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Edited Transcript of SMWH.L earnings conference call or presentation 17-Oct-19 8:00am GMT

Full Year 2019 WH Smith PLC Earnings Presentation- London

London Oct 21, 2019 (Thomson StreetEvents) -- Edited Transcript of WH Smith PLC earnings conference call or presentation Thursday, October 17, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Carl D. 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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Conference Call Participants

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* Alexander Mees

JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research

* Jonathan Pritchard

Peel Hunt LLP, Research Division - Retail Analyst

* Kate Calvert

Investec Bank plc, Research Division - Retail Analyst

* Paul Rossington

HSBC, Research Division - Analyst

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Presentation

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

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Right. Morning, everybody. Oh, it's my last set of results for God's sake. Morning, everybody. Right, well here we go.

Right. Thanks for coming. And welcome to our results presentation for the group for the 12 months ending the 31st of August 2019. And as you will have seen this morning, we've also announced the proposed acquisition of the Marshall Retail Group, and Carl and Robert will talk you through all of the detail of that shortly.

I think as you all know, I'm Stephen Clarke, the group CEO; and to my left here, you've got Bobby Moorhead, our Group CFO and COO; and Carlos Cowling, who will be taking over as CEO when I leave, probably at the end of this presentation.

As most of you do know, however, Carl has been in the business for 5 years now, and has successfully run all parts of our business. He's just finishing up his stint as MD of High Street, where he has been for the last couple of years. But before that, when he joined the group, he joined as MD of Travel, responsible for both the U.K. and what was then, our very young, but fast-growing International business. So he is in perfect position to pick up the reins from me as I leave the business. And I feel really confident that not only am I leaving the business in great shape, but I'm leaving it in the excellent hands of these 2 characters over here.

So given the acquisition announcement that we made this morning, we've altered the presentation format a little bit. You'll be pleased to know you're not going to get all the normal slides you normally get at year-end, we've abridged that a little bit, so that we could spend some time taking you through the details of the acquisition.

But can I just say my own words on that acquisition, because you're not going to hear very much from me today. I think it is a really great deal for WH Smith. We've been looking at it. We've all been looking at it, all 3 of us, for a number of years way back when Carl was actually the MD of our Travel business. And that's because we think it's a really great, well-run business. It's well invested in for scalability, in particular, and we saw that when we visited a number of years ago. But most importantly, we think it puts us in a really good position to continue to drive shareholder value growth in what is the world's large travel market.

So from my point of view, as I walk out the door, I think it's an absolutely fantastic deal. These 2 guys have done an absolutely terrific job in getting it across the line. And I think it sets us up really, really well.

So before I hand over to Robert to take you through the numbers, let me do a quick introduction. And for the last time, I'm pleased to tell you we've had another really strong year across the group. Total sales were up 11%, and PBT of GBP 155 million is in line with our expectations and yours.

The distinct strategies for each of our businesses continue to deliver. In Travel, we've seen another very good year of like-for-like sales growth in our U.K. business, our sixth in a row. And internationally, we continue to be very successful in winning new business. In fact, we've had another record year internationally, where we won 45 units right across the world, including our first units in the U.S., I'm very happy to say. And as you know, during the year, we acquired InMotion, which is performing ahead of our initial expectations, which has only really confirmed the attractiveness of the U.S. market to us as we've experienced InMotion over the last few months.

In High Street, we've delivered another good performance despite the continued challenges of the U.K. High Street, our profit's in line with last year, which you won't hear many retailers say, because the strategy continues to deliver. So overall, the group is in really great shape and is on track for another good year of profit growth, complemented, of course, by this morning's announcement on the acquisition of the Marshall Retail Group.

And as I said, as always, value creation for shareholders remains and will remain central to our plans. And so the business will continue to focus on profitable growth, cash generation and optimal use of the cash, whilst appropriately investing for the future. So you won't hear from me again until the very end. I'll now hand you over to Robert to take you through the numbers.

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

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Thank you, Steve. Let's start off with the group financial summary. The group has produced a strong performance in the year with both Travel and High Street performing well. We completed the acquisition of InMotion in the year and these 2019 results include 9 months of trading from InMotion, but obviously InMotion is not in the like-for-likes.

So total group revenue was GBP 1.4 billion, 11% higher than last year. Profit from trading operations at GBP 177 million was up GBP 14 million or 9% compared to last year, with Headline Group profit before tax increasing by GBP 10 million to GBP 155 million, an increase of 7%.

Headline earnings per share at 114.7p, increased by 6%, reflecting the increase in profit and the lower average weighted number of shares in issue as a result of the return of cash to shareholders.

Free cash flow generated in the year was GBP 109 million, compared to GBP 96 million last year, and I'll come on and talk about the cash flow in more detail later.

The Board has proposed a final dividend of 41p, making a total of 58.2p for the year, an increase of 8%, reflecting the good business performance, our strong cash generation and our confidence in the future prospects of the business.

So turning first to revenue. Overall, group revenue for the year was GBP 1.4 billion, up 11% on 2018 with like-for-like sales up 1%. As in the first half, we saw group like-for-like sales up 1% in the second half.

It was another strong performance from Travel, where revenue is now 40% higher than in High Street. Total revenue at GBP 817 million was up 22% on last year with InMotion contributing GBP 94 million. Excluding InMotion, Travel sales were up 8%, with like-for-like revenue up 3%. We saw good growth across our U.K. air, rail and hospital channels, reflecting our initiatives and the increase in passenger numbers.

