A summary of the reported financial results for the year ended 28 January 2006 is set out below.
Group Finance Director
|Profit before tax||231.8||647.7||(64.2)%|
|Adjusted profit before tax||445.7||661.4||(32.6)%|
|Basic earnings per share||6.0p||19.3p||(68.9)%|
|Adjusted earnings per share||12.3p||19.7p||(37.6)%|
|Underlying Return on Invested Capital (ROIC)||7.3%||9.5%||(2.2)pps|
A reconciliation of statutory profit to adjusted profit is set out below:
|Profit before tax||231.8||647.7||(64.2)%|
|Financing fair value remeasurements||(1.6)||–|
|Amortisation of acquisition intangibles||0.1||–|
|Adjusted profit before tax||445.7||661.4||(32.6)%|
|Income tax expense||(92.8)||(201.2)|
|Adjustments to income tax expense||(68.3)||(5.3)|
|Adjusted profit after tax||284.6||454.9||(37.4)%|
|Adjusted profit after tax attributable to equity shareholders||285.1||454.4||(37.3)%|
Total reported sales grew 4.7% to £8.0 billion, up 3.9% on a constant currency basis. During the year, an additional 46 net new stores were added, taking the store network to 645. On a like-for-like (LFL) basis, Group sales were down 2.2%.
Adjusted profit before tax declined 32.6% reflecting the tough trading conditions in the UK that resulted in a significantly lower contribution from B&Q.
The Group incurred a £205.3 million restructuring charge in B&Q UK relating to the planned closure of 20 stores, the downsizing of a further 17 stores and the costs of streamlining B&Q’s corporate offices, of which £66 million is non-cash. A further charge of £19 million was incurred following B&Q’s decision to terminate a contract with its current supplier of consumer credit services and £10 million arose integrating the OBI China business acquired in the year with B&Q in China. These were partially offset by £18.9 million profit on the disposal of properties and investments, mostly in the UK.
Earnings per share
Basic earnings per share declined by 68.9% to 6.0p. Adjusted earnings per share declined 37.6% from 19.7p to 12.3p per share as calculated below.
|Basic earnings per share||6.0p||19.3p|
|Exceptional items (net of tax)||7.6p||0.4p|
|Financing fair value remeasurements (net of tax)||(0.1)p||–|
|Reversal of prior year exceptional tax charge||(1.2)p||–|
|Adjusted earnings per share||12.3p||19.7p|
The Board has proposed a final dividend of 6.8p per share, making the total dividend for the year 10.65p per share, unchanged on the prior year. This dividend is covered 1.2 times by adjusted earnings (2005:1.9 times).
The final dividend for the year ended 28 January 2006 will be paid on 2 June 2006 to shareholders on the register at close of business on 7 April 2006, subject to approval of shareholders at the Company’s Annual General Meeting, to be held on 24 May 2006. A dividend reinvestment plan (DRIP) is available to all shareholders who would prefer to invest their dividends in the shares of the Company.
Return on invested capital (ROIC)
ROIC is defined as net operating profit less adjusted taxes (adjusted operating profit excluding property lease and depreciation costs less tax at the Group’s effective tax rate, plus property revaluation increases in the year) divided by average invested capital (average net assets less financing related balances and pension provisions plus property operating lease costs capitalised at the long-term property yield).
Following the transition to IFRS, the Group elected not to revalue properties from 1 February 2004. However, property appreciation is an integral part of a ROIC measure and therefore Kingfisher continues to include revaluation gains and the current market value of our properties in ROIC calculations.
ROIC declined from 10.4% to 9.0%, compared to the Group’s weighted average cost of capital of 7.9%, down 0.5 percentage points on last year primarily due to a fall in gilt rates.
Underlying ROIC declined from 9.5% to 7.3%. Underlying ROIC assumes properties appreciate in value at a steady rate over the long-term. When calculating the underlying ROIC, short-term variations in property values more or less than the long-term mean are excluded.
A total of £304.1 million (2005: £531.5 million) of cash was generated from operating activities. Excluding post employment benefit provision movements, £36.9 million (2005: £144.3 million outflow) was generated from working capital movements. The level of stock rose by a net £33.3 million, reflecting growth in the number of stores offset in part by stock reduction initiatives at B&Q in the UK. Post employment pension provisions fell £135.2 million reflecting the additional pension contributions made to the UK scheme. Net capital expenditure was £395.4 million (2005: £392.4 million).
The resulting year end net debt was £1,355.2 million (2005: £841.1 million).
Kingfisher continues to prioritise its capital investment into projects and businesses that offer the potential for the most attractive returns. This is supported by a rigorous capital allocation process outlined as follows:
- An annual strategic planning process (which leads into the budget process for the following year) based on detailed plans for all businesses for the next five years. This process drives the key strategic capital allocation decisions and the output is reviewed by the Board, twice a year.
- A capital approval process through a capital expenditure committee chaired by the Group Finance Director delegated to review all projects between £0.75 million and £7.5 million (including the capitalised value of lease commitments).
- Projects above this level are approved by the Executive Committee or the Board although all projects above £0.75 million are notified to the Board.
- An annual post-investment review process to review the performance of all projects above £0.75 million which were completed in the prior year. The findings of this exercise are considered by both the Executive Committee and the Board and directly influence the assumptions for similar project proposals going forward.
Gross capital expenditure (excluding business acquisitions) for the Group was £507.0 million (2005: £413.3 million). £188.0 million was spent on property (2005: £156.3 million) and £319.0 million on fixtures, fittings and intangibles (2005: £257.0 million). A total of £111.6 million (2005: £20.9 million) of proceeds from disposals were received during the year, £97.4 million of which came from property disposals.
