27th Mar 2008 07:02
Kingfisher PLC27 March 2008 EMBARGOED UNTIL 0700 HOURSThursday 27 March 2008 Kingfisher plc Preliminary results for the year ended 2 February 2008 Group Financial Summary 2007/08 2006/07 Reported Constant Like-for-like Currency Change (LFL) change Change (52 weeks)Retail sales (1) £9,364m £8,676m +7.9% +8.0% +2.6%Retail profit (2) £498m £504m (1.2)% (2.7)% Adjusted pre-tax profit (3) £386m £397m (2.8)%Adjusted post-tax profit (3) £265m £277m (4.3)%Adjusted basic EPS (3) 11.3p 11.9p (5.0)% Full year dividend 7.25p 10.65p (31.9)% Net debt £1,559m £1,294m (1) For the UK businesses, reported results are for the 52 weeks ended 2 February 2008 (2006/07: 53 weeks ended 3 February 2007). Outside the UK, results are reported on a calendar month basis. Joint venture (JV) and Associate sales are not consolidated. (2) Retail profit is stated before central costs, exceptional items, acquisition intangibles amortisation and share of joint venture and associate interest and tax. (3) Adjusted measures are before exceptional items, financing fair value remeasurements and acquisition intangibles amortisation. A reconciliation to statutory amounts is set out in the Financial Review. Financial highlights • Group retail sales up 8.0%, +2.6% like-for-like. • Adjusted pre-tax profit down 2.8%. • Final dividend to be reduced by 50% to 3.4p with a similar reduction expected for the forthcoming interim dividend. • Property portfolio valued at £3.6 billion. Operating highlights • International (ex-UK, representing over half of Kingfisher's sales) delivered strong sales, up 11%, and retail profit growth up 5%. o Good performance in France (sales up 7.2%, retail profit up 13.2%). o Strong performance in Poland (sales up 31.1%, retail profit up 41.8%). o B&Q China to be restructured resulting in an exceptional charge of £22 million in 2007/08, with a further exceptional charge of around £11 million expected in 2008/09. • In the UK, sales grew 5%, underlying retail profit was flat before the impact of B&Q's biggest ever year of range and store renewal. Statutory reporting 2007/08 2006/07 Reported ChangePre-tax profit £395m £450m (12.2)%Post-tax profit attributable to equity shareholders £274m £337m (18.7)%Basic EPS 11.7p 14.4p (18.8)% Peter Jackson, Chairman, said: "The last year has been challenging for international retailers with increasedglobal economic uncertainty impacting consumer confidence, particularly here inthe UK. "Despite this there were many examples of good progress across the Group. In ourlargest single business, B&Q, we made a major step forward in improving B&Q'soffer to customers, introducing more new products and modernising more storespace than ever before, whilst capitalising well on more buoyant conditions inmany of our international markets. "At the end of the financial year the Board appointed Ian Cheshire as the newGroup Chief Executive to drive through the changes necessary to improve returnsand maximise our value for shareholders. It is early days but he is alreadymaking good progress, setting new targets and a clear direction for the Group. "The Board is confident that Ian and his team will bring about a majorimprovement in the performance of the Group, but to do that it will need tocontinue investing. Ian is already applying a great deal of rigour to ensurethat cash is spent wisely. Against this internal background and the externaleconomic environment, the Board has decided to reduce the final dividend byfifty percent and would expect to apply a similar cut to the forthcoming interimdividend. This would have the effect of rebasing the dividend to a level moreprudently covered by current earnings from which it could grow consistent withthe performance and capital needs of the Group." Ian Cheshire, Group Chief Executive, said: "I am delighted to be leading Kingfisher at this important time in ourdevelopment. We have a great opportunity to unlock the full potential of ourstrong assets. By changing how the Group as a whole is managed, tightening ouruse of capital and driving out higher cash returns from our businesses we intendto deliver a step-change in value for our shareholders. "No business can fully shield itself from economic cycles and given the currentstate of the financial markets, most commentators are expecting the short-termoutlook to worsen before it improves. Against this background, our prioritiesremain on improving cash margin and controlling costs. I remain confident thatKingfisher has a bright future with a strong position in an attractive retailsector and with geographic diversification in developed and developing markets." REVIEW OF THE YEAR The remainder of this release has three main sections: • Future Direction • Operational Review • Financial Review and preliminary Financial Statements. Future Direction Home improvement is an attractive segment of retail, benefiting from naturallong- term demand characteristics fuelled by