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Edited Transcript of SMWH.L earnings conference call or presentation 11-Apr-19 10:59am GMT

Half Year 2019 WH Smith PLC Earnings Presentation

London Apr 13, 2019 (Thomson StreetEvents) -- Edited Transcript of WH Smith PLC earnings conference call or presentation Thursday, April 11, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Carl Cowling

WH Smith PLC - MD of High Street Business & Executive Director

* Robert Moorhead

WH Smith PLC - CFO, COO & Executive Director

* Stephen Clarke

WH Smith PLC - Group Chief Executive & Executive Director

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Presentation

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [1]

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Welcome to our Interim Results Presentation for 6 Months Ending 28th of February 2019. So as you all know I'm Stephen Clarke, group CEO. We've got Robert Moorhead, our group CFO and COO; and Carl Cowling, who is the MD of our High Street Business and recently joined the Board. And just to warn you the presentation is a little bit longer than usual because we want to give you an update InMotion. So sorry, you two over there.

But before that, let me do a quick introduction. And I'm pleased to tell you that we've had another good half across the group, with total sales up 8% and profit before tax of GBP 81 million, which is right in line with expectations. The distinct strategies for each of our businesses continue to deliver. In Travel, we've seen another good half of like-for-like sales growth in our U.K. business. And internationally, we continue to be very successful in many new business and, of course, as you know, we've acquired InMotion during the half.

High Street delivered a good performance despite the well-documented challenges of the U.K. High Street as our strategy continues to deliver. So the group is in good shape and on track for another year of good profit growth.

So now I hand over to Robert to do the numbers.

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Robert Moorhead, WH Smith PLC - CFO, COO & Executive Director [2]

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Thank you, Steve. Good morning, everybody. So let's start off with group financial summary. So we've had a strong first half and we expect the full year outcome to be ahead of our initial expectations. But before I run through the 6 months numbers in detail, it's worth saying that this is quite an unusual half for us. First, we've had the acquisition of InMotion in the half. Second, we're continuing to see the group shift towards Travel with the peak trading period in our second half, and this is accentuated further by InMotion.

Third, the shape of the High Street's profit are also changing towards the second half, reflecting the greater mix of stationery with the peak back-to-school period and this continues the trend that we've seen over the last few years. And fourth, we have a number of non-underlying items in the half relating to the InMotion acquisition and also from the completion of the High Street review. And I'll touch on all these as I go through the numbers.

So to bring that altogether, we have today delivered a strong performance with our first half in line with expectations. Total group revenue was GBP 695 million, up 8% with group like-for-likes up 1%. Profit from trading operations at GBP 92 million was up GBP 1 million, with Headline group profit before tax at GBP 81 million. Headline earnings per share were 60.6p, broadly in line with last year.

Free cash flow generated in the period was GBP 27 million compared to GBP 39 million last year, and I'll come on and talk about the cash flow in more detail later, but it does include some one-off items in the half. We expect full year free cash flow generation to be around GBP 100 million.

The Board has declared an interim dividend of 17.2p per share, an increase of 8%, which reflects the good business performance, our strong cash generation and our confidence in the outcome for the full year. As usual, we expect to have the interim dividend accounting for around 1/3 of the total dividends for the year.

So let's look first at revenue. Overall group revenue was GBP 695 million, up 8% from last year with like-for-like sales up 1%. It was another strong performance from Travel, total revenue was GBP 364 million, up 18%, including GBP 30 million from InMotion. Excluding InMotion, Travel sales were up 8% with like-for-like sales up 3%. And you've noticed that for the first time, Travel's first half sales were higher than the High Street.

U.K. air, rail and hospitals all performed well in the half reflecting our initiatives and passenger numbers. In international, excluding InMotion, sales were up 25% with more directly run businesses this year.

And in High Street, we saw our second-best revenue performance over the past decade. Like-for-like revenue was down 2%, whilst total revenue was down 1% as expected. So if we look by category, stationery like-for-likes were up 2% with a good performance from our new product development and a number of our seasonal categories including Christmas cards and wrap, diaries and our latest fashion stationery ranges.

