Preliminary results for the year ended 29 January 2011
24 March 2011
2010/11 Financial Review
A summary of the reported financial results for the year ended 29 January 2011 is set out below.
|Increase / (decrease)|
|Adjusted pre-tax profit||670||547||22.5%|
|Profit before taxation after exceptional items||671||566||18.6%|
|Adjusted basic earnings per share||20.5p||16.4p||25.0%|
A reconciliation of statutory profit to adjusted profit is set out below:
|Profit before taxation||671||566||18.6%|
|Profit before exceptional items and taxation||677||549||23.3%|
|Financing fair value remeasurements||(7)||(2)|
|Adjusted pre-tax profit||670||547||22.5%|
Profit and EPS including all exceptional items for the year ended 29 January 2011 is set out below:
|Profit for the year||£491m||£385m||27.5%|
Total sales grew 0.5% on a constant currency basis and declined by 0.5% to £10.4 billion on a reported rate basis. During the year, an additional 21 net new stores were opened taking the store network to 826 (excluding 30 Turkey JV stores). This includes the impact of closing three stores across the Group. On a LFL basis, Group sales were down 0.9%.
Retail Profit before exceptional items grew by 14.7% to £762 million, and by 11.0% to £756 million including exceptional items.
The net interest charge for the year was £27 million, down £30 million on the prior year driven by significantly lower average net debt levels and lower interest rates.
Profit before tax grew by 18.6% to £671 million as a result of improved trading in the year and a reduction in net finance costs. On a more comparable basis, which removes the impact of one off items and fair value remeasurements, adjusted pre-tax profit grew by 22.5% to £670 million.
Profit for the year grew by 27.5% to £491 million. This resulted in the Group recording a basic EPS of 21.0p which is up 4.5p (+27.3%) in the year.
As discussed above, net interest has decreased by £30 million in the year. The breakdown is as follows:
|Interest on net debt||(25)||(54)|
|Interest charge on defined benefit pension scheme||(7)||(4)|
|Underlying net interest||(34)||(59)|
|Financing fair value remeasurements||7||2|
|Statutory net interest||(27)||(57)|
The effective rate of tax, calculated on profit before exceptional items, prior year tax adjustments and the impact of rate changes is 29% (2009/10: 30%). The overall rate is 27% (2009/10: 32%).
|Effective tax rate calculation 2010/11||Profit
|Effective rate %|
|Profit before tax and tax thereon||671||180||27|
|Less: exceptional loss and tax thereon||6||3||-|
|Less: prior year adjustment||-||11||-|
The Group's effective tax rate is sensitive to the blend of tax rates and profits in the various jurisdictions. Whilst we continue to plan our tax affairs efficiently and adopt a prudent approach towards providing for uncertain tax positions, we are aware that with pressure on government finances, the tax cost of multinationals may increase over time.
The tax rates for this financial year and the expected rates for next year are as follows:
|Jurisdiction||Statutory tax rate
|Statutory tax rate 2010/11|
|Rest of Europe||0% - 34%||0% - 34%|
|Asia||16.5% - 25%||16.5% - 25%|
Taxation risk management
The Group's tax strategy is to manage its tax affairs efficiently and in a way which enhances shareholder value whilst balancing the tax risk it faces. Tax risks can arise from change in law, differences in interpretation of 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 local management, its Group tax department and 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 has recorded a net exceptional post tax charge of £3 million in the year (2009/10: gain of £10 million) as follows:
|Profit on disposal of properties||3||17|
|UK distribution network restructuring||(9)||-|
|Tax on exceptional items||3||(7)|
|Net exceptional items||(3)||10|
Earnings per share
Basic earnings per share have increased by 27.3% to 21.0p (2009/10: 16.5p). The increase year on year is as a consequence of improved underlying performance, partially offset by the adverse movement in exceptional items in the year. On a more comparable basis, removing the impact of exceptional items and financing fair value remeasurements, adjusted basic earnings per share have increased by 25% to 20.5p (2009/10: 16.4p).
