5th Feb 2008 07:01
NWF Group PLC05 February 2008 Embargoed until: 07.00, 5 February 2008 NWF GROUP PLC INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 NOVEMBER 2007 NWF Group plc ("NWF"), the diversified sales and distribution business, todayannounces interim results for the six months ended 30 November 2007. Commenting on the results, Mark Hudson, Chairman said: "Trading conditions inthe first six months have been difficult for NWF. Whilst turnover increasedthroughout all four divisions in the period, significant pressure on margins andhigh interest costs associated with recent major capital expansion projects ledto a significant reduction in profit before taxation at the Group level comparedto the previous half year. "Despite challenging and in some cases unusual market conditions all fourbusinesses have profitable track records and experienced management teams. Wehave continued to invest significantly during the period under review which has,we believe, positioned the Group for future growth." Financial highlights: (these results are presented under International FinancialReporting Standards (IFRS) as adopted by the EU, including the restatement ofprior period comparatives figures, for the first time in line with previousannouncements): •Turnover increased by 10.9% to £172.7 million (2006: £155.7 million) •Operating profit down 38.2% to £2.1 million (2006: £3.4 million) •Profit before taxation of £0.8 million (2006: £2.5 million) •Basic earnings per share 1.2 pence (2006: 3.7 pence*) •Interim dividend maintained at 1.0 pence (2006: 1.0 pence*) •Net assets rose by 8.4% to £29.8 million (2006: £27.5 million) •Net cash outflow before financing £13.3 million (2006: outflow £11.1 million) * Restated to take into account the effect of a four-for-one bonus issue ofshares in October 2007. Divisional highlights: •Distribution: turnover up 8.3% to £15.7 million (2006: £14.5 million) with operating profit of £574,000 (2006: £958,000) and significant new capacity now on stream. •Feeds: turnover rose by 9.6% to £41.2 million (2006: £37.6 million) with operating profit of £1,232,000 (2006: £1,087,000) at a time of unprecedented increases and volatility in key input commodities. •Fuels: turnover increased 12.8% to £105.7 million (2006: £93.7 million) with operating profits of £561,000 (2006: £1,026,000) as increases in oil prices have placed pressure on margins. •Garden Centres: turnover increased 2.0% to £10.1 million (2006: £9.9 million) with an operating loss of £231,000 (2006: profit £360,000) resulting from poor summer weather, a slow start to Christmas trading and the build up of sales at the new Ashton Park centre. On the outlook for the coming months Mark Hudson added: "After a testing firstsix months the Board remains confident of a significant increase in performancein the second half of the financial year. We are steadily bringing in newDistribution customers, however additional transition costs and some customerscommencing later than expected will result in significantly lower than plannedoperating profit in Distribution in the current financial year. Feeds and Fuelsare currently performing well and we expect this trend to continue. The outlookfor Garden Centres remains cautious given the retail and general economicoutlook. I look forward to updating shareholders further at the full yearstage." For further information please visit www.nwf.co.uk or contact: Richard Whiting, Chief Executive Mark Taylor John WestPaul Grundy, Finance Director Freddie Crossley Clemmie CarrNWF Group plc Charles Stanley Securities Tavistock (Nominated Advisor) CommunicationsTel: 01829 260260 Tel: 020 7149 6000 Tel: 020 7920 3150 Chairman's Statement Trading conditions in the first six months have been difficult for NWF. Whilstturnover increased throughout all four divisions in the period, significantpressure on margins and high interest costs associated with recent major capitalexpansion projects led to a significant reduction in profit before taxation atthe Group level compared to the previous half year. Despite challenging and in some cases unusual market conditions all fourbusinesses have profitable track records and experienced management teams. Wehave continued to invest significantly during the period under review which has,we believe, positioned the Group for future growth. Results Group revenue for the six months to 30 November 2007 increased by 10.9% from£155.7 million to £172.7 million. Operating profit fell to £2.1 million (2006:£3.4 million). Pre-tax profit was £0.8 million (2006: £2.5 million). Basic earnings per share was 1.2 pence (2006: 3.7 pence) and diluted earningsper share reduced from 3.6 pence to 1.2 pence. Net assets rose by 8.4% to £29.8 million (2006: £27.5 million). The significantcapital expenditure during the period of £4.8 million (2006: £8.4 million)related principally to the investment in Distribution warehousing at Wardle.This, together with an £8.5 million (2006: £3.0 million) absorption of workingcapital that arose mainly from significant raw material price increases,contributed to an overall cash outflow before financing of £13.3 million (2006:£11.1 million). As a result gearing at the period end increased to 182% (2006:131%). As we have previously announced these results are presented under InternationalFinancial Reporting Standards (IFRS), as adopted by the European Union, for thefirst time and include a description of the