Preliminary results for the year ended 28 January 2012
22 March 2012
2011/12 FINANCIAL REVIEW
A summary of the reported financial results for the year ended 28 January 2012 is set out below:
|Adjusted pre-tax profit||807||670||20.4%|
|Profit before taxation after exceptional items||797||671||18.8%|
|Adjusted basic earnings per share||25.1p||20.5p||22.4%|
A reconciliation of statutory profit to adjusted profit is set out below:
|Profit before taxation||797||671||18.8%|
|Profit before exceptional items and taxation||809||677||19.5%|
|Financing fair value remeasurements||(2)||(7)|
|Adjusted pre-tax profit||807||670||20.4%|
Profit and EPS including all exceptional items for the year ended 28 January 2012 is set out below:
|Profit for the year||£639m||£491m||30.1%|
Total sales grew 3.3% on a constant currency basis and by 3.6% to £10.8 billion on a reported rate basis. During the year, an additional 93 net new stores were opened taking the store network to 919 (excluding Turkey JV). This includes the impact of closing 2 stores across the Group, the opening of 27 ex-Focus stores in B&Q UK and 54 Screwfix trade counters in the UK. On a LFL basis, Group sales were up 1.3%.
Retail profit before exceptional items grew by 15.7% to £882 million, and by 15.1% to £870 million including exceptional items.
The net interest charge for the year was £10 million, down £17 million on the prior year. This is discussed further below.
Profit before tax grew by 18.8% to £797 million as a result of continued improved trading in the year and a reduction in net finance costs. On a more comparable basis, which removes the impact of exceptional items and fair value remeasurements, adjusted pre-tax profit grew by 20.4% to £807 million.
Profit for the year grew by 30.1% to £639 million. This resulted in the Group recording a basic EPS of 27.5p which is up 6.5p (+31.0%) in the year.
Net interest has decreased by £17 million in the year. The breakdown is as follows:
*FFVR represents changes in the fair value of financing derivatives, excluding interest accruals, offset by fair value adjustments to the carrying value of borrowings and other hedged items under fair value hedge relationships
|Interest on net debt||(8)||(25)|
|Interest return/(charge) on defined benefit pension scheme||2||(7)|
|Unwinding of discount on provisions||(4)||(3)|
|Underlying net interest||(12)||(34)|
|Financing fair value remeasurements (FFVR*)||2||7|
|Statutory net interest||(10)||(27)|
Cash interest reduced by £17 million in the year to £8 million mainly as a result of having a full year's benefit of buying back debt during 2010/11. Non cash interest reduced by £5 million driven by the defined benefit pension scheme. As a result, the underlying net interest charge reduced by £22 million to £12 million.
Statutory net interest, which is stated after FFVR, reduced by £17 million to £10 million.
The underlying effective rate of tax, calculated on profit before exceptional items, prior year tax adjustments and the impact of rate changes is 28% (2010/11: 29%). The overall tax rate for the year is 20% (2010/11: 27%) which reflects a reassessment of various positions taken in prior years.
|Effective tax rate calculation 2011/12||Profit
|Effective rate %|
|Profit before tax and tax thereon||797||158||20|
|Add exceptional loss and tax thereon||12||7||-|
|Less prior year items||-||59||-|
Kingfisher's effective tax rate is sensitive to the blend of tax rates and profits in the Group's various jurisdictions. Whilst we will 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 charge for the year has been impacted by tax rate changes in some of the countries in which we operate. The most significant changes were the UK statutory tax rate falling from 28% to 26% and the French rate for businesses with turnover over €250m increasing from 34.43% to 36.1%.
The tax rates for this financial year and the expected rates for next year are as follows:
|Jurisdiction||Statutory tax rate 2012/13||Statutory tax rate 2011/12|
|France||34.43% / 36.1%||34.43% / 36.1%|
|Rest of Europe||0% - 34%||0% - 34%|
|Asia||16.5% - 25%||16.5% - 25%|
Taxation risk management
Kingfisher's tax strategy is to manage its tax affairs efficiently and in a way which enhances shareholder value whilst balancing the tax risks it faces. Tax risks can arise from changes in law, differences in interpretation of law, changes in tax rates and the failure to comply with the applicable tax laws 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.
|UK ex-Focus stores acquisition integration||(11)||-|
|(Loss)/profit on disposal of properties||(3)||3|
|Tax on exceptional items||7||3|
|Net exceptional items||(5)||(3)|
The Group has recorded a net exceptional post tax loss of £5 million in the year (2010/11: £3 million loss). Exceptional items before tax included £11 million exceptional costs relating to the integration of ex-Focus DIY stores into the B&Q UK store network and a £3 million loss on disposal of properties (2010/11: £3 million profit), partly offset by a £2 million exceptional credit for the release of the UK restructuring provision following the exit of an idle store (2010/11: £9m restructuring costs).