demand for more new housing andmore frequent home renewal. The market also benefits from many products beingcommon across international markets, giving rise to global sourcing andeconomies of scale. Within this market Kingfisher is alone in having such a large and geographicallydiversified business. However, delivering more shareholder value from thisstrong strategic position will require changes in three key areas. Management Historically, Kingfisher has followed a decentralised management approach, withour retail businesses largely operating independently but participating inGroup-wide programmes for local advantage. This approach has successfullyresulted in the businesses being well adapted to local customers, but it has yetto deliver the Group's full potential. Going forward, the retail businesses will retain responsibility for best servingtheir local customers but a new senior team, working within a new managementstructure, will have collective responsibility for overall Group delivery ofresults as well as key existing cross-Group activities; global sourcing,own-brand development, common purchasing, IT, property and global talentmanagement. Accordingly, three new geographic divisions have now been established; UK,France and Other International. Three new management roles have been createdwith overall responsibility for all businesses in each geographic division andgood progress has been made identifying these executives. Philippe Tible, CEO ofCastorama France, has been appointed to lead the French division and anannouncement about the UK will be made shortly. These three roles will make up the core of the new Retail Board with cross-Grouppowers and incentives. Internal management information has been simplified andmore rigorous internal reporting - business performance monitoring and challengeprocesses - are being introduced. The Group Chief Executive will regularlyattend Board meetings of the UK, French and Polish businesses. Capital Capital invested to support Kingfisher's domestic and international developmenthas been significant to date, building strong retail and sourcing operationsacross the world and there continue to be new investment opportunities whichoffer good returns. However, debt has expanded in recent years and, with theglobal economic cycle now tightening, stabilising debt at current levels, priorto reducing it in due course is now a priority. Accordingly, we have set atarget of constant currency flat net debt for the current year. Consistent with this, existing capital deployed across the Group will bereviewed and new capital investment will continue, albeit at a slower rate.Annual capital investment will be around £400 million, reprioritised to thehighest and fastest-returning projects. Higher hurdle rates have already beenintroduced with immediate effect, driving quicker achievement of attractivereturns. The Board believes there are significant capital investment opportunities overthe coming years that will drive shareholder value. Given this investmentopportunity, combined with the Board's view of capital and performance, theBoard has therefore decided to reduce the final dividend by fifty percent to3.4p, making a total dividend for the year of 7.25p. Had the Board adopted thisfifty per cent reduction at the interim dividend stage, it would have declaredan interim dividend of 1.93p making a total dividend for the year of 5.33pcovered 2.1 times by adjusted earnings. The Board believes that such a level ofdividend would be appropriate for current business needs and is a level fromwhich it could grow consistent with the performance and capital needs of thecompany. Cash Returns Having invested significantly in the worldwide retail and sourcing operations,greater focus will now be placed on generating higher cash returns from theretail businesses. Operational improvements will be achieved through a greatercustomer focus and drive for operating cost efficiencies. Over the next three months the new management team will draw up new three yearoperating plans with clear, stretching, but achievable, sales growth, marginimprovement and cost reduction targets. Greater emphasis will also be placed onoptimising working capital. Accordingly, we will align management incentives tothe delivery of these plans, which will drive a step change in shareholdervalue. Operational Review - UK Retail sales £m 2007/08 2006/07 % Change % Change % LFL (Reported) Change 52 weeks 53 weeks 52 vs 53 weeks 52 vs 52 weeksUK 4,395 4,262 3.1% 5.1% 0.4% Retail profit £m 2007/08 2006/07 % Change (Reported)UK 153 183 (16.3)% UK includes B&Q in the UK, Screwfix and Trade Depot. UK Market The UK home improvement market* grew over the first half of the year, beforeweakening over the second half, as concerns over higher personal debt, less debtavailability and falling house prices began to weigh on the consumer. For thefull year, the market grew by around 3%, following falls of 0.5% last