1st Aug 2006 07:03
Travis Perkins PLC01 August 2006 1 August 2006 TRAVIS PERKINS PLC INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2006 Highlights • Turnover up 9.3% to £1,411.7m • Profit before tax increased by 0.4% to £110.4m • Operating profit up by 1.3% to £139.2m • Basic earnings per share improved by 2.4% to 63.3p • Free cash flow up 54.8% to £161.3m • Interim dividend per share increased by 10% from 11p to 12.1p • Targeted year 2 synergies and buying gains from Wickes integration £55m secured • 19 New branches opened taking total to 1,002 • Benchmarx launched - a new brand serving the small specialist joiner Geoff Cooper, Chief Executive, said: "Against a background of improving yet still challenging market conditions, wehave delivered improved Group operating profits, profits before tax, earningsper share and cash flow. Both our merchant and retail divisions have achievedincreases in market share, profit before tax and productivity. We have securedour targeted year two synergy and buying gains from the Wickes transaction, withthose targets some £20 million in excess of the estimated for synergies madewhen the transaction was commenced. "We maintain our view that there will be a gradual recovery in market activityin the second half and we are well positioned to benefit from this." Enquiries: Geoff Cooper, Chief ExecutivePaul Hampden Smith, Finance DirectorTravis Perkins plc +44 (0) 160 468 3221 David Bick/Trevor PhillipsHolborn Public Relations +44 (0) 207 929 5599 Interim Results 6 Months 6 Months Increase 30 June 30 June 2006 2005 £m £m Turnover 1,411.7 1,291.2 9.3% Operating profit 139.2 137.4 1.3% Profit before taxation 110.4 110.0 0.4% Free cash flow (note 12) 161.3 104.2 54.8% Basic earnings per ordinary share 63.3p 61.8p 2.4% Interim dividend per share 12.1p 11.0p 10.0% Overview Our results for the six months to June show good progress in improving, yetstill challenging market conditions. As expected, our markets are recovering gradually from the poor tradingconditions experienced in 2005. The rate of the recovery in the retail market isbeing held back by further pressures on consumers' disposable incomes. However,a stronger housing market over the past winter has boosted the trade market,where repair and maintenance activity has increased. Although activity levels in both our markets were lower in the first half of2006 than in the comparable period in 2005, we have achieved an improvedfinancial performance on all main key indicators. A series of measures tofurther improve customer service, product ranges and operational performancehave helped us grow market share on a like-for-like basis in both our divisions.This, together with the growth in our business derived from our branch expansionprogramme, has enabled us to continue capturing scale benefits. Turnover, at £1,412 million, was up by 9% over the comparable period last year,mainly reflecting an extra 6 weeks trading at Wickes and the impact of ourbranch expansion programme. Group operating profits were up by 1.3% with theGroup's operating margin decreasing from 10.6% to 9.9% - mainly reflecting theimpact of Wickes' structurally lower margin, and the full year effect of thesuccessful investment in trade pricing started at the end of the second quarterin 2005. Profit before tax increased by 0.4% to £110.4 million with ayear-on-year improvement from both the Wickes related business and from the restof the Group. Basic earnings per share increased by 2.4% to 63.3p. In addition to improved profits, we have focussed on improving returns bygenerating an increased cash flow. Like-for-like free cash flow (as shown innote 12), calculated before expansionary capital expenditure, special pensioncontributions and dividends increased by 55%. Despite our continued expansionarycapital expenditure and a special pension contribution, we generated £110million of cash in the period. At 30 June 2006 net debt was £845.2 million. On arolling 12 month basis our interest cover (shown in note 4) is 4.7 times and ournet debt/EBITDA ratio (shown in note 13) has reduced to 2.6 times. The integration of Wickes continues to progress smoothly. The first phase ofrationalisation has been successfully completed, with a second and final phaseexpected to be largely complete in early 2007. We are particularly pleased thatby the half way stage in the year, we have secured our targeted year two synergyand buying gains from the Wickes transaction, with those targets some £20million in excess of the estimate for synergies made when the transaction wasannounced. Apart from the slow market recovery, all other aspects of the Wickestransaction have proceeded as expected and we have confirmed our plans to expandits estate. Our network expansion programme has continued to deliver good growth to all ourmerchant and retail brands, with 19 new branches added in the first half. As afurther development of our strategy, we entered the specialist trade joinerymarket in July, with the launch of our first "Benchmarx" store. During the first half we made significant progress with the integration andfunding of the Group's two final salary pension schemes. On 3 July 2006, theWickes' pension scheme was merged into the Travis Perkins' scheme whilstmaintaining the benefit profiles of the predecessor schemes. A top-up paymentof £8.5 million was made to bring the funding level of the Wickes' scheme inline with that of the TP scheme. Agreement has been reached with the Trusteesfor a payment schedule which is aimed at eliminating the deficit of the newlycombined scheme over a period of nine years. At the end of June 2006, thepension deficit net of tax was £70 million, a reduction of £30 million sinceDecember reflecting higher corporate bond yields and a special contribution intothe TP and Wickes pension schemes over the six month period of £3.3 million. With gradually recovering markets, an internal strategy which is