Group's revised accounting policiesand an explanation of the effects of adopting IFRS on equity, profits and cashflow. In addition, the prior period comparative figures for earnings per shareand dividends per share have been restated to take into account the effect of afour-for-one bonus issue of shares in October 2007. Dividend The Board has approved an unchanged interim dividend per share of 1.0 pence(2006: 1.0 pence). This will be paid on 1 May 2008 to shareholders on theregister on 28 March 2008. The shares will trade ex-dividend on 26 March 2008. Operations Distribution Turnover during the period increased by 8.3% to £15.7 million as some of the newcapacity created at Wardle was utilised, however operating profit reduced by40.1% from £958,000 to £574,000. This has been a period of major capital investment in Distribution, with threenew warehouses commissioned at Wardle delivering an additional 60,000 palletspaces (now bringing total capacity to 130,000). The new warehouses werecommissioned later than originally planned and this has resulted in non-valueadded movement of stock around the Wardle site and sub-optimal use of labour andtransport, which is reflected in the fall in operating profit. New customers areconstantly coming on stream, with 25,000 of the additional 60,000 pallet spacesfilled by the end of November. The remainder of the additional capacity will beutilised during 2008. Some customers are coming in later than anticipated andthe transition costs are higher than forecast. We therefore expect lower thanplanned profitability in the Distribution business in the current financialyear. Feeds During the six months under review the Feeds division saw ruminant feedingpatterns affected in June and July as a result of wet weather and unprecedentedincreases and volatility in raw material costs. The division has focused ondelivering price increases to keep in line with higher raw material costs.Turnover rose by 9.6% to £41.2 million and operating profit increased 13.3% from£1,087,000 to £1,232,000. This was despite total tonnage falling by 2%. Blendedvolumes continue to grow and further investment has taken place to increase ourcapacity in this market. Fuels Turnover increased by 12.8% to £105.7 million on a volume increase of 6.8% to168.5 million litres. Operating profit was £561,000 compared to £1,026,000 in2006, a reduction of 45.3%. The Fuels division has been impacted by the significant increases in oil pricesthroughout the period, resulting in customers seeking competitive prices tomitigate the higher costs. The result was a considerable amount of marginpressure, as we retained customers and increased sales in what remains achallenging market. The experienced management team has focused on improving operational performanceacross all depots and is continually striving to deliver best practice acrossthe business. Garden Centres The division operated six destination garden centres during the half year,including Ashton Park which opened in March 2007. Turnover increased 2.0% to£10.1 million (2006: £9.9 million), of which Ashton Park accounted for £0.9million, with like for like sales down 7% on prior year. The operating loss of£231,000 compared to an operating profit of £360,000 in 2006. The loss resulted from a number of adverse factors. We witnessed very poor,severely weather affected sales in June and July, coupled with a gradual buildup of sales at the newly opened Ashton Park centre. The start of Christmastrading was also slower than expected, as retail consumer confidence remainedlow. However, it is worth noting that our Garden Centres are expected to makethe majority of their annual profits in the second half of the Group's financialyear. Board Richard Whiting succeeded Graham Scott as Chief Executive on 1 November 2007. Iwould like to take this opportunity to thank Graham for his significantcontribution to the Group's success over the last 12 years. The transition hasbeen a smooth one and we look forward to further years of success underRichard's leadership. Outlook and future prospects After a testing first six months the Board remains confident of a significantincrease in performance in the second half of the financial year. We aresteadily bringing in new Distribution customers, however additional transitioncosts and some customers commencing later than expected will result insignificantly lower than planned operating profit in Distribution in the currentfinancial year. Feeds and Fuels are currently performing well and we expect thistrend to continue. The outlook for Garden Centres remains cautious given theretail and general economic outlook. I look forward to updating shareholdersfurther at the full year stage. Mark HudsonChairman5 February 2008 NWF GROUP PLC CONDENSED GROUP INCOME STATEMENT HALF YEAR ENDED 30 NOVEMBER 2007 Half year to Half year to Year to 30 Nov 2007 30 Nov 2006 31 May 2007 (restated) (restated) ---------------------------------------------- £m £m £m Revenue (note 3) 172.7 155.7 320.4 Operating expenses (170.6) (152.3) (312.3) ---------------------------------------------- Operating profit (note 3) 2.1 3.4 8.1 Finance costs (1.3) (0.9) (1.8) ---------------------------------------------- Profit before income tax 0.8 2.5 6.3 Income tax expense (0.2) (0.8) (2.1) ----------------------------------------------Profit for the period 0.6 1.7 4.2 ============================================== Earnings per share (note 