International revenue, excluding InMotion, was up 20%. With more directly run businesses this year, like-for-like revenue in International was up 3%. As expected, High Street like-for-like revenue was down 2% with the first half like-for-likes down 2% and the second half also down 2%.

So looking by category. Stationery like-for-likes were up 2% in the year with a good performance from our Christmas ranges in the first half and continued strong results from new product development within our fashion ranges. This is the fifth consecutive year we have delivered positive like-for-likes in the stationery category. News and Impulse like-for-likes were up 2%. We've seen good growth in Food and Impulse and have gained share in magazines. Books like-for-likes were down 5%, impacted by our ongoing space management with less space allocated to backlist books. All 3 categories saw an increase in gross margin in the year.

So if we look now at the group profit before tax. Travel profits grew to GBP 117 million, an increase of 14% and are now almost double the profits of High Street. UK Travel was up GBP 5 million to GBP 97 million, and profits from International at GBP 20 million were up GBP 9 million. We were pleased with the performance of InMotion, where profits were GBP 8 million, which is better than our initial expectations. International profits at GBP 12 million, were up GBP 1 million and include the impact from the short-term contract at Madrid, as we discussed at the interims. Excluding Madrid, we saw good profit growth from International. High Street profit was flat year-on-year at GBP 60 million. As we expected, second half profits were up GBP 2 million compared to last year, which demonstrates the ongoing shift of profitability to the second half, which we expect to see again this year.

In the High Street business, we've continued to deliver gross margin improvements of around 70 basis points and cost savings of GBP 9 million in the year, in line with our plan.

So group profit from trading operations was GBP 177 million, a 9% increase on the previous year. Central costs were slightly higher, leaving Headline Group operating profit at 9% -- up 9% at GBP 160 million.

The increase in finance charges reflects the additional borrowings used for the acquisition of InMotion, where we took out a GBP 200 million term loan. And that leaves Headline profit before tax at GBP 155 million, up 7%. The effective tax rate was 18%, and we anticipate the tax rate to also be around 18% for this year, although this will depend on the timing of the completion of the MRG acquisition.

So let's look now at the cash flow. We've delivered a free cash flow of GBP 109 million in the year, GBP 13 million higher than last year due to higher profits, offset by higher investment CapEx, some working capital investment and higher interest payments as a result of the term debt.

CapEx spend was GBP 59 million, GBP 6 million higher than the previous year, mainly as a result of our continued investment in stores.

Looking ahead for the existing group, we expect CapEx to be around GBP 60 million to GBP 70 million each year over the next 3 years, with around GBP 70 million in the current year, reflecting continued investment in stores. The total amount will depend on the amount of new business that we win.

Noncash items primarily include share-based payment charges. So if we look at the debt, we remain disciplined about the group's debt position. We funded the InMotion acquisition with a GBP 200 million term loan; and as a result, net debt at the end of August was GBP 180 million being 0.9x EBITDA.

In addition to the GBP 109 million of free cash flow generated, the group has seen a net cash outflow relating to nontrading operations, which includes GBP 60 million of dividends, net ESOP trust purchases of GBP 6 million and contributions to the pension scheme of GBP 3 million, and we returned over GBP 30 million through the buyback in the year, making a total return to shareholders in the year of GBP 90 million.

I'm now going to hand over to Carl to talk about the operational part of the business.

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Carl D. Cowling, WH Smith PLC - MD of High Street Business & Executive Director [3]

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Thank you, Robert. So before I move on, as Steve mentioned at the beginning, we've changed the format of today's presentation so we can update you on the acquisition. I'll start by providing a very quick update on the High Street. I'll then move on to Travel and International. And finally, Robert and I will talk you through the acquisition.

So the High Street. And as you know, probably off by heart, we have a very clear strategy in the High Street, focused on creating sustainable profits, and it continues to be as relevant today as has ever been. This strategy has enabled us to outperform many of our competitors, and this is rooted in creating value for our shareholders.

Growing our Stationery business has been and is key to delivery on the 3 elements of the strategy. Space management, margin growth and lowering our cost to serve. We've had good success at this recently with 5 straight years of like-for-like growth in Stationery, and you should expect more of the same going forward.

In terms of performance, I'm pleased to tell you that we have delivered another good performance in our High Street business for the year despite the continued challenges in the U.K. High Street. Like-for-like sales were down 2% with profit of GBP 60 million, in line with expectations.

Gross margin was well managed, up 70 bps in the year. We continue to invest in Stationery to grow the category, and we saw a good performance over the peak Christmas trading and Back to School periods. And we continue to drive good results from our cost savings, which I'll come on too.

Before I move on, as many of you know, I've been running the High Street business for a couple of years now, and I'm delighted to tell you that we've recently recruited a strong retail leader, Sean Toal, to replace me as MD of the High Street business. He's settled in really well and he's been with us for a few months now.

Turning now to margin and costs. And as usual, we've worked hard at managing the margin during the year, delivering an improvement of 70 bps. As in previous years, the biggest contributor to this margin improvement continues to be category mix management, both across categories, but also within categories as a result of our active space management, the resulting growth in Stationery and the number of post offices. Additionally, margin improvement has also come from better trading terms, sourcing and improved markdown management in Stationery.

Turning now to costs. During the year, we delivered savings of GBP 9 million. As usual, these initiatives come from all parts of the business with the biggest contributor coming from rent savings, with an average rent reduction of around 35%. We have a rolling program of lease renewals with 300 store leases due to expire over the next 3 years, with an average leasing length of 4 years across the entire portfolio. Also, we now have a number of stores where we pay 0 rent, rent in arrears as well as a handful of stores with turnover rents. We, therefore, have further opportunities to renegotiate our occupation costs and expect rent reductions to remain a key component of our future cost-reduction plan. And even with years of savings, the High Street cost base is still substantial and we continue to build a healthy pipeline of trials for future initiatives.