Earnings per share
Basic earnings per share (EPS) have increased by 31.0% to 27.5p (2010/11: 21.0p). The increase year on year is driven by improved trading performance and reduction in net finance costs. On a more comparable basis, removing the impact of exceptional items, financing fair value remeasurements and the effect of prior year tax adjustments, adjusted basic earnings per share increased by 22.4% to 25.1p (2010/11: 20.5p).
|Basic earnings per share||27.5p||21.0p|
|Financing fair value remeasurements (net of tax)||(0.1)p||(0.2)p|
|Impact of prior year items and exceptional items on income tax||(2.8)p||(0.6)p|
|Adjusted earnings per share||25.1p||20.5p|
The Board has proposed a final dividend of 6.37p which gives a full year dividend of 8.84p, an increase of 25.0% (2010/11: 7.07p). The final dividend reduces full year dividend cover on adjusted earnings to 2.8 times (2010/11: 2.9 times) which is in line with our medium term objective to lower dividend cover from 3.0 times to 2.7 times adjusted earnings. 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.
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 2012 would be 3.09p per share (2011: 2.47p per share). The full year 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 28 January 2012 will be paid on 18 June 2012 to shareholders on the register at close of business on 4 May 2012, subject to approval of shareholders at the Annual General Meeting, to be held on 14 June 2012. 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 2 May 2012. For those shareholders electing to receive the DRIP the last date for receipt of electing is 24 May 2012.
The Group has historically reported two main Return on Capital (ROC) measures.
The first measure, Standard ROC, 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.
Internally, management are focused on Kingfisher Economic Profit (KEP) which is derived from the concept of Economic Value Added. The measure is used to ensure capital is being used productively and decisions made which will create value for shareholders. KEP takes into account a charge for the capital employed in the business. In doing this the calculation treat leases as though they were owned assets within capital employed, capitalising them using the long-term yield methodology. For the purposes of the calculation, reported adjusted post-tax profit is used, but interest and lease costs are added back. A charge for the cost of capital employed is then deducted by applying the Group's lease adjusted weighted average cost of capital (WACC) to its lease and pension adjusted capital employed.
Kingfisher Economic Profit (KEP)
|Kingfisher Economic Profit (KEP)||£131m||£68m||£63m|
By optimising the allocation of resources and increasing retail profit, Kingfisher has increased KEP by £63 million in 2011/12 in constant currencies.
|Return on capital (ROC)||10.7%||9.6%||+1.1pps|
For Standard ROC, the Group return is calculated as post-tax Retail Profit less central costs and excluding exceptional items, other than realised property profit. This 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 9.6% to 10.7% in 2011/12 compared to the Group's WACC of 8.1%.
The Group lease adjusted ROC is based on the same definition but it excludes property lease costs, and Invested Capital is adjusted for lease costs capitalised at the long term property yield. The Group lease adjusted ROC has increased from 7.3% to 8.0% in 2011/12, compared to the Group's lease adjusted WACC of 6.8%.
Geographic divisional return
Kingfisher's underlying ROC by geographic division is set out below. All divisions improved their returns in 2011/12. The divisional return is stated adjusted for property lease costs and before property profits. The divisional invested capital excludes goodwill but includes capitalised leases:
|Retail Sales £bn
||Proportion of Group sales %||Invested Capital
|Proportion of Group IC %||Returns % (ROC) (1)
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)||819||704|
|Other non cash items (1)||274||276|
|Change in working capital||(187)||(141)|
|Pensions and provisions (before exceptional items)||(54)||(57)|
|Operating cash flow||852||782|
|Net interest paid||(8)||(19)|
|Gross capital expenditure (before strategic investments)||(338)||(285)|
|Disposal of assets||9||87|
|Free cash flow||367||432|
|Share purchase for employee incentive schemes||(117)||-|
|Strategic capex investments (2)|
|- Freehold interests||(73)||(25)|
|- Ex-Focus DIY stores||(39)||-|
|Cash flow movement in net (debt)/cash||(57)||269|
|Opening net cash/(debt)||14||(250)|
|Other movement including foreign exchange||(45)||(5)|
|Closing net (debt)/cash||(88)||14|
Net debt at the end of the year was £88 million (2010/11: £14 million net cash). Net debt has decreased by £1.5 billion over the last four years on a reported currency basis.
Operating cash flow increased by £70 million during the year due to profit generation of £115 million offset in part by increased working capital requirements.
In the current year working capital has increased by £187 million, significantly driven by the LME change in France (legislative changes shortening payment terms) with the balance due to increased imports from the Kingfisher Sourcing Organisation and additional stock in newly opened stores. Stock days have increased in the year from 95 days in 2010/11 to 102 days on a moving average basis. Over the four years of the 'Delivering Value' programme, working capital has reduced by £427 million excluding the impact of LME of £260 million.
Free cash flow of £367 million was generated in the year, a reduction of £65 million year on year mainly driven by increased net capital expenditure with higher spend on new assets and £78 million lower receipts on the disposal of assets.
