Annual Report and Accounts 2007/08
A summary of the reported financial results for the year ended 2 February 2008 is set out below:
|Profit before taxation||395||450||(12.2)%|
|Adjusted pre-tax profit||386||397||(2.8)%|
|Basic earnings per share||11.7p||14.4p||(18.8)%|
|Adjusted earnings per share||11.3p||11.9p||(5.0)%|
|Underlying Return on
Invested Capital (ROIC)
A reconciliation of statutory profit to adjusted profit is set out below:
|Profit before taxation||395||450||(12.2)%|
|Profit before exceptional
items and taxation
|Financing fair value remeasurements||(5)||(4)||25.0%|
|Adjusted pre-tax profit||386||397||(2.8)%|
|Income tax expense
on pre-exceptional profit
|Income tax on fair value remeasurements||2||1||n/a|
|Adjusted post-tax profit||265||277||(4.3)%|
The Group’s financial reporting year ends on the nearest Saturday to 31 January. The current year is for the 52 weeks ended 2 February 2008 with the comparative financial period being the 53 weeks ended 3 February 2007. This only impacts the UK operations with all of the other operations reporting on a calendar basis as a result of local statutory requirements.
The effect of the 53rd week on the results of the Group’s comparative period was an increase of £79 million revenue. It has no significant impact on operating profit. So that the results are more readily comparable, all of the UK like-for-like analysis has been calculated comparing the 52 weeks against 52 weeks last year.
Total reported sales grew 7.9% to £9.4 billion on a reported rate basis, and 8.0% on a 52 week constant currency basis. During the year, an additional 80* net new stores were added, taking the store network to 765 (excluding Turkey JV). On a LFL basis, Group sales were up 2.6%.
* excluding Turkey JV and discontinued operations
Operating profit before exceptional items grew by 0.2% to £453 million and fell by 8.8% to £457 million after exceptional items.
The net interest charge for the year was £62 million, up £11 million on the prior year as a result of higher annualised interest rates and movements in exchange rates. This was partially offset by an increase in net interest return on the defined benefit pension scheme.
Adjusted pre-tax profit fell 2.8% reflecting challenging trading conditions in the UK and China only being partially offset by positive performances in France and Poland.
The effective rate of tax on profit has increased from 25% in the prior year to 31% reflecting an increased level of tax on exceptional items net of a release of provisions in respect of prior years. The effective rate of tax on profit before exceptional items and excluding prior year tax adjustments and the impact of rate changes is 32% (2006/07: 32%).
The Group effective tax rate is calculated as follows:
|Effective tax rate calculation 2007/08||Profit
|Profit before tax and tax thereon||395||(123)||31%|
|Less exceptional profit and tax thereon||(4)||14|
|Less prior year adjustment – exceptional||(16)|
|Less prior year adjustment – non-exceptional||9|
|Less adjustment attributable to rate changes||(9)|
The Group effective rate of tax is affected by the varying tax rates in the different jurisdictions in which it operates, the mix of taxable profits in those jurisdictions, the rules impacting on deductibility of certain costs and the non-recognition of tax losses in start-up jurisdictions. Whilst the headline tax rates in some of the jurisdictions in which we operate are reducing, there is also an increased focus on tax as a means of raising revenue for the local economies and therefore the tax cost of multinationals is tending to increase over time. We will continue to plan our tax affairs efficiently.
The statutory tax rates in the jurisdictions in which the Group operates for this financial year and expected rates in the next financial year are as follows:
|Jurisdiction||Statutory tax rate 2007/08||Statutory tax rate 2008/09|
|UK||30%||30% – 28%|
|Rest of Europe||12.5% – 37.25%||12.5% – 35%|
|Asia||17.5% – 33%||17.5% – 25%|
Taxation risk management
Kingfisher seeks to organise its tax affairs efficiently and in a way which enhances shareholder value whilst balancing the tax risks it faces. Tax risks can arise from change of law, differences in interpretation of the law, changes in tax rates and the failure to comply with the tax law and associated procedures. The Group manages and controls these risks through use of local management, its Group tax department and takes appropriate advice from reputable professional firms. Where disputes arise with the tax authorities the Group addresses the areas of dispute promptly in a professional, open and constructive manner.
