedbasesalary,benefitsandpension.Asreportedinthissection,givenperformancetargetswerenotmet,nopaymentsweremadeinrespectofboththeFY2019annualbonusplanandtheFY2017-2019LTIPincentiveplan.AstheFY2017-2019LTIPdidnotvestduringtheyear,therehasbeennoimpactofthesharepriceuponremuneration.
JosOpdeweegh3 TonyGrace4 JonathanBunting
Fixed PayFY2019
‘000FY2018
‘000FY2019
‘000FY2018
‘000FY2019
‘000FY2018
‘000
Salary £450 – £243 – £291 £291
Benefits1 £19 – £15 – £30 £32
Pensionbenefits2 £68 – £36 – £61 £59
TotalFixedPay £537 – £294 – £382 £382
Performance Related Pay
Annualbonuspayments £0 – £0 – £0 £0
LTIPawardvesting £0 – £0 – £0 £0
Dividendequivalentpayments5 £0 – £0 – £19 £0
TotalVariablePay £0 – £0 – £19 £0
Total single figure £537 – £294 – £401 £382
Notes1. Benefitsincludethetaxablevalueofacompanycarorcarcashallowance,privatemedicalinsuranceandtheintrinsicvalueofSharesaveoptionsgrantedduringtheyear,asapplicabletoeach
director.2. TheCEOandCFOreceivepensionbenefitsequivalentto15%ofbasesalaryandtheCEOofSmithsNewsreceivespensionbenefitsequivalentto20%ofbasesalarypaidovertheyear.
ThepensionpaymenttotheCEOofSmithsNewsincludesanadjustmentof£2.9kthatwillbecorrectedinthecurrenttaxyear.3. JosOpdeweeghjoinedtheBoardon1September2018.4. TonyGracejoinedtheBoardon5November2018.5. DividendpaymentsequivalenttotheaggregateofalldividendspaidduringthevestingperiodapplicabletobothLTIPandDBP,paidinshares.InthecaseofJonathanBunting,thedividendequivalent
paymentaroseoutoftheexerciseofhisFY2016DBPawardwhichwasexercisedon7February2019andpaidinshares.
Remuneration and link to performance during the year (audited)AnnualbonusInFY2019,eachexecutivehadamaximumopportunityundertheannualbonusof100%ofsalary,split70%onfinancialperformance(forJonathanBunting20%Groupand50%basedonSmithsNews)and30%personalobjectives.
Performancemeasuresandactualperformancewasasfollows:
Measure
Weighting
TargetsActualresult
(£m)Bonus
achievementThreshold Target Max
Groupadj.PBT 70% £23.75m £25.0m £31.25m £23.2m 0
SmithsNewsdivisionadj.OperatingProfit1 50% £66.25 £70.34 £77.90
£72.5mbutbonusreducedtozeroduetothefailuretoachievethe
Groupfinancialunderpin0
Personalobjectives 30% Seedetailbelow Partialachievementintotalitybutstrongperformanceinpart,
reducedtozeroduetothefailuretoachievetheGroupfinancial
underpin
0
1. SmithsNewsandDMDAdjustedoperatingprofitaftercontrollableoverheadallocation.
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Directors’ Remuneration Report cont.
Forthefinancialyearunderreviewtheexecutivedirectorswereeachgivenanumberofpersonalobjectivesagainstwhichtheindividualelementoftheannualbonuswasassessed.Thesearesetoutinthetablebelow.
AsthefinancialunderpinofrequiringGroupadjustedPBTof£22.5mwasnotachieved(aftertakingintoaccounttheaggregatecostofbonusesthatwouldhavebeenmade),theCommitteedeterminedthatnobonuswouldbepayableforthepersonalobjectivesnotwithstandingpartialachievementofperformanceagainstthepersonalobjectivesassetoutinfurtherdetailbelow:
Personal objectives Link to key strategic objectives
Jos Opdeweegh • MaximizecostsavingsatSmithsNews.
• LeadatransformationplantoreturnTuffnellstoprofitability.
• Developaplantoreduceheadofficesupportfunctioncost.
• Developadetailedstrategicplantoidentifyandexecute‘nearadjacent’revenuestreams.
• CostsavingsatSmithsNews.
• Tuffnellsprofitability.
• Efficientheadofficefunctions.
• LeveragingSmithsNews.
Performanceagainstobjectives
WithinSmithsNews,thereintroductionofafocusedmanagementteamimprovedoversightoncostcontrolandhelpedtoaddresstherootcausesofpreviousunder-performance.Tuffnells’returntoprofitabilitywasseverelyimpactedbyanumberofissuesincludingaflowthroughoflegacyweaknesses,uncertaintyinthewidereconomicenvironment,disruptivepricingfromcompetitorsinthesectorandinconsistentserviceperformanceleadingtofurthercustomerattritionand/ordowntrading.ThesetogetherledtoTuffnells’performancebeingmateriallyweaker,resultinginanincreasedlossintheyear.HeadofficecostreductionwasdelayedbytheshiftingfocustoaddresschallengesinTuffnellsbutsomeprogresswasneverthelessachievedthroughthedeploymentofasharedservicecentreinIndiafortheprovisionofselectedback-officesupportfunctionsandazerobasedbudgetingprocesswhichisexpectedtoconcludeinQ1ofFY2020.Near-adjacencystrategywaspurposefullydeprioritisedinordertofocusonotherstrategicobjectives.
Tony Grace • LeadprocessforsaleandleasebackofTuffnellsproperties.
• LeadprocesstobuyoutSNPensionScheme,soastobeontrackforwindupofschemein2020.
• Implementupgraded‘purchasetopay’systemandrevise‘OrdertoCash’and‘RecordtoReport’processes,eachinordertoenhancefinanceefficiency,effectivenessandcontrolenvironment.
• Tuffnellsprofitability.
• CostsavingsatSmithsNews.
• Efficientheadofficefunctions
Performanceagainstobjectives
AdversemarketconditionspreventedsuccessfulcompletionoftheproposedsaleandleasebackofTuffnellsproperties.Goodprogresswasmadeinsecuringthebuy-inoftheSmithsNewsPensionScheme.Implementationoftherevised‘purchasetopay’systemandtherevisionofthe‘OrdertoCash’and‘RecordtoReport’processeshavemadegoodprogressandwillbedeliveredinQ1ofFY2020.FurthergoodprogresswasmadeinstrengtheningtheFinancefunctionanditskeyoutputandcontrols.
Jonathan Bunting • Publishercontractrenegotiation.• Deliver£4.4mof‘inyear’savings.• Tobecompliantacrossallkey
publishercontractualKPIs.• SafetyFirst.
• SmithsNewscontracts.• CostsavingsatSmithsNews.• SmithsNewscontracts.• Culture.
Performanceagainstobjectives
7majorpublishercontractsweresuccessfullyrenegotiatedwhichrepresentover80%ofSmithsNews’currentrevenueshavingbeensecuredthroughtoatleast2024.Thiswasahighlysignificantachievement.£4.4mofinyearsavingsfromtheSmithsNewsbusinessunitweredelivered.AlllocationsachievedkeypublishercontractualKPIs.Losttimeincidentsper100,000hoursworkedweresubstantiallylessthantarget.
MoredetailonourkeystrategicobjectivesisprovidedintheStrategicReportsetoutonpages10and11.
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Long-termincentiveplanLTIPawardsweregrantedinFebruary2017torelevantexecutivedirectorsatthetimesubjecttoperformanceoverathreeyearperformanceperiodFY2017-2019.TheawardsweresubjecttoequallyweightedperformanceconditionsbasedonadjustedbasicEPSachievedinFY2019and50%onaggregateoperatingcashflow.Astheperformancetargetswerenotachieved,theLTIPawardsdidnotvestandaccordinglylapsedinfullasdemonstratedinthetablebelow:
FY2017-2019AwardThreshold
(20%vesting)Maximum
(100%vesting)Actual
performance Vesting
FY2019AdjustedbasicEPS 19.5p 23.0p 7.9p 0%
AggregateOperatingcashflow £163.3m £204.7m £122.4m 0%
Total vesting (% of max) 0%
Performance graph and tableThegraphbelowshowstheCompany’sTotalShareholderReturn(TSR)performanceagainsttheTSRoftheFTSESmallCapIndex(excl.InvestmentTrusts)overthepasttenyears.TheFTSESmallCapIndexwaschosenbecauseitrepresentsabroadequitymarketindexofwhichtheCompanyisaconstituentandisthebenchmarkfortheTotalShareholderReturnperformanceconditionusedfortheFY2020-2022LTIPaward.ThetablebelowthegraphsetsoutthetotalremunerationfortheChiefExecutiveOfficerduringeachofthelasttenfinancialyears.
TotalShareholderReturn
0
50
100
150
200
250
300
August2009
Valu
e (£
)
August2010
August2011
August2012
August2013
August2014
August2015
August2016
August2017
August2018
August2019
Connect Group PLC FTSE All Share Support Services
FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019
ChiefExecutiveOfficertotalremuneration(£’000) 846 862 1,079 1,311 970 1,095 882 794 539 537
Annualbonuspayment(%maximum) 100.0% 59.9% 83.1% 67.1% 12.5% 71.3% 38.9% 15.0% 0.0% 0.0%
EPP1payout(%maximum) 84.1% 79.2% 89.4% 86.8% 55.1% 61.5% 72.0% 72.0% 0.0% N/A
LTIPvesting(%maximum) 0.0% 78.0% 100.0% 100.0% 100.0% 63.5% 0.0% 0.0% 0.0% 0.0%
1. Legacyincentiveplanbasedoneconomicprofit.InFY2018,theCommitteeexerciseditsdiscretionindecidingthatthefinaltranchepaymentwouldnotbeconsideredinFY2019orFY2020aspermittedbytheschemerules.
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Directors’ Remuneration Report cont.
Percentage change in directors’ remunerationThetablebelowshowsthepercentagechangeinthedirectors’salary,benefitsandannualbonusovertherelevantreportingperiodsnotedinthetablecomparedtotheaverageofallUK-basedemployees.ThisgrouphasbeenchosenasthemajorityofourworkforceisUK-based.
%changeFY2017–FY2018 % change FY2018 – FY2019
Basesalary BenefitsAnnualbonus Base salary Benefits
Annualbonus
Chairman 0.0 0.0 – 0.0 0.0 –
ChiefExecutiveOfficer 0.0 (22.8)1 (100.0) 0.0 0.0 0.0
ChiefFinancialOfficer2 – – – 0.0 0.0 0.0
ChiefExecutiveSmithsNews 0.0 6.0 (100.0) 0.0 (4.9) 0.0
Non-executivedirectors3 0.0 0.0 0.0 0.0 0.0 0.0
UKemployees 4.4 8.0 (29.0) 5.6 1.1 4.7
1. TheChiefExecutiveOfficeratthetimerevertedfromacompanycartoacashallowanceduringtheyear,atamuchlowerbeneficialvalue.2. NodataisavailablefortheChiefFinancialOfficerinFY2017-FY2018asthisrolewasfilledbyaninterimposition.3. Non-executivedirectorfeeshavenotincreased.However,forthenewnon-executivedirectorroleofChairoftheNationalColleagueEngagement
Forumasupplementalfeeof£5,000perannumwasintroducedwitheffectfromFY2019.
Chief Executive Officer pay ratio to the workforceThetablebelowshowstheratiooftheChiefExecutiveOfficer’ssinglefiguretotalremunerationtothemedian(50thpercentile),25thand75thpercentilepaidemployee,basedonthetotalremunerationoftheGroup’sfull-timeequivalentUKcolleagues.
Theemployeetotalremunerationincludeswagesandsalary,taxablebenefits,annualbonus,share-basedremunerationandotherincentiveplansandpensionbenefits.Inlinewiththepaygapregulations,wehaveshownthepayratioforFY2018alongsideFY2019.
Year Methodology Population 25thpercentile Median 75thpercentile
FY2019
OptionB
Employeetotalremuneration £16,818 £23,750 £28,448
CEOtoemployeepayratio 31.8:1 22.7:1 18.8:1
FY2018 Employeetotalremuneration £17,446 £19,884 £30,310
CEOtoemployeepayratio 32.4:1 26.3:1 17.8:1
TheCompanyhascalculatedtheratiosinaccordancewiththeOptionBmethodologylaidoutinthepaygapregulationswhichweredeemedthemostreasonableandpracticalapproachgiventhecollationofdataexerciserequiredforthegenderpaygapreporting.
ThecompositionofthetwomainemployingentitieswithintheGroup(SmithsNewsandTuffnells)includesover50%ofcolleaguesinfrontlineoperationalroles.Theseincludewarehouseoperatives(approximately1,900)anddrivers(approximately1,000).Paybetweenthe25thpercentileandthemedianisrepresentativeofwarehouseoperativeandsupervisorroles,whichtypicallyattractpaylevelsatorclosetotheNationalLivingWage.Drivers’salariestypicallysitbetweenthemedianand75thpercentiledependingonclassofvehicle,3.5tonnedriversreceivingaroundthemedian.Thelargeproportionofoperationalrolesthereforeexplainsboththesalariesthatsitatthe25thpercentileandmedianandalsotheproximityofsalariesbetweenthosetwopoints.
Insummary,theGroup’sorganisationalshapeandnatureofoperationexplainsthesalariesateachreportedpercentileandtheratiosbetweentotalemployeeremuneration(atmedian,upperquartileandlowerquartile)andChiefExecutiveOfficertotalremuneration.Duetothediverserangeofroleswithinthebusiness,paypracticedoesvarybutwebelievethatthedataandratiosareatruereflectionofpaywithintheGroup.
Inconsideringthedata,itshouldbenotedthattheChiefExecutiveOfficer’ssinglefiguretotalremunerationforFY2019andforFY2018doesnotincludeanyannualbonusorLTIPpaymentsandthereforerepresentsalowerlevelofremunerationcomparedtohistoricalnorms.Basedonthedirectors’payscenariochartonpage66,andwithbusinessperformancedeliveringattargetormaximumlevelofperformancethepayfortheChiefExecutiveOfficerwouldbelikelytoincreaseatasignificantlyhigherratethanthatofthegeneralemployeepopulationandsotheratioswouldbesignificantlyhigher.Asaconsequence,thisyear’spayratioreportingdoesnotconstituteanormalbaseline.
ThemedianofthedataforemployeetotalremunerationhasincreasedsignificantlyinFY2019comparedtoFY2018.Thisisprimarilyduetostructuralchangesinthepopulationreflectingsignificantinvestmentinincreasingdriver/warehouseoperativepayandbringingagreaternumberofagencydriversontocontractintheTuffnellsbusinesscombinedwiththeimpactofNationalMinimum/LivingWageincreases.
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Relative importance of spend on payThetablebelowillustratestheCompany’sexpenditureonpayincomparisontoAdjustedprofitbeforetax,corporationtaxpaidanddistributionstoshareholdersbywayofdividendpayments.
FY2019 £m
FY2018£m %change
Totalemployeepay–ContinuingOperations 113.5 112.6 0.7%
AdjustedGroupprofitbeforetax–ContinuingOperations 23.2 28.4 (18.3)%
Corporationtaxpaid–ContinuingOperations 2.6 7.2 (63.9)%
Dividendspaid nil 24.1 (100)%
ThefiguresaboveareprincipallysetoutintheGroupincomestatementonpage86andonpages104,108and109intheNotestotheGroupFinancialStatements.TotalemployeepayisthetotalpayforallGroupemployees.AdjustedGroupprofitbeforetaxhasbeenusedasacomparisonasthisisthekeyfinancialmetricwhichtheBoardconsiderswhenassessingCompanyperformance.CorporationtaxpaidanddividendspaidhavealsobeenusedasacomparisonasthesetogetherindicatethesustainableaftertaxanddividendspaidpositionoftheCompanyforreinvestment.
Share plans – awards made during the yearLTIPawardsgrantedinFY2019(audited)On13December2018,thefollowingexecutivedirectorsweregrantedtheFY2019-2021LTIPawards.Assetoutinlastyear’sreport,theawardstotheChiefExecutiveOfficerandChiefFinancialOfficerwereworth100%ofsalaryatthedateofgrant,andtheawardtotheChiefExecutiveOfficerofSmithsNewswasworth50%ofsalaryatthedateofgrant,reflectingthescale-backof50%oftheusualawardof100%ofbasesalary:
ExecutiveSharepriceatdateofgrant1
Numberofnil-costoptions
subjecttoaward
Facevalueofaward
Percentageofawardsreleasedforachieving
thresholdtargets2Performance
period
JosOpdeweegh
36.025p
1,249,132 £450,000
20% FY2019-2021TonyGrace 818,875 £295,000
JonathanBunting 404,319 £145,656
Notes1. Basedontheaverageclosingpriceforthethreedealingdayspriortothedateofgrant,usedtocalculatethenumbersofsharesunderaward.2. 100%forachievingmaximumtargets.
Awardsaresubjecttoequallyweightedperformanceconditionsbasedon(i)adjustedbasicEPSachievedinFY2021(asdefinedbyIAS33,beforeAdjustedItems(previously,exceptionalornon-recurringitems)andtheirassociatedtaximpact,adjustedbytheCommitteeasconsideredappropriatetoensureconsistency)and(ii)aggregatecashflowfromoperationsachievedoverthethreeyearstoFY2021.
Theperformanceconditionsappliedtotheawardswereasfollows:
PerformanceperiodAdjustedEPSinfinalyearof
performanceperiod(FY21)Aggregatecashflowfrom
operationsoverthreeyearsProportion
exercisable
Threeyearsending31August2021
Below9.8p £125m Zero
9.8p £125m 20%
Between9.8pand12.3p Between£125mand£150m 20%-100%
12.3pormore £150mormore 100%
DeferredBonusPlanawardsgrantedinFY2019(audited)AstherewasnobonuspaymentforFY2018,nodeferredBonusPlanawardsweregrantedduringtheyear.
SharesaveSchemeawardsgrantedinFY2016(audited)On26June2019,TonyGracewasgranted59,210sharesatanoptionpriceof30.4ppershare(thefacevalueoftheawardwas£18,000).
ThemaximumamountwhichcanbesavedpursuanttotheSharesaveSchemeis£500permonth,thetotalsavingsattheendofthetermbeingusedtopurchasesharesat80%oftheirmarketvalueatthestartofthesavingscontract.Incommonwithmostschemesofthistype,therearenoperformanceconditionsapplicabletooptionsgrantedundertheSharesaveScheme.
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Payments to former DirectorsAsannouncedon6November2019,JosOpdeweeghsteppeddownfromtheBoardwithimmediateeffect.
InaccordancewithJosOpdeweegh’sservicecontractandtheCompany’sdirectors’remunerationpolicy,thefollowinghasbeenagreed:
• giventhatJos’scontractualnoticeperiodfromtheCompanyis12months,theCompanyhaselectedtoterminateJos’semploymentwithimmediateeffectbygivinghimwrittennoticethatitwillmakeapaymentinlieuofnotice(PILON),representinghisgrossannualbasicsalaryof£450,000butexcluding(i)anybonus,(ii)anypaymentinlieuofpensioncontributionsorotherbenefitsand(iii)anypaymentinrespectofanyholidayentitlementthat,ineachcase,wouldotherwisehaveaccruedduringthenoticeperiod.ThepaymentstoJoswillbephasedinmonthlyinstalmentsover12monthsandanypaymentshallbereducedbytheamountinrespectofincomereceivablefromalternativeemploymentinaccordancewiththedutyonhisparttomitigateloss.
• Joswillnotbeeligibleforanannualbonusforthefinancialyearending29August2020.• JoswillnotreceiveanyfutureawardundertheCompany’slong-termincentiveplan.Anyoutstandingawards
undertheCompany’slong-termincentiveplan(includingthegrantmadeon13December2018inrespectofanawardofupto1,249,132shares)willlapse.
• InrecognitionofthelowervalueofthepaymentsunderthePILONcomparedtoserving12months’noticetoterminatehisemployment,togetherwiththeforfeitureoftheFY2020bonusopportunityandtheFY2020-2022LTIPaward,theCommitteeintendstoapplyitsdiscretionnottorequestJostorepaythevalueofthemodestrelocationallowanceof£19,174whichhereceivedonappointment.Thiscoveredaone-waybusinessclassairfareforJosandhisfamily,oneweeks’accommodationinaservicedapartmentandassistancewithvisarequirements,allrelatedtoamovefromtheUSA.
Inaccordancewiththeschemerules,JoswillbeeligibletothereturnofanysavingshehasmadeforthepurposeoftheCompany’sSaveAsYouEarnScheme.
Asdisclosedinlastyear’sAnnualReport,MarkCashmoresteppeddownfromtheBoardattheendofFY2018,butremainedwiththebusinessuntil28September2018toensureasmoothtransitiontothenewleadership.Markcontinuedtoreceivehisbasicsalary,benefitsandpension,subjecttooffsetagainstearningsreceivedelsewherefromanyotherexecutiveroleuntil30June2019.
Therehavebeennopaymentstoanyotherformerexecutivedirectors.
Employee Benefit TrustTheCompany’sEmployeeBenefitTrustisusedtofacilitatetheacquisitionofordinarysharesintheCompanytosatisfyawardsgrantedundertheCompany’sexecutiveshareschemesandSharesaveScheme.TheTrustisadiscretionarytrust,thesolebeneficiariesbeingemployees(includingexecutivedirectors)andformeremployeesoftheCompany.TheTrustwaivesitsrighttovoteandtodividendsonthesharesthatitholds.
TheTrusteeisComputershareTrustees(Jersey)Limited,anindependentprofessionaltrusteecompanybasedinJersey.
ThenumberofsharesheldintheEmployeeBenefitTrustat31August2019was1,188,537ordinaryshares.TheaccountingtreatmentisshownintheGroupstatementofchangesinequityonpage185.Duringtheyear,theBoardresolved(untilotherwiseagreed)tosatisfyallfutureemployeeshareschemeexercisesthroughtheEmployeeBenefitTrustusingmarketpurchasedsharesandintendstoinstigateaplanforsharepurchasestocoverlikelyfuturecommitments.
Dilution of share capital by employee share plansAwardsgrantedundertheCompany’sSharesaveSchemehave,inthepast,beensatisfiedbytheissueofnewshareswhentheoptionsareexercised.TheCompanymonitorsthenumberofsharesissuedundertheSharesaveSchemeandasat31August2019hadissued3,513,505newshareswithinthepastten-yearperiod,representing1.42%oftheissuedsharecapital.Thisiswellwithinourdilutionlimitof10%inanyrollingten-yearperiodintheSharesaveSchemerulesandinlinewiththeguidelinessetbytheInvestmentAssociation.
Directors’ Remuneration Report cont.
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Executive directors’ share interests (audited)Thetablebelowsetsoutdetailsofoutstandingshareawardsheldbyexecutivedirectorsasat31August2019undertheLTIPandDBP(coveringdeferredannualbonusandlegacyEPPawards).Awardsundertheseschemesarestructuredasnilcostoptions.Inaddition,thetablesetsoutawardsheldbyexecutivedirectorsasat31August2019pursuanttotheSharesaveschemewhereparticipantsmaybuyshareswithsavingsmadeoverathreeyearperiod(uptoHMRClimitsof£500permonth)forafixedpricedeterminedatgrant.
Shareawards
Withperformance
measures
Withoutperformance
measures
Vestedbut
unexercised
Exercised/Vestingduring
theyear
JosOpdeweegh 1,249,132 0 0 0
TonyGrace 818,875 59,210 0 0
JonathanBunting 883,288 88,995 0 146,7261
1. InFebruary2019,JonathanBuntingexercisedhisFY2016DBPawardinrespectof97,649sharesandadividendequivalentpaymentof£18,943whichwaspaidbywayofanadditional49,077shares.Followingthedeductionoftax,aresidualallocationof77,623shareswasawardedtoJonathanBuntingandhasbeenretainedpursuanttotheshareholdingguidelines(seebelow).
Executive directors’ shareholdings and shareholding guidelinesTheshareholdingguidelineforexecutivedirectorsis200%ofsalary.Untilthislevelisreached,exceptforpaymentoftaxarisingontheexercise/vestingofawardsandotherexceptionalcircumstances,executiveswillberequiredtoretain75%ofthesharesvestingundershareincentivearrangements(excludingtheapplicationoftheSharesavescheme).ThetablebelowsetsoutthebeneficialinterestsoftheexecutivedirectorswhoservedduringthereportingperiodintheordinarysharesoftheCompany,togetherwiththelevelheldagainsttheshareholdingguidelines.
Name Salary
Holdingat31August
2018
Holding at 31 August
2019
Valuationofcurrent
holding1
%ofsalaryheldcompared
to200%ofsalarytargetshareholding
JosOpdeweegh £450,000 0 535,935 £194,544 43.2%
TonyGrace £295,000 0 100,727 £36,563 12.4%
JonathanBunting £291,312 370,876 448,499 £162,805 55.9%
1.Usingsharepriceof36.3pasat31August2019.
Between1September2019and5November2019(thepublicationdateofthisreport),therehasbeennootherchangeintheexecutivedirectors’shareholdingsshownabove.
Contracts of employmentDetailsofthecontractsofemploymentfortheexecutivedirectorswhoservedduringtheyearareasfollows:
Executive DateofcontractNoticeperiodbyCompany
Noticeperiodbydirector
JonathanBunting1 1April2010 12months 9months
JosOpdeweegh 29July2018 12months 12months
TonyGrace 5November2018 12months 9months
1.JonathanBunting’sservicecontracthasnotbeenchangedforhisnewroleofInterimChiefExecutiveOfficer.
Non-executive directorsLettersofappointmentAllnon-executivedirectors,includingtheChairman,havealetterofappointmentforaninitialthree-yearterm,whichcanbeterminatedbyeitherpartygivingthreemonths’notice,assetoutinthetablebelow.
Non-executive Dateofappointment Noticeperiod
GaryKennedy 2March2015 3months
DeniseCollis 1December2015 3months
MichaelHolt 1October2018 3months
MarkWhiteling 1September2017 3months
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Non-executivedirectors’feesThefeespaidtonon-executivedirectors(excludingtheChairman)compriseabasefeeof£40,000,withanadditionalfeeof£10,000forchairingtheAuditorRemunerationCommittee,anadditionalfeeof£5,000forchairingtheNationalColleagueEngagementForumandanadditionalfeeof£5,000fortheroleofSeniorIndependentDirector.BasefeesandCommitteeChairFeeshaveremainedunchangedsince2015.
Asnotedelsewhereinthisreport,theannualfeeforMichaelHolthasincreasedtemporarilyby£205,000fortheintendedshort-termdurationofhistenureasExecutiveChairmanofTuffnells.
Thefollowingfeeswerepaidtonon-executivedirectorsforFY2019andFY2018(audited):
YearBasefee
£000
Additionalfees
£000Benefits1
£000Totalfees
£000
GaryKennedy2FY2019 140 12 152
FY2018 140 – 11 151
DeniseCollisFY2019 40 10 2 52
FY2018 40 10 2 52
MarkWhiteling4FY2019 40 15 2 60
FY2018 40 13 4 57
MichaelHolt3FY2019 40 1 3 44
FY2018 – – – –
1. ThebenefitsdisclosedrelatetothereimbursementoftravelandaccommodationexpensesincurredinattendingBoardmeetingsattheCompany’spremisesaroundtheUK.Thegrossed-upvaluehasbeendisclosedandthetaxarisingissettledbytheCompany.
2. GaryKennedyispaidasinglefeewhichincludeschairmanshipoftheNominationsCommittee.3. MichaelHoltjoinedtheBoardon1October2018andisChairoftheNationalColleagueEngagementForum.4. MarkWhitelingsucceededAndrewBrentasSeniorIndependentDirectoron23January2018andreceivedanadditional£5,000peryearpro-rated
forFY2018forthisadditionalrole.
Non-executive directors’ shareholdings (audited)Thebeneficialinterestsofthenon-executivedirectorswhoservedduringthereportingperiodaresetoutbelow:
31 August 2019
31August2018
GaryKennedy 60,000 60,000
DeniseCollis 48,846 48,846
MarkWhiteling 80,000 80,000
MichaelHolt 0 N/A
Therehasbeennochangeinthenon-executivedirectors’shareholdingsshownabovebetween1September2019and5November2019.
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Implementation of the Remuneration Policy in FY2020 Executive directorsSalariesForthedurationofhisappointment,theInterimChiefExecutiveOfficerwillreceiveanannualisedsalarysupplementof£158,688inadditiontohisbasesalaryof£291,312,resultinginatotalannualisedsalaryof£450,000,thesameashispredecessor.TheChiefFinancialOfficer’ssalaryisunchangedat£295,000.
Thenextsalaryreviewwillbeon1September2020asnotedinthedirectors’remunerationpolicy,inordertoalignwiththeCompany’sfinancialyearend.
PensionThepensionforJonathanBuntinginhisroleasChiefExecutiveofSmithsNewswas20%ofsalary.Thishasbeenreducedto15%oftotalsalaryfrom5November2019forthedurationofhisappointmentasInterimChiefExecutiveOfficer,beingthesamepercentagepensioncontributionashispredecessorandtheChiefFinancialOfficer.Asnotedearlierinthisreport,themonetaryvalueofpensioncontributionswillbefrozenatFY2019contributionlevels.IntheeventthattheInterimChiefExecutiveOfficerisappointedpermanentlyintotheroleofChiefExecutiveOfficeroftheGroup,hispensioncontributionwouldreducetotherateappliedtothemajorityoftheworkforce,currently4%ofbasesalary.
BonusBonusopportunitywillremainat100%ofbasesalary.FortheInterimChiefExecutiveOfficerthiswillbebasedontheactualbasesalaryplussalarysupplementreceivedoverthecourseoftheyear.70%ofthebonuswillbebasedonarangeofGroupAdjustedPBTtargetsand30%ofthebonuswillbebasedonindividualobjectiveslinkedtostrategyandleadership.
50%ofthemaximumbonuswillbepaidoutforboththefinancialandpersonalobjectivesforon-targetperformance.TheCommitteewillapplydiscretionastowhetheranypaymentshouldbemadeontheindividualelementofthebonusintheeventthattheGroupfinancialtargetsarenotmet.Indoingso,theCommitteewillensurethattheoverallprofitabilityoftheGroupremainsakeyfactorinitsdecisionmaking.Consistentwithlastyear,therewillbearequirementforaminimumindividualperformanceratingtobeachievedbeforetheGroupfinancialperformanceelementmaybepaid.
Theperformancetargetsareconsideredcommerciallysensitivesowillnotbedisclosedinadvance.However,therewillbefulldisclosureofthetargetsthatwereset,theperformanceagainstthemandthebonuspayable,innextyear’sAnnualReport.
LTIPLTIPawardsareexpectedtobegrantedwithin42daysfollowingpublicationoftheCompany’spreliminaryfinancialresultsforFY2019coveringtheperformanceperiodFY2020-2022.
TheLTIPgrantlevelsfortheFY2020-2022awardfortheInterimChiefExecutiveOfficerwillbe100%ofbasesalary.Thiswillbecalculatedbasedontwomonthsbasesalaryplustenmonthsofcombinedbasesalaryandsalarysupplement.IntheabsenceofknowinganexactenddatefortheInterimChiefExecutiveOfficer’srole(althoughitisreasonablyprudenttoassumethatitwillcontinueforthemajorityofFY2020),andgiventhattheawardwillbemadeshortly(unlikethebonusawardwhichwillbeconsideredaftertheendofthefinancialyear),theRemunerationCommitteehasdeterminedthatthiswasthemoststraightforwardapproachtotake.Inaddition,theLTIPgrantfortheChiefFinancialOfficerwillbe100%ofbasesalary.However,forboththeInterimChiefExecutiveOfficerandtheChiefFinancialOfficer,theCommitteehasdeterminedthattheLTIPawardwillbebasedoneither30pashareortheactualsharepriceatthedateofgrant,whicheveristhehigher.
TheLTIPawardwillbesubjecttostretchingEPSandTSRperformanceconditions.Theperformanceconditionsaresetoutbelow:
Measure WeightingThreshold
(20%vests)Maximum
(100%vests)
AdjustedbasicEPSinfinalyearofperformanceperiod 50% 10.0p 13.0p
RelativeTSRversusthecompaniescomprisingtheFTSESmallCapindexasatthedateofgrant 50% Median Upperquartile
TheCommitteehasreviewedtheLTIPperformancemeasuresanditsalignmenttothebusinessstrategyandshareholders’interests.Aftercarefulconsideration,theCommitteehasreplacedthecumulativecashflowmeasurewitharelativetotalshareholderreturnperformancemetric,comparingtheCompany’sstockmarketperformance(sharepriceplusdividends)againstthecompaniescomprisingtheFTSESmallCapIndex.TheCommitteewishestoaddanelementofTSRtoprovideamoredirectincentivetomanagementtoimprovetheCompany’ssharepriceanddividendperformancevspeersinasustainableandlong-termmannerandensurecommonalignmentwiththelong-terminterestsofourshareholders.TheTSRelementwillaccountfor50%ofanaward,withtheremaining50%beingbasedonAdjustedbasicEPSperformancemeasuredoverthreeyearstoFY2022.EPSwillstillprovideastrongfocusonourlong-termfinancialperformance.AlthoughcashflowhasbeenremovedasaperformancemeasurefortheLTIP,thereisastrongcashflowdisciplinethroughoutthemanagementteamandtheBoardremainsparticularlymindfuloftheviewsofsomeofourshareholdersandintendstothereforemaintainadeeplevelofoversightofongoingcashflow.