You can see on the table, our latest forecast for cost savings up to 2022. Since last year, we have identified a further GBP 7 million of savings, giving us a total of GBP 17 million over the next 3 years. So that's it for the High Street. Just to reiterate, it's in good shape. It continues to deliver sustainable profits and we continue to deliver on the strategy.

Turning now to Travel. And let me just remind you the travel strategy. Firstly, to deliver like-for-like sales in our U.K. business. We do this through a forensic approach to space management, developing our formats and ranges to meet changing customer and landlord needs and investing in our stores and service to increase throughput capacity and sales per passenger. The second element of the strategy is to add 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 acquisition opportunities that create long-term strategic and financial value in markets and territory with good growth prospects.

So moving on to the operating performance. Travel delivered another strong performance with total sales up 22% in the year, up 8% if you exclude InMotion with like-for-likes up 3%. This is the sixth year in succession of good like-for-like growth.

Profit for the year was up 14% to GBP 117 million. Now as you know, we have made significant investments in our Travel business, and it's this investment that's been a key driver of our like-for-like sales performance. And importantly, we continue to see investment opportunities to drive the U.K. business forward in the years ahead, particularly in format development across our 3 key channels.

As you would expect, we worked hard at managing costs and margins, with a gross margin up 100 bps, driven mainly by category mix management. We continue to grow our store base, both here in the U.K. and overseas. We opened 19 new stores in the year in the U.K., and we expect to open a similar number in the current financial year.

Internationally, we won 45 units, a new record for us and that's including 7 new InMotion stores in the U.S. and 3 InMotion stores outside of the U.S. We have also won our first WH Smith stores in a major U.S. airport. And we expect these units to open over the next 6 to 9 months.

So turning now to channel performance. In U.K. air, total sales were up 5% with like-for-likes up 3%. This is another strong performance in air despite the current economic uncertainty. And this also reflects the success of our new large airport format. In our hospital channel, total sales were up 12% with like-for-likes up 6%. This reflects our format development initiatives and new store openings including M&S Simply Food stores. The hospital channel is now our second biggest channel by revenue and there's plenty of opportunity to grow strongly. In rail, total sales were up 1% with like-for-likes also up 1%. And in our International business, total sales including InMotion, were up over 90%, with like-for-like sales up 3%, and I'll come on to that shortly.

So let's now look at our U.K. business in a bit more detail, starting with air. In UK Travel, airports have been an area of significant investment for us, particularly the work we have done on the large-store formats, that will position us very well for the future. I'm pleased to say that we've seen some particularly good results from our large-format stores in Gatwick, Heathrow, Birmingham and Belfast. Our experience continues to show that we can deliver superior sales per passenger from these large stores, through improved layouts and increase capacity. In the current financial year, we expect to open more stores using this format, including the new terminal at Manchester Airport. And we believe this compelling offer will be of interest to more landlords as they reconfigure their space going forward.

In addition to our large airport format, you may remember, we opened our new 6,000 square foot WH Smith Pharmacy format back in April. So just to recap, this format combines our traditional WH Smith format with a pharmacy. Combining the product ranges, you would expect to find in a large WH Smith store, plus a [Boots] offer. All under one roof, including a pharmacy counter and in-store pharmacist. I'm pleased to tell you that we're seeing some very good results, with double-digit sales per passenger growth as well as really positive feedback from both the landlord and customers.

During the second half, we also opened a new 2,000 square foot book shop at Gatwick. So across Gatwick, we now have over 25,000 square foot of selling space with a number of different formats, positioning us very well to take full advantage of the expected growth in passenger numbers. And as you would expect, we will continue to monitor the results of both of these stores, and we expect these formats will present good opportunities for us with other landlords going forward.

Turning now to the hospital business. As you know, the hospital channel is an important business for us, and it provides good growth opportunities well into the future. It's a great example of how we continue to innovate. We have developed a strong customer offer over the years, well aligned to the NHS strategy on healthy eating as well as a strong store format proposition that we can adapt to meet the needs of each hospital and trust. I'm pleased to say that our partnerships with M&S and Costa continue to grow. And we now have 21 M&S Simply Food stores open in hospitals. In addition to these, we also have 22 M&S implants within our own stores, including 8 stores where we're trial ling a smaller range suitable for small hospitals.

In terms of Costa, we now operate 2 Costa Coffee shops in Blackburn Hospital and Churchill Hospital in Oxford. And it is this broad suite of brands and formats that allows us to meet the needs of our NHS partners in a variety of different-sized hospitals across the country. This is demonstrated by our tender win in Colchester Hospital, where we will open a WH Smith store and M&S Simply Food and a Costa Coffee shop later this year.

It is this innovation over the years that has enabled us to grow this channel further, meaning that hospital sales have now overtaken rail, making it our second biggest channel behind air. In total, we now have 140 hospital units open across 100 hospitals, and we believe there are around 300 hospitals that have the potential to support at least one of our hospital store formats. We're encouraged by the pipeline of new store openings going forward.

Turning now to rail. We're also investing in our rail channel and expect to open more new units this financial year. We have continued to develop our Tech Express offer and during the second half, we opened a new unit at Euston Station and we expect to open a further 2 Tech Express units in the current financial year in Liverpool Street Station and Birmingham New Street. Feedback from both landlords and customers continues to be really positive. And we're seeing some encouraging sales results across these units. There is scope for more Tech Express stores in busy stations as space becomes available.