year and4% in 2005/06. Kingfisher's businesses outperformed the market by delivering sales growth of5.1%, despite disruption from B&Q's biggest year of change in its history. *Market data from GfK for the leading retailers of home improvement products andservices B&Q's total reported sales were £3.9 billion, up 2.7% (52 weeks). For the firsttime in three years, despite operating in a challenging market and withdifficult summer weather patterns, LFLs were up, by 0.6%. Total sales grew 4.8%over the first half but only 0.5% in the second half (26 weeks), reflecting atougher retail environment. However, good sales growth from revamped largestores and new ranges helped offset disruption from the ongoing renewalactivity. Retail profit was £131 million (2006/07: £163 million), after £29 million netrevenue costs of the renewal programme (£14 million revamping larger stores and£15 million range review clearance activity). Underlying retail profit wasbroadly maintained. The underlying gross margin rate, before range reviewclearance activity, was slightly up compared to last year, reflecting lesspromotional activity and a favourable sales mix towards new, higher marginproducts. Total costs grew 4% (52 weeks) with underlying cost inflation of 2%, net newspace growth of 2% and the additional costs of store revamping offset by costsavings. Renewal programme update B&Q aims to grow its share of home improvement expenditure by strengthening itsappeal to both the Do-it-Yourself (DIY) and Do-it-For-Me (DFM) customer. During2007/08, B&Q underwent the biggest year of change in its history, which includedupdating product ranges, improving its store environments and introducing moreservices, to ensure B&Q is the first and only store for a greater proportion ofcustomers' home improvement spend. New product ranges B&Q updated 60% of its overall product ranges during the year, supported by amajor new advertising campaign. Updated ranges of wall and window coverings,lighting, soft furnishings and kitchens sold particularly well as have bedroom,plumbing and flooring ranges which have been updated more recently. A betterunderlying performance is expected from these changes in 2008/09. Customer service Customer service requirements are typically the highest when shopping for roommake-over decorative items and major home improvement projects. Good advice,on-line and in-store, coupled with fast and efficient delivery and installationare key to good customer service. During the first half of the year, 800 in-store decorative advisers receivedpractical decorating skills training, to enable them to advise customers on howto style rooms. This initiative has been well received and will be extended tolaying flooring, tiling and the basics of plastering and fitting kitchens andbathrooms. Following a major overhaul of B&Q's installation and home delivery services, thetime from order to delivery and installation of kitchens and bathrooms has beenreduced by five weeks on average. Also, the B&Q website (www.diy.com) has been revamped, with customers now ableto use new free room design and bathroom planner software, view more than 35,000products on-line and check availability in their local store. In addition, 6,500products continue to be available for home delivery. Store development Having revamped around 5.5 million square feet of store space across the year, B&Q now has over half its store space in a modern format. Twenty seven largestore revamps, which encompass more clearly defined shop-within-shop sections,room-set displays and more space allocated to kitchens, bathrooms, flooring andtiling areas were completed. This programme remains on track for completion by2011. The 11 large new format stores which have been open for more than one year havedelivered targeted average sales densities of over £200 per square foot, 25%higher than comparable sized, older format stores. The higher sales productivity results from customers spending more in theexpanded kitchen, bathroom and associated project areas. In aggregate, therevamps, which on average have only 24 weeks trading data, have delivered salesuplifts of 13% higher than a 'control group'. However, measurement of thisrelative uplift excludes the benefits of updated product ranges, which are nowsubstantially available in all stores, including the 'control group' stores. B&Q now has 117 large stores (38 in the latest format) and 206 medium stores (ofwhich 151 have been modernised). Overall net space increased 2% during the year. UK Trade Screwfix total sales grew 28.0% (52 weeks), driven by the continued roll-out ofthe trade counters, which provide customers with immediate product availabilityand a bigger catalogue. An additional 55 outlets opened during the year, takingthe total to 93. Trade counters now represent almost 40% of total sales. Tosupport this continued growth, a second distribution centre was successfullycommissioned during the year in