4)Basic 1.2p 3.7p 9.1pDiluted 1.2p 3.6p 8.9p Proposed dividend per share 1.0p 1.0p 3.9p GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE HALF YEAR ENDED 30 NOVEMBER 2007 Half year to Half year to Year to 30 Nov 2007 30 Nov 2006 31 May 2007 (restated) (restated) ---------------------------------------------- £m £m £m Actuarial gain on pension scheme - - 1.0Movements on deferred tax relating topension liability - - (0.3) ---------------------------------------------- Net income recognised directly in equity - - 0.7 Profit for the period 0.6 1.7 4.2 ----------------------------------------------Total income recognised for the period 0.6 1.7 4.9 ============================================== All of the Group's activities are derived from current operations. The notes that follow these statements form an integral part of these condensedconsolidated half yearly financial statements. NWF GROUP PLC GROUP BALANCE SHEET AS AT 30 NOVEMBER 2007 30 Nov 2007 30 Nov 2006 31 May 2007 (restated) (restated) ----------------------------------------- £m £m £mAssetsNon current assetsProperty, plant and equipment 57.0 43.1 53.7Intangible assets 10.2 10.1 10.1Deferred income tax assets 1.0 1.4 1.1 ----------------------------------------- 68.2 54.6 64.9 -----------------------------------------Current assetsInventories 9.6 7.7 8.1Trade and other receivables 47.9 40.9 39.9Derivative financial instruments 1.7 0.3 0.2Cash and cash equivalents 0.1 0.1 0.1 ----------------------------------------- 59.3 49.0 48.3 ----------------------------------------- Total assets 127.5 103.6 113.2 ----------------------------------------- LiabilitiesCurrent liabilitiesTrade and other payables (37.1) (32.6) (36.7)Current income tax liabilities (0.4) (0.8) (1.0)Borrowings (24.2) (10.9) (10.0)Derivative financial instruments (1.3) (0.2) - ----------------------------------------- (63.0) (44.5) (47.7) ----------------------------------------- Non current liabilitiesTrade and other payables - (0.6) (0.6)Borrowings (29.9) (25.2) (30.0)Deferred income tax liabilities (1.4) (1.3) (1.3)Retirement benefit obligations (3.4) (4.5) (3.5) ----------------------------------------- (34.7) (31.6) (35.4) ----------------------------------------- Total liabilities (97.7) (76.1) (83.1) -----------------------------------------Net assets 29.8 27.5 30.1 ========================================= Shareholders' equity (note 5)Ordinary shares 11.7 2.3 2.3Share premium - 6.2 6.2Other reserves - 0.3 0.3Retained earnings 18.1 18.7 21.3 -----------------------------------------Total shareholders' equity 29.8 27.5 30.1 ========================================= The notes that follow these statements form an integral part of these condensedconsolidated half yearly financial statements. NWF GROUP PLC CONDENSED GROUP CASH FLOW STATEMENT HALF YEAR ENDED 30 NOVEMBER 2007 Half year to Half year to Year to 30 Nov 2007 30 Nov 2006 31 May 2007 (restated) (restated) ----------------------------------------- £m £m £mCash flows from operating activitiesProfit before income tax 0.8 2.5 6.3Depreciation 1.9 1.7 3.4Finance costs 1.3 0.9 1.8(Increase)/decrease in working capital (8.5) (3.0) 1.4Other (0.1) (0.2) (0.1) -----------------------------------------Cash (used in)/generated from operations (4.6) 1.9 12.8 Interest paid (1.7) (0.9) (2.4)Income tax paid (0.9) (0.9) (1.9) -----------------------------------------Net cash (used in)/generated fromoperating activities (7.2) 0.1 8.5 ----------------------------------------- Cash flows from investing activitiesPurchase of property, plant and equipment (4.8) (8.4) (20.1)Proceeds from sale of property, plant and equipment 0.1 0.1 0.2Purchase of intangible assets (0.1) (0.2) (0.2)Acquisitions, net of cash acquired - (1.5) (1.6)Deferred acquisition payments (1.3) (1.8) (1.8)Deferred disposal proceeds - 0.6 0.6 -----------------------------------------Net cash used in investing activities (6.1) (11.2) (22.9) ----------------------------------------- Net cash outflow before financing (13.3) (11.1) (14.4) ----------------------------------------- Cash flows from financing activitiesProceeds from issue of ordinary shares 0.5 - -Term loan and HP finance movements (0.1) 0.9 (0.2)Medium term loan received - - 6.0Dividends paid to Company's shareholders (1.3) (1.1) (1.7) -----------------------------------------Net cash (used in)/generated fromfinancing activities (0.9) (0.2) 4.1 -----------------------------------------Net decrease in cash and cash equivalents (14.2) (11.3) (10.3) ----------------------------------------- Cash, cash equivalents and bankoverdrafts at beginning of period (9.6) 0.7 0.7 ----------------------------------------- Cash, cash equivalents and bankoverdrafts at end of period (23.8) (10.6) (9.6) ========================================= The notes that follow these statements form an integral part of these condensedconsolidated half yearly financial statements. Notes to condensed consolidated half yearly financial statements 1. General information NWF Group plc ('the Company') is a company incorporated and domiciled in the UK.The principal activities of NWF Group plc and its subsidiaries (together 'theGroup') are the warehousing and distribution of ambient groceries, themanufacture and sale of animal feeds, the distribution of fuel oils and theoperation of large retail garden centres. The address of the Company's registered office is NWF Group plc, Wardle,Nantwich, Cheshire, CW5 6BP. The Company has its primary listing on the Alternative Investment Market ('AIM')on the London Stock Exchange. These interim financial statements do not constitute statutory accounts withinthe meaning of section 240 of the Companies Act 1985. The interim results to 30November 2007 are neither audited nor reviewed by the Group's auditors.Statutory accounts for the year ended 31 May 2007 were approved by the Board ofDirectors on 14 August 2007 and delivered to the Registrar of Companies. Thereport of the auditors on those accounts was unqualified, did not contain anemphasis of matter paragraph and did not contain any statement under Section 237of the Companies Act 1985. 