The Group recorded a £4 million pre-tax exceptional income in the year. Net profits on property disposals of £39 million and £5 million income on previously written off loans have been offset by exceptional costs in Asia of £40 million.
Costs of £13 million have been expensed on the closure of B&Q Korea and the Asia head office, which will close during the first half of 2008/09. The Group also sold its B&Q Taiwan 50% stake for £50 million recording a gross profit before goodwill of £27 million and net loss on disposal of £5 million. The £32 million goodwill was allocated to B&Q Taiwan on the acquisition of Castorama’s minority interest in 2002/03. A further £22 million loss has been recorded as a result of restructuring the B&Q China business.
In total the B&Q China restructuring is anticipated to cost approximately £33 million of which £9 million will be a cash cost.
Earnings per share
|Basic earnings per share||11.7p||14.4p|
|Exceptional items (net of tax)||(0.3)p||(2.4)p|
|Financing fair value remeasurements (net of tax)||(0.1)p||(0.1)p|
|Adjusted earnings per share||11.3p||11.9p|
The Board has proposed a final dividend of 3.4p per share, making the total dividend for the year 7.25p per share, down 31.9% on the prior year. This dividend is covered 1.6 times by adjusted earnings (2006/07: 1.1 times).
The final dividend for the year ended 2 February 2008 will be paid on 13 June 2008 to shareholders on the register at close of business on 18 April 2008, subject to approval of shareholders at the Company’s Annual General Meeting, to be held on 5 June 2008. A dividend reinvestment plan (DRIP) is available to all shareholders who would prefer to invest their dividends in the shares of the Company.
The shares will go ex-dividend on 16 April 2008. For those shareholders electing to receive the DRIP the last date for receipt of electing is 22 May 2008. Dividend cheques and tax vouchers will be posted on 11 June 2008. Certificates for shareholders electing for the DRIP will be posted no later than 26 June 2008.
Return on Invested Capital (ROIC)
ROIC is defined as net operating profit less adjusted taxes (adjusted operating profit excluding property lease and property depreciation costs less tax, 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 8.7% to 6.5%, compared to the Group’s weighted average cost of capital of 7.6%, up 0.2 percentage points on last year primarily due to higher costs of debt.
Underlying ROIC increased from 6.9% to 7.0%. 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.
ROIC excluding goodwill
Kingfisher’s sales, invested capital and underlying ROIC excluding goodwill are disclosed below by geography:
The Group generated £465 million of cash from operating activities in the year, down £94 million on the prior year. The year on year change is mainly as a result of a cash outflow recorded in working capital of £36 million, whereas in 2006/07 a cash inflow of £124 million was recorded. Inventory at £1,873 million was £342 million greater than last year reflecting an increased number of stores, extra inventory from the revamp programmes at B&Q UK and Castorama France, the effect of exchange rates (£118 million) and buying ahead as a result of the timing of Easter.
Net capital expenditure was £411 million (2006/07: £216 million) which has risen year on year as a result of a rise in the level of acquisitions within the Group’s portfolio and a reduction of disposals.
The Group received £50 million net consideration on the sale of B&Q Taiwan.
The resulting year end net debt was £1,559 million (2006/07: £1,294 million).
Following the appointment of a new Group Chief Executive the capital allocation and approval process has been tightened with the aim of prioritising a lower rate of annual capital investment towards the highest and fastest returning projects:
- The management team will draw up new three year operating plans which lead into the budget process for the following year. This process drives the key strategic capital allocation decisions and the output is reviewed by the Board, twice a year.
- The capital expenditure committee will now be chaired by the Group Chief Executive and will include the Group Property Director as well as the Group Finance Director. It will review all projects between £0.75 million and £15.0 million (including the capitalised value of lease commitments). Projects above this level are approved by the Board although all projects above £0.75 million are notified to the Board.
- Investment criteria and hurdle rates have been revised with more challenging hurdle rates for IRR (Internal Rate of Return) and payback and the introduction of a new target for year three returns versus initial cash investment.
- An annual post-investment review process will continue to review the performance of all projects above £0.75 million which were completed in the prior year. The findings of this exercise will be considered by both the new Retail Board and the main Board and directly influence the assumptions for similar project proposals going forward.