Stafford. Retail profit increased 6.4%, driven by the strong sales growth and fulfilmentefficiency gains, offset by start-up costs for the second distribution centreand an accelerated trade counter opening programme. Excluding the impact fromthese initiatives, retail profit would have been up around 14%. Trade Depot, which targets the general builder and specialist trade customer,opened two more branches during the year taking the total trading to six.Underlying trading remains encouraging. As part of the new management structure, an integrated review of the optimal UKtrade strategy across our various brands will be conducted. Operational Review - FRANCE Retail sales £m 2007/08 2006/07 % Change % Change % LFL (Reported) (Constant) ChangeFrance 3,224 2,955 9.1% 7.2% 2.6% Retail profit £m 2007/08 2006/07 % Change % Change (Reported) (Constant)France 237 206 15.2% 13.2% France includes Castorama and Brico Depot.All percentage movements below are in constant currencies. In France, Kingfisher's total sales grew 7.2% (LFL +2.6%). Eight new stores wereopened in the year and six were revamped, adding around 4% new space. Banque deFrance data shows that growth in comparable DIY store sales* was 3.0% for thefull year. Kingfisher's businesses outperformed the market by deliveringcomparable stores sales growth of 3.7% (on the same basis as Banque de France),despite disruption from store revamps. *Banque de France data including relocated and extended stores Retail profit grew 13.2% to £237 million with both businesses delivering goodprofit growth. Gross margins were up 90 basis points due to higher own-brandsales penetration, a 25% increase in direct sourcing and an improved sales mixacross both businesses. With a high level of freehold stores and strong costcontrol, Kingfisher's net cost inflation in France continues to run at around2%. This is expected to increase to around 3% for 2008/09. Castorama total reported sales grew 4.1% to £1.7 billion (+3.7% LFL, +5.6% on acomparable store basis), driven by good performances of new paint, decorativeand bathroom ranges. The sales participation of exclusive own-brand productscontinued to grow with sales of the decorative 'Colours' ranges almost doublingcompared to the prior year. Castorama continued its store modernisation programme, with six stores revampedduring the year. Forty-two per cent of total selling space is now in the newformat and these stores continue to outperform, with average sales densities 19%higher than older format stores. Brico Depot total reported sales increased 11.1% to £1.5 billion. LFL salesgrowth was +1.4% after around 2% of internal cannibalisation resulting from thedecision to open new stores in catchments where existing stores are trading atfull capacity. Sales were strong in building and decorative categories,supported by favourable weather and new ranges of power tools and indoor paint. Eight new stores opened in the year taking the total to 89, including theopening of three stores transferred from Castorama at the end of last year. The new SAP information technology platform was implemented to support BricoDepot's future growth. Since completion of the project stock availability andstock quality have improved. Operational Review - REST OF EUROPE Retail sales £m 2007/08 2006/07 % Change % Change % LFL (Reported) (Constant) ChangeRest of Europe 1,273 1,002 27.0% 22.8% 12.2% Retail profit £m 2007/08 2006/07 % Change % Change (Reported) (Constant)Rest of Europe 122 110 10.1% 5.9% Rest of Europe includes Poland, Italy, Spain, Ireland, Russia, Turkey JV andHornbach in Germany. Joint Venture and Associate sales are not consolidated. All percentage movements below are in constant currencies. Rest of Europe sales increased 22.8% to £1,273 million (+12.2% LFL) with 12 morestores (excluding Turkey JV) trading compared to the prior year. Retail profitincreased 5.9% to £122 million, reflecting strong growth in Poland offset byweaker performances from Castorama Italy and Hornbach (21% economic interest) ina difficult German market. Seventeen new stores were opened in the year across six countries, includingseven in Poland, five in Turkey and two in Russia. Sales for Castorama and Brico Depot in Poland increased 31.1% to £703 million(+22.5% LFL), boosted by buoyant consumer spending, strong property andconstruction markets and favourable weather. Retail profit increased 41.8% to£87 million as good cost control, a year on year doubling in direct sourcing andincreased own-brand penetration, helped to offset increasing wage inflation. Newranges, including exclusive own-brand professional tools and decorativeproducts, performed well. Seven new stores opened including the second Brico Depot, launched to meet thedemand for a more trade-orientated offer. Operating in a generally weak retail market, Castorama Italy sales declined 1.2%to £314 million (-2.4% LFL). Sales benefited from relocated and revamped stores,together with