2. Basis of preparation of financial statements For the year ended 31 May 2007 and previous accounting periods, the Groupprepared its audited full year and unaudited interim financial statements underUnited Kingdom Generally Accepted Accounting Principles ("UK GAAP"). From 31 May 2008, the Group is required to prepare its published financialstatements in accordance with International Financial Reporting Standards("IFRS") as adopted by the European Union and implemented in the United Kingdom,as well as those parts of the Companies Act 1985 that are applicable tocompanies reporting under IFRS. The date of transition to IFRS for the Group was 1 June 2006 and the Group hasprepared its opening IFRS balance sheet as at that date. This interim report has been prepared in accordance with the principalaccounting policies described in Appendix 1. The IFRS and the InternationalFinancial Reporting Interpretations Committee ("IFRIC") interpretations thatwill be applicable as at 31 May 2008, including those that will be applicable onan optional basis, are not known with certainty at the time of preparing thisreport; however, no significant differences are expected between the accountingpolicies adopted in preparing this report and those that will be adopted in thefinancial statements for the year ended 31 May 2008. The comparative figures shown in this report have been restated to reflect thenew accounting policies under IFRS. Reconciliations and explanations of theeffects of adopting the new policies on the Group's equity, profits and cashflows are also provided in Appendix 2. This interim report has also been prepared on the going concern basis under thehistorical cost convention, as modified by the revaluation of land andbuildings, and financial assets and liabilities (including derivative financialinstruments) at fair value through the income statement. This interim report does not comply with IAS 34 "Interim Financial Reporting",as is currently permissible under the rules on the Alternative Investment Market("AIM"). 3. Segmental information Half year to Half year to Year to 30 Nov 30 Nov 2006 31 May 2007 2007 (restated) (restated) ----------------------------------------- £m £m £mTurnoverDistribution 15.7 14.5 27.0Feeds 41.2 37.6 81.5Fuels 105.7 93.7 190.4Garden Centres 10.1 9.9 21.5 ----------------------------------------- 172.7 155.7 320.4 =========================================Operating profitDistribution 0.6 0.9 1.4Feeds 1.2 1.1 2.1Fuels 0.5 1.0 3.3Garden Centres (0.2) 0.4 1.3 ----------------------------------------- 2.1 3.4 8.1 =========================================Net assetsDistribution 23.5 10.8 23.9Feeds 9.9 8.9 9.0Fuels 8.7 7.0 8.1Garden Centres 21.8 20.7 21.5Unallocated (2.1) 0.2 0.2 ----------------------------------------- 61.8 47.6 62.7 ========================================= 4. Earnings per share The calculation of basic earnings per share for the half year to 30 November2007 is based on profit after taxation of £0.6m (2006: £1.7m) and on 46.9million (2006: 45.7 million) ordinary shares, representing the weighted averagenumber of shares in issue during the period. The calculation of diluted earnings per share for the half year is based on thefigures shown above amended for the weighted average dilutive effect (nilshares) of share options outstanding through the period (2006: 1.0 millionshares). The numbers of shares and share options stated above have been adjusted in allperiods to take into account the effect of the bonus issue of shares referred toin Note 5 below. 5. Shareholders' funds and statement of changes in equity Ordinary share Share Other Retained capital premium reserves earnings Total ----------------------------------------------------- £m £m £m £m £m At 1 June 2006 2.3 6.2 0.3 18.1 26.9 Profit for the period - - - 1.7 1.7Dividend paid to shareholders - - - (1.1) (1.1) -----------------------------------------------------At 30 November 2006 2.3 6.2 0.3 18.7 27.5 Profit for the period - - - 2.5 2.5Dividend paid to shareholders - - - (0.6) (0.6)Actuarial gain on pensionscheme - - - 1.0 1.0Deferred income tax charge on actuarial movement - - - (0.3) (0.3) -----------------------------------------------------At 31 May 2007 2.3 6.2 0.3 21.3 30.1 Profit for the period - - - 0.6 0.6Dividend paid to shareholders - - - (1.3) (1.3)Ordinary shares issued - 0.4 - - 0.4Bonus issue of shares (seebelow) 9.4 (6.6) (0.3) (2.5) - -----------------------------------------------------At 30 November 2007 11.7 - - 18.1 29.8 ===================================================== On 4 October 2007 the Company's shareholders approved a bonus issue of four newordinary shares of 25 pence each ("New Ordinary Shares") for each existingordinary share held by a shareholder on the share register at the close ofbusiness on 4 October 2007. This resulted in the issue of 37.5 million NewOrdinary Shares with a total nominal value of £9.4m. In order to effect thebonus issue, £9.4m was capitalised from reserves, comprising £6.6m from SharePremium, £0.3m from Other Reserves and £2.5m from Retained Earnings. 