News and Impulse like-for-likes were up 2%. We've seen a good performance from continued development of Impulse categories and we've gained market share in newspapers and magazines.

Books like-for-likes were down 5%. Market performance continues to vary by category, and our performance was impacted by our ongoing shift to space away from [backless] books and into Post Offices and Stationery. All 3 categories saw an increase in gross margin in the half.

So turning to group profit before tax. Travel delivered a profit of GBP 44 million, up 7% on last year. In U.K. Travel, profit increased by 3% to GBP 38 million, reflecting higher sales and increased margin and additional space.

Profits in international were GBP 6 million. Excluding InMotion, profits were GBP 4 million, in line with last year, although this includes a challenging performance in Madrid where we have a short-term contract due to airport redevelopment. Excluding Madrid, we still saw a good profit growth in international in the half. And for the full year, we expect profit in international to be up on last year.

Finally, in International Travel, we completed the acquisition of InMotion on the 30th of November, which contributed GBP 2 million in the first half as expected. We are well placed for Travel's peak trading through the second half.

High Street delivered profits of GBP 48 million as expected with sales down 1%, an increasing gross margin and cost saves of GBP 4 million in the half. Like 2018, we expect a shift in profits towards the second half reflecting the ongoing mix shift to stationery and this year, also the phasing of cost saves, which are greater in the second half. So that leaves profit-from-trading operations at GBP 92 million. Central costs were slightly higher, leaving group operating profit in line with last year at GBP 83 million.

Finance costs are higher due to the additional borrowings used for the acquisition of InMotion. And that leaves headline profit at GBP 81 million in line with our expectations. And we remain well positioned for the full year.

And we have some non-underlying items in the half, so let me take you through them now. So the non-underlying items in the half relate to the InMotion acquisition and completing the High Street review we announced in October 2018. InMotion costs of GBP 9 million include transaction costs, integration costs and a noncash amortization charge. We expect the full year non-underlying items relating to InMotion to be around GBP 11 million, with the addition being further integration costs and the second half amortization charge.

Also in the half, we completed the review announced in October 2018 of central costs and our store operations in High Street. The cost relating to this were broadly as expected at GBP 7 million. As this review is now finished, there are no further costs to come. The cash cost of these items in the half was GBP 9 million with a further GBP 5 million expected in the second half.

So let's look at profit from trading operations in more detail. With sales increasing by 8% and total gross margin increasing by 10 basis points, gross contribution for the group increased by GBP 32 million to GBP 415 million. Travel's underlying gross margin before InMotion was up 40 bps in the first half mainly due to mixed management. In High Street, gross margin increased by around 70 basis points through category mix management representing around 50% of the increase with buying, sourcing, promotional and markdown management being the balance. In the second half, we expect Travel's underlying gross margin to be up around 90 basis points and High Street's gross margin also up at around 140 basis points.

In terms of cost and trading operations, as we continue to grow Travel, the group sees an increase in costs. In Travel this is due to the higher rent, rents being based on turnover, new stores in both the U.K. and international and our continued investment in service and stores. And of course, these numbers include the InMotion costs, which are not included in last year's comparative. Across both businesses and all cost lines, we remained focused on cost efficiency and cost management.

In High Street, we continue to identify cost savings and in the half, we saw lower rents at lease expiry where our average reduction was 33%. We've worked hard over the years to inject flexibility into our lease portfolio. And with an average lease length of under 4 years, we have over 300 leases up for renewal over the next 3 years spread right across the portfolio and the country.

The cost base in High Street remains substantial at over GBP 300 million, and we continue to see opportunities for further savings and we also have the benefit from the High Street review going forward.

So let's look now at the free cash flow. We've delivered a free cash flow of GBP 27 million in the period, which is lower than last year due to higher investment CapEx and some working capital investment. CapEx spend was as expected at GBP 31 million, GBP 5 million higher than the previous year mainly as a result of our continued investment in stores. In the period, we made CapEx investment in, for example, Travel with new stores in both the U.K. and directly run stores internationally, in our in-store operating model and investing at High Street stores, including the latest tranche of Post Offices.

This was an unusual half of working capital reflecting some one-offs. We invested around GBP 5 million in working capital as part of our contingency plans for Brexit, which we expect to unwind in due course.