TheEPSrangerepresentssignificantgrowth(c.32%-71%abovetheFY2019outturn),isaheadofanalystconsensusEPSatthetimeofwritingandaheadoftherangesetforlastyear’sLTIPawards.
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Non-executive directorsNon-executivedirectors’feesinFY2020Therewillbenochangetothestandardnon-executivedirectorbasefeeandCommitteeChairfeesinFY2020.Forthedurationofhistimeinrole(whichisexpectedtobeonlyofashort-termnature),MichaelHoltwillreceiveanadditionalfeeontopofhiscurrentnon-executivedirectors’fees,of£205,000perannum.Hewillnotreceiveanybenefitsorperformancerelatedpay.
Consideration by the directors of matters relating to Directors’ RemunerationRemunerationCommitteeGaryKennedyisnon-executivechairmanoftheBoardandwasdeemedindependentonappointment.AllothermembersoftheCommitteeareindependentnon-executivedirectors.MichaelHoltjoinedtheBoardandbecameamemberoftheCommitteeon1October2018.AsreferredtointheCorporateGovernancereport,inlightofMichaelHolttakingonthetemporaryroleofExecutiveChairmanofTuffnells,MichaelHoltwillstepdownfromtheCommitteeforthedurationofthistemporaryrole.
InadditiontotheformalnumberofCommitteemeetingssetoutbelow,membersregularlyengagedthroughouttheyearinconsideringvariousothermattersthataroseundertheremitoftheCommittee.
Meetingsattended
Possiblemeetings
DeniseCollis 6 6
GaryKennedy 6 6
MarkWhiteling 6 6
MichaelHolt1 5 5
1. MichaelHoltjoinedtheBoardon1October2018andattendedallCommitteemeetingsoccurringafterthatdate.
TheCommittee’stermsofreference,whichareavailableontheCompany’swebsitewww.connectgroupplc.comandfromtheCompanySecretaryonrequest,setouttheresponsibilitiesoftheCommittee.
Duringtheyear,theCommitteewassupportedinitsworkbyitsappointedexternaladvisers,KornFerry,whowerepaidfeesof£77,860(plusVAT).KornFerryhasnoconnectionwiththeCompanyorthedirectors.BasedonitsexperienceofworkingwiththeadviserstheCommitteeissatisfiedthattheadvicereceivedfromKornFerryhasbeen,andcontinuestobe,objectiveandindependent.KornFerryprovidesnootherservicestotheCompanythatcouldpotentiallyleadtoaconflictofinterestwiththeindependentadvicetotheCommittee.
KornFerryisafoundermemberoftheRemunerationConsultants’Groupand,assuch,voluntarilyoperatesunderthecodeofconductinrelationtoexecutiveremunerationconsultingintheUK.Thecodeofconductcanbefoundatwww.remunerationconsultantsgroup.com.
JosOpdeweegh(formerChiefExecutiveOfficer),StuartMarriner(CompanySecretary&GeneralCounsel)andtheHeadofRewardalsoattendedCommitteemeetingsintheyearbutwerenotpresentwhentheirownperformanceorremunerationwasdiscussed.
ShareholdervoteAtthe2017andthe2019AnnualGeneralMeetings,shareholderswereaskedtoapprovetheremunerationpolicyandFY2018Directors’Remunerationreportrespectively.Thevotesreceivedwere:
Resolution Votesfor
Percentageofvotescast
infavourVotes
against
Percentageofvotescast
againstTotal
votescastVotes
withheld
ToapprovetheRemunerationPolicy–the2017AGM 165,987,901 94.21% 10,203,503 5.79% 176,191,404 1,832,869
ToapprovetheDirectors’Remunerationreportfortheyearended31August2018–the2019AGM
144,131,838 99.71% 424,137 0.29% 144,555,975 2,029,008
ApprovalThisreportwasapprovedbytheBoardandsignedonitsbehalfby:
Denise CollisRemunerationCommitteeChair5November2019
CONNECT GROUP ANNUAL REPORT 2019 GOVERNANCE 75
Directors’ reportThisAnnualReportandtheGroupFinancialStatementsincludetheDirectors’ReportandtheauditedfinancialstatementsofConnectGroupPLC(the‘Company’)anditssubsidiaries(the‘Group’)fortheyearended31August2019.TheinformationrequiredtobedisclosedintheDirectors’ReportisprovidedinthefollowingsectionsoftheAnnualReport,whichareincorporatedintothisDirectors’Reportbyreference:
• StrategicReportonpages2to31;• CorporateGovernancereportonpages36to43;• AuditCommitteereportonpages44to50;• NominationsCommitteereportonpages51to53;• Directors’Remunerationreportonpages54to74;• thissection,Otherstatutorydisclosures;• Directors’Responsibilitiesstatementonpage79;and• NotestotheGroupFinancialStatementsasdetailedinthissection.
ThisDirectors’Reporthasbeendrawnupandpresentedinaccordancewith,andinrelianceuponapplicableEnglishcompanylaw,andtheliabilitiesofthedirectorsinconnectionwiththosereportsshallbesubjecttothelimitationsandrestrictionsprovidedbysuchlaw.
Non-financial information statementTheCompanyhascompliedwiththerequirementsofs414CBoftheCompaniesAct2006byincludingcertainnon-financialinformationwithintheStrategicReportasfollows:
• Thebusinessmodelonpage6;• Informationonenvironmental,employee,social,humanrights,anti-corruptionandanti-briberymatters
(non-financialmatters),includingtherelevantpolicies,duediligenceprocessimplementedinpursuanceofthepoliciesandoutcomesofthosepolicies,onpages28to31;
• Principalandemergingrisksidentifiedinrelationtonon-financialmatters,includingadescriptionofthebusinessrelationships,productsandserviceswhicharelikelytocauseadverseimpactsinthoseareasofrisk,andadescriptionofhowtheprincipalrisksaremanaged,onpages22to25;
• AllKeyPerformanceIndicators(KPIs),includingthoseinrelationtonon-financialmatters,areonpage11;and• TheFinancialReview,whichincludeswhereappropriate,referencesto,andadditionalexplanationsof,
amountsincludedintheGroupFinancialStatementsonpages16to21.
Subsidiaries and branchesTheCompany’soperatingsubsidiaries,branchesandassociatedundertakingsarelistedinNote34totheGroupFinancialStatements.
Post balance sheet eventsOn23September2019,theGroup’ssubsidiary,TuffnellsParcelsExpressLimited(Tuffnells),exchangedcontractsinrespectoftheproposedsaleandleasebackofsixdistributiondepots,ofwhichthreewerefreeholdandthreewerelongleaseholdproperties,toUrbanLogisticsPropCo1(AC)Limited(UrbanLogistics),asubsidiaryofUrbanLogisticsREITplc.Completionsubsequentlytookplaceon27September2019.
ThesalepricereceivedfromUrbanLogisticswas£9.9m.Atcompletion,thisfirsttrancheofpropertieswassubsequentlyleasedbackfromUrbanLogisticson20yearleaseterms,withmarketrentspayableat£0.7mperannum,subjecttomarketinflation.Ineachcase,theleasesareguaranteedbytheCompany.TheexpectedimpactunderIFRS16willbetorecogniseagainondisposalof£0.7m,aleasecreditorof£8.0m,arightofuseassetof£3.2m,annualdepreciationof£0.2mandyear1interestof£0.4m.
Profit attributable to shareholders and dividendsThestatutorylossforthefinancialyear,aftertaxation,fromtheContinuingOperationswas£31.5m(FY2018:£38.1m).Therewerenodiscontinuedoperationsintheyear(FY2018:lossof£8.9m).Inaggregate,thestatutorylossforthefinancialyear,aftertaxation,fromboththeContinuingOperationsandDiscontinuedOperationswas£31.5m(FY2018:£47.0m).
InlightoftheGroup’sperformance,theBoardhasdecidedtorecommendafinaldividendof1.0p.Accordingly,thetotaldividendfortheyearended31August2019was1.0pperordinaryshare(FY2018:3.1p).
UK referendum (Brexit)FollowingtheoutcomeoftheUKreferendumon23June2016toleavetheEU,thereremainanumberofuncertaintiesregardinghowtheexitwillbeachievedandwhatarrangementsmaybeputinplaceasaresult.TheGrouphasestablishedaBrexitsteeringcommitteewhichmeetsonaregularbasistodiscussthekeyimpactsoftheBrexitdecisionandreportstotheExecutiveTeam.Wecontinuetoseekwaystomitigatepotentialrisksand,inthemeantime,webelievethatthedirectimpactofBrexittotheGroupwillbemutedbuttheindirectimpactongeneralconsumerconfidenceandmarketuncertaintytohavegreatersignificanceacrosseachofourbusinesses.WewillcontinuetomonitortherisksanduncertaintiesarisingfromBrexitwithintheGroup’sexistingriskmanagementandcontrolprocessasoutlinedonpage22.
Directors’ Report – Other Statutory
Disclosures
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Share capitalTheCompany’sissuedsharecapitalcomprisesasingleclassofordinarysharesof5peach.Allissuedsharesarefullypaid,canbeheldincertificatedoruncertificatedformandarelistedontheLondonStockExchange.DetailsofmovementsintheissuedsharecapitalduringtheyearcanbefoundinNote28totheGroupFinancialStatements.
TherightsandobligationsattachingtotheCompany’sordinaryshares,inadditiontothoseconferredontheirholdersbylaw,aresetoutintheCompany’sArticlesofAssociation(Articles),acopyofwhichcanbeobtainedfromCompaniesHouseorfromtheCompany’swebsitewww.connectgroupplc.com.TheCompany’sArticlesmayonlybeamendedbyaspecialresolutionoftheCompany.Subjecttoapplicablestatutes,sharesmaybeissuedwithsuchrightsandrestrictionsastheCompanymaybyordinaryresolutiondecide,or(ifthereisnosuchresolutionorsofarasitdoesnotmakespecificprovision)astheBoardmaydecide.
HoldersofordinarysharesareentitledtoattendandspeakatgeneralmeetingsoftheCompany;toappointoneormoreproxiesand,iftheyarecorporations,toappointcorporaterepresentatives;andtoexercisevotingrights.HoldersofordinarysharesmayalsoreceiveadividendandonaliquidationmayshareintheassetsoftheCompany.Inaddition,holdersofordinarysharesareentitledtoreceivetheCompany’sAnnualReportandAccounts.Subjecttomeetingcertainthresholds,holdersofordinarysharesmayrequireageneralmeetingoftheCompanytobeheldorproposeresolutionstobeconsideredatAnnualGeneralMeetings.
Voting rights and restrictions on transfer of sharesOnashowofhandsatageneralmeetingoftheCompany,everyholderofordinarysharespresentinpersonorbyproxyandentitledtovotehasonevoteandonapolleverymemberpresentinpersonorbyproxyandentitledtovotehasonevoteforeveryordinaryshareheld.NoneoftheordinarysharescarryanyspecialrightswithregardtocontroloftheCompany.ElectronicandpaperproxyappointmentsandvotinginstructionsmustbereceivedbytheCompany’sRegistrarsnotlaterthan48hoursbeforeageneralmeeting.However,whencalculatingthe48-hourperiod,noaccountistakenofanypartofadaythatisnotaworkingday.
Thedirectorsmayrefusetoregisteratransferofacertificatedshare:whichisnotfullypaid,providedthattherefusaldoesnotpreventdealingsinthesharesintheCompanyfromtakingplaceonanopenandproperbasis;oronwhichtheCompanyhasalien.Thedirectorsmayalsorefusetoregisteratransferofacertificatedshareunlesstheinstrumentoftransfer:(i)islodgedattheoffice,orsuchotherplaceasthedirectorsmaydecideaccompaniedbythecertificateforthesharetowhichitrelatesandsuchotherevidence(ifany)asthedirectorsmayreasonablyrequiretoshowtherightofthetransferortomakethetransfer;(ii)isinrespectofonlyoneclassofshares;and(iii)isinfavourofnotmorethanfourtransferees.
TransfersofuncertificatedsharesmustbecarriedoutusingCRESTandthedirectorscanrefusetoregisteratransferofanuncertificatedshareinaccordancewiththeregulationsgoverningtheoperationofCREST.
TherearenootherrestrictionsonthetransferofordinarysharesintheCompanyotherthanthoseimposedbyprevailinglawsandregulations(suchasinsidertradinglawsandmarketrequirementsinrespectofcloseperiods).
TheCompanyisnotawareofanyagreementsbetweenshareholdersthatmayresultinrestrictionsonthetransferofordinarysharesoronvotingrights.
Shares held by the Employee Benefit TrustTheTrusteeoftheSmithsNewsEmployeeBenefitTrustholdsordinarysharesoftheCompanyonbehalfofthebeneficiariesoftheTrust,whoaretheemployeesandformeremployeesoftheGroup.Ifanyofferismadetotheholdersofordinarysharestoacquiretheirshares,theTrusteewillnotbeobligedtoacceptorrejecttheofferinrespectofanyshareswhichareatthattimesubjecttosubsistingoptions,butwillhaveregardtotheinterestsoftheoptionholdersandcanconsultthemtoobtaintheirviewsontheoffer,andsubjecttotheforegoing,theTrusteewilltaketheactionwithrespecttotheofferitthinksfair.TheTrusteewaivesitsrighttovoteandtodividendsonthesharesthatitholds.FurtherdetailsontheTrustcanbefoundintheDirectors’Remunerationreportonpage54.
Purchase of own sharesAttheAnnualGeneralMeetingheldon31January2019,authoritywasgivenfortheCompanytopurchase,inthemarket,upto24,765,920ordinarysharesof5peach.TheCompanydidnotusethisauthoritytomakeanypurchasesofitsownsharesduringFY2019.ThisauthorityisrenewableannuallyandapprovalwillbesoughtfromshareholdersattheAnnualGeneralMeetingin2020torenewtheauthorityforafurtheryear.
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Issue of new ordinary sharesTheBoardhasresolved,untilotherwiseagreed,tosatisfyallfutureemployeeshareschemeexercisesthroughtheEmployeeBenefitTrust(furtherdetailsontheEmployeeBenefitTrustandmarketpurchasesaresetoutinDirectors’Remunerationreportonpage70).Accordingly,duringtheyearended31August2019,noordinarysharesintheCompanywereissued.
Anynewlyissuedordinarysharesrankparipassuwiththosepreviouslyinissue.TheArticlesprovidethattheBoardmay,subjecttothepriorapprovaloftheCompany’sshareholders,exerciseallthepowersoftheCompanytoallotrelevantsecuritiesincludingnewordinaryshares.
Interests in voting rightsAsat31August2019,theCompanyhadbeennotified,pursuanttotheFinancialConductAuthority’sDisclosureandTransparencyRule5,ofthefollowingnotifiableinterestsinitsissuedsharecapital:
Holder%ofvoting
rights
AberforthPartnersLLP 13.1
FidelityInternationalLimited 10.0
SilchesterInternationalInvestorsLLP 9.9
FORUMFamilyOfficeValueFund 8.0
AmeripriseFinancial,Inc. 4.8
HargreaveHaleLimited 3.8
FORUMSmallcapFund 3.0
Intheperiod1September2019to5November2019theCompanywasnotified(on11September2019)thatFidelityInternationalLimitedhadreduceditsrelevantshareholdinginterestto9.9%.On16October2019,theCompanywasinformedthatFORUMSmallcapFundhadincreaseditsrelevantshareholdingto4.09%.
Exceptfortheabove,theCompanyisnotawareofanyordinaryshareholderswithinterestsin3%ormoreofthevotingrightsattachedtotheissuedsharecapitaloftheCompany.
Change of control EachoftheCompany’stradingsubsidiarieshasagreementswithcustomersandsuppliersthatmaycontainchangeofcontrolclausesgivingrightstothosecustomersandsuppliersonatakeoveroftheCompany.
AchangeofcontroloftheCompanyfollowingatakeoverbidmaycauseanumberofotheragreementstowhichtheCompanyand/oroneormoreofitssubsidiariesisparty,suchasbankingarrangements,propertyleasesandlicenceagreementstoalterorbecapableofterminationattheelectionofthecounterparty.
TheCompanydoesnothaveagreementswithanydirectororemployeethatwouldprovidecompensationforlossofofficeoremploymentresultingfromatakeoverexceptthatprovisionsoftheCompany’sshareschemesmaycauseoptionsandawardsgrantedtoemployeesundersuchschemestovestonatakeover–therelevantschemerulesstatingthatasaresultofachangeofcontrolevent(orothercorporateaction)theproportionoftheawardwhichmayvestshallbelimited(unlesstheBoarddeterminesotherwise)toaprorataproportiononthebasisofthenumberofwholemonthswhichhaveelapsedfromthefirstdayoftheperformanceperiodtothedateofthecorporateaction,ascomparedtothenumberofwholemonthswithintheperformanceperiod;anyremainderoftheawardtherebylapsing.
DirectorsThedirectorswhoservedduringtheyeararesetoutonpage36withtheexceptionof(i)MichaelHoltwhojoinedtheBoardon1October2018,(ii)TonyGracewho,havingjoinedtheGrouponaninterimbasisinJune2018,wasappointedtotheBoardfollowingasuccessfulinductionon5November2018,and(iii)JosOpdeweegh,whoservedthroughouttheyearasChiefExecutiveOfficerbutwho,on5November2019,steppeddownasadirectorandChiefExecutiveOfficerandwasreplacedbyJonathanBuntingasInterimChiefExecutiveOfficer.
ThedirectorsareresponsibleforthemanagementofthebusinessoftheCompanyandmayexerciseallthepowersoftheCompanysubjecttoapplicablelegislationandregulationandtheCompany’sArticles.
TheCompany’sArticlesgivepowertotheBoardtoappointdirectorsand(wherenoticeisgivensignedbyalltheotherdirectors)removeadirectorfromoffice.TheyalsogiveapowertotheCompanytoappointdirectors(byordinaryresolution)andremoveadirectorfromoffice(byspecialresolutionorbyordinaryresolutionofwhichspecialnoticehasbeengiven).
TheinterestsofthedirectorsandtheirimmediatefamiliesinthesharecapitaloftheCompany,alongwithdetailsofdirectors’shareoptionsandawards,aresetoutintheDirectors’Remunerationreportonpages69,71and72.
AtnotimeduringtheyeardidanyofthedirectorshaveamaterialinterestinanysignificantcontractwiththeCompanyoranyofitssubsidiaries.
TheCompanymaintainsdirectors’andofficers’liabilityinsurancewhichgivesappropriatecoverforanylegalactionbroughtagainstitsdirectors.TheCompanyhasalsoprovidedanindemnityforitsdirectorsandsecretaryandforthedirectorsofitsassociatedcompanies,totheextentpermittedbylaw,whichisaqualifyingthirdpartyindemnityprovisionforthepurposesofsection234oftheCompaniesAct2006.
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Directors’ conflicts of interestTheBoardconfirmsthataformalsystemfordirectorstodeclaretheirinterestsandfortheindependentdirectorstoauthorisesituationalconflictscontinuestobeinplace.AnyauthorisationsgivenbytheBoardarerecordedintheBoardminutesandinaregisterofdirectors’conflictswhichisreviewedannuallybytheBoard.
Employees DetailsoftheGroup’spoliciesinrelationtoemployment,traininganddevelopment,employeeengagement,employeeshareownershipandequalopportunitiesaresetoutintheCorporateResponsibilityreportonpages28to31.
Greenhouse gas emissionsDetailsoftheGroup’sgreenhousegasemissionsaresetoutintheCorporateResponsibilityreportonpages28and29.
Political donationsItistheGroup’spolicynottomakepoliticaldonationsandnopoliticaldonationsorEUpoliticalexpenditureweremadeintheyear(FY2018:£nil).
Bribery Act 2010TheGrouphasanestablishedanti-briberypolicyinplacedesignedtomanagerisksrelatingtobriberyandcorruption.Guidanceandtrainingisprovidedtocolleaguesthroughanonlinewebinarpresentation,alongwithsupportfromtheGroup’sLegalteamonhowtomanagetheserisks.Suppliersandcontractorsaremadeawareoftheanti-briberypolicy,throughourSupplierCodeandappropriatecontractualarrangements.Anti-briberyandcorruptioniskeptregularlyunderreviewtoensurethatthestepsinplacearesufficientlyrobusttopreventbriberyandcorruption.
Health & safetyWearecommittedtoprovidingasafeplaceforourcolleaguestoworkandforvisitorsandcontractorstooursites.Policiesapplicabletothesafetyandwell-beingofourcolleaguesarereviewedonanongoingbasistoensurethattheapproachtotraining,riskassessments,safesystemsofworkingandaccidentmanagementareappropriate.AnongoingauditprogrammeassessesHealth&Safetyrisksonaregularbasisandensuresthatrobustcontrolmeasuresareinplacetolimittheserisks.FurtherdetailsaresetoutintheCorporateResponsibilityreportonpages28to31.
Financial instrumentsInformationontheGroup’sfinancialriskmanagementobjectivesandpoliciesandontheexposureoftheGrouptorelevantrisksinrespectoffinancialinstrumentsissetoutinNote20totheGroupFinancialStatements.
Disclosure of information to auditorEachdirectorconfirmsthat,sofarastheyareaware,thereisnorelevantauditinformation(asdefinedinsection418oftheCompaniesAct2006)ofwhichtheCompany’sauditorisunawareandthateachdirectorhastakenallthestepstheyoughtreasonablytohavetakenasadirectorinordertomakethemselvesawareofanyrelevantauditinformationandtoestablishthattheCompany’sauditorisawareofthatinformation.
AuditorResolutionstoappointBDOLLPasauditoroftheCompanyandtoauthorisetheAuditCommitteetodeterminetheirremunerationwillbeproposedatthe2020AnnualGeneralMeeting.
Annual General MeetingThe2020AnnualGeneralMeetingoftheCompanywillbeheldatRowanHouse,CherryOrchardNorth,KembreyPark,Swindon,WiltshireSN28UHonFriday31January2020at11.30am.TheNoticeofAnnualGeneralMeetingisgiven,togetherwithexplanatorynotestotheproposedresolutionstobeconsideredatthemeeting,inthebookletwhichaccompaniesthisreport.
ApprovedbytheBoardandsignedonitsbehalfby:
Stuart MarrinerCompanySecretary&GeneralCounsel5November2019
Directors’ Report – Other Statutory Disclosures cont.
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ThedirectorsareresponsibleforpreparingtheAnnualReportandthefinancialstatementsinaccordancewithapplicablelawandregulations.
Companylawrequiresthedirectorstopreparefinancialstatementsforeachfinancialyear.UnderthatlawthedirectorsarerequiredtopreparetheGroupfinancialstatementsinaccordancewithInternationalFinancialReportingStandards(IFRSs)asadoptedbytheEuropeanUnionandapplicablelawandhaveelectedtopreparetheCompanyfinancialstatementsinaccordancewithUnitedKingdomGenerallyAcceptedAccountingPractice(UnitedKingdomAccountingStandardsandapplicablelawsincludingFRS101ReducedDisclosureFramework.UndercompanylawthedirectorsmustnotapprovethefinancialstatementsunlesstheyaresatisfiedthattheygiveatrueandfairviewofthestateofaffairsoftheGroupandtheCompanyandoftheprofitorlossfortheGroupandtheCompanyforthatperiod.
Inpreparingthesefinancialstatements,thedirectorsarerequiredto:
• selectsuitableaccountingpoliciesandthenapplythemconsistently;• makejudgementsandaccountingestimatesthatarereasonableandprudent;• fortheGroupfinancialstatements,statewhethertheyhavebeenpreparedinaccordancewithIFRSsas
adoptedbytheEuropeanUnion,subjecttoanymaterialdeparturesdisclosedandexplainedinthefinancialstatements;
• fortheCompanyfinancialstatements,statewhetherapplicableUnitedKingdomAccountingStandardshavebeenfollowed,subjecttoanymaterialdeparturesdisclosedandexplainedinthefinancialstatements;
• preparethefinancialstatementsonthegoingconcernbasisunlessitisinappropriatetopresumethattheGrouporCompanywillcontinueinbusiness;and
• prepareadirectors’report,astrategicreportanddirectors’RemunerationreportwhichcomplywiththerequirementsoftheCompaniesAct2006.
ThedirectorsareresponsibleforkeepingadequateaccountingrecordsthataresufficienttoshowandexplaintheCompany’stransactionsanddisclosewithreasonableaccuracyatanytimethefinancialpositionoftheCompanyandenablethemtoensurethatthefinancialstatementscomplywiththeCompaniesAct2006and,asregardstheGroupfinancialstatements,Article4oftheIASRegulation.TheyarealsoresponsibleforsafeguardingtheassetsoftheCompanyandhencefortakingreasonablestepsforthepreventionanddetectionoffraudandotherirregularities.ThedirectorsareresponsibleforensuringthattheAnnualReportandthefinancialstatements,takenasawhole,arefair,balanced,andunderstandableandprovidetheinformationnecessaryforshareholderstoassesstheGroup’sperformance,businessmodelandstrategy.
Website publicationThedirectorsareresponsibleforensuringtheAnnualReportandthefinancialstatementsaremadeavailableonawebsite.FinancialstatementsarepublishedontheCompany’swebsiteinaccordancewithlegislationintheUnitedKingdomgoverningthepreparationanddisseminationoffinancialstatements,whichmayvaryfromlegislationinotherjurisdictions.ThemaintenanceandintegrityoftheCompany’swebsiteistheresponsibilityofthedirectors.Thedirectors’responsibilityalsoextendstotheongoingintegrityofthefinancialstatementscontainedtherein.
Directors’ responsibilities pursuant to DTR4Thedirectorsconfirmtothebestoftheirknowledge:
• TheGroupfinancialstatementshavebeenpreparedinaccordancewithInternationalFinancialReportingStandards(IFRSs)asadoptedbytheEuropeanUnionandArticle4oftheIASRegulationandgiveatrueandfairviewoftheassets,liabilities,financialpositionandprofitandlossoftheGroup;and
• TheAnnualReportincludesafairreviewofthedevelopmentandperformanceofthebusinessandthefinancialpositionoftheGroupandtheparentcompany,togetherwithadescriptionoftheprincipalrisksanduncertaintiesthattheyface.
ThisresponsibilitystatementwasapprovedbytheBoardon5November2019andsignedonitsbehalfby:
Jonathan Bunting Tony GraceInterimChiefExecutiveOfficer ChiefFinancialOfficer5November2019 5November2019
Directors’ Responsibilities
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OpinionWehaveauditedthefinancialstatementsofConnectGroupPlc(the‘ParentCompany’)anditssubsidiaries(the‘Group’)fortheyearended31August2019whichcomprisetheGroupIncomeStatement,theGroupStatementofComprehensiveIncome,theGroupandParentCompanyBalanceSheet,theGroupandParentCompanyStatementsofChangesinEquity,theGroupCashFlowStatementandthenotestothefinancialstatements,includingasummaryofsignificantaccountingpolicies.ThefinancialreportingframeworkthathasbeenappliedinthepreparationoftheGroupfinancialstatementsisapplicablelawandInternationalFinancialReportingStandards(IFRSs)asadoptedbytheEuropeanUnion.ThefinancialreportingframeworkthathasbeenappliedinthepreparationoftheParentCompanyfinancialstatementsisapplicablelawandUnitedKingdomGenerallyAcceptedPractice,includingFinancialReportingStandard101ReducedDisclosureFramework.(UnitedKingdomGenerallyAcceptedAccountingPractice).
Inouropinionthefinancialstatements:
• giveatrueandfairviewofthestateoftheGroup’sandoftheParentCompany’saffairsasat31August2019andoftheGroup’slossfortheyearthenended;
• theGroupfinancialstatementshavebeenproperlypreparedinaccordancewithIFRSsasadoptedbytheEuropeanUnion;• theParentCompanyfinancialstatementshavebeenproperlypreparedinaccordancewithUnitedKingdomGenerallyAcceptedPractice;and• thefinancialstatementshavebeenpreparedinaccordancewiththerequirementsoftheCompaniesAct2006;and,asregardstheGroupfinancial
statements,Article4oftheIASRegulation.
Basis for opinionWeconductedourauditinaccordancewithInternationalStandardsonAuditing(UK)(ISAs(UK))andapplicablelaw.OurresponsibilitiesunderthosestandardsarefurtherdescribedintheAuditor’sresponsibilitiesfortheauditofthefinancialstatementssectionofourreport.WeareindependentoftheGroupandtheParentCompanyinaccordancewiththeethicalrequirementsthatarerelevanttoourauditofthefinancialstatementsintheUK,includingtheFRC’sEthicalStandardasappliedtolistedpublicinterestentities,andwehavefulfilledourotherethicalresponsibilitiesinaccordancewiththeserequirements.Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforouropinion.
Conclusions relating to principal risks, going concern and viability statementWehavenothingtoreportinrespectofthefollowinginformationintheAnnualReport,inrelationtowhichtheISAs(UK)requireustoreporttoyouwhetherwehaveanythingmaterialtoaddordrawattentionto:
• thedisclosuresintheAnnualReportthatdescribetheprincipalrisksandexplainhowtheyarebeingmanagedormitigated;• thedirectors’confirmationintheAnnualReportthattheyhavecarriedoutarobustassessmentoftheprincipalrisksfacingtheGroup,including
thosethatwouldthreatenitsbusinessmodel,futureperformance,solvencyorliquidity;• thedirectors’statementinthefinancialstatementsaboutwhetherthedirectorsconsidereditappropriatetoadoptthegoingconcernbasis
ofaccountinginpreparingthefinancialstatementsandthedirectors’identificationofanymaterialuncertaintiestotheGroupandtheParentCompany’sabilitytocontinuetodosooveraperiodofatleasttwelvemonthsfromthedateofapprovalofthefinancialstatements;
• whetherthedirectors’statementrelatingtogoingconcernrequiredundertheListingRulesinaccordancewithListingRule9.8.6R(3)ismateriallyinconsistentwithourknowledgeobtainedintheaudit;or
• thedirectors’explanationintheAnnualReportastohowtheyhaveassessedtheprospectsoftheGroup,overwhatperiodtheyhavedonesoandwhytheyconsiderthatperiodtobeappropriate,andtheirstatementastowhethertheyhaveareasonableexpectationthattheGroupwillbeabletocontinueinoperationandmeetitsliabilitiesastheyfalldueovertheperiodoftheirassessment,includinganyrelateddisclosuresdrawingattentiontoanynecessaryqualificationsorassumptions.
Key audit mattersKeyauditmattersarethosemattersthat,inourprofessionaljudgement,wereofmostsignificanceinourauditofthefinancialstatementsofthecurrentperiodandincludethemostsignificantassessedrisksofmaterialmisstatement(whetherornotduetofraud)thatweidentifiedincludingthosewhichhadthegreatesteffecton:theoverallauditstrategy,theallocationofresourcesintheaudit;anddirectingtheeffortsoftheengagementteam.Thesematterswereaddressedinthecontextofourauditofthefinancialstatementsasawhole,andinformingouropinionthereon,andwedonotprovideaseparateopiniononthesematters.
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Valuation of goodwill, intangibles and other assets in the Tuffnells cash generating unit (“CGU”) and carrying value of investments in subsidiaries in the Parent company
Key Audit Matter How we addressed the Key Audit Matter in the audit
ManagementisrequiredtotestgoodwillwithineachCGUannuallyforimpairment.
InrespectoftheTuffnellsCGU,asaresultofcurrenttradingperformance,additionaltimetakentoturnthebusinessaroundandtheeconomicoutlookmanagementdeterminedanimpairmenttotheCGUof£45.5mbasedonvalueinuse.
Thisresultedinfullimpairmentofgoodwill(£6.0m)andintangibles(£26.9m)aswellaspartimpairmentofproperty,plantandequipment(“PPE”)(£12.6m).
Theremainingamountoftheimpairmenttotalling£1.7mwasnotrecordedonthebasisthatthefairvaluelesscoststosellsupportedthecarryingvalueoftheremainingassets.Nootherassetsweredeterminedbymanagementasrequiringimpairment.
Thereisaninherentuncertaintyinvolvedinforecastinganddiscountingfuturecashflowsandthereforeconstitutesakeyjudgement.AsperNote1(e)managementconsiderthesetobeakeyaccountingestimates.
Notes13and14provideadditionaldetailoftheimpairmentsrecordedagainstGoodwill,intangiblesandPPE.
TheimpairmentchargeshavebeenrecordedasadjustingitemsasdetailedinNote4.
TheimpairmentrecognisedalsoimpactedthecarryingvalueoftheinvestmentheldbytheParentCompanyinitssubsidiary,whichinturnheldtheinvestmentinTuffnells.FurtherindicatorsofimpairmentwereidentifiedintheParentcompanyinvestmentduetothedistributionofa£240mdividendbythesubsidiaryintheyear,thisandtheTuffnellsimpairmentresultedina£108.6mimpairmentbeingrecorded(seeParentcompanybalanceandNote3formoredetails).