6. Critical accounting estimates and judgements The Group makes a number of estimates and assumptions concerning the future. Theresulting accounting estimates will, by definition, seldom equal the relatedactual outcome. The estimates and assumptions that have a significant risk ofcausing a material adjustment to the carrying value of assets and liabilitieswithin the current and next financial years are referred to below. Carrying value of goodwill The Group tests annually whether or not goodwill has suffered any impairment, inaccordance with the accounting policy described in section 1.8 of Appendix 1.The recoverable amounts of the relevant cash-generating units have beendetermined based on value on use calculations, which in turn require the use ofestimates. Pension scheme valuation assumptions The balance sheet carrying values of the defined benefit pension scheme surplusor deficit are calculated using independently commissioned actuarial valuations.These valuations are based on a number of assumptions, including the mostappropriate mortality rates to apply to the profile of scheme members and thefinancial assumptions regarding discount rates and inflation. All of these areestimates of future events and are therefore uncertain. 7. Interim report Copies of the Interim Report are due to be sent to shareholders on 8 February2007. Further copies may be obtained from the Company Secretary at NWF Groupplc, Wardle, Nantwich, Cheshire, CW5 6BP, or from the Company's website atwww.nwf.co.uk. 8. 2008 financial calendar Interim dividend paid 1 May 2008Financial year end 31 May 2008Preliminary announcement of full year results Mid August 2008Publication of Annual Report and Accounts Early September 2008Annual General Meeting 2 October 2008Final dividend paid 3 November 2008 Appendix 1 Summary of significant accounting policies The principal accounting policies applied in the preparation of theseconsolidated financial statements are set out below. These policies have beenconsistently applied to all periods presented. 1.1 IFRS exemptions The Group has taken advantage of the following exemptions on transition to IFRS,as permitted by paragraph 13 of IFRS 1, "First Time Adoption of IFRS":- (a) The requirements of IFRS 3, "Business Combinations" have not been applied to business combinations that occurred before the date of transition to IFRS (1 June 2006) (b) The carrying values of some of the Group's freehold land and buildings are based on previously adopted valuations under UK GAAP and these have now been taken as deemed cost on transition to IFRS. 1.2 Basis of consolidation The consolidated Group financial statements incorporate the financial statementsof NWF Group plc and entities controlled by NWF Group plc (its "subsidiaries").Control is achieved where NWF Group plc has the power to govern the financialand operating policies of an investee entity so as to obtain benefits from itsactivities. Subsidiaries are fully consolidated from the date on which control istransferred to the Group. They are de-consolidated from the date that controlceases. The purchase method of accounting is used to account for the acquisition ofsubsidiaries by Group companies. The cost of an acquisition is measured as thefair value of assets given, equity instruments issued and liabilities incurredor assumed at the date of acquisition, plus costs directly attributable to theacquisition. Identifiable assets acquired and liabilities and contingentliabilities assumed in a business combination are measured initially at theirfair values at the acquisition date. The excess of the cost of acquisition overthe fair value of the Group's share of the identifiable net assets acquired isrecorded as goodwill. If the cost of acquisition is less than the fair value ofnet assets acquired, the difference is recognised directly in the incomestatement. All inter-company transactions, balances and unrealised gains on transactionsbetween Group companies are eliminated. Accounting policies of subsidiary companies have been amended where necessary toensure consistency of policies adopted within the Group. 1.3 Segment reporting A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments. The primary segments operated by theGroup are as follows:- Distribution •warehousing and distribution of clients' ambient grocery and other products to supermarket and other retail distribution centres Feeds •manufacture and sale of animal feeds and other agricultural products Fuels •sale of domestic heating, industrial and road fuels Garden Centres •operation of large retail garden centres Segmental information is included in note 3 to the consolidated half yearlyresults. In relation to segmental net assets, the assets of the segments includeproperty, plant and equipment, intangible assets, assets under finance leases,inventories, trade and other receivables, other current assets and cash and cashequivalents. Segment liabilities include retirement benefit obligations, tradecreditors, accruals and other liabilities relating to the provision of goods andservices, but exclude borrowings, finance lease liabilities, other liabilitiesof a financing nature and taxation liabilities. In the Directors' opinion, all of the Group's operations are carried out in thesame geographical segment, namely the United Kingdom. 