And there are other opportunities in rail. We have recently refurbished our store at Paddington. We've taken the learnings from our large airport format and applied them to the rail format. And while it's really early days, the results are looking really positive. We've had a great reaction from our customers.

So finally, for the U.K. looking ahead, most airports are continuing to forecast low single-digit growth for the coming year. And with our investment in driving increased sales per passenger through our active space management and our new format, we are very well positioned. In addition, we continue to invest in new stores across all our channels, and we expect to have opened around 15 to 20 new stores in the U.K. by the end of the current financial year. Of course, the U.K. isn't our only source of growth.

Let's look at International. Our International business is profitable and it's growing fast. The WH Smith brand and offer continue to be well received by both customers and landlords, and where we open new stores, sales per passenger continue to be strong. You will remember that we also acquired InMotion during the year, and I'll come on to the detail of this in a moment.

So total sales, including InMotion -- so total sales internationally, including InMotion were GBP 252 million. Like-for-like sales were up 3%. We've had a really good year, winning new businesses with 45 units won in total, including 8 units in Abu Dhabi, 2 units in Melbourne and 4 units in the Philippines. And as I've touched on already, we have won our first WH Smith stores in the U.S., which are due to open next summer. However, the location remains confidential at this point.

So at the end of the year, we have 433 units opened internationally, including the InMotion units across 102 airports and 30 countries. Profit for the year, including InMotion, was GBP 20 million, GBP 9 million ahead of last year.

Turning now to InMotion. And I thought it might be helpful to give a quick recap of the business. We acquired InMotion last year. InMotion have an excellent store portfolio with 116 stores, great relationships with landlords and brands and a best-in-class customer service proposition. Integration is now complete and I'm pleased to report that the business is performing ahead of our initial expectation. It confirms our view that the U.S. travel market is very attractive and profitable.

We have won 7 units within the U.S. We have also won 3 units outside of the U.S. In all of the locations where we've won an InMotion store outside of the U.S., we already operate our own WH Smith stores. So the InMotion stores will bolster our presence across each of these airports. These wins also demonstrate the potential of the brand outside of the U.S., and we believe there are additional opportunities to export the brand and format into other key territories where we currently operate the WH Smith brand.

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

In addition, our acquisition of InMotion is delivering good results ahead of our initial expectation and demonstrates the potential and attractiveness of the U.S. travel market. Our investment in strengthening the leadership team across the group means that the International business gets the focus it requires as it continues to grow in both size and complexity. And our acquisition of Marshall Retail Group further accelerates our group growth into the U.S. So let's have a look at Marshall Retail Group.

And as you will have seen this morning, we are proposing to acquire Marshall Retail Group for $400 million. MRG is a fast-growing U.S. travel retailer and it's a business we've been interested in for some time since back when I was running our Travel business. It significantly accelerates the growth of our International Travel business.

MRG are a fast-growing and successful travel retailer with a proven business model and unique capabilities that set it apart from competitors as evidenced by its recent tender wins. The acquisition will make us a strong #3 in the U.S. travel market with a stable of specialist brands. The combination of WH Smith, MRG and InMotion allows us to participate in the entire U.S. airport specialty retail market, which is worth $3.2 billion. So we'll be well placed to combine our expertise and forensic approach to space management with their high-growth business as well as InMotion, and that will make us a significant player going forward. And it's got strong financial returns, with mid-single-digit accretion in the first full year following completion.

I think it's also important to highlight that the business has a strong management team in place who are incentivized to continue to drive further growth. So together with the investment we've made in our own senior team, we are in a strong place.

This acquisition is totally in line with our strategy. However, it's also worth looking at how our business has evolved over time. As you know, WH Smith has rapidly grown into a strong and very credible travel retailer with over 400 stores across 30 countries and over 100 airports outside of the U.K. The UK Travel business is now in its sixth year of like-for-like growth.

You can see on the screen, how the group has evolved over the past 10 years from 2009. And while the High Street has grown over this period, it is our Travel and International businesses that have really driven the profit. The output of this is that we have delivered TSR of over 500% during this time. As you know, we entered the U.S. last year with the acquisition of InMotion, and that was the start of our move into this new territory. However, the acquisition is really -- this acquisition is going to significantly accelerate our growth in the world's largest travel retail market. With the acquisition of MRG, almost 70% of our group operating profit will come from Travel, with an ongoing increasing proportion coming from International.

The U.S. travel market is a good market. It's got excellent growth prospects driven by strong passenger growth. Within airports, there is already a huge growing specialty retail market and many airports are issuing multiunit tenders for a number of these specialty units. MRG have been very successful at answering these tenders, they've been winning against the #1 and #2 players. With the addition of InMotion to the stable of brands and with our skills in books and food-to-go, our offering becomes even more credible. However, the combined business still has a relatively small market share. So the combination of WH Smith, Marshall Retail Group and InMotion allows us to take advantage of the entire $3.2 billion market and better places us for multiunit tenders.

So to look at MRG in a bit more detail. We know the business well. We visited a large number of their stores over the past few months and we know they've been very successful in winning new business. Extensively, Marshall Retail Group, is split across airports and resorts and tourist locations. All of the channels are growing, and it's the airport business that really excites us with a number of contracts already won for new stores from 2020 and beyond. In 2020, we are forecasting with all of the contract wins, total sales growth of around 20%, but really significant growth in airports. EBITDA progression has also been strong, with $23 million in 2017, moving to a forecast of over $31 million in 2019. And clearly, with the growth in sales in 2020, we would expect this progression to continue.