WehaveobtainedanunderstandingoftheGroup’sbudgetingandforecastingprocessaswellastheimpairmentreviewprocess.
Theauditteamhaveengagedwithourinternalvaluationsteamtoaudittheunderlyingassumptionsandinputsintheimpairmentmodels.Thiscomprisedanassessmentoftheappropriatenessofthediscountrateusedandassessmentoftheunderlyingmechanicsofthemodel.
Furthermore,theauditteamevaluatedtheaccuracyofManagement’shistoricalforecasting,challengedtherevenueandmarginandothercashflowsassumptionsbasedonourknowledgeofthebusiness,contractualrevenuestreamsandtheeconomicoutlook.
InrespectoftheTuffnellsCGUwescrutinisedandtestedtheremainingamountoftheimpairmenttotalling£1.7mwhichwasnotrecorded,throughassessmentofthefairvalueofassets.
TheimpactoftheimpairmenttotheTuffnellsCGUwasalsofactoredintotheassessmentofthecarryingvalueoftheParentcompany’sinvestmentinitssubsidiary.
FinallywehaveassessedtheadequacyofthefinancialstatementdisclosuresinNote13.inrespectoftheGroupfinancialstatementsandinNote3oftheParentcompanyfinancialstatementsrelatingtothisKeyAuditMatter.
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The adoption of IFRS 15 Revenue from Contracts with Customers
Key audit matter How we addressed the key audit matter in the audit
TheGroupwasrequiredtoadoptIFRS15RevenuefromContractswithCustomersinthecurrentyear.Thisstandardintroducedtheconceptofhighlyprobableinassessingoutcomesandperformanceobligationsandthefive-stepmodelframeworkinrespectofrevenuerecognition.
ManagementcompletedareviewoftheimpactofIFRS15andassetoutinNote36concludedthattherewasnomaterialimpactonthefinancialstatementswiththeexceptionofbalancesheetreclassification(seeNote36).Thenewstandardhasappliedthefullyretrospectiveapproachrestatingthecomparativeperiodsinrespectofreturnsreserveassetandaccrual.TherewasnofurtherimpactidentifiedbymanagementofadoptingIFRS15.
Judgementsatarrivingatthisconclusionincluded:
• Interpretationofcontractterms;• Considerationofagentvprincipal;toensurethattheGroupisableto
continuetorecogniserevenueasprincipal;and• Assessmentofrevenuerecognitionbasedonperformanceobligations
beingachieved.
WeassessedtheGroup’sprocessesandcontrolsinrespectoftheadoptionwhichincludedconsideringcompletenessofareasforadoption.
Weselectedasampleofrevenuekeycontractswithcustomersandforeachonewe:
• Reviewedthecontractualtermsandmetwithcontractmanagerstounderstandthetermsofthecontract,compliancewiththecontract,andthepotentialimplicationrevenuerecognition;
• WeassessedeachagainsttheIFRS15criteriaandcomparedthiswithManagement’sassessmentinrespectofperformanceobligations;and
• WeauditedthedisclosurespreparedinthefinancialstatementstoconfirmthattheyareconsistentwithourinterpretationofIFRS15.
Inadditionwehaveauditedmanagement’sassessmentthatSmithsNewsistheprincipalinthetransactionandthereforeshouldcontinuetorecogniserevenueasprincipal,inlinewithpreviousyears.
Presentation of Adjusting Items as a non-GAAP measure on the face of the income statement
Key audit matter How we addressed the key audit matter in the audit
TheGrouppresentsanon-GAAPmeasureofAdjustedprofitbeforetaxonthefaceoftheincomestatement.ThisisafteradjustingforcertainitemswhichthedirectorsconsidertobesignificantinnatureanddonotrelatetotheunderlyingtradingactivityoftheGroup.Thismeasurerequiresjudgement.
ThereisariskthatamountsareincorrectlyclassifiedasadjustingandthedisclosuresincludedinNote4arenotsufficientlydetailedortransparenttofullyunderstandtheadjustingitemsandthatthenon-GAAPmeasureismisleading.
TheadjustingitemsfortheyearhasbeenscepticallyreviewedtoensurethattheadjustingitemsmeettheGroupsaccountingpolicyforinclusion.
Furtherprocedurescarriedoutforeachadjustingitemsincluded:
• Auditingasampletosupportingdocumentation;and• Examiningdisclosuresofadjustingitemstoconfirmtheyare
sufficientlytransparentandaddresstheguidanceissuedbytheFRCandESMA.
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CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 83
Our application of materialityWeapplytheconceptofmaterialitybothinplanningandperformingourauditandinevaluatingtheeffectofmisstatements.Weconsidermaterialitytobethemagnitudebywhichmisstatements,includingomissions,couldinfluencetheeconomicdecisionsofreasonableusersthataretakenonthebasisofthefinancialstatements.Importantly,misstatementsbelowtheselevelswillnotnecessarilybeevaluatedasimmaterialaswealsotakeaccountofthenatureofidentifiedmisstatementsandtheparticularcircumstancesoftheiroccurrence,whenevaluatingtheireffectonthefinancialstatementsasawhole.
Basedonourprofessionaljudgement,wedeterminedmaterialityfortheGroupfinancialstatementstobe£1.1mandfortheParentCompanytobe£0.8m.Performancematerialitywascalculatedbasedon65%ofourmateriality.Thislevelofperformancematerialitywasselectedtoreflecttherisksapparentinourfirstyearofaudit.
ThematerialityweappliedinrespectoftheGroupfinancialstatementsequatesto5%ofprofitbeforeadjustingitemsandtax.ParentCompanymaterialitywassetat1%oftotalassetsduetoitprincipallyholdinginvestmentsinsubsidiariesonly,andcappedat75%ofGroupmateriality.
Weconsidertheuseof5%ofAdjustedprofittobethemostappropriateperformancemeasureasitremovestheimpactofcertainone-offorexceptionalitemsimpactingtheunderlyingprofitoftheGroupandisalsoakeymeasureforstakeholders.AdjustingitemsaredetailedinNote4totheGroupfinancialstatements.
Wesetcomponentmaterialitybetween£0.6mand£0.9mbasedontheoverallsizeandrespectiveriskofeachcomponent.
WeagreedwiththeAuditCommitteethatwewouldreporttotheCommitteeallauditdifferencesinexcessof£42,000aswellasdifferencesbelowthatthresholdthat,inourview,warrantedreportingonqualitativegrounds.WealsoreporttotheAuditCommitteeondisclosuremattersthatweidentifiedwhenassessingtheoverallpresentationofthefinancialstatements.
An overview of the scope of our auditTheGroupoperatesthroughanumberoflegalentities,whichformreportingcomponents,thereportingcomponentsareconsistentwiththesegmentalanalysisasdisclosedinNote2tothefinancialstatements.Allsignificantcomponentsweresubjecttofullscopeauditswiththeexceptionofcertainoverseasentitieswhichweresubjecttodesktopreviewprocedures.AllauditsanddesktopreviewprocedureswerecompletedbyBDOLLP.
Theauditprocedureswerecarriedoutover98%ofGrouprevenue,profitbeforeadjustingitemsandtotalassets.
TheGroupauditteamsetcomponentmaterialitylevelsasdetailedabovewithworkonallcomponentsbeingperformedbytheBDOLLPunderthedirectionandsupervisionoftheGroupengagementpartner.
WealsogainedanunderstandingofthelegalandregulatoryframeworkapplicabletotheGroupandtheindustryinwhichitoperates,andconsideredtheriskofactsbytheGroupthatwerecontrarytoapplicablelawsandregulations,includingfraud.WedesignedauditproceduresatGroupandsignificantcomponentleveltorespondtotherisk,recognisingthattheriskofnotdetectingamaterialmisstatementduetofraudishigherthantheriskofnotdetectingoneresultingfromerror,asfraudmayinvolvedeliberateconcealmentby,forexample,forgeryorintentionalmisrepresentations,orthroughcollusion.Wefocusedonlawsandregulationsthatcouldgiverisetoamaterialmisstatementinthefinancialstatements,including,butnotlimitedto,theCompaniesAct2006,theUKListingRulesandtaxlegislation.
Ourtestsincludedagreeingthefinancialstatementdisclosurestounderlyingsupportingdocumentation,enquirieswithmanagementandenquiriesofinternallegalcounsel.Thereareinherentlimitationsintheauditproceduresdescribedaboveand,thefurtherremovednon-compliancewithlawsandregulationsisfromtheeventsandtransactionsreflectedinthefinancialstatements,thelesslikelywewouldbecomeawareofit.Wedidnotidentifyanykeyauditmattersrelatingtoirregularities,includingfraud.Asinallofouraudits,wealsoaddressedtheriskofmanagementoverrideofinternalcontrols,includingtestingjournalsandevaluatingwhethertherewasevidenceofbiasbythedirectorsthatrepresentedariskofmaterialmisstatementduetofraud.
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Other informationThedirectorsareresponsiblefortheotherinformation.TheotherinformationcomprisestheinformationincludedintheAnnualReport,otherthanthefinancialstatementsandourauditor’sreportthereon.Ouropiniononthefinancialstatementsdoesnotcovertheotherinformationand,excepttotheextentotherwiseexplicitlystatedinourreport,wedonotexpressanyformofassuranceconclusionthereon.Inconnectionwithourauditofthefinancialstatements,ourresponsibilityistoreadtheotherinformationand,indoingso,considerwhethertheotherinformationismateriallyinconsistentwiththefinancialstatementsorourknowledgeobtainedintheauditorotherwiseappearstobemateriallymisstated.Ifweidentifysuchmaterialinconsistenciesorapparentmaterialmisstatements,wearerequiredtodeterminewhetherthereisamaterialmisstatementinthefinancialstatementsoramaterialmisstatementoftheotherinformation.If,basedontheworkwehaveperformed,weconcludethatthereisamaterialmisstatementoftheotherinformation,wearerequiredtoreportthatfact.
Wehavenothingtoreportinthisregard.
Inthiscontext,wealsohavenothingtoreportinregardtoourresponsibilitytospecificallyaddressthefollowingitemsintheotherinformationandtoreportasuncorrectedmaterialmisstatementsoftheotherinformationwhereweconcludethatthoseitemsmeetthefollowingconditions:
• Fair,balancedandunderstandable–thestatementgivenbythedirectorsthattheyconsidertheAnnualReportandfinancialstatementstakenasawholeisfair,balancedandunderstandableandprovidestheinformationnecessaryforshareholderstoassesstheGroup’sperformance,businessmodelandstrategy,ismateriallyinconsistentwithourknowledgeobtainedintheaudit;or
• Auditcommitteereporting–thesectiondescribingtheworkoftheauditcommitteedoesnotappropriatelyaddressmatterscommunicatedbyustotheauditcommittee;or
• Directors’statementofcompliancewiththe2016UKCorporateGovernance–thepartsofthedirectors’statementrequiredundertheListingRulesrelatingtotheCompany’scompliancewiththe2016UKCorporateGovernanceCodecontainingprovisionsspecifiedforreviewbytheauditorinaccordancewithListingRule9.8.10R(2)donotproperlydiscloseadeparturefromarelevantprovisionofthe2016UKCorporateGovernanceCode.
Opinions on other matters prescribed by the Companies Act 2006Inouropinion,thepartoftheDirectors’RemunerationreporttobeauditedhasbeenproperlypreparedinaccordancewiththeCompaniesAct2006.
Inouropinion,basedontheworkundertakeninthecourseoftheaudit:• theinformationgiveninthestrategicreportandtheDirectors’reportforthefinancialyearforwhichthefinancialstatementsarepreparedis
consistentwiththefinancialstatementsandthosereportshavebeenpreparedinaccordancewithapplicablelegalrequirements;and• thestrategicreportandDirectors’reporthavebeenpreparedinaccordancewithapplicablelegalrequirements.
Matters on which we are required to report by exceptionInthelightoftheknowledgeandunderstandingoftheGroupandtheParentCompanyanditsenvironmentobtainedinthecourseoftheaudit,wehavenotidentifiedmaterialmisstatementsinthestrategicreportortheDirectors’report.
WehavenothingtoreportinrespectofthefollowingmattersinrelationtowhichtheCompaniesAct2006requiresustoreporttoyouif,inouropinion:
• adequateaccountingrecordshavenotbeenkeptbytheParentCompany,orreturnsadequateforouraudithavenotbeenreceivedfrombranchesnotvisitedbyus;or
• theParentCompanyfinancialstatementsandthepartoftheDirectors’Remunerationreporttobeauditedarenotinagreementwiththeaccountingrecordsandreturns;or
• certaindisclosuresofdirectors’remunerationspecifiedbylawarenotmade;or• wehavenotreceivedalltheinformationandexplanationswerequireforouraudit;or• acorporategovernancestatementhasnotbeenpreparedbytheParentCompany.
Responsibilities of DirectorsAsexplainedmorefullyintheDirectors’responsibilitiesstatement,thedirectorsareresponsibleforthepreparationofthefinancialstatementsandforbeingsatisfiedthattheygiveatrueandfairview,andforsuchinternalcontrolastheDirectorsdetermineisnecessarytoenablethepreparationoffinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.
Inpreparingthefinancialstatements,theDirectorsareresponsibleforassessingtheGroup’sandtheParentCompany’sabilitytocontinueasagoingconcern,disclosing,asapplicable,mattersrelatedtogoingconcernandusingthegoingconcernbasisofaccountingunlessthedirectorseitherintendtoliquidatetheGrouportheParentCompanyortoceaseoperations,orhavenorealisticalternativebuttodoso.
Independent Auditor’s Report to the members of Connect Group PLC cont.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 85
Auditor’s responsibilities for the audit of the financial statementsOurobjectivesaretoobtainreasonableassuranceaboutwhetherthefinancialstatementsasawholearefreefrommaterialmisstatement,whetherduetofraudorerror,andtoissueanauditor’sreportthatincludesouropinion.Reasonableassuranceisahighlevelofassurance,butisnotaguaranteethatanauditconductedinaccordancewithISAs(UK)willalwaysdetectamaterialmisstatementwhenitexists.Misstatementscanarisefromfraudorerrorandareconsideredmaterialif,individuallyorintheaggregate,theycouldreasonablybeexpectedtoinfluencetheeconomicdecisionsofuserstakenonthebasisofthesefinancialstatements.
AfurtherdescriptionofourresponsibilitiesfortheauditofthefinancialstatementsislocatedontheFinancialReportingCouncil’swebsiteat:www.frc.org.uk/auditorsresponsibilities.Thisdescriptionformspartofourauditor’sreport.
Other matters which we are required to addressFollowingtherecommendationoftheAuditCommittee,wewereappointedon15March2019toauditthefinancialstatementsfortheyearending31August2019andsubjecttoannualre-electionattheParentCompany’sAGM,subsequentfinancialperiods.Theperiodoftotaluninterruptedengagementisoneyear,coveringtheyearending31August2019.
Thenon-auditservicesprohibitedbytheFRC’sEthicalStandardwerenotprovidedtotheGrouportheParentCompanyandweremainindependentoftheGroupandtheParentCompanyinconductingouraudit.
Ourauditopinionisconsistentwiththeadditionalreporttotheauditcommittee.
Use of our reportThisreportismadesolelytotheParentCompany’smembers,asabody,inaccordancewithChapter3ofPart16oftheCompaniesAct2006.OurauditworkhasbeenundertakensothatwemightstatetotheParentCompany’smembersthosematterswearerequiredtostatetotheminanauditor’sreportandfornootherpurpose.Tothefullestextentpermittedbylaw,wedonotacceptorassumeresponsibilitytoanyoneotherthantheParentCompanyandtheParentCompany’smembersasabody,forourauditwork,forthisreport,orfortheopinionswehaveformed.
Sophia Michael (Senior Statutory Auditor)ForandonbehalfofBDOLLP,StatutoryAuditorLondon5November2019
BDOLLPisalimitedliabilitypartnershipregisteredinEnglandandWales(withregisterednumberOC305127).
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Group Income Statement for the year ended 31 August 2019
2019 2018*1
£m Note Adjusted*Adjusted
items Total Adjusted*Adjusted
items Total
Revenue 2 1,467.9 – 1,467.9 1,534.3 – 1,534.3
Costofsales 3 (1,386.0) (1.0) (1,387.0) (1,429.6) (3.6) (1,433.2)
Gross profit/(loss) 3 81.9 (1.0) 80.9 104.7 (3.6) 101.1
Administrativeexpenses 3 (53.0) (59.8) (112.8) (71.3) (60.3) (131.6)
Incomefromjointventures 0.6 – 0.6 0.5 – 0.5
Operating (loss)/profit 2,3 29.5 (60.8) (31.3) 33.9 (63.9) (30.0)
Financecosts 7 (6.3) – (6.3) (5.5) – (5.5)
(Loss)/profit before tax 23.2 (60.8) (37.6) 28.4 (63.9) (35.5)
Incometaxcredit/(expense) 8 (3.8) 9.9 6.1 (5.5) 2.9 (2.6)
(Loss)/profit for the year from continuing operations 19.4 (50.9) (31.5) 22.9 (61.0) (38.1)
Discontinued operations
(Loss)/profit for the year from discontinued operations 11 – – – 1.3 (10.2) (8.9)
(Loss)/profit attributable to equity shareholders continuing and discontinued operations 19.4 (50.9) (31.5) 24.2 (71.2) (47.0)
(Loss)/earnings per share from continuing operations
Basic 10 7.9p (12.9p) 9.3p (15.5p)
Diluted 10 7.9p (12.9p) 9.3p (15.5p)
Equitydividendspershare(paidandproposed) 9 1.0p 3.1p
* ThismeasureisdescribedinNote1(4)oftheaccountingpoliciesandtheGlossarytotheAccountsonpage132.AdjustedItemsaresetoutinNote4totheGroupAccounts.*1 Theincomestatementhasbeenrestatedtoshowananalysisofcosts,seeNote1(27)fordetails.
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£m Note 2019 2018
Continuing
Items that will not be reclassified to the Group Income Statement
Actuarial(loss)ondefinedbenefitpensionscheme 6 (136.3) (2.1)
ImpactofIFRIC14ondefinedbenefitpensionscheme 6 139.7 2.1
Taxrelatingtocomponentsofothercomprehensiveincomethatwillnotbereclassified 8 (0.7) –
2.7 –
Items that may be subsequently reclassified to the Group Income Statement
Currencytranslationdifferences 0.1 (0.3)
0.1 (0.3)
Other comprehensive result/(loss) for the year – continuing 2.8 (0.3)
Loss for the year – continuing (31.5) (38.1)
Total comprehensive (expense)/income for the year – continuing (28.7) (38.4)
Loss for the year – discontinued – (8.9)
Total comprehensive (expense)/income for the year – discontinued – (8.9)
Total comprehensive (expense)/income for the year (28.7) (47.3)
Group Statement of Comprehensive Income for the year ended 31 August 2019
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£m Note 2019Restated1
2018
Non-current assets
Intangibleassets 13 10.1 50.8
Property,plantandequipment 14 10.9 38.8
Interestinjointventures 15 5.3 5.1
Deferredtaxassets 23 5.2 –
31.5 94.7
Current assets
Inventories 16 16.2 13.3
Tradeandotherreceivables 17 124.2 129.7
Cashandbankdeposits 19 24.0 18.0
Currenttaxasset – 0.3
Assetsclassifiedasheldforsale 11 16.8 0.5
181.2 161.8
Total assets 212.7 256.5
Current liabilities
Tradeandotherpayables 18 (173.7) (175.6)
Currenttaxliabilities – (0.8)
Bankloansandotherborrowings 19 (46.1) (47.2)
Obligationsunderfinanceleases 21 (2.2) (2.8)
Retirementbenefitobligations 6 (0.4) (3.7)
Provisions 24 (7.3) (9.5)
(229.7) (239.6)
Non-current liabilities
Retirementbenefitobligations 6 (2.5) (3.6)
Bankloansandotherborrowings 19 (49.3) (48.8)
Obligationsunderfinanceleases 21 (0.3) (2.5)
Othernon-currentliabilities 22 (1.2) (0.6)
Deferredtaxliabilities 23 – (2.5)
Non-currentprovisions 24 (4.0) (4.8)
(57.3) (62.8)
Total liabilities (287.0) (302.4)
Total net liabilities (74.3) (45.9)
Equity
Calledupsharecapital 28(1) 12.4 12.4
Sharepremiumaccount 28(3) 60.5 60.5
Demergerreserve 29(1) (280.1) (280.1)
Ownsharesreserve 29(2) (1.7) (2.1)
Translationreserve 29(3) 0.3 0.2
Retainedearnings 30 134.3 163.2
Total shareholders’ deficit (74.3) (45.9)
1. TheGrouphasappliedIFRS15usingthefullyretrospectivemethod.SeeNote36.
TheaccountswereapprovedbytheBoardofDirectorsandauthorisedforissueon5November2019andweresignedonitsbehalfby:
Jonathan Bunting Tony GraceInterimChiefExecutiveOfficer ChiefFinancialOfficer
Registerednumber–05195191
Group Balance Sheet at 31 August 2019
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£m NoteShare
capital
Sharepremiumaccount
Demergerreserve
Ownshares
reserve
Hedgingandtranslation
reserveRetainedearnings Total
Balance at 31 August 2017 12.4 60.5 (280.1) (3.1) 0.5 234.9 25.1
Lossfortheyear – – – – – (47.0) (47.0)
Actuariallossondefinedbenefitpensionscheme – – – – – (2.1) (2.1)
ImpactofIFRIC14ondefinedbenefitpensionscheme – – – – – 2.1 2.1
Currencytranslationdifferences – – – – (0.3) – (0.3)
Taxrelatingtocomponentsofothercomprehensiveincome – – – – – – –
Total comprehensive income for the year – – – – (0.3) (47.0) (47.3)
Issueofsharecapital 28 – – – – – – –
Purchaseofownshares – – – – – – –
Dividendspaid 9 – – – – – (24.1) (24.1)
Employeeshareschemes – – – 1.0 – (1.0) –
Recognitionofsharebasedpaymentsnetoftax – – – – – 0.4 0.4
Balance at 31 August 2018 12.4 60.5 (280.1) (2.1) 0.2 163.2 (45.9)
Lossfortheyear – – – – – (31.5) (31.5)
Actuariallossondefinedbenefitpensionscheme 6 – – – – – (136.1) (136.1)
ImpactofIFRIC14ondefinedbenefitpensionscheme 6 – – – – – 139.7 139.7
Currencytranslationdifferences – – – – 0.1 – 0.1
Taxrelatingtocomponentsofothercomprehensiveincome – – – – – (0.7) (0.7)
Total comprehensive expense for the year – – – – 0.1 (28.6) (28.5)
Issueofsharecapital 28 – – – – – – –
Purchaseofownshares – – – – – – –
Dividendspaid 9 – – – – – – –
Employeeshareschemes – – – 0.4 – (0.4) –
Recognitionofsharebasedpaymentsnetoftax – – – – – 0.1 0.1
Balance at 31 August 2019 12.4 60.5 (280.1) (1.7) 0.3 134.3 (74.3)
Group Statement of Changes in Equity for the year ended 31 August 2019
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£m Note 2019 2018
Net cash inflow from operating activities 27 23.0 37.5
Investing activities
Dividendsreceivedfromjointventures 0.1 0.2
Purchaseofproperty,plantandequipment (7.4) (6.1)
Purchaseofintangibleassets (1.2) (2.4)
Proceedsonsaleofproperty,plantandequipment 0.5 –
Proceedsonsaleofsubsidiary(netofdisposalcosts) – 12.9
Net cash (used in)/generated from investing activities (8.0) 4.6
Financing activities
Interestpaid (5.1) (5.8)
Dividendpaid 9 – (24.1)
Repaymentsofobligationsunderfinanceleases (2.8) (3.8)
Net(decrease)/increaseinrevolvingcreditfacility (8.0) 25.3
Newbankloansraised – 48.8
Repaymentofborrowings – (80.0)
Net cash used in financing activities (15.9) (39.6)
Net (decrease)/increase in cash and cash equivalents (0.9) 2.5
Effectofforeignexchangeratechanges 0.1 (0.2)
(0.8) 2.3
Openingnetcashandcashequivalents 8.7 6.4
Closing net cash and cash equivalents 19 7.9 8.7
Duringtheyear,cashoutflowfromoperatingactivitiesattributedtodiscontinuedoperationsamountedto£nil(2018:£8.8minflow)andpaid£nil(2018:£4.3m)inrespectofinvestingactivities.Therewerenocashflowsassociatedwithfinancingactivitiesattributabletodiscontinuedoperations.
Group Cash Flow Statement for the year ended 31 August 2019
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 91
1. Accounting policies(1) BasisofconsolidationConnectGroupPLC(‘theCompany’)isacompanyincorporatedinEnglandUKunderCompaniesAct2006.TheGroupAccountsfortheyearended31August2019comprisetheCompanyanditssubsidiaries(togetherreferredtoasthe‘Group’)andtheGroup’sinterestsinjointventuresandassociates.SubsidiaryundertakingsacquiredduringtheperiodareincludedintheGroupAccountsfromthedateofacquisition.Allsignificantsubsidiaryaccountsaremadeupto31AugustandareincludedintheGroupAccounts.FurthertotheEUIASRegulation(Article4)theGroupAccountshavebeenpreparedinaccordancewithInternationalFinancialReportingStandards(‘IFRS’)asadoptedbytheEuropeanUnion(‘adoptedIFRS’)withthosepartsoftheCompaniesAct2006applicabletocompaniesreportingunderIFRS.
Unlessotherwisenotedreferencesto2018and2019relatetofiscalyearended31August2018and31August2019asopposedtocalendaryear.
Theaccountswereauthorisedforissuebythedirectorson5November2019.
(2) AccountingbasisofpreparationTheaccountsarepreparedonthehistoricalcostbasiswiththeexceptionofcertainfinancialinstrumentsandarepresentedinPoundSterlingandroundedto£0.1m,exceptwhereotherwiseindicated.
TheGroupAccountshavebeenpreparedinaccordancewithInternationalFinancialReportingStandards(‘IFRS’)asadoptedforusebytheEuropeanUnion.
Intra-groupbalancesandunrealisedgainsandlossesorincomeandexpensesarisingfromintra-grouptransactions,areeliminatedinpreparingGroupAccounts.UnrealisedgainsandlossesarisingfromtransactionswiththejointventuresareeliminatedtotheextentoftheGroup’sinterestintheentities.
(3) GoingconcernTheGroupcurrentlyhasanetliabilitypositionof£74.3masat31August2019.GiventhispositionthedirectorshavecarefullyconsideredtheabilityoftheGrouptomeetitsdebtsastheyfalldue.TheGroup’scurrentbankingfacilityisconsideredtohaveadequateheadroom,withatotalfacilityof£175mavailabletotheGroupandwithabalanceundrawnof£95.0matthe31August2019.TheGroup’sforecastsandprojections,takingaccountofreasonablepotentialvariationsintradingperformance,showthattheGroupshouldbeabletooperatewithinthelevelofitscurrentbankingcovenantsdefinedasaperiodofnotlessthan12monthsfromthedateofapprovalofthisreport.ThedirectorsexpectthattheGroupwillbeabletonegotiateafacilitypostJanuary2021toenabletheGrouptotradefortheforeseeablefuture.
Despitetheuncertaineconomicenvironment,thedirectorshaveareasonableexpectationthattheGrouphasadequateresourcestocontinueinoperationalexistencefortheforeseeablefuture.TheGroupthereforecontinuestoadoptthegoingconcernbasisinpreparingitsconsolidatedfinancialstatements.
(4) AlternativeperformancemeasuresTheCompanyusesanumberofAlternativePerformanceMeasures(APMs)inadditiontothosereportedinaccordancewithIFRS.ThedirectorsbelievethattheAPMs,listedintheglossaryonpage132,areimportantwhenassessingtheunderlyingfinancialandoperatingperformanceoftheGroupanditssegments.TheAPMsdonothavestandardisedmeaningprescribedbyIFRSandthereforemaynotbedirectlycomparabletosimilarmeasurespresentedbyothercompanies.
(5) EstimatesandjudgementsThepreparationoftheseaccountsrequiresmanagementtomakejudgements,estimatesandassumptionsthataffecttheapplicationofaccountingpoliciesandthereportedamountsofassetsandliabilities,incomeandexpense.Actualresultsmaydifferfromtheseestimates.
Key sources of estimation uncertaintyEstimatesandunderlyingassumptionsarereviewedonanongoingbasis.Revisionstoaccountingestimatesarerecognisedintheperiodinwhichtheestimateisrevisediftherevisionaffectsonlythatperiod,orintheperiodoftherevisionandfutureperiodsiftherevisionaffectsbothcurrentandfutureperiods.
Thekeyassumptionsconcerningthefuture,andotherkeysourcesofestimationuncertaintyattheendofthereportingperiodthatmayhaveasignificantriskofcausingamaterialadjustmenttothecarryingamountsofassetsandliabilitieswithinthenextfinancialyearare:
Estimatedimpairmentofgoodwill,intangiblesandproperty,plantandequipment(PPE)TheGrouptestsannuallywhethergoodwillhassufferedanyimpairment;italsotestsintangiblesandPPEwhenimpairmentindicatorsexistinaccordancewiththeaccountingpolicy.
Thecarryingamountsofcash-generatingunits(CGUs)havebeendeterminedbasedonvalueinusecalculations.Thevaluedeterminedonthecashgeneratingunitshasbeencomparedagainsttheassetsofthedivisiontocalculateimpairments.Thesecalculationsrequiretheuseofestimates(Note13).
Notes to the Accounts
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Notes to the Accounts cont.
1. Accounting policies cont.(5) Estimatesandjudgementscont.TuffnellsThedeteriorationintradingperformanceoftheTuffnellsbusinessunit,acurrentyearlossof£14.1m(2018:loss£5.0m),resultedintheGroupperforminganimpairmentassessmentofgoodwill,intangiblesandPPE.Asaresultofthereview,thegoodwill,acquiredintangiblesandPPEwereimpaired,andthevalueoftheremainingassetsinthedivisionhasbeenwrittendowntotheirfairvaluelesscoststosellasthevalueinusedoesnotsupportthem.
Giventheresultsofthevalueinusereview,animpairmentchargeof£6.0m,£26.4mand£13.2marosetogoodwill,intangiblesandPPErespectively.Thedirectorsconsiderthattheassetsshouldbevaluedbasedonthefairvaluelesscosttosellandthisisbasedonthebestestimates.Notes13and14includedetailsofdirectors’assumptionsandimpactofchangingthese.
DawsonMediaDirect(DMD)–EstimatedvalueofgoodwillThelossofamajorcontractinDMDhasresultedinthevalueinuseofthebusinessunitbeingsensitivetochangesinestimationsoffutureperformance.Changestotheseestimateswouldresultinanimpairmenttothegoodwill.FordetailsofthesensitivitiesandtheassumptionsusedtocalculatethevalueinuseseeNote13.
ProvisionsTheGroupholdsanumberofprovisionswhicharesubjecttoestimates.ThekeyprovisionsestablishedintheyearrelatetorestructuringprovisionsoftheoffshoringofcertainoftheGroup’scentralfunctionsandspecificoperationalrestructuringprojects;forfurtherdetailsseeNote24.
Key accounting judgementsThesignificantjudgementsmadeintheaccountsfortheyearended31August2019are:
RevenueTheGrouprecognisesthewholesalesalespriceforitssalesofnewspapersandmagazines.TheGroupisconsideredtobetheprincipalbasedonthefollowingindicatorsofcontroloveritsinventory:discretiontoestablishprices,itholdssomeoftheriskofobsolescenceonceincontroloftheinventoryandhastheresponsibilityoffulfillingtheperformanceobligationondeliveryofinventorytoitscustomers.IftheGroupwereconsideredtobetheagent,revenueandcostofsaleswouldreduceby£1,111.0m(2018:£1,154.5m).
RetirementbenefitsFollowingthecompletionofthe‘buy-in’inOctober2018wheretheWHSmithPensionTrustenteredintoaninsurancebackedannuityoftheSchemeassetswithinthesectionoftheTrustsponsoredbySmithsNews,thepensionschemesactuarynotifiedtheGroupthatfuturecashcontributionsbytheGrouptoaddressthedeficitwouldnolongerberequiredandtheGrouphasreleasedtheIFRIC14liability.The‘buy-in’annuityisrecognisedasaplanassetandthedifferenceinvaluebetweenthevalueoftheinsuranceassetreceivedof£425matthedateoftransactionandtheassettransferredinexchangeforthepolicy£555misconsideredanactuarialremeasurementrecognisedwithinothercomprehensiveincomeandisoffsetbythereleaseoftheIFRIC14liability.
Ifthiswasnotconsideredtobeanactuarialre-measurementtheresultingdifferenceof£130mwouldneedtoberecognisedasachargeintheFY2019incomestatement.Theoffsetting£130m,beingthereleaseoftherestriction,wouldcontinuetobeincludedwithinothercomprehensiveincome.
AdjustedItemsAdjustedItemsofincomeorexpensethatareexcludedinarrivingatAdjustedoperatingprofit.ThisenhancestheusersunderstandingoftheGroup’sperformanceasitaidsthecomparabilityofinformationbetweenreportingperiodsandbusinessunitsbyadjustingfornon-recurringoruncontrollablefactorswhichaffectIFRSmeasures,adjustedmeasuresaredefinedwithotherAPM’sintheglossaryonpages132and133.