|Basic earnings per share||21.0p||16.5p|
|Financing fair value remeasurements (net of tax)||(0.2)p||(0.1)p|
|Impact of prior year items and exceptional items on income tax||(0.6)p||0.7p|
|Adjusted earnings per share||20.5p||16.4p|
Given the strong performance in 2010/11 and confidence in the future prospects provided by self-help initiatives, the Board believes it is now appropriate to start lowering dividend cover from 3.0 times to 2.7 times adjusted earnings over the medium-term. At this level the Board believes the dividend will continue to be prudently covered by earnings and free cash flow and remain consistent with the capital needs of the business. Accordingly, the Board has proposed a final dividend of 5.145p, an increase of 43.9%. This gives a full year dividend of 7.07p, an increase of 28.5% (2009/10: 5.5p).
As previously announced, the Group's interim dividend is calculated automatically as 35% of the prior year's total dividend. Based on this, the interim dividend to be paid in November 2011 would be 2.47p per share (2010: 1.925p per share). The final dividend will continue to be proposed each year as part of the full year preliminary announcement in March.
The final dividend for the year ended 29 January 2011 will be paid on 20 June 2011 to shareholders on the register at close of business on 6 May 2011, subject to approval of shareholders at the Annual General Meeting, to be held on 16 June 2011. A dividend reinvestment plan (DRIP) is available to shareholders who would prefer to invest their dividends in the shares of the Company.
The shares will go ex-dividend on 4 May 2011. For those shareholders electing to receive the DRIP the last date for receipt of electing is 27 May 2011.
Return on Capital (ROC)
The Group has two main Return on Capital (ROC) measures.
The first measure, Standard Return on Capital, is primarily a Group measure. It is stated on a non-lease adjusted basis, although we also quote a lease adjusted number. The asset base includes goodwill.
The second measure, Lease Adjusted ROC excluding Goodwill, is used to monitor performance at a geographic divisional level.
|Standard Return on capital (ROC)||9.6%||8.3%||+1.3%pps|
For Standard ROC, Return is calculated as post tax Retail Profit less central costs and excluding exceptional items, other than realised property profit. Return is then divided by a two point average of Invested Capital (calculated as Net Assets excluding Net Debt and Pension related items including related Deferred Tax).
The strong operating performance combined with improved asset turns has resulted in the Standard ROC performance increasing from 8.3% to 9.6% in 2010/11 compared to the Group's weighted average cost of capital (WACC) of 8.1%.
Lease adjusted ROC is based on the same definition except it excludes property lease costs, and Invested Capital is adjusted for lease costs capitalised at the long-term property yield. Lease adjusted ROC has increased from 6.8% to 7.3% in 2010/11, compared to the Group's lease adjusted cost of capital (WACC) of 6.8%.
Geographic Divisional Return
Kingfisher's underlying ROC by geographic division is set out below. All divisions improved their returns in 2010/11. Return is stated after adjusting for property lease costs and before property profits. Invested capital excludes goodwill but includes capitalised leases:
|Retail Sales £bn
||Proportion of Group sales %||Invested Capital
|Proportion of Group IC %||Returns % (ROC)
- Excluding goodwill of £2.4 billion
Free cash flow
A reconciliation of free cash flow and cash flow movement in net debt/cash is set out below:
|Operating profit (before exceptional items)||704||606|
|Other non cash items (1)||276||319|
|Change in working capital (before exceptional items)||(141)||315|
|Change in pensions and provisions (before exceptional items)||(57)||(68)|
|Operating cash flow||782||1,172|
|Net interest paid (2)||(19)||(63)|
|Tax paid (2)||(133)||(151)|
|Disposal of assets||87||59|
|Free cash flow||407||761|
|French tax receipt||-||148|
|Cash flow movement in net debt/cash||269||740|
|Opening net debt||(250)||(1,004)|
|Closing net cash/(debt)||14||(250)|
- Includes depreciation and amortisation, share-based compensation charge, pension service cost, share of post-tax results of JVs and associates and profit/loss on retail disposals.