deliveringimproved performance and a proven expansion strategy, the Board is increasingthe interim dividend by 10% from 11p to 12.1p reflecting our strong cashgeneration and continued confidence in the prospects of the Group. Markets The progress of our market so far this year has broadly followed the pattern weexpected for 2006, but with the recovery in our trade market running ahead ofthe recovery in retail. Conditions in both our markets in the first half year improved compared to thetrends seen at the end of 2005. Trading conditions in the second quarter werestronger than the first. In particular the activity in the trade market, wherematerial supply is related more to repairs and maintenance, held up better thanin the more discretionary retail market, where activity is driven more byimprovement projects. The 2005 trend of high product cost inflation caused mainly by rising energy andraw material costs continued. This has had most impact on heavy buildingmaterials and plumbing and heating products. Overall weighted average productcost inflation was 3.1% in the trade business but zero in the retail business,reflecting deflation in lightside products. As we predicted, there has been a marked slowdown in the rate of space expansionin both the trade and retail sectors, with retail space contracting for thefirst time for many years. Trade capacity has grown by an estimated 3% - 1%below the growth experienced in 2005 - and retail space reduced by an estimated1% - compared with an expansion rate of 4% in 2005, with competitors closing anddownsizing stores. Operational Performance Against a background of improving yet still challenging market conditions, wehave continued the strategies implemented in 2005 to drive volumes profitably,to exceed buying gain targets and to manage tightly both costs and cash. Theseactions, despite the fact that markets have shrunk since the first half of 2005,have delivered improved Group operating profits, profits before tax, earningsper share and cash flow. Both our merchant and retail divisions have achievedincreases in market share, profit before tax and productivity. Turnover at £1,412 million was 9.3% ahead of last year mainly reflectingcontributions of 7.1% from an additional one and a half months of Wickestrading, 3.1% from other acquisitions and brown field expansion, and 0.6% fromone additional trading day. Like-for-like sales per trading day for the Groupwere lower by 1.6%, an improvement on the trend seen at the end of 2005. Like-for-like sales per trading day in merchanting improved by 0.2%, with ourspecialist business 1.8% ahead and general merchanting lower by 0.7%. Thespecialist division performance was driven by continued strong performance atCCF and an improving trend in City Plumbing following management's successfulimplementation of our recovery plan. In general merchanting, growth continues tobe strongest in the South East. All seven of our merchanting businesses showedimproved trading in the second quarter compared to the first. Our retail business reported overall like-for-like performance of minus 7.0%,the core business was 7.8% lower and showroom 2.8% lower. However, we haveachieved a significant improvement in like-for-like trends in the secondquarter. Total like-for-like turnover on a delivered basis has been lower by4.4% in the last four weeks compared with last year and 1.6% on an orderedbasis. The relative strength of showrooms reflects gains made in our refreshedkitchen range. Around one third of our retail business is from trade customerswith a higher bias towards trade in the South East. This is reflected in therelative strength of both trade related products and the South East division.Market data shows that we gained a small amount of like-for-like and overallmarket share during the first half, as competitors' aggressive promotions werescaled back from levels seen in the fourth quarter of 2005. Merchanting gross margin before synergies is 1.3% lower than last year,reflecting the full year effect of the selective margin investment we made fromthe second quarter of 2005 onwards. Like-for-like sales growth, which hadpreviously been lagging the market, was brought up to market levels in thesecond half of 2005 and is now ahead of the market for the first six months of2006. Overall we continue to make a net positive profit contribution from thisinvestment. Our retail business has improved pre-synergy gross margins by more than 1.5%over the period. This has been achieved by a combination of positive mix as wecontinue to invest in the breadth and depth of our ranges, together with otherbuying improvements including gains on shrinkage. On average we anticipateincreasing the number of SKUs in our extra stores by around 1,500 to 9,000 thisyear. This will benefit the rest of our estate as the most successful productsare rolled out. In total, some 15% of our retail sales are now generated fromthe new products introduced since the acquisition of Wickes. This is enabled byseveral other initiatives to improve space utilisation, including the selectivereallocation of showroom display areas in favour of faster selling products andthe twinning of showrooms in adjacent stores in single catchments. Our continued robust controls on costs have been successful in driving improvedefficiency. Overall productivity per employee is 4.9% ahead in the tradebusiness reflecting a like-for-like reduction in employees of over 400, and 6.6%ahead on the retail side, a like-for-like reduction in employee numbers of over500 since June 2005. Our original projections for 2006 showed 4% inflation onour like-for-like overhead base. We have saved £20 million against thisprojection. In addition to productivity and other improvements, we have beenable to mitigate inflationary increases by several initiatives, which includecombining non-brand facing central support functions in merchanting and retail,notably in finance and IT, the