BasedonthenatureofthetransactionstheGrouphadAdjustedItemstotalling£60.8m(2018:£63.9m)andabreakdownisincludedwithinNote4.
OnerouscontractsThisjudgementrelatestotheyearended31August2018.Presentobligationsarisingunderonerouscontractsarerecognisedandmeasuredasprovisions.AnonerouscontractisconsideredtoexistwheretheGrouphasacontractunderwhichtheunavoidablecostsofmeetingtheobligationsunderthecontractexceedtheeconomicbenefitsexpectedtobereceivedfromthecontract.Thecalculationofonerouscontractprovisionsincludesestimatesofallfuturecostsandincometooccur.Significantjudgementisappliedinthedeterminationofwhencontractsbecomeonerous.ManagementconcludedthatasresultofthedecisiontoclosethePMPdivisionon28May2018allfurtherlossesof£4.7mwouldberecognisedasanonerouscontractloss.SeeNote24forfurtherdetails.
HeldforsaleassetsInJanuary2019,theGrouptookthedecisiontoactivelymarkettheTuffnellsfreehold,longleaseholdpropertyandrelatedassets.Post-sale,theGroupwouldthenleasebacktheseproperties.Giventheabove,theGroupconsideredthatthefollowingcriteriaforrecognitionofassetsheldforsalehadbeenmet:
• Thepropertieswereavailableforimmediatesale,• Thepropertieswerebeingactivelymarketed,• Thesalewasconsideredhighlyprobable,• ThesalewasexpectedtoconcludewithinoneyearofJanuary2019.
Thereforethesepropertieshavebeenreclassifiedasassetsheldforsale.Thishasresultedin£0.6mofdepreciationrelatingtothesepropertiesnotbeingcharged.ForfurtherdetailsseeNote11.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 93
1. Accounting policies cont.(6) Non-currentassetsheldforsaleanddisposalgroupsNon-currentassetsheldforsaleanddisposalgroupsareclassifiedasassetsheldforsalewhentheircarryingamountistoberecoveredprincipallythroughasaletransactionandasaleisconsideredhighlyprobable.Theyarestatedattheloweroftheircarryingamountorfairvaluelesscoststosell.
HeldforsaleassetsareassetsthathavemetallthecriteriarequiredbyIFRS5tobeclassifiedasheldforsale,atwhichpointtheyarederecognisedasnon-currentassets.
(7) DiscontinuedoperationsInaccordancewithIFRS5‘Non-currentassetsheldforsaleandDiscontinuedoperations’,thenetresultsofdiscontinuedoperationsarepresentedseparatelyintheGroupIncomestatement(andthecomparativesrestated)andtheassetsandliabilitiesofoperationsarepresentedseparatelyintheGroupbalancesheetiftheymeettheheldforsalecriteriaatthebalancesheetdate.
AcashgeneratingunitwouldmeettheclassificationofadiscontinuedoperationwhenconsideredmaterialtotheGroup’soverallresults.
(8) RevenueSmiths News – Sales of newspapers and magazines Salesofnewspapersandmagazinesarerecognisedwhencontroloftheproductshastransferred,thatis,whentheproductsaredeliveredtotheretailerandthereisnounfulfilledobligationthatcouldaffecttheretailer’sacceptanceoftheproducts,therisksofobsolescenceandlosshavebeentransferredtotheretailer.Goodsaresoldtoretailersonasaleorreturnbasis.
Revenueforgoodssuppliedwitharightofreturnisstatednetofthevalueofanyreturns.Newspapersandmagazinesareoftensoldwithretrospectivevolumediscountsbasedonaggregatesales.Revenuefromthesesalesisrecognisedbasedonthepricespecifiedinthecontract,netoftheestimatedvolumediscounts.Accumulatedexperienceisusedtoestimateandprovideforthediscountandreturns,usingtheexpectedvaluemethod,andrevenueisonlyrecognisedtotheextentthatitishighlyprobablethatasignificantreversalwillnotoccur.Areturnsreserveaccrualanddiscountaccrual(includedintradeandotherpayables)isrecognisedforexpectedvolumediscountsandrefundspayabletocustomersinrelationtosalesmadeuntiltheendofthereportingperiod.Arighttothereturnedgoods(includedinothercurrentassets)isrecognisedfortheproductsexpectedtobereturned.Noelementoffinancingisdeemedpresent,becausethesalesaremadewithshortcreditterms,whichisconsistentwithmarketpractice.
Areceivableisrecognisedwhenthegoodsaredelivered,sincethisisthepointintimethattheconsiderationisunconditionalbecauseonlythepassageoftimeisrequiredbeforethepaymentisdue.
Tuffnells – Delivery revenueDeliveryrevenueisrecognisedondeliverywhentherearenounfulfilledobligations.Retrospectivevolumediscountsbasedonaggregatesalesareoftengivenbasedontheaggregatesalesoverashortperiod.Revenueisonlyrecognisedtotheextentthatitishighlyprobableandasignificantreversalwillnotoccur.
Areceivableisrecognisedwhenthegoodsaredelivered,sincethisisthepointintimethattheconsiderationisunconditionalbecauseonlythepassageoftimeisrequiredbeforethepaymentisdue.
Accruedincomeonallrevenueisrecognisedwhenaservicehasbeenperformedbutaninvoicehasnotbeenraised,theGroupaccruedincomeisshort-termandinvoicedclosetotheservicebeingprovided.(9) CostofsalesandgrossprofitTheGroupconsiderscostofsalestoequatetocostofinventoriesrecognisedasanexpense,netimpairmentlossesonfinancialassetsanddistributioncostsastheseareconsideredtorepresentfortheGroupdirectcostsofmakingasale.
TheGroupconsidersgrossprofittoequalrevenuelesscostofsales.
(10)TaxationTaxontheprofitorlossfortheyearcomprisescurrentanddeferredtax.Taxisrecognisedintheincomestatement,excepttotheextentitrelatestoitemsrecognisedinothercomprehensiveincomeordirectlyinequity.Currenttaxistheexpectedtaxpayablebasedonthetaxableprofitfortheyear,usingtaxratesenacted,orsubstantivelyenactedatthebalancesheetdateandanyadjustmenttotaxpayableinrespectofpreviousyears.
Deferredtaxisprovidedonthebalancesheetliabilitymethod,providingfortemporarydifferencesbetweenthecarryingamountsofassetsandliabilitiesforfinancialreportingpurposesandtheamountsusedfortaxationpurposes.Theamountofdeferredtaxprovidediscalculatedusingtaxratesenactedorsubstantivelyenactedatthebalancesheetdateandareexpectedtoapplywhentherelateddeferredtaxassetisrealisedorthedeferredtaxliabilityissettled.Deferredtaxassetsarerecognisedtotheextentthatitisprobablethatfuturetaxableprofitswillbeavailableagainstwhichthesetemporarydifferencescanbeutilised.
(11)DividendsInterimandfinaldividendsarerecordedinthefinancialstatementsintheperiodinwhichtheyarepaid.
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Notes to the Accounts cont.
1. Accounting policies cont.(12)CapitalisationofinternallygenerateddevelopmentcostsExpenditureondevelopedsoftwareiscapitalisedwhentheGroupisabletodemonstrateallofthefollowing:thetechnicalfeasibilityoftheresultingasset;theability(andintention)tocompletethedevelopmentanduseit;howtheassetwillgenerateprobablefutureeconomicbenefits;andtheabilitytomeasurereliablytheexpenditureattributabletotheassetduringitsdevelopment.Subsequenttoinitialrecognition,internallygeneratedintangibleassetsarereportedatcostlessaccumulatedamortisationandaccumulatedimpairmentlosses,onthesamebasisasintangibleassetsthatareacquiredseparately.
(13)JointventuresTheGroupAccountsincludetheGroup’sshareofthetotalrecognisedgainsandlossesinitsjointventuresonanequityaccountedbasis.
Investmentsinjointventuresarecarriedinthebalancesheetatcostadjustedbypost-acquisitionchangesintheGroup’sshareofthenetassetsofthejointventures,lessanyimpairmentlosses.Thecarryingvaluesofinvestmentsinjointventuresincludeacquiredgoodwill.LossesinjointventuresthatareinexcessoftheGroup’sinterestinthejointventurearerecognisedonlytotheextentthattheGrouphasincurredlegalorconstructiveobligationsormadepaymentsonbehalfofthejointventure.
(14)Businesscombinations,goodwillandintangiblesTheGroupusestheacquisitionmethodofaccountingtoaccountforbusinesscombinations.Thecostofanacquisitionismeasuredatthefairvalueoftheassetsgiven,equityinstrumentsissued,liabilitiesincurredorassumedatthedateofexchange.Acquisitionrelatedcostsarerecognisedinprofitorlossasincurred.Anydeferredorcontingentpurchaseconsiderationisrecognisedatfairvalueovertheperiodofentitlement.Ifthecontingentpurchaseconsiderationisclassifiedasequity,itisnotremeasuredandsettlementisaccountedforinequity.Anydeferredorcontingentpaymentdeemedtoberemunerationasopposedtopurchaseconsiderationinnatureisrecognisedinprofitorlossasincurred,andexcludedfromtheacquisitionmethodofaccountingforbusinesscombinations.Identifiableassetsacquiredandliabilitiesandcontingentliabilitiesassumedinabusinesscombinationaremeasured,initially,attheirfairvaluesattheacquisitiondate,irrespectiveoftheextentofanynon-controllinginterest.Thenon-controllinginterestismeasured,initially,atthenon-controllinginterest’sproportionofthenetfairvalueoftheassets,liabilitiesandcontingentliabilitiesrecognised.Goodwillismeasuredastheexcessofthesumoftheconsiderationtransferred,theamountofanynon-controllinginterestsintheacquiree,andthefairvalueoftheacquirer’spreviouslyheldequityinterestintheacquiree(ifany)overthenetoftheacquisition-dateamountsoftheidentifiableassetsacquiredandtheliabilitiesassumed.
Goodwillarisingonallacquisitionsisinitiallyrecognisedasanassetatcostandissubsequentlymeasuredatcostlessanyaccumulatedimpairmentlosses.
Thecarryingvalueisreviewedannuallyforimpairmentorwhenevereventsorchangesincircumstancesindicatethatthecarryingamountmaynotberecoverable.Intangibleassetsarisingunderabusinesscombination(acquiredintangibles)arecapitalisedatfairvalueasdeterminedatthedateofexchangeandarestatedatfairvaluelessaccumulatedamortisationandimpairmentlosses.Amortisationofacquiredintangiblesischargedtotheincomestatementonastraight-linebasisovertheestimatedusefullivesasfollows:
Customerrelationships –2.5to7.5yearsTradename –5to10yearsSoftwareanddevelopmentcosts–3to7years
Computersoftwareandinternallygenerateddevelopmentcostswhicharenotintegraltotherelatedhardwarearecapitalisedseparatelyasanintangibleassetandstatedatcostlessaccumulatedamortisationandimpairmentlosses.
Assetsheldunderfinanceleasesaredepreciatedovertheirexpectedusefullivesonthesamebasisasownedassetsor,whereshorter,overthetermoftherelevantlease.AllintangibleassetsarereviewedforimpairmentinaccordancewithIAS36‘ImpairmentofAssets’whenthereareindicationsthatthecarryingvaluemaynotberecoverable.
(15)Property,plantandequipmentProperty,plantandequipmentassetsarestatedatcostlessaccumulateddepreciationandanyrecognisedimpairmentlosses.Nodepreciationhasbeenchargedonfreeholdland.Otherassetsaredepreciated,toaresidualvalue,onastraight-lineovertheirestimatedusefullives,asfollows:
Freeholdandlong-termleaseholdproperties–over20yearsShort-termleaseholdproperties –shorteroftheleaseperiodandtheestimatedremainingeconomiclifeFixturesandfittings –3to15yearsEquipment –5to12yearsComputerequipment –upto5yearsVehicles –upto5years
Assetsheldunderfinanceleasesaredepreciatedovertheirexpectedusefullivesonthesamebasisasownedassetsor,whereshorter,overthetermoftherelevantlease.Allproperty,plantandequipmentisreviewedforimpairmentinaccordancewithIAS36‘ImpairmentofAssets’whenthereareindicationsthatthecarryingvaluemaynotberecoverable.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 95
1. Accounting policies cont.(16)LeasingLeasesareclassifiedasfinanceleaseswheneverthetermsoftheleasetransfersubstantiallyalltherisksandrewardsofownershiptothelessee.Allotherleasesareclassifiedasoperatingleases.Property,plantandequipmentheldunderfinanceleasesiscapitalisedinthebalancesheetatthelowerofthefairvalueorthepresentvalueoftheminimumleasepaymentsandisdepreciatedoveritsusefullife.Thecapitalelementsoffutureobligationsunderleasesareincludedasliabilitiesinthebalancesheet.Leasepaymentsareapportionedbetweenfinancechargesandreductionoftheleaseobligationsoastoachieveaconstantrateofreturnontheremainingbalanceoftheliability.
Propertyandequipmentandvehiclerentalspaidunderoperatingleasesarechargedtoincomeonastraightlinebasisovertheleaseterm.Thebenefitsofrentfreeperiodsandsimilarincentivesarecreditedtotheincomestatementonastraight-linebasistothefirstbreakclause.
(17)InventoriesInventoriescomprisegoodsheldforresaleandarestatedatthelowerofcostornetrealisablevalue.Inventoriesarevaluedusingaweightedaveragecostmethod.Costcomprisesdirectmaterialsand,whereapplicable,directlabourcostsandthoseoverheadsthathavebeenincurredinbringingtheinventoriestotheirpresentlocationandcondition.
(18)FinancialinstrumentsFinancialassetsandfinancialliabilitiesarerecognisedontheGroup’sbalancesheetwhentheGroupbecomesapartytothecontractualprovisionsoftheinstrument.TheGroupderecognisesfinancialassetsandliabilitiesonlywhenthecontractualrightsandobligationsaretransferred,dischargedorexpire.
Financialassetscomprisetradeandotherreceivablesandcashandcashequivalents.Financialliabilitiescomprisetradepayables,financingliabilitiesandbankborrowings.
(19)TradereceivablesTradeandotherreceivablesareinitiallymeasuredatfairvalue,whichfortradereceivablesisequaltotheconsiderationexpectedtobereceivedfromthesatisfactionofperformanceobligations,plusanydirectlyattributabletransactioncosts.Subsequenttoinitialrecognitiontheseassetsaremeasuredatamortisedcostlessanyprovisionforimpairmentlossesincludingexpectedcreditlosses.InaccordancewithIFRS9theGroupappliesthesimplifiedapproachtomeasuringexpectedcreditlosseswhichusesalifetimeexpectedlossallowanceforalltradereceivables.Tomeasuretheexpectedcreditlosses,tradereceivableshavebeengroupedbasedonsharedcreditriskcharacteristicssuchastheageingofthedebtandthecreditriskofthecustomers.Anhistoricalcreditlossrateisthencalculatedforeachgroupandthenadjustedtoreflectexpectationsaboutfuturecreditlosses.TheGroupdoesnothaveanysignificantcontractassets.
Classification as trade receivablesTradereceivablesareamountsduefromcustomersforgoodssoldorservicesperformedintheordinarycourseofbusiness.Theyaregenerallydueforsettlementwithin30daysandarethereforeallclassifiedascurrent.Tradereceivablesarerecognisedinitiallyattheamountofconsiderationthatisunconditional,unlesstheycontainsignificantfinancingcomponents,inwhichcasetheyarerecognisedatfairvalue.TheGroupholdsthetradereceivableswiththeobjectiveofcollectingthecontractualcashflows,andsoitmeasuresthemsubsequentlyatamortisedcostusingtheeffectiveinterestmethod.DetailsabouttheGroup’simpairmentpoliciesandthecalculationofthelossallowanceareprovidedinNote17.
Duetotheshort-termnatureofthecurrentreceivables,theircarryingamountisconsideredtobethesameastheirfairvalue.
(20)TradeandotherpayablesTheseamountsrepresentliabilitiesforgoodsandservicesprovidedtotheGrouppriortotheendofthefinancialyearwhichareunpaid.Theamountsareunsecuredandareusuallypaidwithin30daysofrecognition.Tradeandotherpayablesarepresentedascurrentliabilitiesunlesspaymentisnotduewithin12monthsafterthereportingperiod.Theyarerecognisedinitiallyattheirfairvalueandsubsequentlymeasuredatamortisedcostusingtheeffectiveinterestmethod.
(21)TreasuryCash and bank depositsCashandcashequivalentsinthebalancesheetcomprisecashatbankandinhandandshort-termdepositswithanoriginalmaturityofthreemonthsorless.Intheconsolidatedbalancesheet,bankoverdraftsareshownwithinborrowingsincurrentliabilities.Cashandcashequivalentsinthecashflowstatementcomprisecashatbankandinhandandbankoverdraftsheldfortradingpurposes.
Financial liabilities and equityFinancialliabilitiesandequityinstrumentsareclassifiedaccordingtothesubstanceofthecontractualarrangementsenteredinto.AnequityinstrumentisanycontractthatevidencesaresidualinterestintheassetsoftheGroupafterdeductingallofitsliabilities.Equityinstrumentsissuedarerecordedattheproceedsreceived,netofdirectissuecosts.
Bank borrowingsInterestbearingbankloansandoverdraftsareinitiallymeasuredatfairvalue(beingproceedsreceived,netofdirectissuecosts),andaresubsequentlymeasuredatamortisedcost,usingtheeffectiveinterestratemethod.Financecharges,includingpremiumspayableonsettlementorredemptionsanddirectissuecostsareaccountedforonanaccrualsbasisandtakentotheincomestatementusingtheeffectiveinterestratemethodandareaddedtothecarryingvalueoftheinstrumenttotheextentthattheyarenotsettledintheperiodinwhichtheyarise.
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Notes to the Accounts cont.
1. Accounting policies cont.(21)Treasurycont.Foreign currenciesFinancialstatementsofforeignoperationsTheassetsandliabilitiesofforeignoperations,includinggoodwillandfairvalueadjustmentsarisingonacquisitionofaforeignentityaretreatedasassetsandliabilitiesoftheforeignentityandaretranslatedatforeignexchangeratesrulingatthebalancesheetdate.Therevenuesandexpensesofforeignoperationsaretranslatedatanaverageratefortheperiodwherethisrateapproximatestotheforeignexchangeratesrulingatthedatesofthetransactions.
ForeigncurrencytransactionsTransactionsinforeigncurrenciesarerecordedusingtheraterulingatthedateofthetransaction.Monetaryassetsandliabilitiesdenominatedinforeigncurrenciesatthebalancesheetdatearetranslatedattheforeignexchangeraterulingatthatdate.Foreignexchangedifferencesarisingontranslationarerecognisedintheincomestatement.Non-monetaryassetsandliabilitiesthataremeasuredintermsofhistoricalcostinaforeigncurrencyaretranslatedusingtheexchangerateatthedateofthetransaction.Non-monetaryassetsandliabilitiesdenominatedinforeigncurrenciesthatarestatedatfairvaluearetranslatedatforeignexchangeratesrulingatthedatesthefairvaluewasdetermined.
(22)ProvisionsProvisionsarerecognisedwhentheGrouphasapresentlegalorconstructiveobligationasaresultofapasteventanditisprobablethatanoutflowofeconomicbenefitswillberequiredtosettletheobligation.Provisionsaremeasuredatthedirectors’bestestimateoftheexpenditurerequiredtosettletheobligationatthebalancesheetdateandifthisamountiscapableofbeingreliablyestimated.Ifsuchanobligationisnotcapableofbeingreliablyestimated,noprovisionisrecognisedandtheitemisdisclosedasacontingentliabilitywherematerial.Wheretheeffectismaterial,theprovisionisdeterminedbydiscountingtheexpectedfuturecashflows.
(23)RetirementbenefitcostsTheGroupoperatesanumberofdefinedcontributionschemesforthebenefitofitsemployees.PaymentstotheGroup’sschemesarerecognisedasanexpenseintheincomestatementasincurred.TheGroupoperatestwodefinedbenefitpensionschemes.ThelargestschemeTheWHSmithPensionTrust,isclosedtofurtheraccrual.ThechargetotheGroupofprovidingbenefitsforthesetwoschemesisdeterminedbytheProjectedUnitCreditMethod,withactuarialcalculationsbeingcarriedoutatthebalancesheetdate.ActuarialgainsandlossesarerecognisedinfullintheperiodinwhichtheyoccurintheGroupstatementofcomprehensiveincome.Theretirementbenefitobligationrecognisedinthebalancesheetrepresentsthepresentvalueofthedefinedbenefit,reducedbythefairvalueofschemeassets.AnassetceilingcapisappliedinaccordancewithIFRIC14withanadditionalliabilityrecognisedwherethereisacontractualobligationtomakefurtherpaymentsintothescheme.
(24)EmployeeBenefitTrustSmiths News Employee Benefit TrustThesharesheldbytheSmithsNewsEmployeeBenefitTrustarevaluedatthehistoricalcostofthesharesacquired.Thisvalueisdeductedinarrivingatshareholders’fundsandpresentedastheownsharereserveinlinewithIAS32‘FinancialInstruments:DisclosureandPresentation’.
(25)ShareschemesShare-based paymentsTheGroupoperatesseveralshare-basedpaymentschemes,beingtheSharesaveScheme,theExecutiveShareOptionScheme,theLTIPandtheDeferredBonusPlan.DetailsoftheseareprovidedintheDirectors’RemunerationreportandinNote31.
Equity-settledshare-basedschemesaremeasuredatfairvalueatthedateofgrant.Thefairvalueisexpensedwithacorrespondingincreaseinequityonastraight-linebasisovertheperiodduringwhichemployeesbecomeunconditionallyentitledtotheoptions.Thefairvaluesarecalculatedusinganappropriateoptionpricingmodel.Theincomestatementchargeisthenadjustedtoreflectexpectedandactuallevelsofvestingbasedonnon-marketperformancerelatedcriteria.
Administrativeexpensesanddistributionandmarketingexpensesincludethecostoftheshare-basedpaymentschemes.
(26)ChangesinaccountingpoliciesTheGrouphasappliedthefollowingstandardsandamendmentsforthefirsttimeforitsAnnualReportingperiodcommencing1September2018:
• IFRS9,‘FinancialInstruments’;• IFRS15,‘RevenuefromContractswithCustomers’;• ClassificationandMeasurementofShare-basedPaymentTransactions–AmendmentstoIFRS2;• AnnualImprovements2014–2016cycle;• TransferstoInvestmentProperty–AmendmentstoIAS40;and• Interpretation22,‘ForeignCurrencyTransactionsandAdvanceConsideration’.
TheGrouphadtochangeitsaccountingpoliciesandmakecertainretrospectiveadjustmentsfollowingtheadoptionofIFRS9andIFRS15.ThisisdisclosedinNote36.Mostoftheotheramendmentslistedabovedidnothaveanyimpactontheamountsrecognisedinpriorperiodsandarenotexpectedtosignificantlyaffectthecurrentorfutureperiods.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 97
1. Accounting policies cont.(26)Changesinaccountingpoliciescont.New Standards and Interpretations not yet appliedAtthedateofauthorisationofthesefinancialstatements,thefollowingStandardsandInterpretationsthatarepotentiallyrelevanttotheGroupandwhichhavenotbeenappliedinthesefinancialstatementswereinissuebutnotyeteffective(andinsomecaseshadnotyetbeenadoptedbytheEU):
• IFRS16Leases.• IFRS17InsuranceContracts.• IFRIC23UncertaintyoverTaxTreatments.• AmendmentstoIFRS9–PrepaymentFeatureswithNegativeCompensation.• AmendmentstoIAS19:PlanAmendment,CurtailmentorSettlement.• AmendmentstoIAS28:Long-termInterestsinAssociatesandJointVentures.• AnnualImprovementstoIFRSStandards2015-2017Cycle.
TheGroupwillapplyIFRS16,whichreplacesIAS17,witheffectfrom1September2019.ThestandardwillhaveamaterialimpactfortheGroupasitintroducesanewlesseeaccountingmodelandrequirestherecognitionofassetsandliabilitiesforthemajorityofleases.Rentalcostscurrentlyrecognisedinoperatingprofitwillbereplacedbydepreciationoftheassetsandfinancecostsontheliabilities.Thetotalcashoutflowforleasepaymentswillnotchange.However,thepaymentsrelatedtotheprincipalliabilitieswillbepresentedascashoutflowsfromfinancingactivities,asopposedtothecurrenttreatmentascashoutflowfromoperatingactivities.
TheGroupintendstoapplyIFRS16usingthemodifiedretrospectiveapproach;thecumulativeeffectofinitialadoptionbeingrecognisedasanadjustmenttotheopeningbalanceofretainedearningsasat1September2019withnorestatementofcomparativeinformation.Theleaseliabilitiesontransitionwillbethepresentvalueofleasepaymentsdiscountedusingtheincrementalborrowingrateat1September2019.Theright-of-useassetwillbevaluedatanamountequaltoeithertheleaseliabilityorthecarryingamountasifIFRS16hadbeenappliedsincethestartofthelease,butusingthediscountrateat1September2019(thedateofinitialapplication),determinedonaleasebyleasebasis.TheGroupplanstotakeadvantageofpracticalexpedientsto:
• applyIFRS16onlytocontractspreviouslyidentifiedasleasesunderIAS17LeasesandIFRIC14DeterminingwhetheranArrangementcontainsaLease;
• excludeleaseswheretheleasetermis12monthsorlessfromthedateofinitialapplicationandclasssuchleasesasshort-termleases;• excludelowvalueassets;• excludeinitialdirectcostsfromthemeasurementoftheright-of-useassetatthedateofinitialapplication;• usehindsight,suchasindeterminingtheleasetermifthecontractcontainsoptionstoextendorterminate;• applyasinglediscountratetoaportfolioofleaseswithsimilarcharacteristics;and• relyonitsassessmentastowhetheraleaseisonerousbyapplyingIAS37Provisions,ContingentLiabilitiesandContingentAssetsimmediately
beforethedateofinitialapplicationasanalternativetoperforminganimpairmentreview.
At31August2019,theGroupheldasignificantnumberofoperatingleasesforwhichthefutureundiscountedminimumleasepaymentsamountedto£79.3masdisclosedinNote25totheconsolidatedfinancialstatements.OnadoptionofIFRS16,theexpectedeffectonthebalancesheetistherecognitionof‘rightofuse’assetsofaround£74.5m,acorrespondingleaseliabilityofaround£74.5m.Theexpectedeffectontheincomestatementin2020,basedontheleasesheldontransition,willbeanincreaseintheGroupannualdepreciationchargeofaround£16.8moffsetbyadecreaseinrentalchargesby£18.9mandanimprovementinoperatingprofitby£2.1m.Theinterestchargerelatingtoleasedcreditorswillalsoincreaseby£3.4m.TheGroupcurrentlyhas£1.4mofleaseincentivesand£0.4mofonerousleaseprovisions,thesewillbeincludedwithintherightofuseassetontransition.PostyearendtheGroupenteredintoasaleandleasebackforsixofitspropertiestheIFRS16impactisdisclosedwithinNote11.
Astheleaseliabilityisexpectedtomatchtherightofuseassetat1September2019thereisnoexpectedchangetodeferredtax.
TheGroupwillcontinuetoimplementandrefineproceduresandprocessestoapplythenewrequirementsofIFRS16.Asaresultofthisongoingwork,itispossiblethattheremaybesomechangestotheadoptionimpactoutlinedabove,beforethehalfyearresultsto28February2019areissued.However,atthistimethesearenotexpectedtobematerial.
ThecovenantrequirementsfortheGroup’scommittedfinancingfacilitiesarebasedon“FrozenGAAP”andthereforearenotimpactedbythetransitiontoIFRS16.
Therearenootherstandardsthatarenotyeteffectiveandthatwouldbeexpectedtohaveamaterialimpactontheentityinthecurrentorfuturereportingperiodsandonforeseeablefuturetransactions.
(27)RestatementofIncomeStatementTheprioryearincomestatementhasbeenrestated,topresentasplitofcoststocomplywiththeprinciplesofIAS1,thishasnoimpactontheoverallresultfortheperiod.
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Notes to the Accounts cont.
2. Segmental analysisInaccordancewithIFRS8‘OperatingSegments’,managementhasidentifieditsoperatingsegments.Theperformanceoftheseoperatingsegmentsisreviewed,onamonthlybasis,bytheBoard.TheBoardprimarilyusesameasureofAdjustedoperatingprofitbeforetaxtoassesstheperformanceoftheoperatingsegments.However,theBoardalsoreceivesinformationaboutthesegments’revenue.
Thecontinuingoperatingsegmentsare:
Smiths News TheUKmarketleadingdistributorofnewspapersandmagazinesto27,000retailersacrossEnglandandWalesfrom39distributioncentres.
Tuffnells AleadingproviderofnextdayB2Bdeliveryofirregularweightanddimensionsconsignments.
TheBoardnolongerconsidersthepreviouslyreportedDMDsegmentareportablesegment.TheBoardtookthedecisiontorationalisethepropositionanditisnowincludedwithintheresultsofSmithsNews.TheresultsofSmithsNewshavebeenrestatedtoincludetheresultsofthepreviouslyreportedDMDsegment.
AsexplainedinNote11,theBooksbusiness,aleadingUKdistributorofphysicalanddigitalbooks,wasdisposedofon14February2018.Thebusinesshasbeenpresentedasadiscontinuedoperationandhasbeenincludedbelowwherenecessaryforthepurposeofreconciliation.
ThefollowingisananalysisoftheGroup’srevenueandresultsbyreportablesegment:
Revenue
£m 2019Restated*
2018
SmithsNews 1,303.3 1,361.6
Tuffnells 164.6 175.2
EliminationofIntragrouprevenue – (2.5)
Continuingoperations 1,467.9 1,534.3
Discontinuedoperations – 114.3
Totalcontinuinganddiscontinuedoperations 1,467.9 1,648.6
TheaccountingpoliciesofthereportablesegmentsarethesameastheGroup’saccountingpoliciesdescribedinNote1.
IntragrouprevenuerelatestoservicesprovidedbyTuffnellstoSmithsNewsinrespectofPassMyParcel.
2019 Restated*2018
£m
Adjustedoperating
profitAdjusted
items
Statutoryoperating
profit
Adjustedoperating
profitAdjusted
items
Statutoryoperating
profit
SmithsNews 43.6 (7.3) 36.3 38.9 (11.2) 27.7
Tuffnells (14.1) (53.5) (67.6) (5.0) (52.7) (57.7)
Continuingoperations 29.5 (60.8) (31.3) 33.9 (63.9) (30.0)
Discontinuedoperations* – – – 1.8 (10.6) (8.8)
Total continuing and discontinued operations 29.5 (60.8) (31.3) 35.7 (74.5) (38.8)
Netfinanceexpense (6.3) – (6.3) (5.5) – (5.5)
Profitbeforetaxation 23.2 (60.8) (37.6) 30.2 (74.5) (44.3)Discontinuedoperationsinthetableabovearepre-taxmeasures.PresentationintheGroupincomestatementfordiscontinuedoperationsareposttaxmeasures.
* TheabovetableshavebeenrestatedtoconsolidatetheresultsofDMDwithintheresultsofSmithsNews.DMDresultsfor2018wereasfollows:£26.5mrevenue,£3.0mofAdjustedoperatingprofit,(£0.3m)ofAdjustedItems,£2.7mofoperatingprofit.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 99
2. Segmental analysis cont.InformationaboutmajorcustomersIncludedinrevenuesarisingfromSmithsNewsarerevenuesofapproximately£136.5m(2018:£141.3m)whicharosefromsalestotheGroup’slargestcustomer.Noothersinglecustomercontributed5.9%ormoreoftheGroup’srevenuein2019(2018:6.0%).
Segmentdepreciation,amortisationandnon-currentassetadditions
Depreciation
Amortisation
Impairment
Additionstonon-currentassets
£m 2019Restated*
2018 2019Restated*
2018 2019Restated*
2018 2019Restated*
2018
SmithsNews (2.8) (4.0) (2.4) (3.5) – (3.0) 5.4 3.9
Tuffnells (4.1) (4.6) (6.8) (6.8) (45.5) (46.1) 4.8 4.4
Continuingoperations (6.9) (8.6) (9.2) (10.3) (45.5) (49.1) 10.2 8.3
Discontinuedoperations – – – – – – – 0.6
Consolidated total (6.9) (8.6) (9.2) (10.3) (45.5) (49.1) 10.2 8.9
Additionstonon-currentassetsincludeintangibleassetsandproperty,plantandequipment.
* TheabovetableshavebeenrestatedtoconsolidatetheresultsofDMDwithintheresultsofSmithsNews.DMDresultsfor2018wereasfollows:£0.2mdepreciation,£0.3mofamortisation,£0.1mofadditionstonon-currentassets.