So just to drill into the detail a little further. The origin of the MRG business is in Las Vegas, where they're still headquartered and where they have the majority of their resorts and tourist stores. These stores share many of the same characteristics as our own high footfall travel channels with a captive audience. So they've basically built a model in resorts and high footfall tourist destinations using their ability to tailor their stores and retail offer to meet the needs of individual landlords. Over time, this has translated well into U.S. airports, who are increasingly looking for something unique with their own retail offer. MRG have been very successful tailoring their offer to the landlords' brief in a very similar way to the success we've enjoyed over the past few years with our own International business.

Looking at the airport business and our recent growth in airports has been outstanding. This business really is what excites us the most. They've enjoyed a 75% win rate in the tenders they participated in over the last 12 months. The 36 stores won and due to open will mean that the airport retail space will grow by over 80%, excluding any further wins. 24 of those openings are next year. You can see in 2020, an impressive roll call of airports where stores are due to open including a massive walk-through offer in a major airport, which I'll come on to.

Now this slide needs a bit more explanation, as we look at a couple of airport case studies on how you win a U.S. package. Typically, U.S. airports evaluate the tenders based on design and a sense of place as well as the financial offer. However, it is weighted as much on the design and sense of place as it is on the financials. So in case study A on the left of the screen, you can see the tender was won on the strength of their retail offer and operational capability. That's what really sets the Marshall Retail Group apart. In case study B on the right of the screen, you can see the detail of their district market store in San Francisco airport, where they brought together specialty retail. It's a hugely successful store format and they've used this as a basis for other airports, winning a new tender in a major U.S. airport and this will be a walk-through store.

On the screen, you can see a picture of the District Market store. There's nothing really like this in airports across the world. They've brought together news, convenience, souvenirs, gifting, all under one roof. The other players who currently have 70% of the market have nothing to rival this retail execution. And I'm really excited about the future opportunities as we combine our expertise with store formats and space management with their retail offer.

You can see from the picture, there's a huge amount of overlap with what we do. So it was this successful execution of District Market that led to a significant win in the other large airport, so they're launching a walk-through version of the District Market. This will be the first of its type in the U.S. As you know, we're quite used to walk-through formats in Europe but in the U.S., this doesn't really exist. So MRG really are pioneers.

So let me now explain the resort and tourism channel. As I've already mentioned, Marshall Retail Group was founded in Las Vegas in resorts and tourism, and from there they've moved into airports, focusing on similar characteristics of operating in a captive market, which is very similar to how we operate our own travel channels.

And let me just touch on Vegas for a moment. It's a great market with lots happening. There is more than 1 million square feet of space and development to come over the next few years. There's additional convention center space and there's more sports attractions with a new national stadium being built. It's a profitable business, and it's had a history of consistent footfall. But as you've heard, there is more of a draw in the future. And MRG have seen attractive returns in their recent openings. There's a lot of similarity between that market and our own operations across our travel channels, which we've drawn out on the table on the right of the page. In effect, high footfall locations with a captive audience. The consistent flow of new customers is the biggest point I'll pull out here, it's what leads to a consistent flow of impulse purchases.

There are a number of tenders coming up over many airports for specialty retail so it's great timing and the combined group will be in a strong place to capitalize. You can see on this slide how the combination of both InMotion and MRG creates a significant opportunity for further wins. InMotion are already in a number of the top busiest airports. In fact, they're in 23 of the top 25, and this is a very important foot in the door. InMotion have strong relationships with landlords and this can only help our credibility to further wins with MRG. A good example of this is Atlanta, which is the largest airport in the world. We currently have InMotion stores, but there are no MRG stores.

And on the screen now, you can see the synergies across the categories and how the combination of both WH Smith, InMotion and MRG are once again complementary to each other across airports.

Remember, MRG have won around 75% of their tenders that they participated in. They have a specialist combination of retail offer that is ahead of the competition. InMotion, our specialist digital accessory retailer with presence in all the airports that we want to launch MRG in. And WH Smith skills in book retailing and food-to-go, together with our forensic approach to space management can further turbocharge the overall retail offer. I think we have a really great combination here to make inroads into our competitors' market share.

So over to Robert to talk through the financials.

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Robert Moorhead, WH Smith PLC - CFO, COO & Executive Director [4]

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Thank you, Carl. So we'll be paying $400 million at closing, which we anticipate to be in the first quarter of the next calendar year.

So looking at the financial returns, not only is this a strategically good deal for us, it is driven by the numbers. This deal is pretty unique in terms of the visibility of future growth because of the amount of airport business which has already been won, but is yet to open. As Carl highlighted, this is approximately 36 stores, mainly in airports, of which 24 are due to open next year, and this explains the multiple. The multiple on just the FY '19 forecast is 13.7x. So that's before we include those stores that have been won, but have yet to open. And it's 10x after $11 million of synergies. This is similar to what we paid for InMotion, and we didn't have any synergies there. And of course, it's lower than the multiple for the group as a whole.

The synergies come from procurement gains, about 80% of them; and from operational efficiencies, the remaining 20%, and that's through removing duplicate costs in, for example, business development. So those won stores give good visibility to significant sales growth, delivering a CAGR of over 10% between 2020 and 2024, and of course, strong EBITDA growth.

And we see opportunities to open InMotion stores in the air, resort and tourist locations with MRG. So this gives strong financial returns. Mid-single-digit EPS accretion in the first full year, approaching double-digit EPS accretion in the second full year. With ROIC greater than WACC in the third full year, and it enhances group growth, margins and the free cash flow per share. So let's turn to the capital allocation and how we're going to fund the transaction.