tight control of discretionary capital andrevenue expenditure and the improvement of procurement processes. Our seniormanagement team in addition to its functional responsibilities is tasked withimproving efficiency in specific areas of the whole business, for example byimproving distribution productivity. These 'best practice' projects have alreadydelivered good results. Overall the merchanting business (including synergies but not property profit)shows a sector leading earnings before interest, tax and amortisation margin ("EBITA") of 11.0%. Similarly, the retail business (including synergies but not property profit) isdelivering a sector leading EBITA margin of 6.2%. Development of the Group The Group went through the 1,000 site milestone during June reaching 1,002branches by the end of the month, an increase of 19 in the period. To celebratethis achievement we launched a major community initiative to help deliver "1,000projects in 1,000 places in 1,000 days". This is designed to engage all ourcolleagues, working collaboratively with suppliers and customers in upgradingcommunity facilities in the places where we trade. The merchanting business added a net 16 new branches being 5 acquisitions and 12brownfields less one consolidation. The pipeline for new openings continues tobe strong. We are making good progress against our objective of driving additional valuefrom our trade freehold property portfolio. We are progressing a modest saleand leaseback of a small number of sites, and will be reinvesting the proceeds,not expected to be more than £40 million, in business expansion. We continue tosearch for alternative locations for sites with a high alternative use value.We have also approved several projects to develop a multi brand presence inselected sites. The retail business has added 3 stores including 1 small store and 2 standardstores. In addition we have converted 1 standard store to an extra store. Thishas added 3.8% space to the business. There are an additional 7 stores and 5conversions to extras committed which will open in the next 18 months. Net ofconsolidations, this will add 7% space to the business. The largest proportionof these stores are expected to open in the first quarter of 2007, with some2006 launch costs and nearly a full year of extra revenue occurring next year. Following a strategic review in 2005 which examined new opportunities inspecialist distribution, we determined the specialist small joiner market to bethe most attractive in terms of our current activities, scale and potential forfuture expansion. In early July we launched an additional brand, Benchmarx, to serve the specificneeds of specialist trade joiners, who install kitchens, doors and windows innew and existing homes and other buildings. Our research shows that this groupof tradesmen do not often have their supply needs fully met by currentproviders. Our first branch was opened in Croydon on 10 July 2006. We expect tohave at least 6 branches trading by the year-end. We already supply all therequired products to retail and general trade customers through our existingbusinesses, and anticipate synergies with our existing supplier base as wequickly establish a national presence, starting in the South East. The ManagingDirector of this, our eighth division is Rob Gladwin who has been promoted toRetail Director of Wickes. Health, Safety and Environment We remain committed to the achievement and maintenance of the highest standardsin health and safety. Accident frequency and severity rates have shown a smallimprovement during the first half of 2006. We have updated our Environmental Management System to be compliant withrevisions to the International Standard (ISO 14001 (2004)) and we continue todevelop our environmental management approach. Our core environmental objectivesare to continue to; manage down carbon emissions, decrease the amount of wastegoing to landfill and have zero notifiable environmental incidents across theestate. People and Organisation We were delighted to welcome Andrew Simon and Stephen Carter to our Board inFebruary and April respectively as Non-executive Directors. Andrew previouslyheld roles as Chairman and Chief Executive of Evode plc and holds a number ofother non-executive positions. Stephen is Chief Executive of Ofcom and waspreviously Managing Director and Chief Operating Officer for UK and Ireland forNTL. We continue to strengthen our senior management team. Carol Kavanagh will bejoining us as Group Human Resources Director in September from a FTSE 100retailer. In addition Robin Proctor will join us in September as Group SupplyChain Director. His previous role was with a FTSE 250 retailer and tradesupplier. We are making good progress in our search for the Managing Directorof Wickes following the announcement of Richard Bird's retirement as planned, atthe end of 2006. This period has also seen improvements in a number of central functions. We havecreated a Group risk and assurance function, including audit and security,together with new Group property and IT structures. We have also appointed a newGroup toolhire director and a new health and safety director. We willincreasingly leverage best practice across the Group. It is our intention tocontinue to run those elements of the organisation delivering the Wickes' brandproposition separately, reporting to the Wickes' Managing Director. We have initiated a campaign to reduce employee turnover across the Group by aseries of initiatives starting with a rigorous induction programme. Turnover hasnow fallen to 21.5% having reduced to 24.6% in the full year 2005. Outlook The overall progress of the market so far this year has been in line with ouroriginal expectations, although trade has been stronger and retail weaker. Westill expect a gradual improvement in the second half of the year. Our Julysales performance is in line with the improving trend experienced in the lastquarter. The