Geographicalanalysis
Revenuebydestination
Non-currentassetsbylocationofoperation
£m 2019 2018 2019 2018
UnitedKingdom 1,454.9 1,521.2 40.2 94.6
Spain 0.5 0.7 – –
France 1.2 1.7 – –
Germany 2.9 2.6 – –
Netherlands 4.1 3.6 – –
RestofWorld 4.3 4.5 – –
Continuing operations 1,467.9 1,534.3 40.2 94.6
Discontinued operations – 114.3 – –
Total continuing and discontinued operations 1,467.9 1,648.6 40.2 94.6
IFRS8requiresthatameasureofsegmentassetsshouldbedisclosedonlyifthatamountisregularlyprovidedtothechiefoperatingdecisionmakerandconsequentlynosegmentassetsaredisclosed.
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Notes to the Accounts cont.
3. Operating profit/(loss)TheGroup’sresultsareanalysedasfollows:
2019 Restated*2018
£m Note AdjustedAdjusted
items Total AdjustedAdjusted
items Total
Revenue 1,467.9 – 1,467.9 1,534.3 – 1,534.3
Costofinventoriesrecognisedasanexpense (1,111.0) – (1,111.0) (1,154.5) – (1,154.5)
Netimpairmentlossesonfinancialassets (0.1) – (0.1) (0.4) – (0.4)
Distributioncosts (274.9) (1.0) (275.9) (274.7) (3.6) (278.3)
Gross profit 81.9 (1.0) 80.9 104.7 (3.6) 101.1
Otheradministrativeexpenses (50.2) (7.5) (57.7) (68.3) (7.1) (75.4)
Share-basedpaymentexpense 31 (0.4) – (0.4) – – –
Impairmentofassets 13 – (45.5) (45.5) – (46.1) (46.1)
Amortisationofintangibles 13 (2.4) (6.8) (9.2) (3.0) (7.1) (10.1)
Administrative expenses (53.0) (59.8) (112.8) (71.3) (60.3) (131.6)
Shareofprofitsfromjointventures 15 0.6 – 0.6 0.5 – 0.5
Operating profit 29.5 (60.8) (31.3) 33.9 (63.9) (30.0)
* TheabovenotehasbeenrestatedtocombineothercostofsalesanddistributioncostsastheGroupconsidersthesetoequatetothesametypeofexpense.
Theoperatingprofit/(loss)isstatedaftercharging/(crediting):
2019 2018
£m Note Continuing Discontinued Total Continuing Discontinued Total
Depreciationonproperty,plant&equipment 14 6.9 – 6.9 8.6 – 8.6
Amortisationofintangibleassets 13 9.2 – 9.2 10.3 – 10.3
Operatingleasecharges
occupiedlandandbuildings 10.1 – 10.1 10.2 0.5 10.7
equipmentandvehicles 15.5 – 15.5 16.7 0.1 16.8
Operatingleaserentalincome–landandbuildings (0.3) – (0.3) (0.2) – (0.2)
Writedownofinventoriesrecognisedasanexpense – – – – – –
(Loss)/gainondisposalofnon-currentassets (0.3) – (0.3) (0.4) – (0.4)
(Loss)/gainondisposalofnon-currentassetsheldforsale 12 – – – – (10.5) (10.5)
Staffcosts(excludingshare-basedpayments) 5 (124.5) – (124.5) 125.5 6.7 132.2
IncludedinadministrativeexpensesareamountspayablebytheCompanyanditssubsidiaryundertakingsinrespectofauditandnon-auditserviceswhichareasfollows:
£m 2019 2018
FeespayabletotheCompany’sauditorfortheauditoftheCompany’sannualaccounts–DeloitteLLP – 0.5
FeespayabletotheCompany’sauditorfortheauditoftheCompany’ssubsidiaries–DeloitteLLP 0.1 0.2
FeespayabletotheCompany’sauditorfortheauditoftheCompany’sannualaccounts–BDOLLP 0.2 –
FeespayabletotheCompany’sauditorfortheauditoftheCompany’ssubsidiaries–BDOLLP 0.2 –
Total non-audit fees 0.1 –
Total fees 0.6 0.7
DetailsoftheCompany’spolicyontheuseofauditorsfornon-auditservicesandhowtheauditor’sindependenceandobjectivitywassafeguardedaresetoutintheAuditCommitteereport.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 101
4. Adjusted Items£m Note 2019 2018
Continuing operations
Networkandre-organisationcosts (1) (6.4) (3.1)
Property (2) – 0.7
Saleandleasebackcosts (3) (0.7) –
Amortisationofacquiredintangibles (4) (6.8) (7.1)
Pension (5) (2.2) –
BrierleyHillinsuranceclaim (6) (0.2) –
ImpairmentofTuffnellsassets (7) (45.5) (46.1)
PassMyParcelexitcosts (8) 0.3 (6.7)
ImpairmentofJack’sBeans (9) – (1.1)
NMWregulatorycompliance (10) 0.2 (0.5)
IPRsettlementincome (11) 0.5 –
Total before tax (60.8) (63.9)
Taxation 9.9 2.9
Total after taxation (50.9) (61.0)
Discontinued operations
Lossondisposalofsubsidiary (12) – (10.5)
Re-organisationcosts (13) – (0.1)
Total before tax – (10.6)
Taxation – –
Total after taxation – (10.6)
Continuing and discontinued operations
Totalbeforetax (60.8) (71.6)
Taxation 9.9 2.9
Total after taxation (50.9) (68.7)
TheGroupincurredatotalof£60.8m(2018:£63.9m)ofAdjustedItemsonacontinuingbasis,aftertax£50.9m(2018:£61.0m).
AdjustedItemsaredefinedintheaccountingpoliciesinNote1andintheglossaryonpage132,inthedirectors’opiniontheimpactofremovingtheseitemsfromtheAdjustedprofitgivethetrueunderlyingperformanceoftheGroupandcomprises:
(1) Networkandre-organisationcostsTheseareanalysedasfollows:
• ExecutiveTeamredundanciesof£0.9m. • Outsourcingofthesharedservicecentre£3.2m.• DMDrestructureof£1.2m.• Otherredundancyandre-organisationcostsof£1.1m.
Executive Team redundancies Costsof£0.9mhavebeenincurredrelatingtotherestructureoftheGroup’spreviousExecutiveTeam(2018:£nil).ThesecostsareconsideredtobeadjustinggiventhesizeandtheyenablecomparabilitybetweenyearswithequivalentcostsoftheExecutiveTeam.AstherestructureofthepreviousExecutiveTeamhasbeencompleted,nofurthercostsareexpectedtobeincurred.
Outsourcing central functions £3.2mofthecurrentyearcostrelatestotheoff-shoringofselectedtechnology,customerservicesandfinancefunctions.Thisprocesshasbeencommunicatedtoemployees.The£3.2mcomprisesaprovisionof£2.5mrelatedtoexpectedredundancycostsaspartofthistransitionand£0.7mrelatedtolegalandsetupcosts.Furthercostsoftheoffshoringareexpectedtobeincurredduringthenextfinancialyear.Thesecostsareconsideredadjustingastheimpactofthetransitiontoanoffshoredcentralfunctionisconsideredaoneoff.Therunningcostsoncethecentreisfullyoperationalwillbetreatedasnon-adjusting.
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Notes to the Accounts cont.
4. Adjusted Items cont.(1) Networkandre-organisationcostscont.DMD restructure costs InJune2019,DMD’sbiggestcontractwithBritishAirwayswasended.Assoonasnoticewasgiven,thebusinesssetaboutachangeprogrammetorightsizetheoperations,closesitesandreduceteamstoreflectthelossofthiscontract.Thiswasdesignedtoensurethebusinesswasabletocontinuetodeliverprofitsinfuturewithitssmallercustomercontractbase.Intotal,costsof£1.2mhavebeenincurredonredundanciesandtransferringoperationsintotheSmithsNewsSloughdepot.
Thesecostsareconsideredtobeadjustinggiventhesizeandtheyenablecomparabilitybetweenyearswithequivalentcostsofthedaytodayoperationsofthebusiness.
Other redundancy and re-organisation costs £1.1mhasbeenincurredinredundancyandotherre-organisationinstreamliningtheSmithsNewsandTuffnellsbusinesses(2018:£nil).
Theprioryearincludedabortiveintegrationcostsof£1.6mwithregardtotheintegrationprogrammeannouncedattheendofthepreviousfinancialyear.
Costsassociatedwiththere-organisationprogrammesareconsideredAdjustedItemsgiventheyarepartofastrategicprogrammetodrivefuturecostsavingsandthereforetheimpactofthecostsinthecurrentyeardistortsthetrueunderlyingperformanceoftheGroup.
(2) PropertyDuringtheprioryear,theGroupmadethestrategicdecisiontotransferthepreviouslyvacantSloughdepottotheTuffnellsbusiness,resultinginacreditfromthereleaseofitsonerousleaseprovision.OnerouschargesonpropertiesarechargedthroughAdjustedItemsastheyformpartoftheGroup’sstrategicrestructuringprogrammetogeneratefuturecostsavings.ThereversalofchargeshasalsobeenmadeinAdjustedItemsforconsistency.
(3) SaleandleasebackprofessionalfeesInJanuary2019,theGrouptookthedecisiontoselltheTuffnellsfreeholdandlongleaseholdpropertyportfolioandleaseitback.DuringtheyeartheGroupincurred£0.7mofcostsrelatedtothesaleandleasebackprogramme.TheGroupannouncedthesaleofsomepropertiespostyearend–forfurtherdetailsseeNote11.Giventhemagnitudeandone-offnatureofthetransactionasawholeitisconsideredtobeanAdjusteditem.
(4) AmortisationofacquiredintangiblesAchargeof£6.8m(2018:£7.1m)hasbeenrecognisedrelatingtoamortisationofacquiredintangiblesinTuffnells.ThisisconsideredanAdjusteditemasitallowscomparisonbetweensegmentsand,therefore,consistencyintheperformanceoftheGroupataconsolidatedlevel.
(5) PensionsSmithsNewsincurredprofessionalcostsof£2.1m,asaresultoftheWHSmithPensionTrust(oneoftheGroup’sdefinedbenefitpensionschemes)enteringintoaninsurancebackedannuity‘buy-in’oftheSchemeassets,withinthesectionoftheTrustsponsoredbySmithsNews,whichminimisestheGroup’sexposuretofuturepensionobligations.ThesepensionchargesarenotconsideredtobepartofnormaloperationsduetotheirsizeandnatureandarethereforeconsideredtobeanAdjusteditem.
Thereisafurther£0.1minrelationtoequalisationofGuaranteedMinimumPayments(GMP)oftheTuffnellsParcelExpresspensionscheme.ThisisconsideredtobeanAdjusteditemasitwasduetoaone-offchangeintheinterpretationofthelawrelatingtopreviouslyrecognisedcost,thisisconsideredoutofcontrolofmanagementandthechargerelatestoserviceinpriorperiodsandthereforeisconsideredanAdjusteditem.
(6) BrierleyHillinsuranceclaimTheGroupincurred£0.2mofinsurancesettlementcoststhisyearinrelationtoafatalityatTuffnells’BrierleyHilldepotthatoccurredinJanuary2016.TheGrouphadpreviouslyrecognisedthecostofthefineandlegalcostsinrelationtothis.Giventhemagnitude,one-offnatureandtoensureconsistenttreatmentwithpreviouslyreportedcostsitisconsideredtobeanAdjusteditem.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 103
4. Adjusted Items cont.(7) ImpairmentofTuffnellsassetsManagementreviewedthecarryingvalueoftheTuffnellsbusinessunitandconcludedthatanimpairmentchargeof£45.5m(2018:£46.1m)isrequired.Thiscomprises£6.0m(2018:£46.1m)goodwill,£26.4m(2018:nil)acquiredintangibles,£0.4m(2018:nil)otherintangiblesand£12.7m(2018:nil)property,plantandequipment.ForfurtherdetailsforthereasonandhowtheimpairmentswerecalculatedseeNotes13and14.
Theimpairmentofgoodwillhasnotaximpact;theimpairmentofacquiredintangibleshasresultedinthereleaseof£4.5mdeferredtaxliabilityasacredittoAdjustedItemsincometax.Adeferredtaxassetof£2.5mhasbeenrecognisedwhichhascreditedAdjustedItemsincometaxasaresultoftheimpairmentoftheotherassets.
ItisconsideredadjustingduetoitssignificantvalueandaidscomparabilitybetweenyearstoshowtheunderlyingperformanceoftheGroup.
(8) PassMyParcel(PMP)exitcostsFollowingareviewofthePMPpropositionon23May2018,theBoarddecidedtoclosethedivisionandasaresultachargeof£6.7mwasbookedintheprioryear.Thiswassplit£4.7mofcontractlossesand£2.0mofimpairmentofassociatedassets.
Managementconcludedthatlossesonwindingdownthedivisionrepresentedanonerouscontractwithacostof£4.7mrecognised.ThisrepresentedtheforecastexcessofcostsoverincomefromthedatetheGrouptookthedecisiontoclosethedivision.Ofthisbalance,£2.5minprovisionswasheldattheyearended31August2018tocovertheremainingcoststocloseallcontracts.In2019,£2.2mofcostswereincurredandbookedagainstthisprovision.Theremaining£0.3moftheprovisionhasbeenreleasedthisyear.
Afurther£2.0mofimpairmentchargessplit£1.0mtangibleand£1.0mintangiblewererecognisedtowriteoffthenon-currentassetsrelatingtothedivision.
(9) ImpairmentofJack’sBeansIn2018,theGrouptookthedecisiontoconsiderthesaleoftheJack’sBeansdivisiontofocusonitscorebusinesses.BidsreceivedindicatedthatthenetbookvalueoftheJack’sBeansassetswereoverstatedandsotheywereimpairedby£1.1m.TheGroupsubsequentlydisposedoftheassetsforproceedsequivalenttotheirrevisednetbookvalueinJanuary2019.Giventhemagnitude,theone-offnatureandtheGroup’sstrategytofocusonitscorebusinessesitwasconsideredtobeanAdjustingitem.
(10)NMWregulatorycomplianceTheGrouphasbeenindiscussionwithHMRCregardinganhistoricalunderpaymentinrelationtoamisapplicationofnationalminimumwagelegislationinTuffnells.Aprovisionamountingto£1.3mwasmadeintheprioryearfinancialstatements.Ofthisbalance,£0.5mrelatedspecificallytotheestimatedfine.The£0.5mfinewasclassifiedasadjustingin2018.Theunderpaymentsandfineswereallsettledduring2019.Theremaining£0.2mofthe£0.5mfineprovisionhasbeenreleasedin2019.ThereleasewasalsorecognisedasanAdjustingitemtobeconsistentwithpriorperiodsandduetoitsone-offnatureandmagnitude.
(11)IPRsettlementincomeTheGroupreceivedaone-off£0.5mofincomeinrelationtothesettlementofanIPRdisputeconcerningtheproposeduseofasimilarbrandtooneoftheGroup’sbrands.Thisisconsideredadjustinggivenitssizeandone-offnature.
(12)LossondisposalofsubsidiaryOn14February2018,theGroupcompletedthesaleoftheBooksbusinessatalossof£10.5m–fulldetailsareprovidedinNote12.
(13)Re-organisationcostsRe-organisationcostsof£nil(2018:£0.1m)wereincurredbytheBooksbusinessduringtheyear.Re-organisationcostsareconsideredtobeAdjustedItemsastheyarepartoftheGroup’swiderrestructuringprogrammetodelivercostsavingsandwereincurredpriortothedisposal.Thesearedisclosedseparatelyfromotherre-organisationcostsonthebasistheBooksbusinesswasdiscontinued.
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Notes to the Accounts cont.
5. Staff costs and employees(1) StaffcostsTheaggregateremunerationofemployees(includingexecutivedirectors)was:
£m Note 2019 2018
Continuing
Wagesandsalaries 113.5 112.6
Socialsecurity 9.5 11.0
Pensioncosts 6 1.9 1.9
Total 124.9 125.5
Pensioncostsshownaboveexcludechargesandcreditsforpensionschemefinancingandactuarialgainsandlossesarisingonthepensionschemes.Wagesandsalariesshownaboveexcludeamountsrelatedtosharebasedpaymentcharges.Onacontinuingbasistherewasachargeof£0.4min2019(2018:£nil)relatingtosharebasedpayments(refertoNote3).Therewas£nil(2018:£6.7m)ofstaffcostsrelatingtodiscontinuedoperations;thesearenotincludedintheabovetable.
(2) EmployeenumbersTheaveragetotalmonthlynumberofemployeesrelatingtocontinuingoperations(includingexecutivedirectors)was:
Number 2019 2018
Operations 3,263 3,707
Supportfunctions 1,763 1,137
Total 5,026 4,844
6. Retirement benefit obligationDefinedbenefitpensionschemesTheGroupoperatestwodefinedbenefitschemes,theWHSmithPensionTrust(the‘PensionTrust’)andtheTuffnellsParcelsExpressPensionScheme.
TheGroup’sdefinedbenefitpensionplansarefinalsalarypensionplans,whichprovidebenefitstomembersintheformofaguaranteedlevelofpensionpayableforlife.Thelevelofbenefitsprovideddependsonmembers’lengthofserviceandtheirsalaryinthefinalyearsleadinguptoretirement.Benefitsarepaidtomembersfromtrustee-administeredfunds.Thetrusteesareresponsibleforensuringthattheplanissufficientlyfundedtomeetcurrentandfuturebenefitpayments.Ifinvestmentexperienceisworsethanexpected,theGroup’sobligationsareincreased.
Thetrusteesmustagreeafundingplanwiththesponsoringcompanysuchthatanyfundingshortfallisexpectedtobemetbyadditionalcontributionsandinvestmentperformance.Inordertoassessthelevelofcontributionsrequired,triennialvaluationsarecarriedoutwithplan’sobligationsmeasuredusingprudentassumptions(relativetothoseusedtomeasureaccountingliabilities).Thetrustees’otherdutiesincludemanagingtheinvestmentofplanassets,administrationofplanbenefitsandexercisingofdiscretionarypowers.
Theamountsrecognisedinthebalancesheetareasfollows:
£m
WH SmithPension
Trust
TuffnellsParcels
Express 2019
WHSmithPension
Trust
TuffnellsParcels
Express 2018
Presentvalueofdefinedbenefitobligation (470.2) (13.4) (483.6) (428.6) (11.8) (440.4)
Fairvalueofassets 494.2 10.5 504.7 583.1 9.6 592.7
Net surplus/(loss) 24.0 (2.9) 21.1 154.5 (2.2) 152.3
Amountsnotrecognisedduetoassetlimit (24.0) – (24.0) (154.5) – (154.5)
– (2.9) (2.9) – (2.2) (2.2)
Additionalliabilityrecognisedduetominimumfundingrequirements – – – (5.1) – (5.1)
Pension liability – (2.9) (2.9) (5.1) (2.2) (7.3)
Theprimarydefinedbenefitpensionscheme(theSmithsNewssectionoftheWHSmithPensionTrust)hasanIAS19surplusof£24.0mat31August2019(2018:£154.5msurplus)whichtheGroupdoesnotrecogniseintheaccountsastheGroupdoesnothaveanunconditionalrighttoeitherareductionoffuturecontributionsorrighttoarefundonclosureofthescheme.ThevaluationofthedefinedbenefitschemesfortheIAS19disclosureshavebeencarriedoutbyindependentqualifiedactuariesbasedonupdatingthemostrecentfundingvaluationsoftherespectiveschemes,adjustedasappropriateformembershipexperienceandchangesintheactuarialassumptions.
TheactuarialvaluationforfundingpurposesproducesaschemedeficitduetodifferentassumptionsandcalculationmethodologiesusedcomparedtothoseunderIAS19,mostnotablytheuseofadiscountratethatreflectstheactualinvestmentstrategy,ratherthancorporatebondyieldsasrequiredunderIAS19.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 105
6. Retirement benefit obligation cont.WHSmithPensionTrustTheactuarialvaluationoftheSmithsNewssectionoftheWHSmithPensionTrustat31March2018wascompletedandresultedinnofurtherfundingbeingrequiredfromtheGroupatthistime.Followingthecompletionofthe‘buy-in’inOctober2018wheretheWHSmithPensionTrustenteredintoaninsurancebackedannuityoftheSchemeassetswithinthesectionoftheTrustsponsoredbySmithsNewsthepensionschemesactuarynotifiedtheGroupthatfuturecashcontributionsbytheGrouptoaddressthedeficitwouldnolongerberequiredandtheGrouphasreleasedtheIFRIC14liability.The‘buy-in’annuityisrecognisedasaplanassetandthedifferenceinvaluebetweenthevalueoftheinsuranceassetreceivedof£425matthedateoftransactionandtheassettransferredinexchangeforthepolicy£555misconsideredanactuarialremeasurementrecognisedwithinothercomprehensiveincomeandisoffsetbythereleaseoftheIFRIC14liability.
TuffnellsParcelsExpressschemeThetriennialactuarialvaluationoftheTuffnellsParcelsExpressschemeasat1April2016wasanagreedliabilityof£4.3m.GuaranteedMinimumPension(“GMP”)equalisationhasledtoanincreaseinschemeliabilitiesby£0.1m.Deficitrecoverycontributionstotheschemehavebeenagreedat£0.3mperannum.
Theweightedaveragedurationoftheschemesis17yearsforthePensionTrustand25yearsfortheTuffnellsParcelsExpressscheme.
Theprincipallong-termassumptionsusedtocalculateschemeliabilitiesonallGroupschemesare:
%p.a. 2019 2018
Discountrate 1.8 2.6
Inflationassumptions–CPI 2.2 2.2
Inflationassumptions–RPI 3.2 3.2
DemographicassumptionsforWHSmithPensionTrust:
2019 2018
Lifeexpectancyatage65 Male Female Male Female
Membercurrentlyaged65 21.5 23.3 21.4 23.3
Membercurrentlyaged45 22.5 24.5 22.5 24.5
DemographicassumptionsforTuffnellsParcelsExpressscheme:
2019 2018
Lifeexpectancyatage65 Male Female Male Female
Membercurrentlyaged65 22.1 24.1 22.2 24.1
Membercurrentlyaged45 23.3 25.4 23.3 25.4
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Notes to the Accounts cont.
6. Retirement benefit obligation cont.InflationassumptionsPensionincreasesindefermentinbothSchemesaregrantedinlinewithCPIforalldeferredmembers.RPIinflationisusedtodeterminetheincreasesforpensionscurrentlyinpayment,subjecttoanyannualcapsandfloors.
Asummaryofthemovementsinthenetbalancesheetasset/(liability)andamountsrecognisedintheGroupIncomeStatementandOtherComprehensiveIncomeareasfollows:
£m
Fairvalueofscheme
assets
Definedbenefit
obligation
ImpactofIFRIC14
ondefinedbenefit
pensionschemes Total
At 31 August 2017 620.1 (473.6) (158.0) (11.5)
Currentservicecost – (0.1) – (0.1)
Netinterestcost 14.4 (10.9) (3.7) (0.2)
Administrationexpenses (0.2) – – (0.2)
Total amount recognised in income statement 14.2 (11.0) (3.7) (0.5)
Actualreturnonschemeassets(excludingamountsincludedinnetinterestexpense) (23.4) – (1.7) (25.1)
Actuarialgainsarisingfromexperience – (3.1) – (3.1)
Actuarialgainsarisingfromchangesinfinancialassumptions – 21.9 – 21.9
Actuarialgainsarisingfromchangesindemographicassumptions – 2.5 – 2.5
Changeinsurplusnotrecognised – – 3.8 3.8
Amount recognised in other comprehensive income (23.4) 21.3 2.1 –
Employercontributions 4.7 – – 4.7
Employeecontributions – – – –
Benefitpayments (22.9) 22.9 – –
Amounts included in cash flow statement (18.2) 22.9 – 4.7
At 31 August 2018 592.7 (440.4) (159.6) (7.3)
Currentservicecost – – – –
Netinterestcost 14.9 (11.0) (4.1) (0.2)
Pastservicecost – (0.1) – (0.1)
Administrationexpenses (0.4) – – (0.4)
Total amount recognised in income statement 14.5 (11.1) (4.1) (0.7)
Actualreturnonschemeassets(excludingamountsincludedinnetinterestexpense) (83.0) – 5.2 (77.8)
Actuarialgains/(loss)arisingfromexperience – 7.3 – 7.3
Actuarialgains/(loss)arisingfromchangesinfinancialassumptions – (60.1) – (60.1)
Actuarialgains/(loss)arisingfromchangesindemographicassumptions – (0.4) – (0.4)
Changeinsurplusnotrecognised – – 134.5 134.5
Amount recognised in other comprehensive income (83.0) (53.2) 139.7 3.5
Employercontributions 1.6 – – 1.6
Employeecontributions – – – –
Benefitpayments (21.1) 21.1 – –
Amounts included in cash flow statement (19.5) 21.1 – 1.6
At 31 August 2019 504.7 (483.6) (24.0) (2.9)
Included within current liabilities (0.4)
Included within non-current liabilities (2.5)
Thechargeforthecurrentservicecostisincludedwithinadministrativeexpenses.‘Netinterestcosts’arecalculatedbyapplyingadiscountratetothenetdefinedbenefitassetorliabilityschemeassetsandareincludedwithinfinanceincomeandexpense.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 107
6. Retirement benefit obligation cont.Inflationassumptionscont.Ananalysisoftheassetsatthebalancesheetdateisdetailedbelow:
£m 2019 2018
Giltsandswapsportfolio QuotedandUnquoted 10.8 362.9
Corporatebonds QuotedandUnquoted – 216.0
Equityfunds Unquoted 10.5 9.6
Insurancepolicy Unquoted 470.2 –
Cashandother Unquoted 13.2 4.2
504.7 592.7
Thereturnonschemeassetsduring2019wasalossof£83.0m(2018:alossof£23.4m)duetoachangeininvestmentstrategytopurchaseaninsurancepolicyfortheWHSmithPensionTrust.
ThevalueoftheassetsheldbytheTrustinConnectGroupPLCissuedfinancialinstrumentsis£nil(2018:£nil).
Sensitivityofresultstochangesinthemainassumptions:
AssumptionChangein
assumptionImpacton
IAS19liabilities
Discountrate +/-0.5% (£41.8m)/+£35.5m
Rateofinflation +/-0.5% £41.3m/+(£36m)
Lifeexpectancy +/-1year £22.4m/+(£15.5m)
Thesensitivityanalysisforeachsignificantactuarialassumptionhasbeendeterminedbasedonreasonablypossiblechangestotheassumptionsattheendofthereportingperiod.Itisbasedonachangeinthekeyassumptionwhileholdingallotherassumptionsconstant.Theeffectofachangeinmorethanoneassumptionwillbedifferenttothesumoftheindividualchanges.Whencalculatingthesensitivities,thesamemethodologyusedtocalculatetheliabilityrecognisedinthebalancesheethasbeenapplied.Themethodologyandtypesofassumptionsusedinpreparingthesensitivityanalysisisconsistentwiththepreviousperiod.
ThecumulativeamountofactuarialgainsandlossesrecognisedinthestatementofcomprehensiveincomesincetheadoptionofIFRSisalossof£26.8m(2018:alossof£30.5m).
TheGroup’sdefinedbenefitpensionplanshaveanumberofareasofrisk,themostsignificantofwhicharesetoutbelow:
• LifeexpectancyThemajorityoftheplans’obligationsaretoprovideapensionforthelifeofthemember,soincreasesinlifeexpectancywillresultinanincreaseintheplans’liabilities.
• InflationriskTheplans’benefitobligationsarelinkedtoinflationandhigherinflationwillleadtohigherliabilities.
• ChangesinbondyieldsFallingbondyieldstendtoincreasethefundingandaccountingliabilities.Theschemesbothholdinvestmentsincorporateandgovernmentbondswhichofferadegreeofmatching,i.e.themovementinassetsarisingfromchangesinbondyieldspartiallymatchesthemovementinthefundingoraccountingliabilities.Inthisway,theexposuretomovementsinbondyieldsisreduced.
However,theWHSmithPensionTrustenteredintoaninsurancebackedannuity‘buy-in’oftheSchemeassets,withinthesectionoftheTrustsponsoredbySmithsNews,whichminimisestheGroup’sexposuretofuturepensionobligations(Note32).
DefinedcontributionschemesTheGroupoperatesanumberofdefinedcontributionschemes.Fortheyearended31August2019,contributionsfromtherespectiveemployingcompanyforcontinuingoperationstotalled£1.9m(2018:£1.9m)whichisincludedintheIncomeStatement.
AdefinedcontributionplanisapensionplanunderwhichtheGrouppayscontributionstoanindependentlyadministeredfund–suchcontributionsarebaseduponafixedpercentageofemployees’pay.TheGrouphasnolegalorconstructiveobligationstopayfurthercontributionstothefundoncethecontributionshavebeenpaid.Members’benefitsaredeterminedbytheamountofcontributionspaidbytheCompanyandthemember,togetherwithinvestmentreturnsearnedonthecontributionsarisingfromtheperformanceofeachindividual’schoseninvestmentsandthetypeofpensionthememberchoosestobuyatretirement.Asaresult,actuarialrisk(thatbenefitswillbelowerthanexpected)andinvestmentrisk(thatassetsinvestedinwillnotperforminlinewithexpectations)fallontheemployee.
CONNECT GROUP ANNUAL REPORT 2019F
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Notes to the Accounts cont.
7. Finance costs£m Note 2019 2018
Continuing operations
Interestonbankoverdraftsandloans (5.1) (4.1)
Amortisationofloanarrangementfees (0.5) (0.5)
Interestpayableonfinanceleases (0.1) (0.6)
Total interest cost on financial liabilities at amortised cost (5.7) (5.2)
Netinterestexpenseondefinedbenefitobligation 6 (0.2) (0.2)
Unwindingofdiscountonprovisions–trading 24 (0.4) (0.1)
Finance costs – continuing operations (6.3) (5.5)
Finance costs – continuing and discontinued operations (6.3) (5.5)
8. Income tax expense2019 2018
£m Adjusted Adjusted Items Total Adjusted AdjustedItems Total
Continuing operations
Currenttax 2.9 (1.4) 1.5 5.6 (1.9) 3.7
Adjustmentinrespectofprioryear 0.9 – 0.9 (1.0) – (1.0)
Total current tax charge 3.8 (1.4) 2.4 4.6 (1.9) 2.7
Deferredtax–currentyear (0.1) (9.1) (9.2) 0.6 (1.0) (0.4)
Deferredtax–prioryear 0.1 – 0.1 0.3 – 0.3
Deferredtax–impactofratechange – 0.6 0.6 – – –
Total tax (credit)/charge – continuing operations 3.8 (9.9) (6.1) 5.5 (2.9) 2.6
Effective tax rate 16.4% (16.2%) 19.4% (7.3%)
Taxcharge–discontinuedoperations – – – 0.4 (0.4) –
Tax charge – continuing and discontinued operations 3.8 (9.9) (6.1) 5.9 (3.3) 2.6
Theeffectiveadjustedincometaxrateforcontinuingoperationsintheyearwas16.4%(2018:19.4%).AftertheimpactofAdjustedItemsof£9.9m(2018:£2.9m),theeffectivestatutoryincometaxrateforcontinuingoperationswas(16.2)%(2018:(7.3)%).
CorporationtaxiscalculatedatthemainratesofUKcorporationtax,thosebeing19.0%(2018:19.0%).Taxationforotherjurisdictionsiscalculatedattheratesprevailingintherespectivejurisdictions.
TheimpairmentofTuffnellsgoodwillcreatesadisallowableexpense;theimpairmentofacquiredintangibleshasresultedinthereleaseof£4.5mdeferredtaxliabilityasacredittoAdjustedItemsincometax.Adeferredtaxassetof£2.5mhasbeenrecognisedwhichhascreditedAdjustedItemsincometaxasaresultoftheimpairmentoftheotherassets.SeeNotes4and13fordetailsrelatingtotheimpairments.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 109
8. Income tax expense cont.Thetaxchargefortheyearcanbereconciledtothelossintheincomestatementasfollows:
£m 2019 2018
Loss before tax (37.6) (35.5)
TaxonprofitatthestandardrateofUKcorporationtax19.0%(2018:19.0%) (7.1) (6.7)
Expensesnotdeductiblefortaxpurposes 1.3 9.8
Non-taxableincome – (0.5)
Share-basedpayments – 0.6
Adjustmentinrespectofprioryears (1.0) (0.6)
ImpactofchangeinUKtaxrate 0.6 –
Impactofhigheroverseastaxrates 0.1 –
Tax (credit)/charge (6.1) 2.6
ExpensesnotdeductiblefortaxpurposesarecomprisedmainlyofthetaxeffectoftheimpairmentofgoodwillinTuffnells.SeeNote4.
Taxchargestoothercomprehensiveincomeanddirectlyinequity
£m 2019 2018
Continuing operations
Currenttaxrelatingtothedefinedbenefitpensionscheme (0.3) (0.7)
Deferredtaxrelatingtoretirementbenefitobligations 1.0 0.7
Tax charge/(credit) to other comprehensive income and directly in equity – continuing operations 0.7 –
Tax charge to other comprehensive income and directly in equity – discontinued operations – –
Tax charge/(credit) to other comprehensive income and directly in equity – continuing and discontinued operations 0.7 –
9. DividendsAmountspaidandproposedasdistributionstoequityshareholdersintheyears:
2019Per share
2018Pershare
2019£m
2018£m
Paid and proposed dividends for the year
Interimdividend–paid – 3.1p – 7.6
Finaldividend–proposed 1.0p – 2.5 –
1.0p 3.1p 2.5 7.6
Recognised dividends for the year
Finaldividend–prioryear – 6.7p – 16.5
Interimdividend–currentyear – 3.1p – 7.6
– 9.8p – 24.1
Thereisaproposedfinaldividendof1.0ppersharefortheyearended31August2019(2018:nil).