Secondly, we have seen an adverse movement in the half of around GBP 9 million relating to rent and Travel, be a combination of some early rent payments on a couple of new contracts and a wash-up of historic rents on a number of contract extensions. While this has a one-off impact on the group's working capital, the new and extended contracts set us up well for the future.

The remaining working capital cash pattern is similar to last year, reflecting the seasonality of the business. And like last year, we expect most to reverse in the second half. We will, however, continue to see an ongoing working capital investment as a result of our store-opening program in Travel. Noncash items primarily include [severance] payment charges and we continue to see that cash generative nature of both Travel and High Street as one of the group's strengths and anticipate a full year free cash flow generation of our around GBP 100 million.

So if we look now at the net debt. We remained disciplined about the group's debt position. Following the acquisition of InMotion, the group's debt position changed materially. We funded the acquisition with a GBP 200 million term loan at LIBOR plus 100 bps. As a result, the group's net debt at the end of February was GBP 221 million. This additional debt is expected to take us to approximately 0.9x EBITDA at the year-end.

We also saw a GBP 20 million higher cash outflow from nontrading items as part of our capital allocation policy with dividends of GBP 41 million, up GBP 4 million on last year and a higher buyback in this half, which at GBP 25 million was GBP 16 million higher than last year. And let me just reiterate our approach to capital allocation.

Our disciplined approach to cash and capital allocation remains unchanged. As we've said many times before, we see 3 uses for the cash: invest in the business where we see attractive returns ahead of the cost of capital, we expect CapEx this year to be around GBP 60 million; returning cash to shareholders, firstly, through a progressive dividend policy and then the share buyback; and considering appropriate acquisitions that drive shareholder value. The Board reviews the balance sheet on an ongoing basis. We're comfortable operating with a level of net debt up to 1.25x EBITDA. And as I said, we expect the leverage at the year-end to be around 0.9x. And we're not changing our guidance on the buyback of up to GBP 50 million announced on the 11th of October 2018.

So let's now look at that return of cash. We've increased the interim dividend by 8% and have now grown the dividend every year since 2006. And as I've said, we have the share buyback. So far this year, we've completed GBP 25 million of the up to GBP 50 million share buyback that we announced last October. So through a combination of dividends and buybacks, we will return over GBP 1 billion to shareholders since the 2007 financial year, with GBP 80 million returned last year. And since 2006, we've retired 40% of our equity.

So finally, to recap, these are the group key indicators, most of which I've touched on already, let me just mention fixed charges cover at 1.7x. We expect this to be 1.6x at the full year, in line with last year, the higher cover at the half year reflecting the seasonality of profits.

And Steve will now discuss the operational performance of the business.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [3]

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Right. I'll do Travel and Carl will do High Street.

So first up, let me remind you of the 4 key elements of the Travel strategy. Firstly to drive like-for-like scenes in our U.K. business through our forensic approach to space management developing our formats and ranges to best meet changing customer and landlord needs and investing in stores and service to increase throughput capacity and sales per passenger.

Secondly, to win new space and retain existing space in our U.K. business. Thirdly, to win profitable new space internationally where we can create significant long-term value. And finally, to take appropriate acquisition opportunities that create long-term strategic and financial value for the group.

So let's move on, then, to operating performance. And Travel delivered another strong performance with total sales up 18% in the half, and that's up 8% if you exclude InMotion with like-for-likes up 3%. Now this is the sixth year in succession of good like-for-like growth. Profit in the half was up 7% to GBP 44 million. As you all know, we've made significant investments in our Travel business over the past 6 years. This investment has been a key driver of our like-for-like sales performance along with passenger growth. And importantly, we continue to see investment opportunities to drive the U.K. business forward in the years ahead, particularly in format development across all 3 of our channels.

As usual, we worked hard at managing costs and margins with gross margin up 40 basis points in the half, driven mainly by category mix management. And we continue to grow our store base, both here in the U.K. and overseas. We opened 5 new stores in the U.K. in the half with 3 new airport units and 2 additional units in hospitals, and we expect to have opened around 20 units over the course of the full year.