majority of lead indicators continue to exhibit a positive trendincluding property transactions, house price inflation, new house starts,consumer confidence and mortgage equity withdrawal. These need to be balancedwith some uncertainty about unemployment levels and interest rate expectations. Against this overall background, we have, in both our merchant and retaildivisions, gained market share, extended our branch network, lowered the cost ofproducts for resale, raised productivity and cost performance and across theGroup we have strengthened both our organisational structure and seniormanagement team. We are well placed to take advantage of the anticipated marketgrowth. Consolidated income statement Six months 30 June 2006 Six months 30 June 2005 Year 31 December 2005 (Reviewed) (Reviewed) (Audited) Non- Identified Total Non- Identified Total Non- Identified Total Wickes impact of Wickes impact of Wickes impact of related Wickes related Wickes related Wickes (Note (Note (Note below) below) below) £m £m £m £m £m £m £m £m £m Revenue 987.2 424.5 1,411.7 938.5 352.7 1,291.2 1,881.0 759.8 2,640.8Operatingprofit before property profits 101.8 33.4 135.2 106.2 31.2 137.4 208.3 59.7 268.0 Property profits - 4.0 4.0 - - - - - - Operating profit 101.8 37.4 139.2 106.2 31.2 137.4 208.3 59.7 268.0 Finance income (Note 4) 0.7 0.9 1.6 0.3 - 0.3 0.4 - 0.4 Finance costs (Note 4) (0.6) (29.8) (30.4) (4.9) (22.8) (27.7) (10.8) (50.9) (61.7) Profit before taxation 101.9 8.5 110.4 101.6 8.4 110.0 197.9 8.8 206.7 Tax (Note 5) (32.2) (1.7) (33.9) (32.3) (3.2) (35.5) (61.9) (4.0) (65.9) Profit for the period 69.7 6.8 76.5 69.3 5.2 74.5 136.0 4.8 140.8 Earnings per ordinary share (Note 6) Basic 63.3p 61.8p 116.8p Diluted 62.8p 61.0p 115.6p Proposed dividend per ordinary share (Note 7) 12.1p 11.0p 34.0p All results relate to continuing operations. Note The column headed "Identified impact of Wickes" includes the post acquisitionresult of Wickes, together with the synergies that have arisen from specificprojects and the additional finance related costs incurred by the group, as aresult of the acquisition. Statement of recognised income and expense Six months 30 Six months Year June 30 June 31 Dec 2006 2005 2005 (Reviewed) (Reviewed) (Audited) £m £m £m Actuarial gains and losses on defined benefit pension scheme 39.6 (8.6) 2.4Gains/(losses) on cash flow hedges 5.0 - (5.0) Tax on items taken directly to equity (14.4) 1.7 10.1 Net income/(expense) recognised directly in equity 30.2 (6.9) 7.5Transferred to income statement on cash flow hedges 0.6 - 0.5Tax on items transferred from equity (0.2) - (0.1)Profit for the period 76.5 74.5 140.8 Total recognised income and expense for the period 107.1 67.6 148.7 Consolidated balance sheet As at As at As at 30 June 30 June 31 Dec 2006 2005 2005 (Reviewed) (Reviewed) (Audited) £m £m £mASSETSNon-current assetsProperty, plant and equipment 439.2 452.3 445.2Goodwill 1,279.9 1,239.2 1,273.8Other intangible assets 162.5 162.5 162.5Derivative financial instruments - - 1.3Investment property 4.0 4.0 4.1Deferred tax asset 30.0 53.8 42.9 Total non-current assets 1,915.6 1,911.8 1,929.8 Current assetsInventories 270.1 277.2 263.2Derivative financial instruments 0.3 - -Trade and other receivables 393.4 361.8 322.4Cash and cash equivalents 130.8 26.1 56.1 Total current assets 794.6 665.1 641.7 Total assets 2,710.2 2,576.9 2,571.5 Consolidated balance sheet (continued) As at As at As at 30 June 30 June 31 Dec 2006 2005 2005 (Reviewed) (Reviewed) (Audited) £m £m £mEQUITY AND LIABILITIESCapital and reservesIssued capital 12.2 12.1 12.1Share premium account 168.2 161.8 165.6Revaluation reserves 26.2 26.5 26.3Own shares (8.1) - (8.1)Hedging reserve 0.7 (5.3) (3.2)Accumulated profits 643.0 496.9 565.3 Total equity 842.2 692.0 758.0 Non-current liabilitiesInterest bearing loans and borrowings 965.2 1,025.8 1,027.4Retirement benefit obligation 99.9 179.5 142.8Long-term provisions 11.9 7.6 13.2Deferred tax liabilities 73.2 79.0 72.6Derivative financial instruments 25.4 - - Total non-current liabilities 1,175.6 1,291.9 1,256.0 Current liabilitiesInterest bearing loans and borrowings 2.8 5.3 2.9Unsecured loan notes 8.0 8.9 8.2Derivative financial instruments - - 5.1Trade and other payables 609.8 490.3 482.3Tax liabilities 39.2 61.2 33.3Short-term provisions 32.6 27.3 25.7 Total current liabilities 692.4 593.0 557.5 Total liabilities 1,868.0 1,884.9 1,813.5 Total equity and liabilities 2,710.2 2,576.9 2,571.5 The interim financial statements were approved by the board of directors on 31July 2006. Signed on behalf of the board of directors. G. I. Cooper )P. N. Hampden Smith ) Directors Consolidated cash flow statement Six months Six months Year 30 June 30 June 31 Dec 2006 2005 2005 (Reviewed) (Reviewed) (Audited) £m £m £mOperating profit 139.2 137.4 268.0 Adjustments for: Depreciation of property, plant and equipment 26.9 26.8 54.5 Other non cash movements 1.7 1.3 2.4 (Gain)/loss on disposal of property, plant and equipment (4.3) (0.1) 0.7 Operating cash flows before movements in working capital 163.5 165.4 325.6(Increase)/decrease in inventories (6.0) (3.9) 12.4Increase in receivables (67.9) (44.0) (1.5)Increase in payables 130.8 42.0 2.8Cash payments to the pension scheme in excess of the charge to income statement (3.3) (1.5) (28.5) Cash generated from operations 217.1 158.0 310.8Interest paid (28.9) (14.7) (38.6)Income taxes paid (28.9) (26.7) (47.0) Net cash from operating activities 159.3 116.6 225.2 Cash flows from investing activitiesInterest received 0.7 0.2 0.4Proceeds on disposal of property, plant and equipment 5.1 3.1 1.4Purchases of property, plant and equipment (21.0) (39.7) (71.6)Acquisition of businesses net of cash acquired (8.9) (1,020.7) (1,045.5) Net cash used in investing activities (24.1) (1,057.1) (1,115.3) Financing activitiesProceeds from the issue of share capital 2.7 2.6 6.4Purchase of own shares - - (8.1)Payment of finance