successful targeted promotional activity in bathroom accessory andflooring categories. Retail profit of £29 million was down slightly on the prioryear (2006/07: £31 million), with higher pre-opening and revamp costs. Increasedown-brand penetration and good cost control helped to offset the slow market. One new store was opened taking the total to 28. Two stores were revamped andone was relocated. In Ireland, where B&Q has eight stores, sales grew 6.8%, reflecting one newstore opening in the second half of the year. Brico Depot's expansion into Spaincontinued with 11 stores now trading with underlying trading encouraging. InRussia, two new Castorama stores were opened taking the total to five. Salesmore than doubled compared to the prior year (+25.6% LFL). Koctas in Turkey, a 50% joint venture, continued to grow sales and retail profitstrongly, benefiting from Kingfisher sourcing buying power and own-brandpenetration. Five new stores opened taking the total to 15. Hornbach, in whichKingfisher has a 21% economic interest, contributed £13 million to retailprofit; £6 million lower than last year, due to a difficult German market. Operational Review - ASIA Retail sales £m 2007/08 2006/07 % Change % Change % LFL (Reported) (Constant) ChangeAsia 472 457 3.4% 7.0% (0.1)% Retail profit £m 2007/08 2006/07 % Change % Change (Reported) (Constant)Asia (14) 5 n/a n/a Asia includes China, Taiwan and South Korea. Taiwan JV sales are notconsolidated. All percentage movements below are in constant currencies. Asia sales increased 7.0% to £472 million (-0.1% LFL) with retail losses of £14million (2006/07: £5 million profit). B&Q China sales increased 7.9% to £465 million reflecting new store openings andthe development of new ranges. Sales were flat on a LFL basis, impacted by aslowdown of new apartment sales in the major Chinese markets, and newregulations covering trading terms between retailers and suppliers. Following the regulation change, finalisation of B&Q China's 2007 supplieragreements was delayed until clarification with the authorities in August 2007.As a result of the required changes to some of its supplier arrangements, B&QChina's result for the year was impacted by £11 million, contributing to aretail loss of £12 million (2006/07: £8 million profit). The Chinese market remains fundamentally attractive with B&Q's operations in themajor cities continuing to show attractive returns. B&Q has expanded rapidlyover the last three years, adding 42 stores, tripling its store base. However,after several years of dramatic growth the business now needs a period ofconsolidation. Following a Group-led review, B&Q China will be restructuredgiving rise to an operating exceptional cost of £22 million in 2007/08, relatingto the accelerated write-down of assets. A further exceptional charge of around£11 million is expected to be recognised in 2008/09. Of the total £33 millionexceptional charge, the cash cost is expected to be £9 million. Other Asia B&Q Taiwan delivered a small profit for the year prior to it being sold to its50% joint venture partner on 4 January 2008. The exit from the two stores inSouth Korea was completed towards the end of the year. Following the disposal ofTaiwan and Korea, the B&Q Asia head office in Hong Kong will close in the firsthalf. Financial Review Financial summary A summary of the reported financial results for the year ended 2 February 2008is set out below. 2007/08 2006/07 Increase / £m £m (decrease)Revenue 9,364 8,676 7.9%Operating profit 457 501 (8.8)%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)%Dividends 7.25p 10.65p (31.9)%Underlying Return on Invested Capital (ROIC) 7.0% 6.9% 0.1pps A reconciliation of statutory profit to adjusted profit is set out below: 2007/08 2006/07 Increase / £m £m (decrease)Profit before taxation 395 450 (12.2)% Exceptional items (4) (49) (91.8)%Profit before exceptional items and taxation 391 401 (2.5)% Financing fair value remeasurements (5) (4) 25.0%Adjusted pre-tax profit 386 397 (2.8)% Income tax expense on pre-exceptional profit (125) (120) 4.2% Income tax on fair value remeasurements 2 1Minority interest 2 (1)Adjusted post-tax profit 265 277 (4.3)% Reporting period 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 comparativefinancial period being the 53 weeks ended 3 February 2007. This only impacts theUK operations with all of the other operations reporting on a calendar basis asa result of local statutory requirements. The effect of the 53rd week on the results of the Group's comparative period wasan increase of £79 million revenue. It has no significant impact on operatingprofit. So that the results are more readily comparable, all of the UKlike-for-like analysis has been calculated comparing the 52 weeks against 52weeks last year. Total reported sales grew 7.9% to £9.4 billion on a reported rate basis, and8.0% on a 52 week constant currency basis. During the year, an additional 80net new stores were