- Prior year excludes French tax receipt – £120 million tax and £28 million related repayment supplement.
- Includes dividends received from JVs and associates, issue/purchase of shares and cash utilisation of exceptional provisions.
The Group exceeded its net debt target for the year, reporting year end net cash of £14 million (2009/10: £250 million financial net debt). On a constant currency basis net financial debt has decreased by £1.7 billion over the last three years (£1.6 billion on a reported currency basis).
Free cash flow of £407 million was generated in the year, a movement of £354 million year on year mainly driven by movement in working capital. In the prior year significant progress was made on our 'Delivering Value' objective to reduce working capital and as a result a one off benefit of £315 million was recorded. Over the full period of 'Delivering Value' working capital has reduced by over £500 million excluding the impact of LME of around £180 million over the same period. LME is the legislative change shortening payment terms in France, implemented over the three years to 2012.
In the current year working capital has increased by £141 million. The largest single item impacting this is the LME change in France. The balance is due to planned earlier purchase of seasonal stock and additional stock in newly opened stores. Stock days have increased in the period from 92 days in 2009/10 to 95 days on a moving average basis.
With a tight focus on cash over the last three years, the Group has been able to reduce its reliance on external funding improving our financial flexibility. In 2010/11 the Group repaid £679 million nominal value of gross debt by repaying maturing debt, and by repurchasing significant proportions of our 2014 Eurobonds and US Private Placement debt. In total over the last three years we have repaid gross debt with a value of £1,371 million.
The Group will maintain a high focus on free cash flow generation going forward to fund dividends to shareholders and increased investment in growth opportunities where returns are attractive.
Gross capital expenditure increased by 21% in the year to £310 million. Of this, £116 million was spent on property (2009/10: £102 million). In the year £194 million was spent on fixtures, fittings and intangibles (2009/10: £154 million). A total of £87 million of proceeds from disposals were received during the year (2009/10: £59 million).
As detailed last year the Group has a rigorous approach to capital allocation and authorisation. The process includes:
- An annual strategic planning process based on detailed plans for all businesses for the next three 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, attended by the Group Chief Executive, Group Finance Director, Group Property Director and the three regional CEOs as required. The committee is delegated to 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 also notified to the Board.
- Clear investment criteria with challenging hurdle rates for IRR (Internal Rate of Return) and discounted payback.
- An annual post-investment review process to undertake a full review of all projects above £0.75 million which were completed in the last four years, together with a review of recent performance on all other existing stores. The findings of this exercise are considered by both the Retail Board and the Board and directly influence the Regional and Group Development Strategy and the assumptions for similar project proposals going forward.
- An annual review of return on capital by store is performed which drives plans to improve the returns of weaker stores.
Management of liquidity risk and financing
The Group now has low levels of financial net debt. However, the Group's overall leverage, including capitalised lease debt that (in accordance with accounting regulations) does not appear on the balance sheet, is estimated to be around 50%. At this level the Group has financial flexibility whilst retaining an efficient cost of capital.
Kingfisher is currently targeting to have relatively low levels of financial net debt to support a solid investment grade credit rating. Where appropriate Kingfisher may purchase current leasehold assets used by the Group. This may increase financial net debt but have no impact on lease adjusted net debt.
Kingfisher regularly reviews the level of cash and debt facilities required to fund its activities. This involves preparing a prudent cash flow forecast for the next three years, determining the level of debt facilities required to fund the business, planning for repayments of debt at its maturity and identifying an appropriate amount of headroom to provide a reserve against unexpected outflows.
At the year end, Kingfisher had an undrawn £500 million committed bank facility, which matures in August 2012.