lease liabilities (2.4) (1.1) (2.3)Repayment of unsecured loan notes (0.2) (0.1) (0.8)(Decrease)/increase in bank loans (32.8) 873.6 872.7Dividends paid (27.8) (25.3) (38.6) Net cash (used in)/from financing activities (60.5) 849.7 829.3 Net increase/(decrease) in cash and cash equivalents 74.7 (90.8) (60.8)Cash and cash equivalents at beginning of period 56.1 116.9 116.9 Cash and cash equivalents at end of period 130.8 26.1 56.1 Notes to the interim financial statements 1 General information and accounting policies The Interim Financial Statements have been prepared in accordance withInternational Financial Reporting Standards (IFRS) adopted for use in theEuropean Union. Basis of preparation The Interim Financial Statements have been prepared on the historic cost basis,except that derivative financial instruments are stated at their fair value.The Interim Financial Statements include the accounts of the company and all itssubsidiaries. The financial information for the six months ended 30 June 2006 and 30 June 2005is unaudited and does not constitute statutory accounts as defined in section240 of the Companies Act 1985. This information has been reviewed by Deloitte &Touche LLP, the group's auditors, and a copy of their review report appears onpage 22 of this Interim Report. A copy of the statutory accounts for the yearended 31 December 2005 as prepared under IFRS has been delivered to theRegistrar of Companies. The auditors' report on those accounts was unqualified. The principal accounting policies applied in preparing the Interim FinancialStatements are set out below. Revenue recognition Revenue is recognised when goods or services are received by the customer andthe risks and rewards of ownership have passed to them. Revenue is measured atthe fair value of consideration received or receivable and represents amountsreceivable for goods and services provided in the normal course of business, netof discounts and value added tax. Business combinations and goodwill All business combinations are accounted for using the purchase method. The costof an acquisition represents the cash value of the consideration and/or the fairvalue of the shares issued on the date the offer became unconditional, plusexpenses. At the date of the acquisition an assessment is made of the aggregatefair value of the net assets acquired. It is this fair value, which isincorporated into the consolidated accounts. Goodwill represents the excess of the cost of acquisition over the share of theaggregate fair value of identifiable net assets (including intangible assets) ofa business or a subsidiary at the date of acquisition. Goodwill is initiallyrecognised as an asset and allocated to cash generating units, then at leastannually, is reviewed for impairment. Any impairment is recognised immediatelyin the income statement and is not subsequently reversed, as such, goodwill isstated in the balance sheet at cost less any provisions for impairment in value. Intangible assets Intangible assets identified as part of the assets of an acquired business arecapitalised separately from goodwill if the fair value can be measured reliablyon initial recognition. Intangible assets are amortised to the income statementon a straight-line basis over a maximum of 20 years except where they areconsidered to have an indefinite useful life. In the latter instance they arereviewed annually for impairment. Property, plant and equipment Property, plant and equipment is stated at cost or deemed cost less accumulateddepreciation and any impairment in value. Assets are depreciated to theirestimated residual value on a straight-line basis over their estimated usefullives as follows: • Buildings - 50 years or if lower, the estimated useful life of the building or the life of the lease.• Plant and equipment - 4 to 10 years.• Land is not depreciated. Assets held under finance leases are depreciated over their expected usefullives on the same basis as owned assets, or where shorter the term of therelevant lease. The gain or loss arising on the disposal or retirement of an asset is determinedas the difference between the sale proceeds net of expenses and the carryingamount of the asset in the balance sheet and is recognised in the incomestatement. Where appropriate, the attributable revaluation reserve remaining inrespect of properties revalued prior to the adoption of IFRS is transferreddirectly to accumulated profits. Investment properties Investment properties, which are held to earn rental income or for capitalappreciation or for both, are stated at deemed cost less depreciation.Properties are depreciated to their estimated residual value on a straight-linebasis over their estimated useful lives, up to a maximum of 50 years. Rental income from investment property is recognised in the income statement ona straight-line basis over the term of the lease. Notes to the interim financial statements 1 General information and accounting policies (continued) Leases Finance leases, which transfer to the group substantially all the risks andbenefits incidental to ownership of the leased item, are capitalised at theinception of the lease at the fair value of the leased asset or, if lower, atthe present value of the minimum lease payments. Lease payments are apportionedbetween the finance charges and reduction of the lease liability so as toachieve a constant rate of interest on the remaining balance of the liability.Finance charges are charged directly against income. Capitalised leased assetsare depreciated over the shorter of the estimated useful life of the asset orthe lease term. Leases where the lessor retains substantially all the risks andbenefits of ownership of the asset are classified as operating leases. Operating lease rental payments are recognised as an expense in the incomestatement on a straight-line basis over the lease term. Reverse lease premia and other incentives receivable for entering