Internationally, we won 21 units including 4 new InMotion units in the U.S. and I'll come on to that a bit shortly.

So let's look at channel performance. And in U.K. air, total sales were up 5% with like-for-likes up 4%. This is another strong performance in air despite the recent economic uncertainty. And it reflects the success of our new, large airport format.

In our hospital channel, total sales were up 11% with like-for-likes up 4%. This reflects our format development initiatives in hospitals and new store openings including M&S Simply Food stores. Now this is particularly pleasing as the hospital channel will be our second biggest channel by sales by the end of this financial year, and there's plenty of opportunity to continue growing the hospital channel.

In railways, total sales were flat with like-for-likes up 1%. Now this performance in rail continues to be affected by the ongoing disruption from upgrading of the network and softer passenger numbers. In our international business, total sales including InMotion were up 76% with like-for-likes up 4% and I'll come on to all of that shortly. And of course, as you all know, as sales and passenger numbers grow in our Travel business, so do our variable costs, particularly rent.

So let's look at the U.K. in a bit more detail. And in U.K. Travel, airports have been an area of significant investment for us, particularly the work that we've been doing on the new, large store formats that will position us well for the future. And we've seen particularly good results from our new stores in Gatwick North and Gatwick South and more recently, our stores in Heathrow, Birmingham and Belfast, which have all had the upgrade. Our experience continues to show that we can deliver superior sales per passenger from these new large format stores.

During the second half, we expect to open a further 3 of the large format in Dublin, Manchester and an additional store in Gatwick North. And we believe this new compelling offer will be of interest to more landlords as they reconfigure their space.

Now in addition to the large airport format, we've been working for some time on combining our traditional WHSmith format with a pharmacy, providing passengers with a compelling one-stop-shop customer offer. Now we've had a couple of small-scale trials operating with Well Pharmacy, Well are the U.K.'s third largest pharmacy chain in our Southampton and Southend airport shops.

Alongside these trials, we've been in discussions with Gatwick Airport for a large store format in Gatwick North Terminal to essentially combines the large WHSmiths there and the large Boots there into one big store. I'm pleased to tell you that this new combined WHSmith pharmacy opened last week on the 1st of April. And early signs are very positive.

You can see the new store on the screen. It's over 5,000 square feet and has 2,500 pharmacy SKUs as well as the usual 6,000 news, books and convenience SKUs from WHSmith. Now it really does provide time-pressed passengers with a true one-stop-shop offer with a full range of the usual WHSmith products plus the 2.5 health and beauty lines and a pharmacy counter to offer advice on the sale of medicines, which can only be sold under the provision of a pharmacist.

In addition to this store, we're about to build a new bookshop in Gatwick North, and we'll also keep our existing 4,000 square-foot store in the same terminal, which opened just last year. So while it's early days and it will take some time to assess the results, we're confident that the new pharmacy format will present us with good opportunities to grow and good opportunities to create value for our landlords.

So moving on, then, to the hospital channel. And as you know, the hospital channel is a very important business for us as it provides good growth opportunities well into the future. And it's a great example of how we continue to innovate with our store formats. We now have 133 hospital shops open, and we believe there are around 300 hospitals in total that have the potential to support one of our hospital-store formats.

The hospital channel is also an attractive market as it's not subject to the usual cyclical nature of some other Travel formats. And it's our innovation over the years that's enabled us to grow this channel further. We've invested in our stores, built great strong relationships with the NHS Trusts and we've restructured our pricing in hospital stores such that it's in line with other High Street retailers and local supermarkets. As a result of all of this, sales in our hospital business have increased by over 90% in the last 5 years. Meaning, as I said earlier, that hospitals will have overtaken railways by the end of this financial year and very importantly, as I've also highlighted, there is plenty of room for much more growth.

And our partnership with M&S continues to deliver great results in hospitals. So far we've launched a dozen or so WHSmith stores that have an M&S Food to Go implant and we expect this to reach 20 by the end of the second half. You can see a picture of one of our latest openings in Guy's Hospital on the left of the screen.

In addition to the M&S implant stores, we've recently opened a new Simply Food store at West Middlesex Hospital, taking the total number of Simply Food stores we now have opened to 20. And we continue to see plenty of scope to further roll out Simply Food stores well into the long term.