CONNECT GROUP ANNUAL REPORT 2019F
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Notes to the Accounts cont.
10. Earnings per share2019 2018
Earnings£m
Weightedaverage
number ofshares million
Pence per share
Earnings£m
Weightedaverage
numberofsharesmillion
Pencepershare
Weightedaveragenumberofsharesinissue 247.7 247.7
SharesheldbytheESOP(weighted) (1.3) (1.7)
Basic earnings per share (EPS)
Continuing operations
Adjustedearningsattributabletoordinaryshareholders 19.4 246.4 7.9p 22.9 246.0 9.3p
AdjustedItems (50.9) (61.0)
Earnings attributable to ordinary shareholders (31.5) 246.4 (12.9p) (38.1) 246.0 (15.5p)
Discontinued operations
Earnings attributable to ordinary shareholder – 246.4 – 1.3 246.0 0.5p
Total – continuing and discontinued operations
Adjustedearningsattributabletoordinaryshareholders 19.4 246.4 7.9p 24.2 246.0 9.8p
AdjustedItems (50.9) (71.2)
Earnings attributable to ordinary shareholders (31.5) 246.4 (12.9p) (47.0) 246.0 (19.1p)
Diluted earnings per share (EPS)
Effectofdilutiveshareoptions – –
Effectofdilutiveshareoptionsadjusting 0.7 0.7
Continuing operations
DilutedadjustedEPS 19.4 247.1 7.9p 22.9 246.7 9.3p
DilutedEPS (31.5) 246.4 (12.9p) (38.1) 246.0 (15.5p)
Discontinued operations – diluted EPS – 247.1 – (8.9) 246.0 (3.6p)
Total – continuing and discontinued operations
DilutedadjustedEPS 19.4 247.1 7.9p 24.2 246.7 9.8p
DilutedEPS (31.5) 246.4 (12.9p) (47.0) 246.0 (19.1p)
Dilutivesharesincreasethebasicnumberofsharesat31August2019by0.7mto246.4m(31August2018:246.7m).
ThecalculationofdilutedEPSreflectsthepotentialdilutiveeffectofemployeeincentiveschemesof0.7mdilutiveshares(31August2018:0.7m).
DilutivesharesareonlydilutiveforthepurposesoftheGroup’sadjustedmeasure,whereaprofitisrecognised.TheapplicationofthedilutivesharestotheAdjustedprofitsmeasurereducestheprofitpershare.WheretheGroup’sstatutorymeasuresarelossmaking,thepotentialdilutiveeffectofemployeeincentiveschemesisantidilutive,inthattheywouldreducethelosspershare.Accordingly,theyarenotappliedtothestatutorycalculationwithbasicanddilutiveEPSbeingthesame.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 111
11. Discontinued operations and assets held for sale£m 2019 2018
Non-currentassetsheldforsale 16.8 0.5
TuffnellspropertyportfolioInJanuary2019theGrouptookthedecisiontoenterintoasaleandleasebackarrangementforthe“Tuffnellspropertyportfolio”madeupof12freeholdandthreelongleaseholdpropertiesincludingrelatedassets,theportfoliohasnetbookvalueof£16.8mbeing:£13.6mfreeholdproperty,£1.1mlong-termleaseholdproperty,£0.1mshortleasehold,£0.5mfixturesandfittingsand£1.5mofequipment.
On23September2019,theGroup’ssubsidiary,TuffnellsParcelsExpressLimited(Tuffnells),exchangedcontractsinrespectoftheproposedsaleandleasebackofsixdistributiondepots,ofwhichthreewerefreeholdandthreewerelongleaseholdproperties,toUrbanLogisticsPropCo1(AC)Limited(UrbanLogistics),asubsidiaryofUrbanLogisticsREITplc.Completionsubsequentlytookplaceon27September2019.
ThesalepricereceivedfromUrbanLogisticswas£9.9m.Atcompletion,thisfirsttrancheofpropertieswassubsequentlyleasedbackfromUrbanLogisticson20yearleaseterms,withmarketrentpayableat£0.7mperannum,subjecttomarketinflation.Ineachcase,theleasesareguaranteedbytheCompany.TheexpectedimpactunderIFRS16willbetorecogniseagainondisposalof£0.7m,aleasecreditorof£8.0m,arightofuseassetof£3.2m,annualdepreciationof£0.2mandyear1interestof£0.4m.
TheGroupcontinuestomarkettheremainingpropertiesandexpectstosellthepropertiesbyFebruary2020.FurtherinformationisincludedwithinNote32.
Jack’sBeansInJanuary2019,theGroupsoldtheassetsrelatingtotheJack’sBeansdivisionforconsiderationof£0.5m.Thedivisionwasnotconsideredtomeetthedefinitionofadiscontinuedoperationgiventhesizeoftheoperationmakinguplessthan1%oftheGroupstotalrevenue.ThedecisiontosellthedivisionwasmadeinAugust2018,toenabletheGrouptofocusonitscorebusinesses.Thebidsreceivedindicatedanexcessofnetbookvalueof£1.0m,therefore,theGroupimpairedtheassetsdownto£0.5minthepriorfinancialyearandmovedthemintonon-currentassetsheldforsale.
BooksTheBooksbusinesswasclassifiedasheldforsaleon31August2017astheGroupwasactivelymarketingthebusiness.Itsubsequentlydisposedofthebusinesson14February2018.Assuch,theresultsoftheBooksbusinessarealsoclassifiedasdiscontinued.
Theresultsofdiscontinuedoperations,whichhavebeenincludedwithintheconsolidatedincomestatement,areasfollows:
12 months to Aug 2019 12monthstoAug2018
£m Adjusted Adjusted Items Total Adjusted AdjustedItems Total
Revenue – – – 114.3 – 114.3
Expenses – – – (112.5) (10.6) (123.1)
Operating profit – – – 1.8 (10.6) (8.8)
Financecosts – – – (0.1) – (0.1)
Profit before tax – – – 1.7 (10.6) (8.9)
Incometaxexpense – – – (0.4) 0.4 –
Profit from discontinued operations – – – 1.3 (10.2) (8.9)
Duringtheyearcashoutflowfromoperatingactivitiesattributedtodiscontinuedoperationsamountedto£nil(2018:inflow£8.8m)andpaid£nil(2018:£4.3m)inrespectofinvestingactivities.Therewerenocashflowsassociatedwithfinancingactivitiesattributabletodiscontinuedoperations.
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12. Disposal of subsidiariesTheGroupdisposedoftheBooksbusinesson14February2018.
Thenetassetsofthebusinessatthedateofdisposalwere:
£m 2018
Goodwill 9.7
Intangibleassets 3.6
Property,plantandequipment 4.1
Inventories 20.7
Tradeandotherreceivables 32.7
Cashandbankbalances 4.6
Tradeandotherpayables (45.9)
Corporationtaxliability (0.1)
Deferredtaxliabilities (0.3)
Provisions (0.5)
Net assets disposed 28.6
Grossproceedsreceived 18.7
Disposalcosts (1.5)
Releaseofdeferredconsiderationliability 0.9
Netassetsdisposed (28.6)
Loss on disposal (10.5)
Totalconsideration
Satisfiedby:
Cash 18.7
Net cash inflow arising on disposal
Equityconsideration 6.0
Disposalproceedstorepayoverdraft* 12.7
Consideration received in cash and cash equivalents 18.7
Less:cashandcashdepositsdisposed (4.6)
Less:cashdisposalcosts (1.5)
Net cash inflow arising from disposal of Books business 12.6
* AspartofthesaleandpurchaseagreementaGroupoverdraftbalancewassettledwhichwasintrinsicallylinkedtotheBooksbusiness.
Thelossondisposalisincludedinthe2018profitfortheyearfromdiscontinuedoperations.
£m 2018
NetcashinflowarisingfromdisposalofBooksbusiness 12.6
Cashconsiderationreceivedintheyearending31August2018arisingfromdisposalofEducation&Care 0.3
Net cash inflow arising from disposals 12.9
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 113
13. Intangible assetsAcquiredintangibles
£m GoodwillCustomer
relationships Tradename Software
Internallygenerated
developmentcosts
Computersoftware
costs Total
Cost:
At1September2018 57.8 29.3 30.7 0.8 7.1 12.5 138.2
Additions – – – – 0.4 1.0 1.4
Disposals – – – – (0.1) (2.1) (2.2)
At 31 August 2019 57.8 29.3 30.7 0.8 7.4 11.4 137.4
Accumulated amortisation:
At1September2018 (46.1) (15.3) (11.4) (0.8) (5.4) (8.5) (87.5)
Amortisationcharge – (3.7) (3.1) – (0.6) (1.8) (9.2)
Disposals – – – – – 2.3 2.3
Impairment (6.0) (10.3) (16.2) – – (0.4) (32.9)
At 31 August 2019 (52.1) (29.3) (30.7) (0.8) (6.0) (8.4) (127.3)
Net book value at 31 August 2019 5.7 – – – 1.4 3.0 10.1
Cost:
At1September2017 57.8 29.3 30.7 0.8 6.4 11.5 136.5
Additions – – – – 0.7 1.1 1.8
Disposals – – – – – (0.1) (0.1)
At 31 August 2018 57.8 29.3 30.7 0.8 7.1 12.5 138.2
Accumulated amortisation:
At1September2017 – (11.3) (8.3) (0.7) (3.9) (5.8) (30.0)
Amortisationcharge – (4.0) (3.1) (0.1) (0.4) (2.7) (10.3)
Disposals – – – – – – –
Impairment (46.1) – – – (1.0) – (47.1)
At 31 August 2018 (46.1) (15.3) (11.4) (0.8) (5.4) (8.5) (87.4)
Net book value at 31 August 2018 11.7 14.0 19.3 – 1.8 4.0 50.8
TheGroupleasessoftwareundervariousfinanceleasearrangements.Thenetbookvalueoffinanceleasescontainedwithinthesoftwarebalanceaboveis£nil(2018:£0.2m).
ThenetbookvalueoftheGroup’sacquiredintangiblessplitbyCGUisincludedinthetablebelow.
Goodwill Acquiredintangibles Total
£m 2019 2018On
acquisition 2019 2018On
acquisition 2019 2018On
acquisition
DMD 5.7 5.7 5.7 – 0.2 2.6 5.7 5.9 8.3
SmithsNews – – – – 0.3 – – 0.3
Tuffnells – 6.0 52.1 – 33.1 58.1 – 39.1 110.2
5.7 11.7 57.8 – 33.3 61.0 5.7 45.0 118.8
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13. Intangible assets cont.ImpairmenttestsgoodwillGoodwillisnotamortised,buttestedannuallyforimpairmentormorefrequentlyifthereareindicationsthatgoodwillmightbeimpairedwiththerecoverableamountbeingdeterminedfromvalueinusecalculations.Therecoverableamountsofthecombinedcashgeneratingunitsaredeterminedfromthevalueinusecalculations.TheGrouppreparescashflowforecastsderivedfromthemostrecentplanforthefollowingasapprovedbytheBoardandextrapolatesthesecashflowsonanestimatedgrowthrateintoperpetuity.
Therateusedtodiscounttheforecastcashflowsisincludedinthetablebelow,beingtheGroup’sweightedaveragecostofcapitaladjustedforindustryandmarketrisk.
ThetablebelowincludesthekeyassumptionsusedtocalculatetheGroup’scashgeneratingunitvalueinuse:
Tuffnells DMD
2019 2018 2019 2018
Averageplanrevenuegrowth 2.2% 1.4% 2.5%* 0.0%
Posttaxdiscountrate 11.5% 9.5% 10.5% 9.5%
Pretaxdiscountrate 20.0% 8.1% 19.9% 8.7%
Long-termgrowthrate 2.0% 2.0% 0.0% 0.0%
* AveragegrowthofrevenuerelatestoyearsFY21-FY23
IngeneratingthesebudgetstheBoardhasconsideredtheoverallstrategyoftheGroup,theprincipalandemergingrisksanduncertaintiesinherentwithinthebusiness,aswellasmakinganumberofkeystrategicplanningassumptionswhicharenotedbelow:
1. NosignificantimpactontradingasaresultoftheEUExitorotherpoliticalchange;2. ModestrevenuegrowthinTuffnellsintheassessmentperiod;3. DeliveryofmarginimprovementinTuffnells,drivenbyefficienciesbothinoperatingandoverheadcostsintheassessmentperiod;and4. Continueddeclineinsalesofprintedmediaduringtheassessmentperiodoffsetbyoverheadefficienciesintheassessmentperiod.
ConsistentwithIAS36revenuesinrelationtoenhancementofassetshasnotbeenincluded.
SensitivitytochangesinkeyassumptionsImpairmenttestingisdependentonmanagement’sestimatesandjudgements,particularlyastheyrelatetotheforecastingoffuturecashflows,thediscountratesselectedandexpectedlong-termgrowthrates.
TheGrouphasconductedsensitivityanalysisontheimpairmenttestofeachoftheCGUsclassifiedwithincontinuingoperations.
TuffnellsThecontinueddeteriorationofperformancewhichwasdue,inpart,totheweakeningofconsignmentvolumesincomparisontotheprioryearhasresultedinlossesof£14.1mintheTuffnellsbusinessunit(2018:£5.0m).ThisweakeninghasimpactedthefutureoutlookandhasnegativelyimpactedthevalueinuseoftheTuffnellsCGUandresultedintheGrouprecordinganimpairmentof£6.0magainstthevalueofthegoodwillasitisconsideredtohavenorecoverablebasis.
TheTuffnellsCGUhasarecoverableamountofnegative£0.6mbasedontheassumptionsinthetableabove;theeffectofareasonablypossiblechangeintheassumptionsisdisclosedinthetablebelow.Thisvaluationhasresultedinthevaluationbasisforremainingassetstobetheloweroftheirnetbookvalueorthefairvaluelesscoststosell.Thishasresultedinfurtherimpairmentsbeyondthatofgoodwillforfurtherdetails;seesectiononotherassetsbelowandNote14.WhiletheCGUrecoverableamountwillbeimpactedbythechangesintheassumptionsbelowitwouldnotresultinfurtherimpairmentstootherassets.
Planscenario Change
Effectonvalueinuse
£m
Long-termgrowthrate(%) % -/+0.5% 2.1/(1.9)
Posttaxdiscountrate(%) % -/+1% 5.8/(4.5)
Averagerevenuegrowth % -0.2% (16.7)
Reductionincostsavings £m 3.0 (8.2)
DMDTheDMDCGUhasarecoverableamountof£7.1mwhichprovidesheadroomof£1.4mabovethecarryingvalueofgoodwillbasedontheassumptionsinthetableabove;theeffectofareasonablypossiblechangeintheassumptionsisdisclosedinthetablebelow.
Planscenario Change
Effectonvalueinuse
£m
Long-termgrowthrate(%) % -/+1% 0.6/(0.5)
Posttaxdiscountrate(%) % -/+1% (0.7)/0.8
ReductioninCGUprofit % -10% (1.2)
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 115
13. Intangible assets cont.OtherIntangiblesTuffnells Parcels ExpressThevalueinusecalculationperformedfortheTuffnellsbusinessunitnolongersupportstheintangibleassetsrelatingtothisbusinessunit,seeoverleaffordetailsoftheassumptionsusedandreasonforthisdeclineinvalue.
TheGrouphasdeemedthefairvaluelesscosttoselltobe£nil.Asboththefairvalueandvalueinusenolongersupporttheseassets,animpairmentchargeof£26.9m(2018:nil)hasbeenrecognised,split,acquiredintangibles£26.5mandcomputersoftware£0.4m.
Pass My ParcelIncludedwithincostofsalesis£nil(2018:£1.0m)inrelationtotheimpairmentofintangibleassetsinthePMPdivision.ThisisincludedwiththeSmithsNewsCGU,furtherdetailsofwhichareincludedwithinNote4.
14. Property, plant and equipment
Land&buildings
£mFreehold
propertiesLong-termleasehold
Short-termleasehold
Fixturesandfittings
Equipmentandvehicles Total
Cost:
At1September2018 14.0 1.3 13.6 5.4 42.2 76.5
Additions 0.2 0.3 0.2 0.7 7.4 8.8
Disposals – – (0.2) (0.4) (11.3) (11.9)
Classifiedasheldforsale (14.0) (1.3) (0.2) (1.2) (2.6) (19.3)
At 31 August 2019 0.2 0.3 13.4 4.5 35.7 54.1
Accumulated depreciation:
At1September2018 (0.2) (0.3) (8.7) (3.6) (24.9) (37.7)
Depreciationcharge – (0.4) (0.6) (1.3) (4.6) (6.9)
Transferbetweenassetclasses – 0.3 (0.4) 0.6 (0.6) (0.1)
Disposals 0.1 – 0.2 0.4 10.9 11.6
Impairments (0.5) – (1.7) (0.9) (9.5) (12.6)
Classifiedasheldforsale 0.6 0.1 0.1 0.7 1.0 2.5
At 31 August 2019 – (0.3) (11.1) (4.1) (27.7) (43.2)
Net book value at 31 August 2019 0.2 – 2.3 0.4 8.0 10.9
Cost:
At1September2017 14.1 1.5 12.6 4.9 42.7 75.8
Additions – – 1.3 0.9 6.9 9.1
Transferbetweenassetclasses – – – – – –
Disposals (0.1) (0.2) (0.3) (0.4) (4.0) (5.0)
Classifiedasheldforsale – – – – (3.4) (3.4)
At 31 August 2018 14.0 1.3 13.6 5.4 42.2 76.5
Accumulated depreciation:
At1September2017 – (0.4) (7.7) (3.5) (22.9) (34.5)
Depreciationcharge (0.2) – (1.0) (1.3) (6.1) (8.6)
Transfersbetweenassetclasses – – – 0.6 (0.6) –
Disposals – 0.1 – 0.6 3.8 4.5
Impairments – – – – (2.0) (2.0)
Classifiedasheldforsale – – – – 2.9 2.9
At 31 August 2018 (0.2) (0.3) (8.7) (3.6) (24.9) (37.7)
Net book value at 31 August 2018 13.8 1.0 4.9 1.8 17.3 38.8
TheGroupleasesplantandequipmentunderanumberoffinanceleasearrangementsandhastheoptiontopurchasetheequipmentattheendofeachlease.Thenetbookvalueoffinanceleasescontainedwithinthesebalancesis£0.2mat31August2019(2018:£3.7m).
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14. Property, plant and equipment cont.TuffnellsThevalueinusecalculationperformedfortheTuffnellsbusinessunitresultedinavalueinuseofnegative£0.6m,thereforetheassetsrelatingtothethisbusinessunitareconsideredtobenolongersupported;seeNote13fordetailsoftheassumptionsusedandreasonforthisdeclineinvalue.
TheGrouphasthereforedeemedamoreappropriatevaluationmethodologytobethelowerofnetbookvalueorfairvaluelesscoststosell.Theproperty,plantandequipmentrelatingtotheTuffnellsbusinessunithasbeenvaluedat£1.6mthereforeresultinginanimpairmentchargeof£12.6m(2018:£nil).
OtherImpairmentsof£1.0mand£1.0mwererecognisedintheprioryearrelatingtothewritedownofJack’sBeansandwriteoffofthePassMyParcelassetsrespectivelytotheirNBV;furtherdetailisincludedwithinNote4.
15. Interests in joint venturesTheGroup’sshareoftheresults,assetsandliabilitiesofjointventuresisasfollows:
£m 2019 2018
Revenue 5.4 5.1
Profitaftertax 0.5 0.5
Non-currentassets 1.8 1.5
Currentassets 2.8 2.5
Totalassets 4.6 4.0
Currentliabilities (1.8) (1.8)
Non-currentliabilities (0.4) –
Totalliabilities (2.2) (1.8)
Goodwill 2.9 2.9
Share of net assets 5.3 5.1
Dividendsof£0.1m(2018:£0.2m)werereceivedintheyearto31August2019fromjointventures.
TheGrouphasa50%interestintheordinarysharesofRascalSolutionsLimited,acompanyincorporatedinEngland(2018:50%),whichinturnowns100%oftheordinarysharesofOpen-ProjectsLimited.ThelateststatutoryaccountsofRascalSolutionsLimitedweredrawnupto31August2019.TheGroupalsohasa50%investmentinFMDLimited,theholdingcompanyofWorldwideMagazineDistributionLimited,acompanyincorporatedinEngland(2018:50%).ThelateststatutoryaccountsofFMDLimitedweredrawnupto31July2018.BothFMDLimitedandWorldwideMagazineDistributionLimitedarecurrentlyintheprocessofliquidation.
16. Inventories£m 2019 2018
Goodsheldforresale 15.5 12.4
Rawmaterialsandconsumables 0.7 0.9
Inventories 16.2 13.3
17. Trade and other receivables
£m 2019Restated*
2018
Tradereceivables 87.2 86.9
Provisionforexpectedcreditlosses (0.3) (0.5)
86.9 86.4
Otherdebtors 32.1 36.7
Prepayments 2.8 3.9
Accruedincome 2.4 2.7
Trade and other receivables 124.2 129.7
* Thebalanceshavebeenrestatedtoreflectthereturnsreserveaccrualof£23.4m(2018:£25.5m)previouslynetoffagainsttradereceivableswithinothercreditorsandthereturnsreserveassetof£20.2m(2018:£22.5m)netoffagainsttradepayablesincludedwithinotherdebtors.SeeNote36forfurtherinformation.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 117
17. Trade and other receivables cont.TradereceivablesTheaveragecreditperiodtakenonsaleis22days(2018:20days).Tradereceivablesaregenerallynon-interestbearing.
ThefollowingtableprovidesinformationabouttheGroup’sexposuretocreditriskandECLsagainstcustomerbalancesasat31August2019underIFRS9:
2019 20181
£m
Grosscarrying amount
Loss allowance
Net carrying amount
Grosscarryingamount
Baddebtprovision
Netcarryingamount
Current(notoverdue) 84.5 (0.1) 84.4 83.8 – 83.8
30-60daysoverdue 2.0 (0.1) 1.9 2.0 – 2.0
61-90daysoverdue 0.4 – 0.4 0.4 – 0.4
91-120daysoverdue – – – 0.5 (0.3) 0.2
Over120daysoverdue 0.3 (0.1) 0.2 0.2 (0.2) –
87.2 (0.3) 86.9 86.9 (0.5) 86.4
Note:1. Thetableaboveprovidesinformationabouttheageingoftradereceivablesasat31March2018underIAS39.TheGrouphasadoptedIFRS9starting1September2018usingthetransitionoption
availableinthestandardbydisclosingtheimpactasanadjustmenttoopeningretainedearningsatthedateofinitialapplication.Underthisoption,thecomparativeinformationisnotrestated.
ThefollowingtableprovidesinformationabouttheGroup’slossratesappliedagainstcustomerbalancesasat31August2019underIFRS9:
% 2019
Current(notoverdue) 0.1
30-60daysoverdue 2.9
61-90daysoverdue 6.1
91-120daysoverdue –
Over120daysoverdue 18.4
Ofthetradereceivablesbalanceattheendoftheyear:
• Onecustomer(2018:one)hadanindividualbalancethatrepresentedmorethan10%ofthetotaltradereceivablesbalance.Thetotalofthiswas£13.0m(2018:£13.2m);and
• Afurtherthreecustomers(2018:seven)hadindividualbalancesthatrepresentedmorethan5%ofthetotaltradereceivablesbalance.Thetotalofthesewas£17.0m(2018:£32.8m).
Movementintheallowancefordoubtfuldebts:
£m 2019 2018
At1September 0.5 0.5
Impairmentlossesrecognised (0.1) 0.5
Amountswrittenoffasuncollectible (0.3) (0.4)
Amountsrecoveredduringtheyear 0.2 (0.1)
Amountsreleasedduringtheyear – –
At31August 0.3 0.5
Thedirectorsconsiderthatthecarryingamountoftradeandotherreceivablesapproximatestheirfairvaluewhichisconsideredtobealevel2methodologyofvaluingthem.
OtherdebtorsandprepaymentsThelargestitemsincludedwithinthisbalanceare£20.2m(2018:£22.5m)returnsreserveasset,£7.9m(2018:£6.8m)ofpublisherdebtors.
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18. Trade and other payables
£m 2019Restated*
2018
Tradepayables (114.4) (116.3)
Othercreditors (47.0) (43.0)
Accruals (12.1) (16.1)
Deferredincome (0.2) (0.2)
(173.7) (175.6)
* Thebalanceshavebeenrestatedtoreflectthereturnsreserveaccrualpreviouslynetoffagainsttradereceivableswithinothercreditorsandthereturnsreserveassetnetoffagainsttradepayablesincludedwithinotherdebtors.SeeNote2forfurtherinformation.
Includedwithinothercreditorsisabalanceof£23.4m(2018:£25.5m)relatingtothereturnsreserveaccrual.
Tradeandotherpayablesprincipallycompriseamountsoutstandingfortradepurchasesandongoingcosts.Theaveragecreditperiodtakenfortradepurchasesis31days(2018:31days).Nointerestischargedontradepayables.Thedirectorsconsiderthatthecarryingamountoftradeandotherpayablesapproximatestotheirfairvalueusingalevel2valuation.
19. Cash and borrowingsCashandborrowingsbycurrency(Sterlingequivalent)areasfollows:
£m Sterling Euro USDollar OtherTotal 2019 2018
Cashandbankdeposits 20.9 1.9 0.8 0.4 24.0 18.0
Overdrafts (16.1) – – – (16.1) (9.3)
Netcashandcashequivalents 4.8 1.9 0.8 0.4 7.9 8.7
Revolvingcreditfacility–disclosedwithincurrentliabilities (30.0) – – – (30.0) (38.0)
Termloan–disclosedwithinnon-currentliabilities (49.3) – – – (49.3) (48.8)
Totalborrowings (95.4) – – – (95.4) (96.0)
Net borrowings (74.5) 1.9 0.8 0.4 (71.4) (78.1)
Total borrowings
Amountdueforsettlementwithin12months (46.1) – – – (46.1) (47.2)
Amountdueforsettlementafter12months (49.3) – – – (49.3) (48.8)
(95.4) – – – (95.4) (96.1)
CashandbankdepositscomprisecashheldbytheGroupandshort-termbankdepositswithanoriginalmaturityofthreemonthsorless.Thecarryingamountoftheseassetsapproximatestheirfairvalue.
InOctober2017,theGroupenteredintobankingfacilitiesof£175.0mwithsixrelationshipbankswithatermwhichrunsuntilJanuary2021.Thefacilitycomprisesofatermloanof£50.0mwithnoamortisationandarevolvingcreditfacility(RCF)for£125.0m(seeNote20).The£46.0mdueforsettlementwithin12monthsrelatestotheRCFandoverdraft.
AvailableGroupbankfacilitiesareoutlinedinNote20.Interestpayableunderthefacilityinplaceat31August2019iscalculatedasthecostofonemonthLIBORplusaninterestmarginofbetween1.35%and2.35%dependentonthenetdebt/AdjustedEBITDAcovenantratio.Theweightedaverageinterestratefortheyearwas5.5%(2018:4.9%).
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 119
19. Cash and borrowings cont.ReconciliationofliabilitiesarisingfromfinancingactivitiesThetablebelowdetailschangesintheGroup’sliabilitiesarisingfromfinancingactivities,includingbothcashandnon-cashchanges.Liabilitiesarisingfromfinancingactivitiesarethoseforwhichcashflowswere,orfuturecashflowswillbe,classifiedintheGroup’sconsolidatedstatementofcashflowsascashflowsfromfinancingactivities.
£m Note1September
2018Financing
cashflowsNewfinance
leasesOther
changes31August
2019
TermLoan 19 48.8 – – 0.5 49.3
Revolvingcreditfacility 19 38.0 (8.0) – – 30.0
Financeleases 5.3 (2.8) – – 2.5
Total 92.1 (10.8) – 0.5 81.8
£m Note1September
2017Financing
cashflowsNewfinance
leasesOther
changes31August
2018
TermLoan 19 80.0 (30.0) – (1.2) 48.8
Revolvingcreditfacility 19 – 24.1 – 13.9 38.0
Financeleases 8.5 (3.8) – 0.6 5.3
Total 88.5 (9.7) – 13.3 92.1
Otherchangesincludeinterestaccrualsandpayments.
Analysisofnetdebt
£m Note 2019 2018
Cashandcashequivalents 19 7.9 8.7
Currentborrowings 19 (30.0) (38.0)
Non-currentborrowings 19 (49.3) (48.8)
Net borrowings (71.4) (78.1)
Financeleaseliabilities 21 (2.5) (5.3)
Net debt (73.9) (83.4)
Themovementinnetdebtintheperiodincludes£0.5mloanfeeamortisation.
Cashandcashequivalentsincludescashof£24.0m(2018:£18.0m)offsetby£16.0m(2018:£9.2m)ofoverdrafts.
20. Financial instrumentsTreasurypolicyTheGroupoperatesacentralisedtreasuryfunctiontomanagetheGroup’sfundingrequirementsandfinancialrisksinlinewiththeBoardapprovedtreasurypoliciesandproceduresandtheirdelegatedauthorities.Treasury’sroleistoensurethatappropriatefinancingisavailableforrunningthebusinessesoftheGrouponadaytodaybasis,whilstminimisinginterestcost.Notransactionsofaspeculativenatureareundertaken.Dealingsarerestrictedtothosebankswithsuitablecreditratingsandcounterpartyriskandcreditexposureismonitoredfrequently.
CapitalriskmanagementTheGroupmanagesitscapitaltoensurethatentitiesintheGroupwillbeabletocontinueasagoingconcernwhilemaximisingthereturntostakeholdersthroughtheoptimisationofthedebtandequitybalance.ThecapitalstructureoftheGroupconsistsofdebt,whichincludestheborrowings,cashandcashequivalentsasdisclosedinNote19andequityattributabletoequityholdersoftheparent,comprisingissuedcapital,reservesandretainedearningsasdisclosedintheGroupStatementofChangesinEquity.
TheonlyexternallyimposedcapitalrequirementsfortheGrouparedebttoEBITDA,fixedchargecoverandinterestcoverunderthetermsofthebankfacilities,withwhichtheGrouphasfullycompliedduringboththecurrentyearandtheprioryear.Tomaintainoradjustitscapitalstructure,theGroupmayadjustthedividendpaymenttoshareholdersand/orissuenewshares.TheGroup’scapitalisonlyrestrictedbydistributablereserves.
TheBoardregularlyreviewsthecapitalstructure.Aspartofthisreview,theBoardconsidersthecostofcapitalandtherisksassociatedwitheachclassofcapital.TheGroupintendstotakeamoreprudentanddisciplinedapproachtocapitalmanagement.Weexpectfreecashfromoperationstobesufficienttofundtheinvestmentneededforrecovery,withthesurplususedtoreducenetdebtwhilealsomaintaininganattractivetotalshareholderreturn.TheGroupistargetingareducednetdebt/EBITDAratioof1xby2021,withrepaymentachievedthroughacombinationofsurplusfreecashfromoperationsaswellasproceedsfromthesaleandleasebackofselectedfreeholdandlongleaseproperties.TheGroup’sfacilitiesincludeafrozenGAAPclauseandthenet/EBITDAratioisstatedonthisbasis.
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20. Financial instruments cont.LiquidityriskTheGroupmanagesliquidityriskbymaintainingadequatereservesandbankingfacilitiesandbymonitoringforecastandactualcashflows.ThefacilitiesthattheGrouphasatitsdisposaltofurtherreduceliquidityriskaredescribedbelow.
Asat31August2019,theGrouphad£175.0mcommittedbankfacilitiesinplace(2018:£175.0m).Bankfacilitiescomprised:
• a£50.0msyndicatedtermloan;and• a£125.0msyndicatedrevolvingcreditfacility,
whichtogetherexpireinJanuary2021.
ThefacilitydescribedaboveissubjecttothefollowingcovenantswhicharesubjecttoafrozenGAAPclause:
• Leveragecover–thenetdebt:AdjustedEBITDAratiowhichmustremainbelow2.75x.At31August2019theratiowas1.9x(2018:1.8x);• Interestcover–theconsolidatednetinterest:AdjustedEBITDAratiowhichmustremainabove4.0x.Asat31August2019theratiowas7.2x
(2018:9.6x);• Fixedchargecover–theratioofAdjustedEBITDAtoconsolidatedfixedchargesisnotlessthan1.75xto1.Asat31August2019theratiowas
2.1x(2018:2.3x);and• Guarantorcover–theannualturnover,grossassetsandpre-taxprofitsoftheguarantorscontributeatanytime80%ormoreoftheannual
consolidatedturnover,grossassetsandpre-taxprofitsoftheGroupforeachofitsfinancialyears.Theguarantors,whichareall100%ownedorwhollyownedsubsidiariesoftheConnectGroupPLC,areeachofConnectGroupPLC,SmithsNewsHoldingsLimited,SmithsNewsTradingLimitedandTuffnellsParcelsExpressLimited.