1.4 Revenue recognition Revenue comprises the fair value of the consideration received or receivable forthe sale of goods and services in the ordinary course of the Group's activities.Revenue is shown net of value added tax, estimated returns, rebates anddiscounts and after eliminating sales within the Group. Specific types ofrevenue are recognised as follows:- Distribution Revenue from storage, distribution, handling and re-packaging of clients'products is recognised when the relevant service has been performed. Feeds, Fuels and Garden Centres Revenue from the sale of goods in each of these segments is recognised when theyare delivered to the customer. Interest income Interest income on short term deposits is recognised as it accrues. 1.5 Deferred income tax Deferred income tax is provided in full, using the liability method, ontemporary differences arising between the tax bases of assets and liabilitiesand their carrying amounts in the consolidated financial statements. However,deferred income tax is not accounted for if it arises from initial recognitionof an asset or liability in a transaction other than a business combination thatat the time of the transaction affects neither accounting nor taxable profit orloss. Deferred income tax is determined using tax rates (and laws) that have beenenacted or substantially enacted by the balance sheet date and are expected toapply when the related deferred income tax asset is realised or the deferredincome tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable thatfuture taxable profits will be available against which the temporary differencescan be utilised. 1.6 Dividend distribution The distribution of a dividend to the Company's shareholders is recognised as aliability in the Group's financial statements in the period in which it isapproved by the Company's shareholders. 1.7 Property, plant and equipment Certain freehold land and buildings are stated at deemed cost in accordance withthe exemption on transition to IFRS permitted by IFRS 1. All other property,plant and equipment is stated at historical cost less accumulated depreciation.Cost comprises the purchase price and any directly attributable costs.Subsequent costs are included in the asset's carrying value, or recognised as aseparate asset, only when it is probable that future economic benefitsassociated with the asset will flow to the Group and the cost of the asset canbe measured reliably. Property, plant and equipment is subsequently stated at cost less accumulateddepreciation and any provision for impairment in value. Depreciation is providedon a straight line basis to write down assets to their residual value evenlyover the estimated useful lives of the assets from the date of acquisition bythe Group. Land is not depreciated. Depreciation on other assets is calculated, using thestraight line method, to allocate their cost to their residual values over theiruseful economic lives within the following ranges: •Freehold and long leasehold buildings 13 - 50 years •Plant, machinery and equipment 3 - 10 years •Commercial vehicles 6 - 10 years •Motor vehicles 4 years The assets' residual values and useful lives are reviewed, and adjusted ifappropriate, at each balance sheet date. An asset's carrying amount is written down immediately to its estimatedrecoverable amount if the asset's carrying amount is greater than its estimatedrecoverable amount. Gains and losses on disposal are determined by comparing the proceeds ofdisposal with the carrying value and are recognised in the income statement. 1.8 Intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the Group's share of the net identifiable assets of the acquired subsidiaryat the date of acquisition. Goodwill on acquisition of subsidiaries is includedin 'intangible assets'. Separately recognised goodwill is tested annually for impairment and carried atcost less accumulated impairment losses. Impairment losses on goodwill are notreversed. Gains and losses on the disposal of an entity include the carryingamount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairmenttesting. The allocation is made to those cash-generating units or groups ofcash-generating units that are expected to benefit from the business combinationin which the goodwill arose. (b) Trademarks and licences Acquired trademarks and licences are stated at historical cost, less accumulatedamortisation. Historical cost comprises the purchase price and any directlyattributable costs. Trademarks and licences have a finite useful life and are carried at cost lessaccumulated amortisation. Amortisation is calculated, using the straight linemethod, to allocate the cost of trademarks and licences over their estimateuseful lives (10 years). (c) Computer software Acquired computer software licences are capitalised on the basis of costsincurred to acquire and bring to use the specific software. These costs areamortised over their estimated useful lives (3 - 5 years). 