into a leaseagreement are recognised in the income statement over the life of the lease. Impairment of tangible and intangible assets excluding goodwill The carrying amounts of the group's tangible and intangible assets are reviewedat each balance sheet date to determine whether there is any indication ofimpairment. If such an indication exists, the asset's recoverable amount isestimated and compared to its carrying value. Where the asset does not generatecash flows that are independent from other assets, the group estimates therecoverable amount of the cash generating unit ("CGU") to which the assetbelongs. Where the carrying value exceeds the recoverable amount a provisionfor the impairment loss is established with a charge being made to the incomestatement. For intangible assets that have an indefinite useful life the recoverable amountis estimated at each annual balance sheet date. Impairment losses recognised in respect of a CGU are allocated first to reducethe carrying amount of any goodwill allocated to the CGU and then to reduce thecarrying amount of the other assets in the unit on a pro-rata basis. Inventories Inventories, which consist of goods for resale, are stated at the lower of costand net realisable value. Cost comprises direct materials and, whereapplicable, direct labour costs and those overheads that have been incurred inbringing the inventories to their present location and condition. Netrealisable value is the estimated selling price less the estimated costs ofdisposal. Financial instruments Financial assets and liabilities are recognised in the balance sheet when thegroup becomes a party to the contractual provision of the instrument. Trade receivables Trade receivables are measured at amortised cost which is carrying amount lessprovision for irrecoverable amounts. Allowances for the estimated irrecoverableamounts are made in the income statement when the receivable is considered to beuncollectable. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with anoriginal maturity of three months or less. Bank and other borrowings Interest bearing bank loans and overdrafts and other loans are recognised in thebalance sheet at amortised cost. Costs associated with arranging a bankfacility are recognised in the income statement over the life of the facility.All other borrowing costs are recognised in the income statement in the periodin which they are incurred. Trade payables Trade payables are measured at amortised cost. Foreign currencies Transactions denominated in foreign currencies are recorded at the rates rulingon the date of transaction. At the consolidated balance sheet date, unhedgedmonetary assets and liabilities denominated in foreign currencies are translatedat the rate of exchange ruling at that date. Foreign exchange differencesarising on translation are recognised in the income statement. Derivative financial instruments and hedge accounting The group uses derivative financial instruments to hedge its exposure tointerest rate and foreign exchange risks arising from financing activities. Thegroup does not enter into speculative financial instruments. In accordance withits treasury policy, the group does not hold or issue derivative financialinstruments for trading purposes. Notes to the interim financial statements 1 General information and accounting policies (continued) Derivative financial instruments and hedge accounting (continued) Derivative financial instruments are stated at fair value. The fair value ofderivative financial instruments is the estimated amount the group would receiveor pay to terminate the derivative at the balance sheet date, taking intoaccount current interest and exchange rates and the current creditworthiness ofthe counterparties. Changes in the fair value of derivative financial instruments, that aredesignated and effective as hedges of the future variability of cash flows, arerecognised directly in equity and the ineffective portion is recognisedimmediately in the income statement. For an effective hedge of an exposure to changes in the fair value of a hedgeditem, the hedged item is adjusted for changes in fair value attributable to therisk being hedged with the corresponding entry in the income statement. For derivatives that do not qualify for hedge accounting, any gains or lossesarising from changes in fair value are taken to the income statement as theyarise. Derivatives embedded in commercial contracts are treated as separate derivativeswhen their risks and characteristics are not closely related to those of theunderlying contracts, with unrealised gains or losses being reported in theincome statement. Taxation The tax expense represents the sum of the tax currently payable and the deferredtax. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income and expense that are taxable or deductible in otheryears and it further excludes items which are never taxable or deductible. Thegroup's liability for current tax is calculated using tax rates that have beenenacted or substantially enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit. This is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if the temporarydifference arises from goodwill or from the initial recognition (other than in abusiness combination) of other assets and liabilities in a transaction thataffects neither the tax profit nor the accounting profit. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset realised. Deferred tax ischarged or credited in the income statement, except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. Pensions and other post-employment benefits For defined benefit schemes, operating profit is charged with the cost ofproviding pension benefits earned by employees in the period. The expectedreturn on pension scheme assets less the interest on pension scheme liabilitiesis shown as a finance cost within the income statement. Actuarial gains and losses arising in the period from the difference betweenactual and expected returns on pension scheme assets, experience gains andlosses on pension scheme liabilities and the effects of changes in demographicsand financial assumptions are included in the statement of recognised income andexpense. Recoverable pension scheme surpluses and pension scheme deficits and theassociated deferred tax balances are recognised in full in the period in whichthey occur and are included in the balance sheet. Obligations for contributions to defined contribution pension plans arerecognised as an expense in the income statement as incurred. Employee share incentive plans The group issues equity-settled share-based payments to certain employees (longterm incentives, executive share options and Save As You Earn), which do notinclude market related conditions. These payments are measured at fair value atthe date of grant by use of the Black Scholes option-pricing model taking intoaccount the terms and conditions upon which the options were granted. The costof equity-settled awards is recognised on a straight-line basis over the vestingperiod, based on the group's estimate of the number of shares that willeventually vest. No cost is recognised for awards that do not ultimately vest. Provisions A provision is recognised in the balance sheet when the group has a presentlegal or constructive obligation as a result of a past event, and it is probablethat an outflow of economic benefits will be required to settle the obligation.Provisions are measured at the directors' best estimate of the expenditurerequired to settle the obligation at the balance sheet date, and are discountedto present value where the effect is material. Equity instruments and own shares Equity instruments represent the ordinary share capital of the group and arerecorded at the proceeds received, net of directly attributable incrementalissue costs. Notes to the interim financial statements 1 General information and accounting policies (continued) Equity instruments and own shares (continued) Consideration paid by the group for its own shares is deducted from totalshareholder equity. Where such shares vest to employees under the terms of thegroup's share option or the group's share saving schemes or are sold, anyconsideration received is included in shareholder equity. Dividends Dividends proposed by the board of directors and unpaid at the period end arenot recognised in the financial statements until they have been approved byshareholders at the annual general meeting. 2 Business segments For management purposes, the group is currently organised into two operatingdivisions - Builders Merchanting and DIY Retailing. These divisions are thebasis on which the group reports its primary segment information. Segmentresults include items directly attributable to segments as well as those thatcan be allocated on a reasonable basis. Unallocated items comprise mainlycorporate expenses. Segment information Six months ended 30 June 2006 Builders DIY Eliminations Consolidated Merchanting Retailing £m £m £m £m Revenue 988.3 424.5 (1.1) 1,411.7 ResultSegment result 110.0 30.4 - 140.4 Unallocated corporate expenses (1.2)Finance costs (28.8) Profit before taxation 110.4Taxation (33.9) Net profit 76.5 Six months ended 30 June 2005 Builders DIY Eliminations Consolidated Merchanting Retailing £m £m £m £m Revenue 938.5 352.7 - 1,291.2 ResultSegment result 107.0 31.2 - 138.2 Unallocated corporate expenses (0.8)Finance costs (27.4) Profit before taxation 110.0Taxation (35.5) Net profit 74.5 There were no inter-segment sales or charges. Notes to the interim financial statements 2. Business segments (continued) Year ended 31 December 2005 Builders DIY Eliminations Consolidated Merchanting Retailing £m £m £m £m Revenue 1,881.0 759.8 - 2,640.8 ResultSegment result 213.3 55.9 - 269.2 Unallocated corporate expenses (1.2)Finance costs (61.3) Profit before taxation 206.7Taxation (65.9) Net profit 140.8 There were no inter-segment sales or charges. 3 Pension scheme Builders DIY Total Merchanting Retailing £m £m £m Gross deficit 1 January 2006 (100.8) (42.0) (142.8)Current service costs (6.8) - (6.8)Contributions 9.3 1.2 10.5Other finance income/(costs) 0.3 (0.7) (0.4)Actuarial gains and losses 29.2 10.4 39.6 Gross deficit at 30 June 2006 (68.8) (31.1) (99.9)Deferred tax asset 20.7 9.3 30.0 Net deficit at 30 June 2006 (48.1) (21.8) (69.9) Notes to the interim financial statements 4 Finance costs Year Six months Six months Year 30 June 30 June 30 June 31 Dec 2006 2006 2005 2005 £m £m £m £mLoan and other bank interest (57.6) (27.9) (23.8) (53.5)Interest on obligations under finance leases (1.9) (1.2) (1.3) (2.0)Other finance costs - pension schemes (1.9) (0.4) (2.2) (3.7)Unwinding of discounts in provisions (1.5) (0.6) - (0.9)Net loss on re-measurement of derivatives at fair value (0.6) - - (0.6)Amortisation of issue costs of bank loans (0.9) (0.3) (0.4) (1.0) Finance costs (64.4) (30.4) (27.7) (61.7) Interest on bank deposits 0.8 0.7 0.3 0.4Net gain on re-measurement of derivatives at fair value 0.9 0.9 - - Finance income 1.7 1.6 0.3 0.4 Net finance costs (62.7) (28.8) (27.4) (61.3) Interest cover finance costs (see below) (58.3) (27.8) (23.5) (54.0) Operating profit 269.8 139.2 137.4 268.0IFRS adjustment 4.1 5.4 3.6 2.3 2005 UK GAAP operating profit 273.9 144.6 141.0 270.3 Interest cover (times) per chairman's statement 4.7 - - 5.0 Interest cover is calculated by dividing 2005 UK GAAP operating profit bythe combined value of interest on bank loans, discounts and interest on bankdeposits. Interest cover for 2005 has been restated to reflect thismethodology. 