And finally, during the half for hospitals, we entered into a new partnership with Costa Coffee, the U.K.'s largest coffee-shop operator, to become a franchise partner for the hospital channel. You can see a picture of our store in Blackburn Hospital on the right-hand side of the screen.

Now this partnership presents good growth opportunities for our hospital business going forward, and this broad suite of brands and formats allows us to meet the needs of our NHS partners and a variety of different-sized hospitals across the country. And this is really demonstrated by our recent tender win in Colchester Hospital where we will operate a WHSmith store, a M&S food hall and a Costa Coffee shop.

So moving onto railways. And we're also investing in the railway channel. As you know, we have a very strong presence in large mainline rail stations and we continue to look for new space opportunities. During the half, we continued to develop our Tech Express offer. You remember, I showed you a picture last time of our Tech Express format in London Bridge. Well, I'm pleased to say, we've opened another one in Waterloo Station, which you can see on the screen. And we've won a further 2 new units in rail, including a Tech Express at Houston Station and another WHSmith store. We expect these new units to open in the second half. Feedback from both landlords and our customers continue to be really positive and we're seeing some really good sales results in Tech Express. The scope for more of these stores in busy stations as space becomes available.

And there are other opportunities in rail. During the second half, we will trial a new large format in Paddington Station, similar to our large airport format and we'll update you on how that's going in October.

So finally, for the U.K. looking ahead, and despite the uncertainty in the broader economic and political outlook, most airports are experiencing and continue to forecast low single-digit growth for the rest of this year and next, although as always, the forecast will vary by location. In addition, we continue to invest in new stores across all our channels and as I said earlier, we expect to open 20 new Travel stores in the U.K. by the end of the current financial year. And at the same time, we continue to drive like-for-like sales through active space and mix management.

And of course, the U.K. isn't the only source of growth, so let's look at international and I'll start with that update on InMotion. Now as you all know, we acquired InMotion at the end of last year. InMotion has an excellent store portfolio with 115 stores across 43 airports, great relationships with landlords and brand suppliers and a best-in-class service proposition. So this acquisition comes with all the benefits of owning a market-leading, pure-play Travel retailer.

In addition, InMotion -- the InMotion acquisition provides us with the platform to launch our WHSmith airport format in the world's largest travel retail market for news, books and convenience with the ability to benefit from InMotion's deep market knowledge, good infrastructure and strong landlord relationships.

And finally, we also think there are good opportunities to export the InMotion brand and format into other key territories outside of the U.S. where we currently operate WHSmith stores.

And as I said before, the integration of InMotion is really straightforward and I'm happy to say it's going to plan. That tender pipeline in the U.S. looks very encouraging. In fact, since the acquisition, we've won a further 4 new airport units in the U.S., 2 in San Francisco, 1 in Boston and 1 in Charlotte Douglas International Airport. And there's plenty of scope for future growth there.

In addition, we've also met with a number of the major U.S. landlords since acquiring the business to reestablish direct relationships for the WHSmith brand. And since acquisition, we've even won 2 airport tenders outside of the U.S. with the InMotion format; 1 in Perth, Australia; and the other 1 in Alicante in Spain, demonstrating the potential for international growth. Now on both these locations we already operate WHSmith stores. So the InMotion stores will bolster our presence in both those airports.

So moving on, then, to the rest of international. So our international business is profitable and growing fast. The WHSmith brand and offer continued to be well received by both customers and landlords. And where we opened new stores, sales per passenger continued to be strong.

Total sales for the half internationally, included InMotion, were GBP 104 million, like-for-likes were up 4%. In addition to InMotion, we've had some really good success winning new business during the half. 21 units in total including 5 in Australia, 1 in Sydney, which is now our eighth stores opened in there, a further 2 in Perth, in Western Australia and 2 in Melbourne Terminal 3, which now gives us a strong presence across Terminals 2, 3 and 4 in Melbourne Airport.

So at the end of the half, we had 425 units opened internationally including the 115 InMotion shops. Profit for the half was GBP 6 million, GBP 2 million ahead of last year. And you can see on the screen here a picture of the recently opened store in Sydney, and as I've said this is now our eighth store open, giving us a very strong presence in Sydney International.