1.9 Impairment of non-financial assets Assets that have an indefinite life, for example goodwill, are not subject toamortisation and are tested annually for impairment. Assets that are subject toamortisation are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. Animpairment loss is recognised as the amount by which the asset's carrying amountexceeds the recoverable amount. The recoverable amount is the higher of theasset's fair value (less costs to sell) and its value in use. 1.10 Inventories Inventories are stated at the lower of cost and net realisable value. Cost isdetermined using the first in, first out ("FIFO") method. The cost of rawmaterials, consumables, finished goods and goods for resale comprises purchasecost and, in the case of finished goods, the cost of transporting the goods totheir stock location. Net realisable value comprises the estimated selling price in the ordinarycourse of business less applicable variable selling expenses. Provision is made for obsolete, slow moving or defective items whereappropriate. 1.11 Trade receivables Trade receivables are recognised initially at fair value less provision forimpairment. Subsequent to initial recognition, receivables are measured atamortised cost, using the effective interest method. A provision for impairment is established when there is objective evidence thatthe Group will not be able to collect all amounts due according to the originalterms of the receivables. The amount of the provision is recognised through theincome statement within administrative expenses. 1.12 Derivative financial instruments A derivative is initially recognised at fair value on the date that theassociated contract is entered into and then is remeasured at fair value at eachsubsequent balance sheet date. The method of recognising the resulting gain orloss depends on whether or not the derivative is designated as a hedginginstrument and, if so, the nature of the item being hedged. The Group has not designated any derivatives as hedging instruments during theperiod under review. As a result, changes in the fair value of derivativeinstruments are recognised immediately in the income statement. 1.13 Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banksand bank overdrafts. Bank overdrafts are shown within borrowings in currentliabilities on the balance sheet. 1.14 Trade payables Trade payables are recognised initially at fair value and subsequently measuredat amortised cost using the effective interest method. 1.15 Borrowings Borrowings are recognised initially at fair value, net of transaction costsincurred, and subsequently measured at amortised cost. Any difference betweenthe proceeds (net of transaction costs) and the redemption value is recognisedin the income statement over the period of the borrowings, using the effectiveinterest method. Borrowings are classified as current liabilities unless the Group has anunconditional right to defer settlement of the liability for at least one yearafter the balance sheet date. 1.16 Employee benefits - pension obligations Group companies operate various pension schemes, including defined contributionand defined benefit schemes. The schemes are generally funded through paymentsto insurance companies or trustee-administered funds, determined by periodicactuarial calculations. A defined contribution scheme is a pension scheme underwhich the Group pays fixed contributions into a separate entity and where theGroup has no legal or constructive obligations to pay further contributions ifthe scheme does not hold sufficient assets to pay all employees the benefitsrelating to employee service in the current and prior periods. A defined benefitscheme is a pension scheme that is not a defined contribution scheme; typically,defined benefit schemes define an amount of pension benefit that an employeewill receive on retirement, usually dependant on one or more factors such asage, length of service or remuneration. The liability recognised in the balance sheet in respect of defined benefitschemes is the present value of the defined benefit obligation at the balancesheet date less the fair value of scheme assets, together with adjustments forunrecognised actuarial gains or losses and past service costs. The definedbenefit obligation is calculated annually by independent actuaries using theprojected unit credit method. The present value of the defined benefitobligation is determined by discounting the estimated future cash outflows usinginterest rates of high quality corporate bonds that are denominated in thecurrency in which the benefits will be paid and that have terms to maturityapproximating to the terms of the related pension liability. The interest cost and expected return on the assets are shown within financecosts and finance income respectively within the income statement. Actuarialgains and losses are recognised immediately in the Group statement of recognised income and expense. Net defined benefit pension schemedeficits before tax relief are presented separately on the balance sheet withinnon current liabilities. The attributable deferred income tax asset is includedwithin deferred income tax asset and is subject to the recognition criteria asset out in the accounting policy on deferred income tax. For defined contribution schemes, the Group pays contributions to publicly orprivately administered pension insurance schemes on a mandatory, contractual orvoluntary basis. The contributions are recognised as employee benefit expensewhen they are due. 1.17 Provisions Provisions are recognised when the group has a present legal or constructiveobligation as a result of past events, it is probable that an outflow ofresources will be required to settle the obligation and the amount has beenreliably estimated. Provisions are not recognised for future operating losses. 