As you would expect from us, we've approached this in a disciplined and sensible way. First, there is no change to our capital allocation policy. And let me just reiterate that, and I've probably told it to you 100 times, but I'm going to do it again. Firstly, we invest in the business where we can see rates of return greater than the cost of our capital. We returned cash to shareholders through a progressive dividend policy, which remains and through share buybacks. And we make appropriate acquisitions in markets with attractive growth opportunities.

So we'll fund the acquisition through a combination of debt and equity. We'll take on GBP 200 million of debt and expand our RCF to GBP 200 million, and then a fully underwritten equity placing of GBP 155 million. And this will leave our leverage at the end of this financial year between 1.3x and 1.4x EBITDA, and will be well below our target of 1.25x EBITDA by the end of the first full financial year. So that's August 2021. And we'll suspend the buyback during that period to support the deleveraging.

We want to retain a conservative balance sheet, and I'm very happy with this financing structure, and we delever fast. This gives good visibility to returning to our leveraged target range, which is appropriate for a business with this level of cash generation. And finally, this is a Class 1 transaction, and we expect to publish the circular by the end of November.

And now I'll hand back to Carl.

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Carl D. Cowling, WH Smith PLC - MD of High Street Business & Executive Director [5]

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So let me try and summarize all of that. And let me start off by saying that this acquisition is entirely consistent with our long-standing strategy for delivering value for our shareholders. Our International growth is an important part of that strategy and as we've demonstrated in recent years with our investment in growing that business and then with our acquisition of InMotion last year.

It's worth emphasizing that we already operate a successful and profitable Travel business in over 100 airports across 30 countries outside the U.K. And whilst our market share is still small, we are growing fast. We now have a much better understanding of the U.S. travel market. And the combination of WH Smith, InMotion and Marshall Retail Group significantly enhances our scale and creates significant growth opportunities going forward in the world's largest travel market. And all of this can deliver strong financial returns. As always, value creation for our shareholders will remain central to our plans.

I'll hand back to Steve.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [6]

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Right. So we've had another good year. 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 last year, 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 very fast, and we continue to win new business as our record number of wins this year demonstrates. And along with our acquisition of InMotion continues to deliver really good growth. And then as you've just heard from Robert and Carl, our acquisition of the Marshall Retail Group significantly accelerates that growth in the world's largest travel market in the U.S. So it really is an exciting time for the group.

And High Street shouldn't be forgotten because our successful High Street strategy, which has been very effective for us over the years, remains unchanged. We continue to deliver on our margin growth and on our cost savings with more to go, and we'll continue to work on how we use our space and external partnerships to best deliver the strategy going forward.

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

Going forward, while the broader economic environment and the political environment continue to be uncertain, we've had a really good start to our new financial year. And as you'll have seen from this morning's trading update, the business will continue to invest in the long-term, whilst continuing to be very disciplined with its capital allocation in order to maximize the contribution from both businesses and best deliver value for our shareholders.

So as I sign off, can I just reiterate that WH Smith is a great business. It's in very good shape. And I'm happy to say, I leave it with one of the best management teams in retail, headed by Carl and Robert, without whom my success just wouldn't be possible.

So my sincere thanks goes to them and to everybody at the WH Smith team who are here today, who make days like today actually really easy for me. There's a few people I'm going to give a name-call to if you will indulge me for just 1 minute. [Stella] and [Nikki], who is -- who are my PA and Robert's PA, we couldn't deliver days like today without them. They're our work [WAGs]. And Nicola, our Communications Director, who's sitting at the front, who has put in -- she's responsible for the slick operation of today, makes it really easy for me. It's also her -- and I don't care if you're upset or not, it's also her 40th birthday today. So we have yanked her from the bosom of her family. She really is brilliant, as they all are. And today is like -- days like today would not go this smoothly if we didn't have people like that lot.

Our Chairman is here today and he's been the Chairman the whole way through my tenure. And I couldn't have asked for a better Chairman. And so thank you, Henry. And I really, really appreciate it. He's sitting beside Ian Houghton, our Company Secretary, who's basically kept me out of prison for the last 6 years. And so thank you for that, Ian.

And the last people I'd like to thank is you lot. But you don't get out very often. But all your input and advice, your challenges, your questions or your multiple questions, [Tony], all of that has really helped make my 6 years doing this a real pleasure. So thank you, too.

And now we'll take your questions.

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Questions and Answers

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

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Right. And there he goes with his -- I've got a question on this, and I've got a question on this, and I've got a question on this. [Shoot it].

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Unidentified Analyst, [2]

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You forgot Mark, by the way. Okay? Back you go.

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

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And finally and most sincerely, may I -- can I thank Mark Boyle. He is the only one who understands me. I can't say the same thing back, I don't think. Good save, [Tony].

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Unidentified Analyst, [4]

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I know, I know. I'm good for something. Could you just run us through how you're proposing to operate the various bits of the U.S., bearing in mind you've got a couple of separate managements and your own sort of U.S. management presumably. So just give us a bit of background on that?

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

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Is that it?

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Unidentified Analyst, [6]

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Possibly.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [7]

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Carl will take that one.

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Carl D. Cowling, WH Smith PLC - MD of High Street Business & Executive Director [8]

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So Marshall Retail Group, have got a great management team. So Michael Wilkins, he's the CEO there. He's been the CEO for 20 years and he's got a great leadership team. So they're really excited about the prospect of ownership under WH Smith and they're really excited about the growth opportunity. So we're keeping that management team whole. So Michael will work for me.

