Annual Report and Accounts 2007/08
Chief Executive's statement
Ian Cheshire, Group Chief Executive, at the Brico Dépôt store in Melun, near Paris.
Our aim is to deliver a step-change in value by focusing on three key priorities
I am delighted to be leading Kingfisher at this important time in our development. We have a great opportunity to unlock the full potential of our strong assets. By changing how the Group as a whole is managed, tightening our use of capital and driving out higher cash returns from our businesses we intend to deliver a step-change in value for our shareholders.
Home improvement is an attractive segment of retail, benefiting from natural long-term demand characteristics fuelled by demand for more new housing and more frequent home renewal. The market also benefits from many products being common across international markets, giving rise to global sourcing and economies of scale.
Within this market Kingfisher is alone in having such a large and geographically diversified business. However, delivering more shareholder value from this strong strategic position will require changes in three key areas.
A new senior team, working within a new management structure, will have collective responsibility for overall Group delivery of results as well as key existing cross-Group activities.
Historically, Kingfisher has followed a decentralised management approach, with our retail businesses largely operating independently but participating in Group-wide programmes for local advantage. This approach has successfully resulted in the businesses being well adapted to local customers, but it has yet to deliver the Group’s full potential.
Going forward, the retail businesses will retain responsibility for best serving their local customers but a new senior team, working within a new management structure, will have collective responsibility for overall Group delivery of results as well as key existing cross-Group activities; global sourcing, own-brand development, common purchasing, IT, property and global talent management.
Accordingly, three new geographic divisions have now been established; UK, France and Other International. Three new management roles have been created with overall responsibility for all businesses in each geographic division, and good progress has been made in identifying these executives. Philippe Tible, CEO of Castorama France, has been appointed to lead the French division and an announcement about the UK will be made shortly.
These three roles will make up the core of the new Retail Board with cross-Group powers and incentives. Internal management information has been simplified and more rigorous internal reporting – business performance monitoring and challenge processes – are being introduced. The Group Chief Executive will regularly attend Board meetings of the UK, French and Polish businesses.
Investment will be reprioritised, targeting higher hurdle rates and faster payback periods. A key target is to stabilise debt at current levels, prior to reducing it in due course. A target of flat net debt has been set for the current year.
Capital invested to support Kingfisher’s domestic and international development has been significant to date, building strong retail and sourcing operations across the world and there continue to be new investment opportunities which offer good returns. However, debt has expanded in recent years and, with the global economic cycle now tightening, stabilising debt at current levels, prior to reducing it in due course is now a priority. Accordingly, we have set a target of constant currency flat net debt for the current year.
Consistent with this, existing capital deployed across the Group will be reviewed and new capital investment will continue, albeit at a slower rate. Annual capital investment will be around £400 million, reprioritised to the highest and fastest-returning projects. Higher hurdle rates have already been introduced with immediate effect, driving quicker achievement of attractive returns.
Greater focus will be placed on generating higher cash returns from the retail businesses. Stretching targets for sales growth, margin improvement and cost reduction will be drawn up.
Having invested significantly in the worldwide retail and sourcing operations, greater focus will now be placed on generating higher cash returns from the retail businesses. Operational improvements will be achieved through a greater customer focus and drive for operating cost efficiencies.
Over the next three months the new management team will draw up new three-year operating plans with clear, stretching, but achievable, sales growth, margin improvement and cost reduction targets. Greater emphasis will also be placed on optimising working capital. Accordingly, we will align management incentives to the delivery of these plans, which will drive a step-change in shareholder value.
No business can fully shield itself from economic cycles and given the current state of the financial markets, most commentators are expecting the short-term outlook to worsen before it improves. Against this background, our priorities remain on improving cash margin and controlling costs. I remain confident that Kingfisher has a bright future with a strong position in an attractive retail sector, and with geographic diversification in developed and developing markets.
Group Chief Executive