At31August2019,theGrouphadavailable£95.0m(2018:£87.0m)ofundrawncommittedborrowingfacilities.Therewerenobreachesofloanagreementsduringeitherthecurrentorprioryears.
AstheGroupiscashgenerativeitsliquidityriskisconsideredlow.TheGroup’scashgenerationallowsittomeetallloancommitmentsastheyfalldueaswellassustainanegativeworkingcapitalposition.
TheGroupinvestssignificantresourcesintheforecastingandmanagementofitscashflows.ThisiscriticalgivenaroutinecashcycleatSmithsNewsthatresultsinsignificantpredictableswingswithineachmonthofaround£40.0m,whichutilisestheRevolvingCreditFacilityof£125.0m.
Thefollowingisananalysisoftheundiscountedcontractualcashflowspayableunderfinancialliabilitiesandderivatives.Theundiscountedcashflowswilldifferfromboththecarryingvalueandfairvalue.Floatingrateinterestisestimatedusingtheprevailingrateatthebalancesheetdate.
£mDuewithin
1yearDuebetween1and2years
Duebetween2and3years
Greaterthan3years
At 31 August 2019
Non derivative financial liabilities
Bankandotherborrowings (38.0) (50.0) – –
Financeleases (2.2) (0.3) – –
Total (40.2) (50.3) – –
At 31 August 2018
Non derivative financial liabilities
Bankandotherborrowings (47.2) – (50.0) –
Financeleases (2.8) (1.7) (0.4) (0.6)
Total (50.0) (1.7) (50.4) (0.6)
CounterpartyriskDealingsarerestrictedtothosebankswithsuitablecreditratingsandcounterpartyriskandcreditexposureismonitored.
Foreigncurrencyrisk• ThemajorityoftheGroup’stransactionsarecarriedoutinthefunctionalcurrenciesofitsoperations,andsotransactionalexposureislimited.• ThemajorityoftheGroup’snetliabilitiesareheldinSterling,withonly£3.2m(2018:£1.0m)ofnetassetsheldinoverseascurrencies.Translation
exposurearisesonthere-translationofoverseassubsidiaries’profitsandnetassetsintosterlingforfinancialreportingpurposesandisnotseenassignificant.
• Note19denotesborrowingsbycurrency.• Therearenomaterialcurrencyexposurestodisclose.
InterestrateriskTheGroupmonitorsitsexposuretointerestrateinlightoftheGroup’sdebtexposure,considerationofthemacroeconomicenvironmentandsensitivitytopotentialinterestraterises.TheGroupavoidstheuseofderivativesorotherfinancialinstrumentsincircumstanceswhentheoutcomewouldeffectivelybelargelydependentuponspeculationonfutureratemovements.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 121
20. Financial instruments cont.HedgeaccountingItis,andhasbeenthroughouttheperiodofreview,theGroup’spolicythatnotradinginderivativefinancialinstrumentsshallbeundertaken.
Allfinancialassetsareclassifiedunderloansandreceivablesandotherfinancialliabilitiesareheldatamortisedcost.
InterestratesensitivityanalysisBasedontheassumptionthattheliabilitiesoutstandingatthebalancesheetdatewereoutstandingforthewholeyear,ifinterestrateshadbeen0.5%higher/lowerandallothervariableswereheldconstant,theGroup’sprofitandequityfortheyearended31August2019woulddecrease/increaseby£0.5m(2018:£0.4m).
CreditriskTheGroupconsidersitsexposuretocreditriskat31August2019tobeasfollows:
£m 2019 2018
Bankdeposits 23.9 17.9
Tradeandotherreceivables 124.2 129.4
148.1 147.3
FurtherdetailontheGroup’spolicyrelatingtotradereceivablescanbefoundinNote17.
21. Obligations under finance leases2019 2018
£m
Minimum lease
payments
Present valueof minimum
lease payments
Minimumlease
payments
Presentvalueofminimum
leasepayments
Amount payable under finance leases:
Withinoneyear 2.2 2.2 2.8 2.8
Inthesecondtofifthyearsinclusive 0.3 0.3 2.7 2.5
Total 2.5 2.5 5.5 5.3
Less:futurefinancecharges (0.2) –
Present value of lease obligations 2.5 2.5 5.3 5.3
Less:amountdueforsettlementwithin12months(shownundercurrentliabilities) (2.2) (2.8)
Amount due for settlement after 12 months 0.3 2.5
Grouppolicyistoacquirecertainitemsofitsfixtures,equipmentandsoftwareunderfinanceleases.Theaverageleasetermisthreeyears.Interestratesarefixedatthecontractdate.Allleasesareonafixedrepaymentbasisandnoarrangementshavebeenenteredintoforcontingentrentalpayments.
ThefairvalueoftheGroup’sleaseobligationsapproximatestotheircarryingamount.
22. Other non-current liabilities£m 2019 2018
Othercreditors (1.2) (0.6)
Thebalancedisclosedasothercreditorswithinnon-currentliabilitiesrelatestooperatingleaseincentiveswhicharebeingrecognisedovertheleaseterm.
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23. Deferred taxDeferredtaxassetsandliabilitiesareattributabletothefollowing:
£mAcceleratedtax
depreciation OtherSharebased
paymentsIntangible
assetsRetirement
benefits Total
At1September2018 1.9 0.2 – (5.9) 1.3 (2.5)
Chargetoincome 2.7 (0.2) 5.9 – 8.4
Chargetoothercomprehensiveincomeanddirectlyinequity – – 0.1 – (0.8) (0.7)
At 31 August 2019 4.6 – 0.1 – 0.5 5.2
Deferredtaxassets 4.6 – 0.1 – 0.5 5.2
Deferredtaxliabilities – – – – – –
At1September2017 1.8 0.9 0.7 (7.2) 2.0 (1.8)
Chargetoincome 0.1 (0.7) (0.7) 1.3 – –
Chargetoothercomprehensiveincomeanddirectlyinequity – – – – (0.7) (0.7)
At 31 August 2018 1.9 0.2 – (5.9) 1.3 (2.5)
Deferredtaxassets 1.9 0.2 – – 1.3 3.4
Deferredtaxliabilities – – – (5.9) – (5.9)
TheGrouphasrecognisedthenetbalanceofdeferredtaxastheliabilityandassetarewiththesametaxauthorityandunwindoverthesametimeperiod.ThedeferredtaxassetshavebeendeemedrecoverableastheyareoffsetbyaliabilityandtheGroupforecaststhatitwillcontinuetomakeprofitsagainstwhichtheassetscanbeutilised.
TheGrouphascapitallossescarriedforwardof£28.2m(2018:£28.2m).Deferredtaxassetshavenotbeenrecognisedinrespectofthecapitallossescarriedforwardduetotheuncertaintyoftheirutilisation.
ChangestotheUKcorporationtaxratesweresubstantivelyenactedaspartofFinanceBill2017(on6September2016).Theseincludereductionstothemainratetoreducetherateto17%from1April2020.Deferredtaxesatthebalancesheetdatehavebeenmeasuredusingtheseenactedtaxratesandreflectedinthesefinancialstatements.
24. Provisions
£m RegulatoryRe-organisation
provisions
Insuranceandlegalprovision
Propertyprovisions Total
At 1 September 2018 (2.8) (4.0) (1.9) (5.6) (14.3)
Chargedtoincomestatement – (2.6) (1.2) – (3.8)
Creditedtoincomestatement 0.7 0.5 – 0.6 1.8
Utilisedinperiod 2.1 2.5 0.8 – 5.4
Unwindingofdiscountutilisation – – – (0.4) (0.4)
At 31 August 2019 – (3.6) (2.3) (5.4) (11.3)
£m 2019 2018
Includedwithincurrentliabilities (7.3) (9.5)
Includedwithinnon-currentliabilities (4.0) (4.8)
Total (11.3) (14.3)
Includedwithinnon-currentliabilitiesis£4.0m(2018:£4.8m)relatingtopropertyprovisions.
Regulatoryprovisionsbroughtforwardincluded£1.3minrelationtolegalcostsandestimatedhistoricalunderpaymentofnationalminimumwagecompliance,seeNote4forfurtherinformation;£0.7mofthisprovisionhasbeenreleasedandtheremainingliabilitysettledinfull.Afurther£1.5mofthebalancebroughtforwardwassettledinfullon3October2018followingTuffnellsprosecutionon11September2018relatingtoafatalityatitsBrierleyHilldepotandanoffenceunderS2(1)oftheHealth&SafetyatWorkAct.
Re-organisationprovisionsinclude£1.0mrelatingtotheclosureofPassMyParcel.£2.6mofredundancycostshavebeenaccruedaspartoftheGroup’sstrategytooffshoreitssharedservicecentres,thetransitionhadbeenannouncedpriortotheyearendandthetotalamountisexpectedtobeutilisedduringthefollowingfinancialyear(seeNote4forfurtherinformation).
Insurance&legalprovisionsrepresenttheexpectedfuturecostsofemployer’sliability,publicliability,motoraccidentclaimsandlegalclaims.
ThepropertyprovisionrepresentstheestimatedfuturecostoftheGroup’sonerousleasesonnon-tradingpropertiesandforpotentialdilapidationcostsacrosstheGroup.Theseprovisionshavebeendiscountedatariskadjustedrateandthisdiscountwillbeunwoundoverthelifeoftheleases.Theprovisionscovertheperiodto2036,however,asignificantportionofthepotentialliabilityfallswithinfiveyears.Includedwithintheprovisionareamountsof£0.4minrelationtoestimatedPMPrelatedpropertycosts(seeNote4forfurtherinformation).
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 123
25. Contingent liabilities and capital commitments£m 2019 2018
Bankandotherloansguaranteed 7.8 6.8
OtherpotentialliabilitiesthatcouldcrystalliseareinrespectofpreviousassignmentsofleaseswheretheliabilitycouldreverttotheGroupifthelesseedefaulted.PursuanttothetermsoftheDemergerAgreementfromWHSmithPLC,anysuchcontingentliabilityinrespectofassignmentpriortodemerger,whichbecomesanactualliability,willbeapportionedbetweenConnectGroupPLCandWHSmithPLCintheratio35:65(providedthattheactualliabilityofConnectGroupPLCinany12monthperioddoesnotexceed£5m).TheCompany’sshareoftheseleaseshasanestimatedfuturecumulativegrossrentalcommitmentat31August2019of£0.8m(2018:£1.3m).
Contractsplacedforfuturecapitalexpenditureapprovedbythedirectorsbutnotprovidedforamountto:£2.3m(2018:£nil).
TheGrouphasapprovedaletterofcreditof£7.8mtotheinsurersoftheGroupforthemotorinsuranceandemployerliabilityinsurancepolicy.Theletterofcreditcoverstheemployerdeductibleelementoftheinsurancepolicyforinsuranceclaims.
26. Operating lease commitmentsTheGroupaslessee:Minimumleasepaymentsundernon-cancellableoperatingleasesareasfollows:
2019 2018
£mLand and buildings
Equipment and vehicles Total
Landandbuildings
Equipmentandvehicles Total
Continuing
Withinoneyear 10.0 9.2 19.2 12.1 13.3 25.4
Inthesecondtofifthyearsinclusive 27.7 15.7 43.4 30.4 18.6 49.0
Inmorethanfiveyears 16.2 0.5 16.7 22.3 2.3 24.6
53.9 25.4 79.3 64.8 34.2 99.0
TheGroupleasesvariousdistributionpropertiesandplantandequipmentundernon-cancellableoperatingleaseagreements.Theleaseshavevaryingterms,escalationclausesandrenewalrights.
TheGroupaslessor:Atthebalancesheetdate,theGrouphadcontractedwithtenantsforthefollowingfutureminimumleasepayments:
£m 2019 2018
Withinoneyear 0.2 0.1
Inthesecondtofifthyearsinclusive 0.7 –
Morethanfiveyears 0.2 –
1.1 0.1
Propertyrentalincomeearnedduringtheyearwas£0.3m(2018:£0.2m).
CONNECT GROUP ANNUAL REPORT 2019F
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Notes to the Accounts cont.
27. Net cash inflow from operating activities£m Note 2019 2018
Operating(loss)/profit–continuing 3 (31.3) (30.0)
Operating(loss)/profit–discontinued 3 – (8.8)
Operating(loss)/profit–total (31.3) (38.8)
Lossesondisposalofassets 0.2 0.5
Impairmentofassetsheldforsale 4 – 1.1
Impairmentoftangibleassets 4 – 1.0
Shareofprofitsofjointventures (0.4) (0.5)
Lossondisposalofsubsidiary 12 – 10.5
Adjustmentforpensionfunding (1.2) (4.2)
Depreciationofproperty,plantandequipment 6.9 8.6
Amortisationofintangibleassets 4 9.2 11.4
ImpairmentofTuffnellsassets 4 45.5 46.1
Sharebasedpayments 0.2 (0.3)
(Increase)/decreaseininventories (2.8) 0.5
Decreaseinreceivables 5.3 17.7
Decreaseinpayables (2.9) (10.2)
Decreaseinprovisions (3.5) (0.3)
Noncashpensioncosts 0.4 0.3
Amortisationofloanarrangementfees 7 – 0.6
Incometaxpaid (2.6) (6.5)
Net cash inflow from operating activities 23.0 37.5
NetcashflowfromoperatingactivitiesisstatedafterthefollowingAdjustedItems:
Re-organisation&restructuringcosts (4.0) (4.7)
PMPexitcosts (0.8) (2.1)
Pension (2.0) –
IPRsettlement 0.5 –
BrierleyHillsettlement (1.7) –
NMWsettlement (0.3) –
Feesrelatingtodisposalactivity – (1.5)
(8.3) (8.3)
28. Share capital(1) Sharecapital
£m 2019 2018
Issued and fully paid:
At1September 12.4 12.4
Sharesissuedduringtheyear – –
247.7mordinarysharesof5peach(2018:247.7m) 12.4 12.4
(2) Movementinsharecapital
Number(m)Ordinaryshares
of5peach
31August2018 247.7
Sharesissuedduringtheyear –
At 31 August 2019 247.7
TheholdersofordinarysharesareentitledtoreceivedividendsasdeclaredfromtimetotimeandareentitledtoonevotepershareatthegeneralmeetingsoftheCompany.TheCompanyhasoneclassofordinaryshares,whichcarrynorighttofixedincome.
Noshareswereissuedduringtheyearto31August2019.Duringtheyearto31August2018125ordinary5pshareswereissuedtosatisfyshareschemeexercises.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 125
28. Share capital cont.(3) Sharepremium
£m 2019 2018
Balanceat1September 60.5 60.5
Premiumarisingonissueofequityshares – –
Balance at 31 August 60.5 60.5
29. Reserves(1) Demergerreserve
£m 2019 2018
At1September (280.1) (280.1)
At31August (280.1) (280.1)
Thisrelatestoreservescreatedfollowingthecapitalre-organisationundertakenaspartofthedemergerofWHSmithPLCin2006.ThebalancerepresentedthedifferencebetweenthesharecapitalandreservesoftheGrouprestatedonapro-formabasisasat31August2004andthepreviouslyreportedsharecapital.
(2) Ownsharesreserve
£m 2019 2018
Balanceat1September (2.1) (3.1)
Acquiredintheperiod – –
Disposedofonexerciseofoptions 0.4 1.0
Balance at 31 August (1.7) (2.1)
ThereserverepresentsthecostofsharesinConnectGroupPLCpurchasedinthemarketandheldbytheSmithsNewsEmployeeBenefitTrusttosatisfyawardsandoptionsgrantedundertheGroup’sExecutiveShareSchemes(seeNote31).ThenumberofordinarysharesheldbytheTrustasat31August2019was1,188,537(2018:1,506,850).InaccordancewithIAS32,thesesharesaredeductedfromshareholders’funds.UnderthetermsoftheTrust,theTrusteehaswaivedalldividendsonthesharesitholds.
(3) Hedgingandtranslationreserve
£m 2019 2018
Balanceat1September 0.2 0.5
Settlementontermination – –
Netmovementincashflowhedges – –
Exchangedifferencesontranslatingnetassetsofforeignoperations 0.1 (0.3)
Balance at 31 August 0.3 0.2
Thehedgingreserverepresentsthecumulativeamountofgainsandlossesonhedginginstrumentsdeemedeffectiveincashflowhedges.Thecumulativedeferredgainorlossonthehedginginstrumentisrecognisedintheprofitorlossonlywhenthehedgedtransactionceasestobeeffective.
30. Retained earnings£m
Balance at 31 August 2017 234.9
AmountsrecognisedinTotalcomprehensiveincome (47.0)
Dividendspaid (24.1)
Employeeshareschemes (1.0)
Equity-settledsharebasedpayments,netoftax 0.4
Balance at 31 August 2018 163.2
AmountsrecognisedinTotalcomprehensiveexpense (28.6)
Dividendspaid –
Employeeshareschemes (0.4)
Equity-settledsharebasedpayments,netoftax 0.1
Balance at 31 August 2019 134.3
CONNECT GROUP ANNUAL REPORT 2019F
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Notes to the Accounts cont.
31. Share-based paymentsIn2019,theGrouprecognisedatotalchargeof£0.4mrelatedtoequity-settledshare-basedpaymenttransactions.In2018therewasatotalcreditof£0.4m.Theaveragesharepricethroughouttheyearwas37.4p(2018:72.0p).
TheGroupoperatesthefollowingshareincentiveschemes:
SharesaveScheme UnderthetermsoftheConnectGroupSharesaveScheme,theBoardmaygrantoptionstopurchaseordinarysharesintheCompanytoeligibleemployeeswhoenterintoanHMRevenue&CustomsapprovedSave-As-You-Earn(‘SAYE’)savingscontractforatermofthreeyears.Optionsaregrantedata20%discounttothemarketpriceofthesharesonthedayprecedingthedateofofferandarenormallyexercisableforaperiodofsixmonthsaftercompletionoftheSAYEcontract.
ExecutiveShareOptionScheme(ESOS) UnderthetermsoftheConnectGroupExecutiveShareOptionScheme,theBoardmaygrantoptionstopurchaseordinarysharesintheCompanytoexecutivesuptoanannuallimitof200%ofbasesalary.TheexerciseofoptionsisconditionalontheachievementofAdjustedprofitafterathree-yearperiod,whichisdeterminedbytheRemunerationCommitteeatthetimeofgrant.Providedthatthetargetismet,optionsarenormallyexercisableuntilthedayprecedingthe10thanniversaryofthedateofgrant.
LTIP UnderthetermsoftheConnectGroupLTIP,executivedirectorsandkeyseniorexecutivesmaybeawardedeachyearconditionalentitlementstoordinarysharesintheCompany(whichmaybeintheformofnilcostoptionsorconditionalawards)or,inordertoretainflexibilityandattheCompany’sdiscretion,acashsumlinkedtothevalueofanotionalawardofsharesuptoavalueof200%ofbasesalary.Thevestingofawardsissubjecttothesatisfactionofathree-yearperformancecondition,whichisdeterminedbytheRemunerationCommitteeatthetimeofgrant.Subjecttothesatisfactionoftheperformancecondition,awardsarenormallyexercisableuntilthe10thanniversaryofthedateofgrant.
DeferredBonusPlan(DBP) UnderthetermsoftheConnectGroupDeferredBonusPlan,executivedirectorsandkeyseniorexecutivesmaybegrantedeachyearshareawards(intheformofnilcostoptions)dependentontheachievementoftheAnnualBonusPlanperformancetargets.Awardsarenormallyexercisableaftertwoyearssubjecttocontinuedemployment.
Detailsoftheoptions/awardsareasfollows:
Sharesave ESOS LTIP DBP
Numberofoptions/awardsNoof
shares
Weightedaverage
exerciseprice(p)
Noofshares
Weightedaverage
exerciseprice(p)
Noofshares
Weightedaverage
exerciseprice(p)
Noofshares
Weightedaverage
exerciseprice(p)
At31August2017 3,565,191 118.1 6,097,269 144.8 3,006,029 – 910,524 –
Granted 3,154,226 43.6 1,353,061 108.8 2,137,786 – 338,976 –
Exercised (9,846) 101.3 (114,935) 86.3 – – (676,941) –
Expired/forfeited (2,787,326) 115.1 (705,876) 165.0 (2,039,058) – (92,705) –
At31August2018 3,922,245 60.4 6,629,519 136.3 3,104,757 – 479,854 –
Granted 3,104,452 30.40 – – 8,561,924 – 416,378 –
Exercised – – – – – – (158,785) –
Expired/forfeited (1,908,532) 79.40 (2,290,577) 154.5 (1,786,330) – (92,297) –
At31August2019 5,118,165 45.42 4,338,942 126.7 9,880,351 – 645,150 –
Exercisable at 31 August 2019 16,312 110.3 152,209 159.8 – – – –
Exercisableat31August2018 253,052 128.4 2,753,725 134.3 – – – –
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 127
31. Share-based payments cont.Theweightedaverageremainingcontractuallifeinyearsofoptions/awardsisasfollows:
Sharesave ESOS LTIP DBP
Outstanding at 31 August 2019 2.5 6.8 1.9 1.3
Outstandingat31August2018 2.6 6.6 8.6 1.2
Detailsoftheoptions/awardsgrantedorcommencingduringthecurrentandcomparativeyearareasfollows:
Sharesave ESOS LTIP DBP
During 2019:
Effectivedateofgrantorcommencementdate Jun2019 Dec2018May2019
Averagefairvalueatdateofgrantorschemecommencement–pence 8.0 36.5
During 2018:
Effectivedateofgrantorcommencementdate Jun2018 Dec17 Dec17 Dec17
Averagefairvalueatdateofgrantorschemecommencement–pence 13.9 11.6 – 109
Theoptionsoutstandingat31August2019hadexercisepricesrangingfromnilto189.5p(2018:nilto189.5p).
Theweightedaveragesharepriceonthedateofexercisewas37p(2018:108p).
TheSharesaveoptionsgrantedduringeachperiodhavebeenvaluedusingtheBlack-Scholesmodel,theLTIPandDBPschemesarevaluedbyreferencetothesharepriceatthedateofgrant.
TheinputstotheBlack-Scholesmodelareasfollows:
Sharesave ESOS LTIP LTIP DBP
2019 options/awards: May19 Dec18 Dec18
Sharepriceatgrantdate–pence 38.0 – 37.4 36.25 36.25
Exerciseprice–pence 30.4 – – – –
Expectedvolatility–percent 39% – – – –
Expectedlife–years 3.0 – – – –
Riskfreerate–percent 0.4% – – – –
Expecteddividendyield–percent 2.6% – – – –
Weightedaveragefairvalue–pence 8.0 – 37.4 36.25 36.25
2018 options/awards: Dec2017
Sharepriceatgrantdate–pence 52.3 109 – 109 109
Exerciseprice–pence 42.0 109 – – –
Expectedvolatility–percent 50% 33% – – –
Expectedlife–years 3.0 3.0 – – –
Riskfreerate–percent 0.94% 0.78% – – –
Expecteddividendyield–percent 1.9% 9.1% – – –
Weightedaveragefairvalue–pence 13.9 11.6 – 109 109
CONNECT GROUP ANNUAL REPORT 2019F
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Notes to the Accounts cont.
32. Post balance sheet events
On23September2019,theGroup’ssubsidiary,TuffnellsParcelsExpressLimited(Tuffnells),exchangedcontractsinrespectoftheproposedsaleandleasebackofsixdistributiondepots,ofwhichthreewerefreeholdandthreewerelongleaseholdproperties,toUrbanLogisticsPropCo1(AC)Limited(UrbanLogistics),asubsidiaryofUrbanLogisticsREITplc.Completionsubsequentlytookplaceon27September2019.
ThesalepricereceivedfromUrbanLogisticswas£9.9m.Atcompletion,thisfirsttrancheofpropertieswassubsequentlyleasedbackfromUrbanLogisticson20-yearleaseterms,withmarketrentpayableat£0.7mperannum,subjecttomarketinflation.Ineachcase,theleasesareguaranteedbytheCompany.TheexpectedimpactunderIFRS16willbetorecogniseagainondisposalof£0.7m,aleasecreditorof£8.0m,arightofuseassetof£3.2m,annualdepreciationof£0.2mandyear1interestof£0.4m.
33. Related party transactionsTransactionsbetweenbusinesseswithintheGroupwhicharerelatedpartieshavebeeneliminatedonconsolidationandarenotdisclosedinthisNote.
TransactionswiththeGroup’spensionschemesaredisclosedinNote6.
Tradingtransactions
Salestorelatedparties Amountsowedbyrelatedparties
£m 2019 2018 2019 2018
Jointventures 2.6 3.5 0.5 0.8
Salestorelatedpartiesareformanagementfees,paymentisdueonthelastdayofthemonthfollowingthedateofinvoice.
Non-tradingtransactions
Loanstorelatedparties
£m 2019 2018
Jointventures 0.6 –
AggregateremunerationofkeymanagementpersonnelTheremunerationofthedirectorsandtheExecutiveTeam,whoarethekeymanagementpersonnelofthecontinuingGroup,issetoutbelowinaggregateforeachofthecategoriesspecifiedinIAS24‘RelatedPartyDisclosures.’
£m 2019 2018
Short-termemployeebenefits 2.9 2.1
Post-employmentbenefits – 0.4
Terminationbenefits 0.3 –
Sharebasedpayments 0.2 (0.1)
3.4 2.4
Informationconcerningdirectors’remuneration,interestinsharesandshareoptionsareincludedintheDirectors’RemunerationreportintheAnnualReport.MarkCashmore,theGroup’sformerChiefExecutiveOfficer,continuedtoreceivehisbasicsalary,benefitsandpension,subjecttooffsetagainstearningsreceivedelsewherefromanyotherexecutiverole,until30June2019.Thistotalled£0.6muptoJune2019(2018:£0.5m).
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 129
34. Subsidiary and associated undertakings
Companyname/(number) ShareClass Group% Companyname/(number) ShareClass Group%
United Kingdom
RowanHouse,CherryOrchardNorth,KembreyPark,SwindonSN28UH
ConnectLimited02008952 OrdinaryShares 100% Martin-LavellLimited02654521(*) OrdinaryShares 100%
ConnectLogisticsLimited09172965 OrdinaryShares 100% PassMyParcelLimited09172022 OrdinaryShares 100%
ConnectNews&MediaLimited08572634 OrdinaryShares 100% PhantomMediaLimited03805661(*) OrdinaryShares 100%
ConnectParcelFreightLimited09295023 OrdinaryShares 100% SmithsNewsHoldingsLimited04236079 OrdinaryShares 100%
ConnectParcelsLimited09172850 OrdinaryShares 100% SmithsNewsInstoreLimited03364589 OrdinaryShares 100%
ConnectServicesLimited08522170 OrdinaryShares 100% SmithsNewsInvestmentsLimited
06831284 OrdinaryShares 100%
ConnectSpecialistDistributionGroupLimited08458801 OrdinaryShares 100% SmithsNewsLimited
08506961 OrdinaryShares 100%
Connect2ULimited03920619 OrdinaryShares 100% SmithsNewsTradingLimited00237811 OrdinaryShares 100%
DawsonMediaServicesLimited06882722 OrdinaryShares 100% TheBigGreenEuroMachineLimited
02496549 OrdinaryShares 100%
DawsonGuaranteeCompanyLimited06882393 OrdinaryShares 100% TheBigGreenParcelGroupLimited
05356630 OrdinaryShares 100%
DawsonHoldingsLtd00034273 OrdinaryShares 100% TheBigGreenParcelHoldingCompanyLtd
06459283 OrdinaryShares 100%
DawsonLimited03433262 OrdinaryShares 100% TheBigGreenParcelMachineLimited
03125293 OrdinaryShares 100%
DawsonMediaDirectLimited06882366 OrdinaryShares 100% TuffnellsParcelsExpressLimited
00319964 OrdinaryShares 100%
TwoSnowhill,SnowHill,Birmingham,B46GA
WorldwideMagazineDistributionLimited01206287 OrdinaryShares 50% FMDLimited
03729720 OrdinaryAshares 50%
27KingsRoad,Berkhamsted,Hertfordshire,HP43BH
FreshOnTheGoLimited08775703 OrdinaryShares 30%
EstantiaHouse,PitreavieDrive,PitreavieBusinessPark,Dunfermline,FifeKY118US
BlueboxAviationSystemsLtdSC267388 OrdinaryShares 36.1% BlueboxSystemsGroupLimitedSC544863 OrdinaryAShares 36.1%
InflightHouse,HurricaneWay,Langley,SL38AG
BlueboxAvionicsLimited05684001 OrdinaryShares 36.1%
SilburyCourt,420SilburyBoulevard,MiltonKeynesMK92AF
Open-ProjectsLimited02422753 OrdinaryShares 50% RascalSolutionsLimited05191277 OrdinaryAShares 50%
CONNECT GROUP ANNUAL REPORT 2019F
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Notes to the Accounts cont.
34. Subsidiary and associated undertakings cont.Companyname/(number) ShareClass Group% Address
France
DawsonMediaDirectSAS450101340RCSBobigny OrdinaryShares 100% 11rueLéopoldBellan,75000Paris,France
Spain
DawsonMediaDirectIbericaSLCIF-B84692904 OrdinaryShares 100% AvendidadelaIndustria38,NaveC-17,28223Coslada,Spain
Germany
DawsonMediaDirectGmbHHRB99445 OrdinaryShares 100% AufderRoos6-12,65795HattersheimamMain,Germany
Belgium
DawsonMediaDirectNV474.114323 OrdinaryShares 99% Brixtonlaan1E,1930Nossengem,Belgium
Turkey
DawsonMediaDirectAnonimSirketi14449-5 OrdinaryShares 100% ParimaPlazaMaltepeMahallesiEskiCirpiciYoluSokNo:8K:14-176
Merter-Zeytinburnu,Istanbul,Turkey
Australia
DawsonMediaDirectAustraliaPtyLimited615545545 OrdinaryShares 100% C/OGrantThorntonAustraliaLevel17,383KentStreet,SydneyNSW2000,
Australia
Hong Kong
DawsonMediaDirectChinaLimited1167911 OrdinaryShares 100% Flat/Rm500850/F,CentralPlaza,18HarbourRoad,Wanchai,HongKong
Thailand
DawsonMediaDirectCo.Ltd105558138385 OrdinaryShares 48.9% 87MThaiTower,AllSeasonsPlace,23rdFloor,WittayuRoad,
LumpiniSub-District,PathumwanDistrict,Bangkok,Thailand
United Arab Emirates
DMDHoldingsLimited(JAFZA)OF3596 OrdinaryShares 100% POBox7992,Dubai,UnitedArabEmirates
United States
DawsonMediaDirectHoldingsInc4056281 CommonStock 100% CorporationTrustCentre,1209OrangeStreet,WilmingtonILDE19801,
UnitedStates
DawsonMediaDirectInc4056283 CommonStock 100% 40WallStreet,28thFloor,NewYork,NY10005,USA
* Auditexemptionstatement.
Fortheyearended31August2019,thecompaniesasindicatedinthetableby‘(*)’abovewereentitledtoexemptionfromauditundersection479AoftheCompaniesAct2006relatingtosubsidiarycompanies.Assuch,ConnectGroupPLChasprovidedaguaranteeagainstalldebtsandliabilitiesinthesesubsidiariesasat31August2019.Themembersofthesecompanieshavenotrequiredthemtoobtainanauditoftheirfinancialstatementsfortheyearended31August2019.
BlueboxSystemsGroupLimited,BlueboxAviationSystemsLimitedandBlueboxAvionicsLimitedareassociatedundertakings.RascalSolutionsLimited,Open-ProjectsLimited,FMDLimitedandWorldwideMagazineDistributionLimitedarejointventures(seeNote15).
35. Reconciliation cash flow to net movement in cash and cash equivalentsAreconciliationbetweenFreecashflowandthenetincrease/(decrease)incashandcashequivalentsisshownbelow:
£m 2019 2018
Net(decrease)/increaseincash&cashequivalents (0.8) 2.5
Dividendpaid – 24.1
Proceedsonsaleofsubsidiary(netofdisposalcosts) – (12.9)
Decreaseinborrowings 8.0 5.9
Adjustmentforpensionfunding 1.2 4.7
Dividendsreceivedfromassociates (0.1) (0.2)
TotalFreecashflow 8.3 24.1
DiscontinuedFreecashflow – (3.9)
ContinuingFreecashflow 8.3 20.2
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 131
36. Adoption of new accounting standardsInthecurrentyear,theGrouphasadoptedandappliedthefollowingaccountingstandardsissuedbytheInternationalAccountingStandardsBoardthatarerelevanttotheoperationsoftheGroup.
• IFRS9‘FinancialInstruments’.• IFRS15‘RevenuefromContractswithCustomers’.
TheimpactoftheadoptionofthesenewstandardsontheGroup’sfinancialstatementsisexplainedbelow.Neitherofthesestandardshashadamaterialimpactontheincomestatementorthenetassets/(liabilities)oftheGroup.