added, taking the store network to 765 (excluding TurkeyJV). On a LFL basis, Group sales were up 2.6%. Operating profit before exceptional items grew by 0.2% to £453 million and fellby 8.8% to £457 million after exceptional items. The net interest charge for the year was £62 million, up £11 million on theprior year as a result of higher annualised interest rates and movements inexchange rates. This was partially offset by an increase in net interest returnon the defined benefit pension scheme. Adjusted pre-tax profit fell 2.8% reflecting challenging trading conditions inthe UK and China only being partially offset by positive performances in Franceand Poland. Taxation The effective rate of tax on profit has increased from 25% in the prior year to31% reflecting an increased level of tax on exceptional items net of a releaseof provisions in respect of prior years. The effective rate of tax on profitbefore exceptional items and excluding prior year tax adjustments and the impactof rate changes is 32.0% (2006/07: 32.0%). The Group effective tax rate is calculated as follows: Effective tax rate calculation 2007/08 Profit Tax Effective rate £m £mProfit before tax and tax thereon 395 (123) 31%Less exceptional profit and tax thereon (4) 14Less prior year adjustment - exceptional (16)Less prior year adjustment - non-exceptional 9Less adjustment attributable to rate changes (9)Total 391 (125) 32% The Group effective rate of tax is affected by the varying tax rates in thedifferent jurisdictions in which it operates, the mix of taxable profits inthose jurisdictions, the rules impacting on deductibility of certain costs andthe non-recognition of tax losses in start-up jurisdictions. Whilst theheadline tax rates in some of the jurisdictions in which we operate arereducing, there is also an increased focus on tax as a means of raising revenuefor the local economies and therefore the tax cost of multinationals is tendingto increase over time. We will continue to plan our tax affairs efficiently. The statutory tax rates in the jurisdictions in which the Group operates forthis financial year and expected rates in the next financial year are asfollows: Jurisdiction Statutory tax rate 2007/08 Statutory tax rate 2008/09UK 30% 30% - 28%France 34.43% 34.43%Poland 19% 19%Rest of Europe 12.5% - 37.25% 12.5% - 35%Asia 17.5% - 33% 17.5% - 25% Exceptional items The Group recorded a £4 million pre-tax exceptional income in the year. Netprofits on property disposals of £39 million and £5 million income on previouslywritten 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 Asiahead office, which will close during the first half of 2008/09. The Group alsosold its B&Q Taiwan 50% stake for £50 million recording a gross profit beforegoodwill of £27 million and net loss on disposal of £5 million. The £32 milliongoodwill was allocated to B&Q Taiwan on the acquisition of Castorama's minorityinterest in 2002/03. A further £22 million charge has been recorded as a resultof restructuring the B&Q China business. In total the B&Q China restructuring is anticipated to cost approximately £33million of which £9 million will be a cash cost. Earnings per share 2007/08 2006/07Basic earnings per share 11.7p 14.4pExceptional items (net of tax) (0.3)p (2.4)pFinancing fair value remeasurements (net of tax) (0.1)p (0.1)pAdjusted earnings per share 11.3p 11.9p Dividends The Board has proposed a final dividend of 3.4p per share, making the totaldividend for the year 7.25p per share, down 31.9% on the prior year. Thisdividend 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 June2008 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, tobe held on 5 June 2008. A dividend reinvestment plan (DRIP) is available to allshareholders who would prefer to invest their dividends in the shares of theCompany. The shares will go ex-dividend on 16 April 2008. For those shareholders electingto 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. Certificatesfor shareholders electing for the DRIP will be posted no later than 26 June2008. Return on Capital Employed (ROCE) ROCE reduced to 7.5% in the year (2006/07: 7.9%). ROCE is defined as adjustedoperating profit (pre exceptional operating profit excluding share of interestand tax of joint ventures and associates) divided by average capital employed. Return on invested capital (ROIC) ROIC is defined as net operating profit less adjusted taxes (adjusted operatingprofit excluding property lease and property depreciation costs less tax, plusproperty revaluation increases in the year) divided by average invested capital(average net assets less financing related balances and pension provisions plusproperty operating lease costs capitalised at the long-term property yield). Following the transition to IFRS, the Group elected not to revalue propertiesfrom 1 February 2004. However, property appreciation is an integral part of aROIC measure and therefore Kingfisher continues to