Gross capital expenditure (excluding business acquisitions) for the Group was £528 million (2006/07: £467 million). £227 million was spent on property (2006/07: £220 million) and £301 million on fixtures, fittings and intangibles (2006/07: £247 million). A total of £117 million (2006/07: £251 million) of proceeds from disposals were received during the year, £115 million of which came from property disposals.
Payments to acquire businesses in the year amounted to £1 million (2006/07: £2 million) which related to the purchase of minorities in China.
At the year end, the Group had undrawn committed bank facilities available of £675 million. The Group has no significant debt maturities until 2010. The maturity profile of Kingfisher plc’s debt and financing arrangement is illustrated at: www.kingfisher.com/investors/debtinvestors/debtmaturity
Kingfisher aims to smooth the maturity profile of its debt by issuing debt with different maturities and by utilising committed bank revolving credit facilities to provide additional liquidity.
In March 2007, the Group obtained new committed revolving credit facilities totalling £275 million with a number of banks and a £25 million committed term bank loan facility. These facilities mature in March 2010 and are available to be drawn to support the general corporate purposes of the Group. In July 2007, the Group extended the maturity of its £500 million syndicated bank revolving credit facility by one year, such that it now matures in August 2012.
The terms of the US Private Placement note agreement and the committed bank facilities require that the ratio of operating profit to net interest payable must be no less than 3:1. The Group comfortably complied with this covenant. The interest rates paid by the Group under these financing arrangements are based on LIBOR plus a margin. The margins are fixed and are not subject to change in line with credit ratings.
Debt maturity profile £m
Financial risk management
Kingfisher’s treasury function has primary responsibility for managing certain financial risks to which the Group is exposed, details of which are provided in note 25 of the accounts.
Capital risk management
The Group’s objectives when managing capital are:
- To safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for its shareholders and benefits for its other stakeholders; and
- To maintain a balance between the higher returns that may arise from a higher level of borrowings and the advantages of a strong credit profile.
The Group manages its capital by:
- Making an assessment of the return on invested capital;
- Monitoring the impact on the Group’s net debt; and
- Reviewing the level of dividends.
The Group is subject to certain externally imposed capital requirements as follows:
- Kingfisher Insurance Limited and Kingfisher Reinsurance Limited, wholly owned subsidiaries, are subject to minimum capital requirements as a consequence of their insurance activities.
- Certain direct and indirect subsidiaries of B&Q (China) B.V., a wholly owned subsidiary, are subject to minimum capital requirements under Chinese statute.
The Group complied with the externally imposed capital requirements during the year.
The values are based on valuations performed by external qualified valuers where the key assumption is the estimated yields. The average income yields used were 6.3% in the UK (2006/07: 5.5%), 6.5% in France and Italy (2006/07: 6.7%), 6.9% in Poland (2006/07: 6.8%) and 7.7% in China (2006/07: 7.7%).
During the year the Group disposed of properties for cash consideration of £115 million including £73 million on the sale of its national distribution centre in Worksop, which it retained the right to lease for 24 years. This is consistent with the Group’s policy of recycling property when economically attractive. The proceeds of the transaction were used to repay existing debt and to invest in Kingfisher’s worldwide store opening programme, including further freehold acquisitions.
The Group owns a significant property portfolio, most of which is used for trading purposes. If the Group had continued to revalue this it would have had a market value of £3.6 billion at year end, compared to the net book value of £2.7 billion recorded in the financial statements. This represents a £386 million increase against the prior year and a £76 million increase on a constant currency basis.
Property market value by segment
The Group holds a net pension surplus of £77 million in relation to defined benefit pension arrangements including an asset of £110 million in relation to its UK Scheme. In 2006/07 the Group held a deficit of £55 million. This increase was as a result of additional payments to the UK pension scheme (£101 million was paid compared to a normal contribution of around £45 million per annum) and increases in the discount rate used to calculate the defined benefit obligation from 5.3% to 6.2% as a result of increases to corporate bond rates over the year. This was partly offset by an increase in the inflation rate assumption from 2.9% to 3.3% and changed mortality rates. The mortality change increased the obligation by approximately £34 million and ensures that these assumptions remain in line with current market best estimates. Further disclosures of the assumptions used (including mortality assumptions) are provided in note 27 of the consolidated financial statements.
It is worth noting that the pension valuation is dependent on a number of assumptions which although they have been applied consistently and sensibly, may change, which could have a significant effect on the overall surplus.