Kingfisher deposits surplus cash with a number of banks with strong credit ratings and with money market funds which have the strongest, AAA, credit rating and offer same day liquidity. A credit limit for each bank or fund is agreed by the Board covering the full value of deposits and a proportion of the value of derivative contracts. The credit risk is reduced further by spreading the investments and derivative contracts across several counterparties. At the year end, Kingfisher had a total of around £500 million of cash deposited with banks and in money market funds. The highest single cash investment was a £86 million money market fund investment.
The maturity profile of Kingfisher's debt is illustrated in the Debt investors section.
The terms of the US Private Placement note agreement and the committed bank facility require that the ratio of Group operating profit, excluding exceptional items, to net interest payable must be no less than 3:1. The Group is in compliance with this covenant, with the ratio at the year end being 26:1.
The Group has entered into interest rate derivative contracts to convert the fixed rate payable on its bonds and the US Private Placement note to a floating rate of interest. The floating interest rates paid by the Group under its financing arrangements are based on LIBOR and EURIBOR plus a margin. The margins were not changed during the year. Under the terms of the financing agreements, the margins are fixed and are not subject to change in line with credit ratings or financial ratios.
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 £3.3 billion at year end (2009/10: £3.0 billion), compared to the net book value of £2.7 billion recorded in the financial statements.
The values are based on valuations performed by external qualified valuers where the key assumption is the estimated yields. The valuation exercise was performed in October 2010 with approximately one third of the portfolio valued by external professional valuers.
At the year end, the Group had a deficit of £58 million in relation to defined benefit pension arrangements of which £21 million is in relation to its UK Scheme. In 2009/10 the Group had a deficit of £198 million.
The approach used to prepare the pension valuation is in line with current market practice and international accounting standards, and has been applied consistently. This uses a number of assumptions which are likely to fluctuate in the future and so may have a significant effect on the accounting valuation of the scheme's assets and liabilities.
The decrease in the deficit was predominantly due to asset returns and changes to the discount rate and mortality assumptions used to value the pension obligation.
The valuation is very sensitive to financial and demographic assumptions. To aid understanding of the impact that changes to the assumptions could have on the pension obligation, we have included sensitivity analysis as part of the pension disclosure in note 9 of this announcement. Further details of all the key assumptions are also contained within the note.
Changes in the mortality assumptions and updated membership data reflect work done as part of the triennial funding valuation of the UK defined benefit scheme undertaken as at 31 March 2010.
In line with the valuations undertaken in 2004 and 2007, the Group chooses to take a longer view when looking at the funding of the pension scheme, and funding levels are set on a 20-30 year horizon with a target of full funding of the scheme on a prudent basis at this point in time. A similar approach has been adopted for this year's valuation, with the aim of keeping the Group's annual contributions to the scheme at a level broadly consistent with previous years.
This has been achieved principally by the introduction of property security held in a partnership, giving the pension scheme recourse to the property assets in the event of Kingfisher's insolvency. The scheme will receive a regular income stream from the partnership that forms part of the annual cash contribution from the Group to the pension scheme under the schedule of contributions.
UK property assets with a market value of £83 million were sold to the partnership and leased back to B&Q plc under standard commercial lease terms. The Group retains control over these properties, including the flexibility to substitute alternatives. The trustee's partnership interest entitles it to the majority of the income of the partnership over the next 20 years. At the end of this term, Kingfisher plc has the option to acquire the trustee's partnership interest.
The assets and activities of the partnership are consolidated within the Group financial statements by virtue of its control over the partnership. Under IFRS, the investment held by the scheme in the partnership does not represent a plan asset for the purposes of the Group's consolidated financial statements. Accordingly, the pension deficit position recorded in the Group financial statements does not reflect the scheme's investment in the partnership. The future payments to be made to the scheme by the partnership will be reflected as pension contributions in the Group financial statements on a cash basis.
The Group will obtain the normal tax deduction for the cash contribution made to the scheme during the current year which will be spread over the next four years.
A further two UK properties with a combined market value of £116 million are likely to be transferred to the partnership during 2011/12, and leased back to B&Q plc. The pension trustee may choose to make a further investment in the partnership at this time.