include revaluation gains andthe current market value of our properties in ROIC calculations. ROIC declined from 8.7% to 6.5% in the year primarily due to a reduction inproperty revaluation gains on owned properties on a like for like basis. In2006/07 these gains increased ROIC by 2.6%. Underlying ROIC increased from 6.9% to 7.0%. Underlying ROIC assumes propertiesappreciate in value at a steady rate over the long-term. When calculating theunderlying ROIC, short-term variations in property values more or less than thelong-term mean are excluded. ROIC excluding goodwill Kingfisher's sales, invested capital and underlying ROIC excluding goodwill aredisclosed below by geography: Retail Sales Proportion of Invested Capital Proportion of Returns % £bn Group sales % (IC) Group IC % (ROIC) (2) (1) £bn (2)UK 4.4 47% 6.1 65% 7%France 3.2 34% 1.7 18% 12%Other International 1.8 19% 1.6 17% 10%Group total 9.4 100% 9.4 100% 9% 1) For the UK businesses, reported total sales figures are for the 52 weeksended 2 February 2008. Outside the UK, figures are on a calendar month basis. 2) Excluding goodwill of £2.5 billion but including smoothed propertyappreciation and leases capitalised at long- term yields. Cashflow 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 aresult of a cash outflow recorded in working capital of £36 million, whereas in2006/07 a cash inflow of £124 million was recorded. Inventory at £1,873 millionwas £342 million greater than last year reflecting an increased number ofstores, extra inventory from the revamp programmes at B&Q UK and CastoramaFrance, the effect of exchange rates (£118 million) and buying ahead as a resultof the timing of Easter. Net capital expenditure was £411 million (2006/07: £216 million) which has risenyear on year as a result of a rise in the level of acquisitions within theGroup'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). Capital expenditure Following the appointment of a new Group Chief Executive the capital allocationand approval process has been tightened with the aim of prioritising a lowerrate of annual capital investment towards the highest and fastest returningprojects: - The management team will draw up new three year operating plans whichlead into the budget process for the following year. This process drives the keystrategic capital allocation decisions and the output is reviewed by the Board,twice a year. - The capital expenditure committee will now be chaired by the GroupChief Executive and will include the Group Property Director as well as theGroup Finance Director. It will review all projects between £0.75 million and£15.0 million (including the capitalised value of lease commitments). Projectsabove this level are approved by the Board although all projects above £0.75million are notified to the Board. - Investment criteria and hurdle rates have been revised with morechallenging hurdle rates for IRR (Internal Rate of Return) and payback and theintroduction of a new target for year three returns versus initial cashinvestment. - An annual post-investment review process will continue to review theperformance of all projects above £0.75 million which were completed in theprior year. The findings of this exercise will be considered by both the newRetail Board and the main Board and directly influence the assumptions forsimilar 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 proceedsfrom disposals were received during the year, £115 million of which came fromproperty disposals. Payments to acquire businesses in the year amounted to £1 million (2006/07: £2million) which related to the purchase of minorities in China. Financing At the year end, the Group had undrawn committed bank facilities available of£675 million. The Group has no significant debt maturities until 2010. Thematurity profile of Kingfisher Plc's debt and financing arrangement isillustrated at: www.kingfisher.com/investors/debtinvestors/debtmaturity Kingfisher aims to smooth the maturity profile of its debt by issuing debt withdifferent maturities and by utilising committed bank revolving credit facilitiesto provide additional liquidity. In March 2007, the Group obtained new committed revolving credit facilitiestotalling £275 million with a number of banks and a £25 million committed termbank loan facility. These facilities mature in March 2010 and are available tobe drawn to support the general corporate purposes of the Group. In July 2007,the Group extended the maturity of its £500 million syndicated bank revolvingcredit facility by one year, such that it now matures in August 2012. The terms of the US Private Placement note agreement and the committed bankfacilities require that the ratio of operating profit to net interest payablemust be no less than 3:1. The Group comfortably complied with this covenant.The interest rates paid by the Group under these financing arrangements arebased on LIBOR plus a margin. The margins are fixed and are not