Payments to acquire businesses in the year amounted to £167.5 million. £143.5 million related to the purchase of the OBI China business at the end of the first half. A further £24.0 million was spent buying out two minority interests in China and some small acquisitions in France. There were no business disposals during the year.
The net interest charge for the year was £37.7 million, up £9.0 million from the prior year reflecting higher average net debt. However, the interest charge benefited from non-recurring interest receipts totalling £7.6 million, relating to tax refunds and property disposals in prior years.
During the year, the Group issued a €550 million Medium Term Note under its €2,500 million MTN Programme. The bond carries a coupon of 4.125% and matures in November 2012. The proceeds were primarily used to repay bank loans. Details of all the MTNs in issue at the year end are provided in note 21.
In March 2005, the Group refinanced its £540 million committed bank facility maturing in February 2007. This was replaced with a £500 million committed bank revolving credit facility, provided by a number of banks, maturing in August 2010. In July 2005, the Group obtained a further £300 million committed bank facility, which provided short-term funding, but this was subsequently repaid and cancelled with the proceeds of the €550 million bond issue in November 2005. In January 2006, the Group borrowed £50 million under a committed term borrowing facility which matures in February 2009. Since the year end, the Group has obtained another £300 million short-term committed bank facility maturing in 2008. All of the bank facilities are available to be drawn to support the general corporate purposes of the Group including working capital requirements.
At the year end, 23% of the Group’s long-term borrowings were at a fixed rate of interest (2005: 35%).
The effective overall tax rate on profit has increased from 31.0% in the prior year to 40.0% primarily due to exceptional costs not qualifying for tax relief. The effective tax rate on profit before exceptional items and excluding prior year tax adjustments is 34.4% (2005: 32.8%) reflecting the higher proportion of profits in high tax jurisdictions and higher overseas start-up losses.
The Group owns a significant property portfolio, most of which is used for trading purposes and which had a market value of £3.0 billion at year end, compared to a net carrying amount of £2.4 billion recorded in the financial statements. The unrecognised property revaluation gain for the year on properties held at the year end was £325 million.
Following transition to IFRS, the consolidated balance sheet now reflects post employment benefit liabilities, mainly comprising defined benefit pension arrangements. The provision has reduced from £325.7 million at the start of the year to £239.6 million at the year end. An additional £130 million was paid into the UK scheme during the year compared with the prior year. A fall in corporate bond rates over the year from 5.3% to 4.7% increased UK pension liabilities by £170 million. Further disclosure of the assumptions used (including mortality assumptions) is provided in note 27 of the consolidated financial statements.
Accounting changes – Adoption of International Financial Reporting Standards
Kingfisher has adopted International Financial Reporting Standards in the current year and, as a result, has restated the comparative financial information for the year ended 29 January 2005. The key impacts of this restatement are disclosed in note 40 of the consolidated financial statements.
Since the publication of our first half year interim results, two amendments in accounting policies have been required. Foreign exchange movements on intercompany loans will no longer be reported in the income statement following the clarification of IAS 21 ‘The Effect of Changes in Foreign Exchange Rates’. The accounting policy on the treatment of operating lease rentals has also changed following clarification from IFRIC (International Financial Reporting Interpretations Committee) on the requirement to account for rental contracts which contain fixed rental uplifts on a straight line basis. Further details are provided in note 2a.
The Group has taken the option to defer the implementation of the standards IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’ until the financial year ended 28 January 2006, without restating comparative amounts.
Treasury risk management
Kingfisher’s Treasury function has primary responsibility for managing certain financial risks to which the Group is exposed. The Board reviews the levels of exposure regularly and approves Treasury policies covering the use of financial instruments required to manage these risks.
Liquidity risk – Treasury manages the Group’s exposure to liquidity risk by reviewing the cash resources required to meet its business objectives and by promoting a diversity of funding sources and debt maturities.
Credit risk – Credit risk of third parties that the Group deals with is managed by setting a credit limit using published credit ratings. The exposure against this limit is determined by taking account of the full value of deposits and a proportion of the value of derivative contracts.
Interest rate risk – The Group manages its interest rate risk by entering into certain interest rate derivative contracts which modify the interest rate payable on the Group’s underlying debt instruments, principally the Medium Term Notes.
Currency risk – The Group’s principal currency exposures are to the euro, the US dollar and the Chinese Renminbi. The euro exposure is operational and arises through the ownership of the retail businesses in France, Italy, Ireland and Spain. Balance sheet euro translation exposure is substantially hedged by maintaining a proportion of the Group’s debt in euro. Following the acquisition of the OBI China business, the Group’s exposure to the Chinese Renminbi has increased significantly. This balance sheet translation exposure is partly hedged by local debt in China and partly by forward foreign exchange contracts entered into to hedge this exposure. However, it is the Group’s policy not to hedge the translation of overseas earnings (primarily euro) into Sterling. In addition, the Group has a significant transaction exposure arising on the purchase of products for re-sale denominated in US dollars. Under Group policies, the Group companies are required to hedge committed product purchases and a proportion of forecast product purchases arising in the next 12 months.
Use and fair value of financial instruments – In the normal course of business the Group uses financial instruments including derivative financial instruments. The Group does not use derivative financial instruments for speculative purposes. The main types of financial instruments used are Medium Term Notes, loans and deposits, interest rate derivative contracts, cross currency interest rate swaps, spot and forward currency contracts, and currency options. Further disclosure on derivative financial instruments is provided in note 24.