And then InMotion, it's got a -- it's a very separate business with a very separate strategy and a separate product group, based down in Jacksonville. And they've got to concentrate on opening 7 new stores this year and all of the other tenders that they need to win. So we're going to keep those 2 businesses very distinct.

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Unidentified Analyst, [9]

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And so you'll need another management for the WH Smith stores when they open, will you?

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Carl D. Cowling, WH Smith PLC - MD of High Street Business & Executive Director [10]

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We won't have separate management for WH Smith. And we'll do that through the Marshall Retail Group because they -- the multiunit tenders, they will drive these multiunit tenders. And where there's an opportunity where it makes sense to the landlord to have a WH Smith, then we'll offer a WH Smith. But what we really want to do is to make sure that we get compelling returns from winning tenders. So at the moment in the U.S., it's more about doing unique-looking retail and kind of giving a sense of place to those airports and giving them a sort of distinct retail frontage. So that's kind of where we're focused on. And Marshall have done really well at winning tenders. They've won 75% of their -- of the last 12 months. So we're just going to keep the strategy as is.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [11]

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And within their group of stable formats, they have a WH Smith-type format. So they'll be able to absorb that quite easily. And where WH Smith may come into play for them is when they bid for tenders in international terminals where landlords find big international brands more appealing. But they'll be able to do all of that for us.

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Unidentified Analyst, [12]

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And in terms of the Marshall's nonairport business, is the model similar like a concession business? And across the whole of the business, the minimums-type of situation, what's that? I mean how...

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Robert Moorhead, WH Smith PLC - CFO, COO & Executive Director [13]

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Very similar to our existing business. It's a minimum with a turnover top up, very similar to what we find right around the world. And so that's why -- one of the reasons why we're very comfortable with it.

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Unidentified Analyst, [14]

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And do you have any upfront sort of payments you have to make to get into these airports? And how do you account for them, Robert?

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Robert Moorhead, WH Smith PLC - CFO, COO & Executive Director [15]

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I'm not aware of any upfront payments that have had to be made to get into these airports, [Tony].

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Carl D. Cowling, WH Smith PLC - MD of High Street Business & Executive Director [16]

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It's quite a strict tender process actually in the U.S. because the airports are owned by municipalities. There's quite complex tender processes across the whole of North America.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [17]

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Next question. Kate.

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Kate Calvert, Investec Bank plc, Research Division - Retail Analyst [18]

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I've got a question on the future growth rate of the underlying travel business. How is the pipeline looking there? And what sort of number of stores do you think you could...

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [19]

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Are you talking about the U.K. or International?

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Kate Calvert, Investec Bank plc, Research Division - Retail Analyst [20]

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Both the U.K. and International.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [21]

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This year, in the U.K., we opened 19 new shops, some hospitals, some train stations, particularly bookstores and tech stores in train stations. And some new space in big airports, not least of which is Gatwick. We're expecting about the same amount of new space this year, about 20 stores, and again from a mixture of those channels. And that's underpinned -- as I say, we're now in year 7 of really good like-for-like sales growth. And you will have seen from the trading update that the new year has got off to a good start.

Internationally, we had another record year. We won 45 new units, 3 of those were the -tender win we had in North America, which was a combination of WH Smith and InMotion. The others were as far flung as Melbourne and everywhere in between Melbourne and here. And that's 2 record years in a row. The guidance we always give you because it's impossible to give guidance, is 30 stores a year internationally, if you exclude some of the new stuff that we're doing in the U.S., is probably as good a guide as any. We always say recent history is probably as good a guide as the future as we can give, but you'll have lumpy years and you'll have fallow years, and that just depends on how that goes. The overall direction of travel though does look very strong in terms of winning new space overseas.

I've got 2 over here.

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Alexander Mees, JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research [22]

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It's Alex Mees from JPMorgan. Three, please. Just firstly, Marshall has multiple brands that it operates. I wonder what's your strategy for those. Do you intend to slim them down at all? Or you're happy to run with them as they are?

And secondly, you've taken InMotion outside of the U.S., is there an opportunity to do that with some of Marshall brands as well?

And just finally on InMotion, you mentioned that the profit delivery was better than expected. I just wondered why that was.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [23]

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Robert will take number 3 and Carl will take 1 and 2.

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Carl D. Cowling, WH Smith PLC - MD of High Street Business & Executive Director [24]

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So in terms of the Marshall brands, they've got a number of different brands. And the reason for that is that they've tried to create a uniqueness in a lot of different environments that they're in. So they've got a vast stable in which they can operate. So when a tender comes up in an airport, they can kind of fit to the landlord's brief a lot better than most other retailers. So you only tend to find those brands in sort of a handful of stores.

So I'm not sure it's something, coming on to part 2, that we'd necessarily bring outside of the U.S. and increasingly what Marshall have been very good at is creating kind of an overall brand that's dedicated to the airport that they're tendering for. So the good example of that is San Francisco, where they've created District Market. And in Denver, they've just opened stores called the Larimer Street Market, which is the downtown area in Denver. And so if anything, they're personalizing it further. So hopefully that answers your question.

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Robert Moorhead, WH Smith PLC - CFO, COO & Executive Director [25]

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And in terms of the performance, really, it was just an all-around better operating performance in the business. And in fact, the longer we've owned it, the more opportunity we think we have got in that business in terms of generating returns. So it's just generally all-around better.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [26]

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Oversight.