5 Tax Six months Six months Year 30 June 30 June 31 Dec 2006 2005 2005 £m £m £mCurrent taxUK corporation tax - current year 34.5 36.0 59.1 - prior year - - (0.4) 34.5 36.0 58.7Deferred tax - current year (0.6) (0.5) 7.0 - prior year - - 0.2 Total deferred tax (0.6) (0.5) 7.2 Total tax charge 33.9 35.5 65.9 Notes to the interim financial statements 5 Tax (continued) Tax for the interim period is charged at 31.9% on profits before tax andproperty profits (Year to 31 December 2005: 31.9%), representing the bestestimate of the weighted average annual corporation tax rate expected for thefull financial year. Profits on property disposals will be offset againstpreviously unprovided capital losses. 6 Earnings per share Six months Six months Year 30 June 30 June 31 Dec 2006 2005 2005 £m £m £mEarningsEarnings for the purposes of basic and diluted earnings per share being net profit attributableto equity holders of the parent 76.5 74.5 140.8 Number of shares No. No. No.Weighted average number of ordinary shares for the purposes of basic earnings per share 120,942,231 120,657,659 120,542,092Dilutive effect of share options on potential ordinary shares 896,273 1,538,168 1,205,748 Weighted average number of ordinary shares for the purposes of diluted earnings per share 121,838,504 122,195,827 121,747,840 7 Dividends Amounts were recognised in the financial statements as distributions to equityshareholders in the following periods: Six months Six months Year 30 June 30 June 31 Dec 2006 2005 2005 £m £m £m Final dividend for the year ended 31 December 2005 of 23.0 pence (2004: 21.0 pence) perordinary share 27.8 25.3 25.3 Interim dividend for the year ended 31 December 2005 of 11.0 pence per ordinary share - - 13.3 The proposed interim dividend of 12.1 pence per ordinary share in respect of theyear ending 31 December 2006 was approved by the Board on 31 July 2006 and inaccordance with IFRS has not been included as a liability as at 30 June 2006.It will be paid on 2 November 2006 to shareholders on the register on 6 October2006. The shares will be quoted ex-dividend on 4 October 2006. Notes to the interim financial statements 8 Borrowings At 30 June 2006 the group had the following borrowing facilities available: 30 June 30 June 31 Dec 2006 2005 2005 £m £m £mDrawn facilitiesUS guaranteed senior notes 231.2 - -5 year term loan 270.0 500.0 500.05 year revolving credit facility 460.0 500.0 494.0 961.2 1,000.0 994.0Undrawn facilities5 year revolving credit facility 240.0 200.0 206.0Bank overdrafts 25.0 25.0 25.0 265.0 225.0 231.0 9 Share capital Authorised AllottedOrdinary shares of 10p No. £m No. £m At 1 January 2006 135,000,000 13.5 121,309,889 12.1Allotted under share option schemes - - 282,895 0.1 At 30 June 2006 135,000,000 13.5 121,592,784 12.2 10 Acquisition of businesses During the period the group has acquired 5 new businesses with 5 branches for acombined value of £8.9m (after adjusting for cash acquired at the date ofacquisition) that resulted in goodwill of £6.1m. 11 Net debt reconciliation 30 June 30 June 31 Dec 2006 2005 2005 £m £m £m Net debt at 1 January (982.4) (30.7) (30.7)Increase/(decrease) in cash and cash equivalents 74.7 (90.8) (60.8)Cash flows from debt 35.4 (878.9) (871.9)Fair value of derivatives 27.4 - (1.3)(Decrease)/increase in finance charges netted off bank debt (0.3) 6.5 2.3Finance leases acquired - (20.0) (20.0) Net debt at 30 June / 31 December (845.2) (1,013.9) (982.4) The presentation of the reconciliation for 30 June 2005 is restatedto agree to that applied at 31 December 2005. Notes to the interim financial statements 12 Free cash flow Six months Six months Year 30 June 30 June 31 Dec 2006 2005 2005 £m £m £m Cash generated from operations 217.1 158.0 310.8Special pension contributions 3.3 1.5 28.5Net interest paid (28.2) (14.5) (38.2)Income taxes paid (28.9) (26.7) (47.0)Replacement capital expenditure (7.1) (17.2) (29.4)Disposal proceeds 5.1 3.1 1.4 Free cash flow 161.3 104.2 226.1 13 Earnings before interest, tax and depreciation Earnings before interest, tax and depreciation ("EBITDA") as referred to in thechairman's statement is derived as follows: Six months Six months Year 30 June 30 June Year 30 June 2006 2005 31 Dec 2006 £m £m 2005 £m £m Profit before taxation 207.1 110.4 110.0 206.7Net finance costs 62.7 28.8 27.4 61.3Depreciation and impairments 54.6 26.9 26.8 54.5 EBITDA under IFRS 324.4 166.1 164.2 322.5Reversal of IFRS adjustments and Wickes' pre- acquisition EBITDA 2.8 4.7 6.3 4.4 EBITDA as defined in UK banking agreements 327.2 170.8 170.5 326.9Net debt under 2005 UK GAAP - see below 841.1 - - 950.7Net debt to EBITDA 2.6 - - 2.9 30 June 30 June 31 Dec 2006 200 2005 £m £m £m Net debt (845.2) (1,013.9) (982.4)IAS 17 Finance leases 32.2 33.3 32.7Fair value of derivatives (26.1) - 1.3Finance charges netted off bank debt (2.0) (6.5) (2.3) Net debt under 2005 UK GAAP (841.1) (987.1) (950.7) Independent Review Report to Travis Perkins plc Introduction We have been instructed by the company to review the financial information forthe six months ended 30 June 2006 which comprises the income statement, thebalance sheet, the cash flow statement, the statement of recognised income andexpense and related notes 1 to 13. We have read the other information containedin the interim report and considered whether it contains any apparentmisstatements or material inconsistencies with the financial information. This report is made solely to the company in accordance with Bulletin 1999/4issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the company those matters we are required to state to them in anindependent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone other thanthe company, for our review work, for this report, or for the conclusions wehave formed. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures are consistent withthose applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the accounting policies and presentationhave been consistently applied unless otherwise disclosed. A review excludesaudit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2006. Deloitte & Touche LLPChartered Accountants and Registered AuditorsBirmingham 31 July 2006 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Travis Perkins