IFRS9‘FinancialInstruments’IFRS9becameeffectiveforaccountingperiodsbeginningonorafter1January2018andreplacedIAS39‘FinancialInstruments:RecognitionandMeasurement’.IFRS9introducednewrequirementsfortheclassificationandmeasurementoffinancialinstruments,impairmentoffinancialassetsusinganexpectedcreditloss(ECL)model,andhedgeaccounting.
TheadoptionofIFRS9didnothaveamaterialimpactontheGroupfinancialstatements,theeffectbeinglimitedtoachangeinthemethodologyusedtocalculateimpairmentoftheGroup’sfinancialassets.ThischangedidnothaveamaterialimpactonthenetassetsorprofitfortheyearoftheGroup.TheGrouphaselectednottorestatecomparativeinformationfortheeffectofapplyingIFRS9onthebasisthatthechangeisimmaterial.
ClassificationandmeasurementoffinancialassetsThedirectorshavereviewedandassessedtheGroup’sfinancialassetsandconcludedthattheapplicationofIFRS9doesnothaveanimpact.Tradeandotherreceivables,cashandcashequivalentswillcontinuetobeclassifiedatamortisedcost.
ImpairmentoffinancialassetsIFRS9requiresanexpectedcreditlossapproachtoimpairmentratherthantheincurredcreditlossmodelunderIAS39.TheGrouphasappliedthesimplifiedapproachtomeasuringexpectedcreditlosses.Thisusesalifetimeexpectedlossallowanceforalltradereceivablesandcontractreceivables.
Balanceshavebeengroupedbasedonsharedcreditriskcharacteristicsandthedayspastdue.OnthisbasisthereisnosignificantimpactcomparedtothosepreviouslyrecognisedunderIAS39FinancialInstruments:RecognitionandMeasurement.
ClassificationandmeasurementoffinancialliabilitiesAlltheGroup’sfinancialliabilitiesareheldatamortisedcost.TheIFRS9requirementsregardingtheclassificationandmeasurementoffinancialliabilitiesarebroadlyconsistentwiththepreviousstandard,IAS39.Accordingly,theadoptionofIFRS9hashadnoimpactontheclassificationandmeasurementoftheGroup’sfinancialliabilities.
IFRS15RevenuefromContractswithCustomersIFRS15RevenuefromContractswithCustomerswasissuedbytheIASBinMay2014andbecameeffectivefortheGroupfrom1September2018.TheGrouphasappliedthefullyretrospectiveapproach;thereforecomparativeperiodshavebeenrestated.
IFRS15‘RevenuefromContractswithCustomers’isanewstandardbasedonafive-stepmodelframework,whichreplacesallexistingrevenuerecognitionstandards.Thestandardrequiresrevenuetorepresentthetransferofpromisedgoodsorservicestocustomersinanamountthatreflectstheconsiderationtowhichtheentityexpectstobeentitledinexchangeforthosegoodsorservices.TheGroupadoptedIFRS15from1September2018usingafullyretrospectiveapproach.TheGroupconsideredthatthecurrentsegmentalsplitofrevenuetobeappropriatelydisaggregatedinlinewithIFRS15.ThereisnochangetotheGroup’srevenuerecognitionunderIFRS15;howeverthereareotherimpactstotheGroupwhicharesetoutinthetablebelow.
AsatAugust2018
Tradeandother
receivables£m
Tradeandotherpayables
£m
Netassets
£m
Balance without IFRS 15 adjustment 81.7 (127.6) (45.9)
IFRS15adjustments:
A–Returnsreserveaccrual 25.5 (25.5) –
B–Returnsreserveasset 22.5 (22.5) –
As reported total 129.7 (175.6) (45.9)
AdjustmentA–ReturnsreserveaccrualUnderIFRS15arightofreturnisnotaseparateperformanceobligationandtheGroupisrequiredtorecogniserevenuenetofestimatedreturns.Areturnsreserveaccrualandacorrespondingassetrepresentingtherighttorecoverproductsfromthecustomerisalsorecognised.TheGrouppreviouslyrecognisedtheseitemsonanetbasisonadoptionofIFRS15.TheGroupwasrequiredtoadjusttradereceivablestogrossoutthereturnsreserveaccrualwiththeoffsetnowincludedwithinothercreditors.
AdjustmentB–ReturnsreserveassetTheassetrepresentingtherighttoreturndiscussedinAdjustmentAhasnowbeenrecognisedwithinotherdebtorswhereitwaspreviouslyoffsetagainsttradepayables.
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Glossary – Alternative Performance Measures
IntroductionInthereportingoffinancialinformation,thedirectorshaveadoptedvariousAPMs.
ThesemeasuresarenotdefinedbyInternationalFinancialReportingStandards(IFRS)andthereforemaynotbedirectlycomparablewithothercompanies’APMs,includingthoseintheGroup’sindustry.
APMsshouldbeconsideredinadditionto,andarenotintendedtobeasubstitutefor,orsuperiorto,IFRSmeasurements.
PurposeThedirectorsbelievethattheseAPMsassistinprovidingadditionalusefulinformationontheunderlyingtrends,performanceandpositionoftheGroup.
APMsarealsousedtoenhancethecomparabilityofinformationbetweenreportingperiodsandbusinessunitsbyadjustingfornon-recurringoruncontrollablefactorswhichaffectIFRSmeasures,toaidusersinunderstandingtheGroup’sperformance.
Consequently,APMsareusedbythedirectorsandmanagementforperformanceanalysis,planning,reportingandincentive-settingpurposes.
ThekeyAPMsthattheGrouphasfocusedonandchangestoAPMswithintheperiodcanbefoundinNote1.
APM
Closest equivalent IFRS measure
Adjustments to reconcile to IFRS measure
Note/page reference for reconciliation Definition and purpose
IncomeStatement
AdjustedItems Nodirectequivalent
N/A Note4 AreitemsofincomeorexpensethatareexcludedinarrivingatAdjustedoperatingprofit.ThisenhancesusersunderstandingoftheGroup’sperformanceasitaidsthecomparabilityofinformationbetweenreportingperiodsandbusinessunitsbyadjustingfornon-recurringoruncontrollablefactorswhichaffectIFRSmeasures.
Adjustedoperatingprofit
Operatingprofit* AdjustedItems Incomestatement/Note4
Adjustedoperatingprofitisdefinedasoperatingprofitfromcontinuingoperations,excludingtheimpactofAdjustedItems(definedabove).ThisistheheadlinemeasureoftheGroup’sperformanceandisakeymanagementincentivemetric.
Adjustedprofitbeforetax
Profitbeforetax(PBT)
AdjustedItems Incomestatement/Note4
Adjustedprofitbeforetaxisdefinedasprofitbeforetaxfromcontinuingoperations,excludingtheimpactofAdjustedItems(definedabove).
Adjustedprofitaftertax
Profitaftertax(PAT)
AdjustedItems Incomestatement/Note4
Adjustedprofitaftertaxisdefinedasprofitaftertaxfromcontinuingoperations,excludingtheimpactofAdjustedItems(definedabove).
AdjustedEBITDA Operatingprofit* DepreciationandamortisationAdjustedItems
Page20 Thismeasureisbasedonbusinessunitoperatingprofitfromcontinuingoperations.Itexcludesdepreciation,amortisationandAdjustedItems.ThisistheheadlinemeasureoftheGroup’sperformanceandisakeymanagementincentivemetric.
Adjustedearningspershare
Earningspershare AdjustedItems Note10 AdjustedearningspershareisdefinedascontinuingadjustedPBT,lesstaxationattributabletoadjustedPBTandincludinganyadjustmentforminorityinteresttoresultinadjustedPATattributabletoshareholders;dividedbythebasicweightedaveragenumberofsharesinissue.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 133
APM
Closest equivalent IFRS measure
Adjustments to reconcile to IFRS measure
Note/page reference for reconciliation Definition and purpose
CashflowStatement
Freecashflow Cashgeneratedfromoperatingactivities
Dividends,acquisitionsanddisposals,Repaymentofbankloans,EBTsharepurchases,Pensiondeficitrepairpayments
Note27 Freecashflowisdefinedascashflowexcludingthefollowing:paymentofthedividend,acquisitionsanddisposals,therepaymentofbankloans,EBTsharepurchasesandcashflowsrelatingtopensiondeficitrepair.Thismeasurereflectsthecashavailabletoshareholders.
Freecashflow(excludingadjustingitems)
Cashgeneratedfromoperatingactivities
Dividends,acquisitionsanddisposals,Repaymentofbankloans,EBTsharepurchases,PensiondeficitrepairpaymentsAdjustedItems
Note27 Freecashflow(excludingAdjustedItems)isFreecashflowaddingbackAdjustedcashcosts.
BalanceSheet
Netdebt Borrowingslesscash
Cashflowstatement
Netdebtiscalculatedastotaldebtlesscashandcashequivalents.Totaldebtincludesloansandborrowings,overdraftsandobligationsunderfinanceleases.
* OperatingprofitispresentedontheGroupincomestatement.ItisnotdefinedperIFRS,however,isagenerallyacceptedprofitmeasure.
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Company Balance Sheet as at 31 August 2019
£m Note 2019 2018
Fixed assets
Investmentsinsubsidiaryundertakings 3 373.2 481.8
373.2 481.8
Current assets
Cashandbankdeposits 2.2 –
2.2 –
Creditors: amountsfallingduewithinoneyear 4 (171.0) (408.8)
Net assets 204.4 73.0
Capital and reserves
Calledupsharecapital 5(1) 12.4 12.4
Sharepremiumaccount 5(3) 60.5 60.5
Retainedearnings 6 131.5 0.1
Total shareholders’ funds 204.4 73.0
Theprofitfortheyearwas£131.4m.
Theseaccountswereapprovedbythedirectorson5November2019.
SignedonbehalfoftheBoardofDirectors
Jonathan Bunting Tony GraceInterimChiefExecutiveOfficer ChiefFinancialOfficer
Registerednumber–05195191
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 135
Statement of Changes in Equity for the year ended 31 August 2019
£m NoteShare
capitalShare
premiumRetainedearnings Total
Balance at 31 August 2017 12.4 60.5 62.4 135.3
Lossfortheyear – – (38.2) (38.2)
Dividendpaid – – (24.1) (24.1)
Balance at 31 August 2018 12.4 60.5 0.1 73.0
Profitfortheyear – – 131.4 131.4
Balance at 31 August 2019 12.4 60.5 131.5 204.4
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Notes to the Company Balance Sheet
1. Accounting policies(1) AccountingconventionTheseparatefinancialstatementsof“theCompany”arepresentedasrequiredbytheCompaniesAct2006.TheCompanymeetsthedefinitionofaqualifyingentityunderFRS100(FinancialReportingStandard100)issuedbytheFinancialReportingCouncil.Accordingly,thefinancialstatementshavethereforebeenpreparedinaccordancewithFRS101(FinancialReportingStandard101)‘ReducedDisclosureFramework’asissuedbytheFinancialReportingCouncil.
TheCompanyhastakenadvantageofsection408oftheCompaniesAct2006nottopresentaprofitandlossaccountandrelatednotes.
TheCompanyhastakenadvantageofthefollowingdisclosureexemptionsunderFRS101:
• therequirementsofparagraphs10(d),10(f),39(c)and134-136ofIAS1PresentationofFinancialStatements;• therequirementsofIAS7StatementofCashflows;• therequirementsofparagraphs30and31ofIAS8AccountingPolicies,ChangesinAccountingEstimatesandErrors;• therequirementsinIAS24RelatedPartyDisclosurestodiscloserelatedpartytransactionsenteredintobetweentwoormoremembersofagroup,
providedthatanysubsidiarywhichisapartytothetransactioniswhollyownedbysuchamember;• therequirementsofparagraphs134(d)-134(f)and135(c)-135(e)ofIAS36ImpairmentofAssets;• paragraphs45(b)and46to52ofIFRS2,‘Share-basedpayment’(detailsofthenumberandweightedaverageexercisepricesofoptions,andhow
thefairvalueofgoodsandservicesreceivedwasdetermined);and• IFRS7,‘FinancialInstruments:Disclosures’
Whererequired,equivalentdisclosuresaregivenintheconsolidatedfinancialstatements.
Thefinancialstatementshavebeenpreparedonthehistoricalcostbasis.Theprincipalaccountingpoliciesadopted,arethesameasthosesetoutinNote1totheconsolidatedfinancialstatementsexceptasnotedbelow.
Investmentsinsubsidiaries,andassociatesarestatedatcostless,whereappropriate,provisionsforimpairment.
Critical accounting estimates and judgementsThepreparationoffinancialstatementsrequiresmanagementtomakejudgements,estimatesandassumptionsthataffecttheapplicationofpoliciesandreportedamountsofassetsandliabilities,incomeandexpenses.Theestimatesandassociatedassumptionsarebasedonhistoricalexperienceandvariousotherfactorsthatarebelievedtobereasonableunderthecircumstances,theresultsofwhichformthebasisofmakingjudgementsaboutthecarryingvalueofassetsandliabilitieswhicharenotreadilyapparentfromothersources.Actualresultsmaydifferfromtheseestimates.Theestimatesandunderlyingassumptionsarereviewedonanongoingbasisandanyrevisionstothemarerecognisedintheperiodinwhichtheyarerevised.
Estimated impairment of investmentsTheCompanytestsforimpairmentupontriggers,inaccordancewiththeaccountingpolicy.Thecarryingamountsofcash-generatingunits(CGUs)havebeendeterminedbasedonvalueinusecalculations.Thesecalculationsrequiretheuseofestimates(Note13)oftheGroupfinancialstatements.
Animpairmentchargeof£108.6m(2018:£38.2m)aroseontheinvestmentinSmithsNewsHoldingLimitedduringthecourseofthe2019year,resultingintheinvestmentbeingwrittendowntoitsrecoverableamount,aftertakingintoaccounttheintercompanybalances.Note13oftheGroupfinancialstatementsincludesdetailsofmanagementsassumptions;theimpactofchangingtheseestimatesarediscussedinNote3.
(2) InvestmentinsubsidiaryundertakingsInvestmentinsubsidiaryundertakingsareindividuallyvaluedathistoricalcostlessprovisionforimpairmentinvalue.
(3) FinancialliabilitiesandequitiesTradepayablesaremeasuredatamortisedcost.
EquityinstrumentsissuedbytheCompanyarerecordedattheproceedsreceived,netofdirectissuecosts.
FinancialassetsandfinancialliabilitiesarerecognisedontheCompany’sbalancesheetwhentheCompanybecomesapartytothecontractualprovisionsoftheinstrument.
(4) TaxationCurrenttaxisprovidedatamountsexpectedtobepaid(orrecovered)usingthetaxratesandlawsthathavebeenenactedorsubstantivelyenactedatthebalancesheetdate.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 137
2. Result for the year TheCompanyhasnotpresenteditsownprofitandlossaccountaspermittedbysection408oftheCompaniesAct2006.Theresultfortheyearattributabletoshareholders,whichisstatedonanhistoricalcostbasis,wasaprofitof£131.4m(2018:£38.2m).Therewerenootherrecognisedgainsorlosses.Thedividendpaidintheyearis£nil(2018:£24.1m)(refertoNote9oftheGroupfinancialstatements).
3. Investments in subsidiary undertakings£m 2019 2018
Net book value:
At1September 481.8 520.0
Impairment (108.6) (38.2)
At 31 August 373.2 481.8
Thecarryingamountoftheinvestmenthasbeenreducedtoitsrecoverableamountthroughrecognitionofanimpairmentloss.Animpairmentof£108.6m(2018:£38.2m)hasbeenrecognisedagainstthecostofinvestments.
Sincetheprioryearadividendof£240.0mwasmadefromSmithsNewsHoldingsLimited(theCompany’simmediatesubsidiary).Thedifferencebetweenthenetbookvalue,sizeofthedividendreceivedfromtheimmediatesubsidiary,thedeterminationoftheoutlookinTuffnellsParcelExpressLimitedandDawsonMediaDirectLimited(DMD)indirectsubsidiariesoftheCompanytriggeredanimpairmentreview.Theimpairmentreviewresultedinanimpairmentchargeof£108.6mbeingmade.
TheCompanyindirectlyownsthreecashgeneratingunits:SmithsNewsTradingLimited(SmithsNews),DawsonMediaDirectGroup(DMD)andTuffnellsParcelExpressLimited(Tuffnells).
Eachcash-generatingunitwasindependentlyvaluedusingvalueinusecalculations,theCompanypreparescashflowforecastsderivedfromthemostrecentplanforthefollowingasapprovedbytheBoardandextrapolatesthesecashflowsonanestimatedgrowthrateintoperpetuity.ThekeyassumptionstakeninperformingthesecalculationsforDMDandTuffnellsaredisclosedinNote13oftheGroup’sAccounts,theassumptionstakenforSmithsNewsareincludedinthetablebelow.
SmithsNews
2019 2018
Averageplanrevenuedecline 3.8% 6.1%
Posttaxdiscountrate 10.5% 9.5%
Pretaxdiscountrate 21.7% 9.8%
Long-term(decline)/growthrate (3.0%) 0.0%
AfteravaluewasallocatedtoeachbusinessunitthattheCompanyholdsanadjustmenttothevaluewasmadefortheGroup’snetliabilitypositiontocalculatethevalueoftheGroup.ThiswasthencomparedwiththevalueoftheinvestmentheldbytheCompanyandthedifferencewasbookedasanimpairment.
SensitivitytochangesinkeyassumptionsImpairmenttestingisdependentonmanagement’sestimatesandjudgements,particularlyastheyrelatetotheforecastingoffuturecashflows,thediscountratesselectedandexpectedlong-termgrowthrates.Thetablebelowsetsouttheimpactofareasonablypossiblechangeintheassumptions.
Planscenario ChangeImpacton
valueinuse
Long-termgrowthrate (3%)to2% -/+1%to0.5% 28.5/(24.3)
Discountrate 10.5%to11.5% -/+1% 15.0/(13.0)
Reductionintheforecastfutureprofits (54.8)
Thetotalcumulativeimpairmentrecognisedagainsttheinvestmentis£289.7m(FY18:£181.1m).FurtherinformationaboutsubsidiariesandjointventuresisprovidedinNote34totheGroupfinancialstatements.
4. Creditors: amounts falling due within one year
£m 2019 2018
AmountsowedtoGroupcompanies (171.0) (408.8)
AmountsowedtoGroupcompaniesarerepayableondemand,unsecured,non-interestbearingandsettledincash.
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Notes to the Company Balance Sheet cont.
5. Share capital(1) Sharecapital
£m 2019 2018
Issued and fully paid ordinary shares of 5p each
At1September 12.4 12.4
Sharesissuedintheyear – –
At31August 12.4 12.4
Theholdersofordinarysharesareentitledtoreceivedividendsasdeclaredfromtime-to-timeandareentitledtoonevotepershareatthemeetingsoftheCompany.TheCompanyhasoneclassofordinaryshares,whichcarrynorighttofixedincome.
Duringtheyearto31August2018,125ordinary5pshareswereissuedtosatisfyshareschemeexercises.
(2) Movementinsharecapital
Number(m)Ordinaryshares
of5peach
At1September2018 247.7
Issuedintheyear –
At 31 August 2019 247.7
(3) Sharepremium
£m 2019 2018
Balanceat1September 60.5 60.5
Sharesissuedintheyear – –
Balance at 31 August 60.5 60.5
6. Reserves
£m
2019 Retained earnings
Balanceat1September 0.1
Profitfortheyear 131.4
Dividendpaid –
Balance at 31 August 131.5
7. Directors’ emoluments and employeesTheCompanyemployedthree(2018:three)non-executivedirectors.SmithsNewsTradingLimited,anindirectsubsidiary,paysallremunerationwithoutrechargeforalldirectorsandtheamountsaredisclosedwithintheDirectors’RemunerationreportintheGroup’sAnnualReport.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 139
Shareholder Information
Company Secretary and registered officeStuartMarriner,ConnectGroupPLC,RowanHouse,CherryOrchardNorth,KembreyPark,Swindon,WiltshireSN28UH.
Telephone08451288888.
General shareholder enquiries – registrarEnquiriesrelatingtoshareholders,suchasthetransferofshares,changeofnameoraddress,lostsharecertificatesordividendcheques,shouldbereferredtotheCompany’sregistrarEquiniti,AspectHouse,SpencerRoad,Lancing,WestSussexBN996DA(telephone037138427711orfromoutsidetheUK+44(0)1214157565).Atextphonefacilityforshareholderswithhearingdifficultiesisavailablebytelephoning037138422551.
Inaddition,Equinitiprovidesarangeofshareholderinformationonlineatwww.shareview.co.uk(toregisterforthisserviceyouwillneedyourshareholderreferencenumberwhichcanbefoundontheProxyForm).
1. Linesareopenfrom8.30amto5.30pm,MondaytoFriday,excludingpublicholidaysinEnglandandWales.
Company websiteConnectGroupPLCAnnualReportsandresultsannouncementsareavailableonlineatwww.connectgroupplc.com.TheinvestorsectionofourwebsiteprovidesawiderangeofinformationabouttheCompanyincludingAnnualReports,regulatorynewsreleases,sharepricedata,financialcalendarandaShareholderCentrecontainingAnnualGeneralMeetinginformationandotherusefulshareholderinformation.
Annual Report and Financial StatementsThisAnnualReportandFinancialStatementsispublishedonourwebsiteandhasonlybeensenttothoseshareholderswhohaveaskedforacopy.ShareholderswhohavenotrequestedapapercopyoftheAnnualReportandFinancialStatementshavebeennotifiedofitsavailabilityonthewebsite.
Annual General MeetingThe2020AnnualGeneralMeetingwillbeheldatRowanHouse,CherryOrchardNorth,KembreyPark,Swindon,WiltshireSN28UHonFriday31January2020at11.30am.TheNoticeofAnnualGeneralMeetingsetsoutthebusinesstobetransacted.ShareholderswhowishtoattendthemeetingshoulddetachtheAttendanceCardfromtheProxyFormthattheyaresentandpresentitattheregistrationdeskonarrivalattheAnnualGeneralMeeting.
Thevotingresultsofthe2020AnnualGeneralMeetingwillbeaccessibleatwww.connectgroupplc.comshortlyafterthemeeting.
ApapercopyoftheAnnualReportandFinancialStatementscanbeobtainedbywritingtotheCompanySecretaryattheaddresslistedaboveoryoucane-mailyourrequesttoinvestor.relations@connectgroupplc.com.
Proxy FormShareholdersunabletoattendtheAnnualGeneralMeetingshouldcompleteaProxyForm.Tobeeffective,itmustbecompletedandlodgedwiththeCompany’sregistrars,Equiniti,bynotlaterthan11.30amonWednesday29January2020.
Electronic proxy votingYoumay,ifyouwish,registertheappointmentofaproxyfortheAnnualGeneralMeetingelectronically,byloggingontothewebsitewww.sharevote.co.uk.Fulldetailsoftheprocedurearegivenonthewebsite.YouwillneedtohaveyourProxyFormtohandwhenyoulogonasitcontainsinformationwhichwillberequired.CRESTmembersmayappointaproxyelectronicallyviatheCompany’sRegistrars,Equiniti(IDRA19).Electronicproxyvotinginstructionsmustbereceivedbynotlaterthan11.30amonWednesday29January2020.
DividendsAfinaldividendof1.0ppersharehasbeenproposedand,subjecttoapprovalattheAnnualGeneralMeeting,willbepaidon13February2020toallshareholdersontheregisteron17January2020.DividendscanbepaidbyBACSdirectlyintoaUKbankaccount,withthetaxvoucherbeingsenttotheshareholder’saddress.
AdividendmandateformisavailablefromEquinitioratwww.shareview.co.uk
Financial calendarFinancialyearend 31August2019Resultsannounced 6November2019AnnualReportpublished 16December2019Finaldividendex-dividenddate 16January2020Finaldividendrecorddate 17January2020AnnualGeneralMeeting 31January2020Finaldividendpaymentdate 13February2020Half-yearend 29February2020Interimresultsannounced 13May2020Financialyearend 29August2020Resultsannounced 4November2020
Forthedatesofeventsinthesecondhalfofthefinancialcalendar,pleasechecktheConnectGroupPLCwebsiteatwww.connectgroupplc.comnearertherelevanttimeforfurtherdetails,andtoensurethatnochangeshavebeenmade.
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Shareholder Information cont.
Share dealing serviceTheCompanyhasarrangedforShareviewDealing,atelephoneandinternetsharedealingserviceofferedbyEquiniti,tobemadeavailabletoUKshareholderswishingtobuyorselltheCompany’sshares.Fortelephonedealing,youmaycall03456037037between8.30amand4.30pm,MondaytoFriday,andforinternetdealinglogontowww.shareview.co.uk/dealing.Youwillneedyourshareholderreferencenumbershownonyoursharecertificate.
ShareGIFTIfyouonlyhaveasmallnumberofshareswhichareuneconomictosell,youmaywishtoconsiderdonatingthemtocharityunderShareGIFT,acharitysharedonationschemeadministeredbytheOrrMackintoshFoundation.AShareGIFTtransferformmaybeobtainedfromEquiniti.FurtherinformationabouttheschemecanbefoundontheShareGIFTwebsiteatwww.sharegift.org.
Warning to shareholders (‘boiler room’ scams)Inrecentyears,likeothercompanies,wehavebecomeawareofasmallnumberofinvestorswhohavereceivedunsolicitedcallsorcorrespondence,insomecasespurportingtohavebeenissuedbyus,concerninginvestmentmatters.ThesetypicallymakeclaimsofhighlyprofitableopportunitiesinUKorUSinvestmentswhichturnouttobeworthlessorsimplydonotexist.Theseapproachesareusuallymadebyunauthorisedcompaniesandindividualsandarecommonlyknownas‘boilerroom’scams.Investorsareadvisedtobewaryofanyunsolicitedadviceorofferstobuyshares.Ifitsoundstoogoodtobetrue,itoftenis.
SeetheFinancialConductAuthoritywebsitewww.fca.org.uk/consumers/scamsformoredetailedinformationaboutthisorsimilaractivity.DetailsofanysharedealingfacilitiesthattheCompanyendorseswillbeincludedinCompanymailings.
UK Capital Gains Tax (CGT)RightsIssue17December2014Shareholders who acquired sharesForthepurposesofcalculatinganychargeablegainsorlosses,anyordinarysharesyouacquiredasaresultoftheRightsIssue(atapriceof102peach)aretreatedasbeingacquiredatthesametimeasyouroriginalholdingofordinarysharesandthesubscriptioncostaddedtothebasecostofyouroriginalholding.
Shareholders who sold or renounced their rights or who allowed their rights to lapseIfyousoldanyorallofyourrightstosubscribefortheordinarysharesprovisionallyallottedtoyou,orifyouallowedyourrightstolapseandreceivedacashpaymentinrespectofthem,iftheproceedswere‘small’ascomparedwiththemarketvalue(onthedateofsaleorlapse)ofyourexistingholdingofordinarysharesinrespectofwhichtherightsarose,youwillnotgenerallybetreatedasmakingadisposalforCGTpurposes.Instead,theproceedsreceivedshouldbedeductedfromthebasecostofyourexistingholdingofordinaryshares.HMRCcurrentpracticeistoregardasumas‘small’forthesepurposeswhereeither:(i)theproceedsdonotexceed5%ofthemarketvalue(atthedateofsaleorlapse)oftheordinarysharesinrespectofwhichtherightsarose;or(ii)thesumreceivedis£3,000orless,regardlessofwhetherthe5%testissatisfied.
Iftheproceedsyoureceivedwerenot‘small’thesaleistreatedasadisposaland,inordertocalculateanychargeablegainsorlosses,youneedtoapportiontheoriginalbasecostofyourexistingholdingofordinarysharesbetweenthesaleproceedsandyourexistingholdingofordinarysharesintheratioofthesaleproceedsdividedbythesaleproceedsplusthemarketvalueofyourexistingholdingofordinaryshares(onthedateofsaleorlapse).FurtherguidancecanbefoundontheHMRCwebsitewww.gov.uk/capital-gains-tax-share-reorganisation-takeover-or-merger.
Demerger31August2006FollowingthedemergerofnewWHSmithPLCon31August2006,inordertocalculateanychargeablegainsorlossesarisingonthedisposalofsharesafter31August2006,theoriginaltaxbasecostofyouroldWHSmithPLCordinarysharesof213/81p(adjustedifyouheldyoursharesat24September2004and22May1998totakeintoaccountthecapitalreorganisationsof27September2004and26May1998respectively(seebelow))willhavetobeapportionedbetweentheshareholdingsofordinarysharesof5pintheCompanyandordinarysharesof226/67p(or20pifthedisposaltookplacebefore22February2008)innewWHSmithPLCintheratioof0.30415and0.69585respectively.
Capitalreorganisation27September2004IfyoursharesresultfromaholdingofoldWHSmithPLCsharesacquiredonorbefore24September2004,inordertocalculateanychargeablegainsorlossesarisingonthedisposalofsharesafter24September2004,theoriginaltaxbasecostofyouroldWHSmithPLCordinarysharesof555/9p(adjustedifyouheldyoursharesasat22May1998totakeintoaccountthecapitalreorganisationof26May1998(seebelow))willhavetobeapportionedbetweentheshareholdingsofordinarysharesof213/81pand‘C’sharesresultingfromthecapitalreorganisation.
Thecostofyourshareholdingofordinarysharesof213/81piscalculatedbymultiplyingtheoriginalbasecostofyourordinarysharesof555/9p(adjustedwherenecessarytotakeintoaccountthecapitalreorganisationof26May1998referredtoabove)by0.73979.
CONNECT GROUP ANNUAL REPORT 2019 FINANCIAL STATEMENTS 141
Capitalreorganisation26May1998IfyoursharesresultfromaholdingofoldWHSmithPLCsharesacquiredonorbefore22May1998,inordertocalculateanychargeablegainsorlossesarisingonthedisposalofsharesafter22May1998,theoriginaltaxbasecostofyouroldWHSmithPLCordinarysharesof50pwillhavetobeapportionedbetweentheshareholdingsofordinarysharesof555/9pandredeemable‘B’sharesresultingfromthecapitalreorganisation.
Thecostofyourshareholdingofordinarysharesof555/9piscalculatedbymultiplyingtheoriginalcostofyourordinarysharesof50pby0.90714.
March1982valuesIfyoursharesresultfromaholdingofoldWHSmithPLCsharesacquiredonorbefore31March1982,thetaxbasecosttobeusedinordertocalculateanychargeablegainsorlossesarisingonthedisposalofsharesisthe31March1982basevaluespershareasfollows:
ArisingfromanoriginalshareholdingofoldWHSmithPLC
‘A’ordinaryshares
‘B’ordinaryshares
Ordinarysharesof5p 26.93p 22.25p
WHSmithPLCordinarysharesof226/67p 61.62p 50.92p
Ifyouhaveacomplicatedtaxposition,orareotherwiseindoubtaboutyourtaxcircumstances,orifyouaresubjecttotaxinajurisdictionotherthantheUnitedKingdom,youshouldconsultyourprofessionaladviser.
Cautionary statement ThisAnnualReportcontainscertainforward-lookingstatementswithrespecttoConnectGroupPLC’sfinancialcondition,itsresultsofoperationsandbusinesses,strategy,plans,objectivesandperformance.Wordssuchas‘anticipates’,‘expects’,‘intends’,‘plans’,‘believes’,‘seeks’,‘estimates’,‘targets’,‘may’,‘will’,‘continue’,‘project’andsimilarexpressions,aswellasstatementsinthefuturetenseandstatementsotherthanstatementsofhistoricalfact,identifyforward-lookingstatements.Theseforward-lookingstatementsarenotguaranteesofConnectGroupPLC’sfutureperformanceandrelatetoeventsanddependoncircumstancesthatmayoccurinthefutureandarethereforesubjecttorisks,uncertaintiesandassumptions.Thereareanumberoffactorswhichcouldcauseactualresultsanddevelopmentstodiffermateriallyfromthoseexpressedorimpliedbysuchforwardlookingstatements,including,amongotherstheenactmentoflegislationorregulationthatmayimposecostsorrestrictactivities;there-negotiationofcontractsorlicences;fluctuationsindemandandpricingintheindustry;fluctuationsinexchangecontrols;changesingovernmentpolicyandtaxations;industrialdisputes;warandterrorism.Theseforward-lookingstatementsspeakonlyasatthedateofthisdocumentandarequalifiedintheirentiretybytheinherentrisksanduncertaintiessurroundingfutureexpectations.Unlessotherwiserequiredbyapplicablelaw,regulationoraccountingstandard,ConnectGroupPLCundertakesnoresponsibilitytopubliclyupdateanyofitsforward-lookingstatementswhetherasaresultofnewinformation,futuredevelopmentsorotherwise.
TheinformationcontainedwithinthisAnnualReportisdeemedtoconstituteinsideinformationasstipulatedundertheMarketAbuseRegulations(EU)No.596/2014.UponthepublicationofthisAnnualReport,thisinsideinformationisnowconsideredtobeinthepublicdomain.
Design and Productionwww.carrkamasa.co.uk
CONNECT GROUPANNUALREPORT2019 FINANCIALSTATEMENTS 141
Connect Group PLCRowanHouseKembreyParkSwindonWiltshireSN28UHUnitedKingdom
08451288888
connectgroupplc.com