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Robert Moorhead, WH Smith PLC - CFO, COO & Executive Director [27]

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Leadership.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [28]

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Jonathan.

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Jonathan Pritchard, Peel Hunt LLP, Research Division - Retail Analyst [29]

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Jonathan Pritchard, at Peel Hunt. Two, if I may. Just on InMotion. Just a little bit more granularity, perhaps on the 3 non-U. S. stores and what that's sort of informing you on the potential there? Because essentially, you mentioned 7 stores in the States, but you could be looking at a similar number overseas and a similar number in resorts with Marshall. So is that a feasible? Is that the potential there?

And then in any terms of -- a bit of an old -favorite, but International leverage. Obviously, you're opening a lot of new stores, which have costs -- start-up costs with those. But is there a sort of cohort of older stores that is now running a margin that's not dissimilar to the U.K., and it's simply this large number of new stores that is holding back the reported number?

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [30]

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All right, good. Carl will take first one and Robert -- I'm loving this, and Robert will take the second one.

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Carl D. Cowling, WH Smith PLC - MD of High Street Business & Executive Director [31]

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So in terms of InMotion stores outside the U.S., we've got 3 stores. We've got one in Leeds, which is an important toehold into -- getting into airport retail across the U.K. We've got one in Spain. And then we've got one in Perth in Australia. And all 3 stores are doing well. So I think there is an opportunity there. And our plan is where we can, where we've got WH Smith stores around the world and we're in 30 countries, if we can get an opportunity with a landlord to open an InMotion store and that's an opportunity we're going to take. So we've got a lot of case studies for those landlords, and it's something that we're actively pursuing.

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Robert Moorhead, WH Smith PLC - CFO, COO & Executive Director [32]

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And in terms of that EBIT margin in International, yes, there are locations where we are delivering returns similar to what we're getting in the U.K. But there are so many more that are in the sort of a growth stage or we are just -- we just put down the space in a territory. And that's why the margins are lower. And we still see over time that there will be accretion in that margin. If you take out Madrid, for example, last year, then there is year-on-year accretion in the margin. And we've talked a lot -- we talked about Madrid at the interims. And that will go, the -- in about 12 months' time. And we know there are only 2 outcomes from that; we'll either retender with a lower rent and make more money or we won't have it there and we'll make more money. So that will help going forward. And over time, we still -- we expect to see some improvement in that EBIT margin towards the U.K. level. But there are some locations where we are getting that.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [33]

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Any more questions? Yes, we've got one here.

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Paul Rossington, HSBC, Research Division - Analyst [34]

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Paul Rossington, HSBC. Just on MRG, can you say, is there a meaningful margin differential between the tourism business and the airport business at all? You've given us the sales breakdowns, just wondering if there's anything in the margin.

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Robert Moorhead, WH Smith PLC - CFO, COO & Executive Director [35]

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Very similar.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [36]

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Yes, we've got another one from Kate.

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Kate Calvert, Investec Bank plc, Research Division - Retail Analyst [37]

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Kate Calvert from HS -- no, where am I now? Investec. Just on Latin America, you've done 2 joint ventures in airports in Latin America. What are your learnings from those JVs, and do you see further expansion opportunities in that part of the world?

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [38]

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I'll give that one to Robert.

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Robert Moorhead, WH Smith PLC - CFO, COO & Executive Director [39]

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I think there are probably better opportunities in North America at the moment, and that's where we'll concentrate -- concentrate at the moment. But I do think in the longer-term, in the Central America and Southern America, there will be opportunities, but we've got enough to do I think, right now in North America and that's where we're going to concentrate.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [40]

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And [Richard] down the front.

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Unidentified Analyst, [41]

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Yes, just 2 more on the acquisition, please. Can you kind of just say what the synergy assumption is based on, just give a little bit more color on that, particularly the procurement amount? Are there any particular product areas you're going to be seeing those savings?

And then I think, Steve, you were talking earlier about the fact Marshall has relatively automated logistics warehousing. I mean, does that give you, you think, a significant advantage over the competitors there? And what sort of advantages does that give you in terms of replenishment, et cetera, against the competition?

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [42]

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Robert and Carl can take those 2?

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Robert Moorhead, WH Smith PLC - CFO, COO & Executive Director [43]

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Well in terms of the synergies in terms of procurement, we think there's quite a lot of opportunity to help them with their purchasing, particularly of convenience and impulse, where we -- we've got a lot of strength there. We've been doing that for a long time. And we think that the opportunity is kind of there in terms of helping them with that. They use a lot of wholesalers, for instance. So we think we can help them with direct relationships and kind of moving the dial there. So that would be the big one that I'd pull out. There's other smaller ones, but that's the main one.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [44]

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Automation to DC? He's referring to a conversation I had with him earlier. Do you want me to answer it?

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Robert Moorhead, WH Smith PLC - CFO, COO & Executive Director [45]

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We were very impressed when we went round the DC . It is very automated. And I think it just gives efficiencies and there is more capacity there to grow. There is enough capacity to -- for these new stores to open and still retain the same DC. There may be opportunities to be more efficient between the East Coast and the West Coast with some of the InMotion products, where they're going to the West Coast. And it just is a more efficient way of doing things. But is it material? Probably not massively.

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Stephen Clarke, WH Smith PLC - Group Chief Executive & Executive Director [46]

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I think the point is the business has been well invested in to grow, and the DC is a really good indicator of that.

Anymore? Going once, going twice. Gone. Thank you.

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Carl D. Cowling, WH Smith PLC - MD of High Street Business & Executive Director [47]

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Bye-bye.