subject tochange in line with credit ratings. Property The values are based on valuations performed by external qualified valuers wherethe key assumption is the estimated yields. The average income yields used were6.3% 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 £115million including £73 million on the sale of its national distribution centre inWorksop, which it retained the right to lease for 24 years. This is consistentwith the Group's policy of recycling property when economically attractive. Theproceeds of the transaction were used to repay existing debt and to invest inKingfisher's worldwide store opening programme, including further freeholdacquisitions. The Group owns a significant property portfolio, most of which is used fortrading purposes. If the Group had continued to revalue this it would have hada 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 £386million increase against the prior year and a £76 million increase on a constantcurrency basis. Pensions The Group holds a net pension surplus of £77 million in relation to definedbenefit pension arrangements of which £110 million is in relation to its UKScheme. In 2006/07 the Group held a deficit of £55 million. This increase wasas a result of additional payments to the UK pension scheme (£101 million waspaid compared to a normal contribution of around £45 million per annum) andincreases in the discount rate used to calculate the defined benefit obligationfrom 5.3% to 6.2% as a result of increases to corporate bond rates over theyear. This was partly offset by an increase in the inflation rate assumptionfrom 2.9% to 3.3% and changed mortality rates with an assumption that peoplewill live longer. The mortality change increased the obligation by approximately£34 million and ensures that these assumptions remain in line with currentmarket best estimates. The approach used to prepare the pension valuation is in line with currentmarket practise and international accounting standards, and has been appliedconsistently. This uses a number of assumptions which are likely to fluctuate inthe future and so may have a significant effect on the valuation of the scheme'sassets and liabilities. Further disclosures of the assumptions used (including mortality assumptions)and sensitivities are provided in note 8.Operational Review - DATA BY COUNTRY as at 2 February 2008 Store numbers Selling space Employees (000s sq.m.) (FTE)B&Q 323 2,368 26,427UK Trade 99 27 2,603Total UK 422 2,395 29,030Castorama 98 972 12,022Brico Depot 89 476 6,001Total France 187 1,448 18,023Castorama Poland 42 334 7,520Castorama Italy 28 175 2,114B&Q Ireland 8 51 590Brico Depot Spain 11 60 684Castorama Russia 5 44 1,282Koctas Turkey 15 78 1,637Total Rest of Europe 109 742 13,827B&Q China 62 585 10,358Total Asia 62 585 10,358Total 780 5,170 71,238 Operational Review - FULL YEAR BY GEOGRAPHY - year ended 2 February 2008 Retail sales £m (1) % % % LFL Retail profit £m (2) % 2007/08 2006/07 Change Change Change 2007/08 2006/07 Change (Reported) (Constant (Reported) currency)UK (3) 4,395 4,262 3.1% 5.1% 0.4% 153 183 (16.3)% 52 weeks 53 weeks 52 vs 53 weeks 52 vs 52 weeksFrance (4) 3,224 2,955 9.1% 7.2% 2.6% 237 206 15.2%Rest of Europe 1,273 1,002 27.0% 22.8% 12.2% 122 110 10.1%(5)Asia (6) 472 457 3.4% 7.0% (0.1)% (14) 5 n/aInternational 4,969 4,414 12.5% 10.8% 4.6% 345 321 7.4%Total 9,364 8,676 7.9% 8.0% 2.6% 498 504 (1.2)% 2007/08 £1 = 1.4472 euro 2006/07 £1 = 1.4720 euro (1) For the UK businesses, reported total sales figures are for the 52 weeks ended 2 February 2008 (2006/07: 53 weeks ended 3 February 2007). Outside the UK, figures are on a calendar month basis. Joint venture (JV) and Associate sales are not consolidated. (2) Retail profit is stated before central costs, exceptional items, acquisition intangibles amortisation and share of joint venture and associate interest and tax. (3) B&Q, Screwfix and Trade Depot. (4) Castorama and Brico Depot. (5) Rest of Europe includes Poland, Italy, Spain, Ireland, Russia, Turkey JV and Hornbach in Germany. (6) Asia includes China, South Korea and Taiwan JV. Enquiries: Ian Harding, Group Communications Director 020 7644 1029Nigel Cope, Head of Communications 020 7644 1030Sarah Gerrand, Head of Investor Relations 020 7644 1032 Further copies of this announcement are available at www.kingfisher.com, orfrom: The Company Secretary, Kingfisher plc, 3 Sheldon Square, London, W2 6PX. Company Profile Kingfisher plc is Europe's leading home improvement retail group and the thirdlargest in the world, with 780 stores in nine countries in Europe and Asia. Itsmain retail brands are B&Q, Castorama, Brico Depot and Screwfix. Kingfisher alsohas a 21% interest in, and strategic alliance with, Hornbach, Germany's leadingDIY Warehouse retailer, with over 120 stores in Germany and eight other Europeancountries. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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