So at the end of the first half, we were present in 99 airports and 30 countries outside of the U.K. And you can see on the table for the first time, our units now open in both North and South America. And we continue to use the 3 operating models with 37% of opened units franchised, 55% now directly run and the balance, joint ventures.

So finally, in international looking ahead. WHSmith is still a small player in a very big market, but we are profitable and we're growing fast, and we see great long-term potential for us to continue to grow internationally. Our experience, to date, is that our brand, customer offer and ability to drive sales per passenger are attractive to overseas landlord.

In addition, our recent acquisition of InMotion provides us with the infrastructure to launch the WHSmith format in the U.S. as well as grow the InMotion business both within the U.S. and overseas.

And our recent investment in strengthening the leadership team across the group with Carl in High Street, Toby here heading up U.K. Travel and Phil McNally heading up International means that the international business gets the focus it requires as it continues to grow both in size and complexity.

So that's it for Travel. I'll now hand you over to Carl who will do High Street.

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Carl Cowling, WH Smith PLC - MD of High Street Business & Executive Director [4]

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Thank you, Steve. As many of you know we have a very clear strategy focused on creating sustainable profits, and it continues to be as relevant today as it has ever been. It forces us to help ourselves rather than hoping for any improvements in consumer spending in the short- to medium-term.

And this strategy has enabled us to outperform many of our competitors and it is rooted in creating value for our shareholders. Growing our stationery business has been and is key to delivering on the 3 elements of the strategy: space management; margin growth; and lowering our cost to serve. We've had good success of this recently with 4 straight years of like-for-like growth in stationery. I'd expect more of the same going forward as we continue to see opportunities for further stationery growth.

And so I'm pleased to tell you that we have delivered another good performance in our High Street business in the half, despite the well-reported challenges of the U.K. High Street. Like-for-like sales were down 2% with profit of GBP 48 million in line with expectations.

Gross margin was well managed, up 70 bps in the year. And we continue to invest in stationery to grow the category, and we saw a good performance from our seasonal categories over the peak Christmas trading period. And I'll come back to this shortly.

We have completed the High Street review announced in October and continue to drive good results from our cost savings with more to come in the second half and beyond.

So let's look at that in a bit more detail. And as usual, we've worked hard at managing the margin, delivering improvements of 70 bps in the half. As in previous years, the biggest contributor to this margin improvement continues to be category of mix management, both across categories but also within categories as a result of our active space management, the results in growth in stationery and the number of Post Offices. With few of the 100 stores having the full range of stationery, we continue to see further opportunities to get more space in the category, which will continue to provide margin mix benefits well into the future.

Additional margin improvement has also come from better trading terms and sourcing, an improved markdown management within stationery.

Turning now to costs. As the shape of our High Street business changes, we continue to identify sustainable cost-efficiency initiatives, while also adjusting our variable cost to sales. During the half, we delivered savings of GBP 4 million and we're on track to deliver a further GBP 5 million in the second half, making a total of GBP 9 million for the full year. As usual, these initiatives come from all parts of the business but rent savings at lease renewal continued to be a significant proportion. Our average reduction was 33% and we have over 300 store leases due to expire during the next 3 years, giving us further opportunities to renegotiate our occupation costs.

Other areas that're delivering savings include the simplification of our store and head office operations, which are part of the High Street review we announced in October; marketing efficiencies; productivity gains from our distribution centers; and, of course, the variable costs to sales. Even with the years of savings, the High Street cost base is still substantial. So we continue to build a healthy pipeline of trials for further initiatives particularly investing in technology to drive further efficiencies in the operating model. And as usual, we will update you on our 3-year guidance at our preliminary results in October.

Moving on to category performance and starting with books. As we have said on a number of occasions before, publishing is the biggest driver of our performance of physical books. And last Christmas was a pretty tough one for us. We didn't benefit from any big publishing trends like we had over the previous couple of years. That said, we saw some good performances during the period from the likes of Michelle Obama's book Becoming, and more recently David Williams', Fing, where we have a #1 in the market. In addition, we continue to make good inroads in improving our in-store customer proposition through ease of browsing and deployments of book recommendations.