During the year free cash flow generated was utilised to improve shareholder returns. The dividend was increased to £178 million and £117 million was used to acquire 42 million Kingfisher shares to cover existing share incentive schemes, avoiding dilution of current shareholders. In addition £73 million (2010/11: £25 million) was invested to increase the freehold property mix in the UK and £39 million was invested in buying 29 ex-Focus DIY stores and reopening 27 of them in the year as B&Q stores.
With a sustained focus on cash over the last four years, the Group has been able to reduce its reliance on external funding and improve its financial flexibility. In 2011/12 the Group bought back £28 million nominal value of its 2014 Sterling MTN, bringing the total reduction in gross debt through repayment and repurchase over the past four years to £1.4 billion. This has been a key driver of the fall in the net cash interest charge from £79 million in 2007/08 to £8 million in the current financial year, and represents an EPS benefit of 2.2p per share.
The Group will maintain a high focus on free cash flow generation going forward to fund increased investment in growth opportunities where returns are attractive and increased dividends to shareholders.
Gross capital expenditure for the year was £450 million (2010/11: £310 million), including strategic capex investments of £112 million (2010/11: £25 million). Before strategic capex investments, on-going capex increased by 19% to £338 million (2010/11: £285 million). Of this, £107 million was spent on property (2010/11: £91 million) and £231 million on fixtures, fittings and intangibles (2010/11: £194 million). A total of £9 million of proceeds from disposals were received during the year (2010/11: £87 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, Chief Operating Officer, Group Property Director, and the two Divisional CEOs as required. The committee is delegated to review all projects above £0.75 million and to sign-off the projects between £0.75 million and £15.0 million (including the capitalised value of lease commitments)
- Projects above £15.0 million are approved by the Board although all projects above £0.75 million are also notified to the Board
- Clear investment criteria including KEP and challenging hurdle rates for IRR (Internal Rate of Return) and DPB (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 2 to 4 years. The findings of this exercise are considered by both the capital expenditure committee 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 KEP 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 maintain a solid investment grade credit rating. Where appropriate Kingfisher may purchase current leasehold assets used by the Group. This may increase financial 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.
The Group derives almost half its profit from the eurozone, and as such is exposed to continuing uncertainty over the future of the euro and resultant market volatility. Kingfisher has undertaken a risk assessment and is developing a series of mitigation strategies to assist in insulating the Group against future eurozone instability.
During the year Kingfisher re-financed its committed bank facility for a further five years to 2016, and at the same time reduced the total facility amount to £200 million. At the year end this facility was undrawn.
Kingfisher deposits surplus cash with a number of banks with the strongest short term 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 the Group had a total of around £300 million of cash deposited with banks and in money market funds. The highest single cash investment was a £63 million money market fund investment.
The maturity profile of Kingfisher's debt is illustrated at: http://www.kingfisher.com/index.asp?pageid=76
The terms of the US Private Placement note agreement and the committed bank facility require only that the ratio of Group operating profit, excluding exceptional items, to net interest payable must be no less than 3:1 for the preceding 12 months at half year and full year ends. At the year end the Group's ratio was significantly higher than this requirement.
The Group has entered into interest rate derivative contracts to convert the fixed rate payable on its bonds and US Private Placement notes 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.
Capital risk management
The Group's objectives when managing capital are:
- To safeguard the Group's ability to continue as a going concern and retain financial flexibility in order to continue to provide returns for shareholders and benefits for other stakeholders; and
- To maintain a solid investment grade credit rating
- Continued focus on free cash flow generation
- Setting the level of capital expenditure and dividend in the context of current year and forecast free cash flow generation
- Rigorous review of capital investments and post investment reviews to drive better returns and
- Monitoring the level of the Group's financial and leasehold debt in the context of Group performance and its credit rating
Kingfisher Insurance Ltd, a wholly owned subsidiary, is subject to minimum capital requirements as a consequence of its insurance activities. The Group complied with the externally imposed capital requirements during the year.
The Group owns a significant property portfolio, most of which is used for trading purposes. If the Group had continued to revalue this in its books it would have had a market value of £3.5 billion at year end (2010/11: £3.3 billion), compared to the net book value of £2.8 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 November 2011 with over one third of the portfolio valued by external professional valuers.
In addition the Group has a lease portfolio which is treated as debt by the rating agencies and is valued by them at around £3.5 billion. The Group calculates this leasehold debt by using property yields, assuming occupancy of the property for the longer term. On this basis the value of leasehold debt at the year end was £4.9 billion.
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 accounting valuation is very sensitive to a number of assumptions and market rates which are likely to fluctuate in the future. To aid understanding of the impact that changes to the assumptions could have on the reported UK pension surplus, 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.
At the year end, the Group had a net deficit of £15 million (2010/11: £58 million deficit) in relation to defined benefit pension arrangements of which a £25 million surplus is in relation to its UK Scheme.
The decrease in the net deficit was predominantly due to strong asset returns more than offsetting a lower discount rate used to value the UK pension obligation.