Our approach to the books business goes unchanged. We will continue to optimize the return on space by shifting the mix towards stationery on the store-by-store basis where appropriate, whilst at the same time building on our areas of relative strengths to make the WHSmith High Street, a delight to readers, kids and educational books. While at the same time, driving the overall net profitability of the category by improving the efficiency of our books' operating model.

Moving on now to stationery. As I said earlier, stationery remains key to delivering the strategy in the High Street, and we have had another good half with many of our initiatives driving good like-for-like sales growth. As you know, we reset our stores at least twice a year to optimize the return on every single-meter job in every store. As I mentioned earlier, stationery continues to be the main beneficiary from the space changes in the year with more space in many stores and also better quality space towards the fronts of some of our stores. This additional space combined with strong promotional offers and our increased focus on design, fashion and product quality has helped us to deliver a strong performance in stationery. Indeed, over the Christmas period, for the half in general, we have seen good year-on-year sales growth in fashion stationery, arts and crafts, Christmas cards, diaries, Christmas wrap and stationery gifts. In addition, we continue to capitalize on the slime craze, and we are now the market leader for slime, having become a one-stop-shop on the High Street.

We continue to see further potential to grow our stationery sales and mix of the business , which, of course, enables us to continue growing the margin and reducing store operating costs.

So moving on to digital channels. And starting with funkypigeon.com, we've had another good half here, saw strong performances over the key Christmas trading and Valentine's Day periods. We saw increased traffic volumes with our focused marketing investments and conversion has continued to be strong as we have developed the website and app. Our extended gifting ranges performed well over the Christmas period, with our best-selling products being personalized key rings and personalized baubles.

As you know, whsmith.co.uk is a very small part of the overall business. It is profitable, however, and we continue to see good growth from our stationery ranges. During the second half, we will relaunch the website to give a vastly improved customer experience. And I'll provide an update on this in October.

Our online pens business, Cult Pens, also performed well in the period, and we are making good progress in developing this business and growing sales.

And finally, in the High Street. A quick update on our partnership with the Post Office. As you know, we have a strong relationship with the Post Office. It helps us to maintain our relevance with customers, it drives footfall and, of course, provides financial benefits through our commercial agreements, all of which contribute to a more sustainable, financial outcome for the individual Post Office stores despite the lost sales from the space assigned to the Post Office footprint.

In October, we announced that we agreed a new deal to open a further 40 Post Offices across our estate and convert the 33 hosted branches to franchise, subject to public consultation. And I'm very pleased to report that we've already opened 9 of the 40 and converted all 33 of the hosted branches. You can see a picture of one of our latest openings in Bristol on the screen. The balance is still under consultation. However, we would expect to be operating over 200 Post Offices within our High Street stores by the end of this financial year.

I'll now hand over to Steve to summarize.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [5]

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Right. So we've had another good half. Our strategy has been and continues to be very effective in creating value for our shareholders. Good like-for-like sales growth in Travel has come on top of strong growth over the last 5 years, and our U.K. business has further opportunities to grow as we continue to develop our market-leading formats.

In addition, our international business is profitable and growing fast and we continue to win lots of new business. Our recent acquisition of InMotion is delivering good growth and integration is both straightforward and going to plan.

Our growth in Travel both here and overseas means that Travel is now the largest part of the group both in sales and profit, and as I said with much more scope for future growth.

Our successful High Street strategy remains unchanged. We continue to deliver on our margin growth and cost savings with more to go. And we'll continue to work on how we use both our space and our external partnerships to best deliver the strategy.

Now as I've said, overall as a group, we are much more Travel focused. And that combined with the growth in High Street stationery means that most of our annual group profit growth now comes in the second half.

The business continues to be cash generative. And as you've already heard, we're increasing the dividend by 8%, which further demonstrates the Board's confidence in the future prospects of the business.

So going forward, whilst the broader economic and political environment is uncertain, we've had a good start to the second half of the financial year in both of our businesses, and we'll continue to invest for the long term, while also remaining our disciplined approach to capital allocation in order to maximize the contribution from both businesses and best deliver value for shareholders.