1.18 Leases Leases in which a significant proportion of the risks and rewards of ownershipare retained by the lessor are classified as operating leases. Payments madeunder operating leases (net of any incentives received from the lessor) arecharged to the income statement on a straight line basis over the period of thelease. Other leases are classified as finance leases. Assets and liabilities underfinance leases are recognised in the balance sheet at the inception of the leaseat amounts equal to their fair value or, if lower, the net present value of theminimum lease payments. Depreciation on leased assets is provided at ratesconsistent with that for similar assets that are owned by the Group. Subsequent to initial recognition, payments made are apportioned between thefinance charge element and the reduction in the capital value of the outstandingliability. The finance charge is allocated to each period so as to produce aconstant periodic rate of interest on the remaining balance of the liability. 1.19 Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown inequity as a deduction, net of tax, from the proceeds of issue. Appendix 2 Explanation of transition to IFRS The tables below show the impact of IFRS on:- (a) the consolidated income statements for the year ended 31 May 2007 (date of last UK GAAP statements) and the six months ended 30 November 2006 (half year end comparative period) and (b) the consolidated balance sheets as at 1 June 2006 (date of transition to IFRS), 31 May 2007 (date of last UK GAAP statements) and 30 November 2006 (half year end comparative period). The main areas of these financial statements impacted by the transition to IFRSare detailed below. In relation to cash flow reporting, under UK GAAP the Group has previouslyreported its cash flows in accordance with FRS 1 (Revised 1996) 'Cash FlowStatements'. The objectives and principles of this standard are similar to thoseset out in the equivalent IFRS standard, IAS 7 'Cash Flow Statements'. Otherthan differences in respect of classification of cash flow items, reportingunder IAS 7 has had no significant effect on the reported net cash flows for theyear ended 31 May 2007 (date of last UK GAAP statements) and the six monthsended 30 November 2006 (half year end comparative period). Group income statement Year ended 31 May 2007 UK (1) (2) (3) (4) IFRS GAAP ----------------------------------------------- £m £m £m £m £m £m Revenue 320.4 320.4Operating expenses (313.3) 0.4 0.5 0.1 (312.3) -----------------------------------------------Operating profit 7.1 0.4 0.5 0.1 8.1Finance costs (1.2) (0.7) 0.1 (1.8) -----------------------------------------------Profit before income tax 5.9 (0.3) 0.5 0.2 6.3Income tax expense (2.1) 0.1 (0.1) (2.1) ------------------------------------------------Profit for the year 3.8 (0.2) 0.4 0.2 4.2 ================================================ Adjustments (1) Income statement effects of accounting for certain property leases,previously classified as operating leases, as finance leases in accordance withIAS 17 'Leases'. The net present value of attributable lease payments has beencapitalised and depreciated over the period of the lease, with finance chargesallocated to accounting periods so as to produce a constant periodic interestrate.(2) Reversal of amortisation of goodwill previously charged under FRS 10'Goodwill and Intangible Assets'; in accordance with IFRS 3 'BusinessCombinations' goodwill is no longer amortised but tested annually forimpairment.(3) Not applicable.(4) Movement in fair values of certain derivative financial instruments, inaccordance with IAS 39 'Financial Instruments: Recognition and Measurement'. Group income statement Half year ended 30 November2006 UK (1) (2) (3) (4) IFRS GAAP ----------------------------------------------- £m £m £m £m £m £m Revenue 155.7 155.7Operating expenses (152.8) 0.2 0.3 (152.3) -----------------------------------------------Operating profit 2.9 0.2 0.3 3.4Finance costs (0.6) (0.3) (0.9) -----------------------------------------------Profit before income tax 2.3 (0.1) 0.3 2.5Income tax expense (0.8) (0.8) ------------------------------------------------Profit for the period 1.5 (0.1) 0.3 1.7 ================================================ Adjustments (1) Income statement effects of accounting for certain property leases,previously classified as operating leases, as finance leases in accordance withIAS 17 'Leases'. The net present value of attributable lease payments has beencapitalised and depreciated over the period of the lease, with finance chargesallocated to accounting periods so as to produce a constant periodic interestrate.(2) Reversal of amortisation of goodwill previously charged under FRS 10'Goodwill and Intangible Assets'; in accordance with IFRS 3 'BusinessCombinations' goodwill is no longer amortised but tested annually forimpairment.(3) Not applicable.(4) Not applicable. Group balance sheet UK (1) (2) (3) (4) IFRSAs at 1 June 2006 GAAP ---------------------------------------------- £m £m £m £m £m £m AssetsNon current assetsProperty, plant and equipment 25.0 10.1 (0.2) 34.9Intangible assets 9.3 0.2 9.5Deferred income tax assets - 1.4 1.4 ---------------------------------------------- 34.3 10.1 1.4 - 45.8 ---------------------------------------------- Current assetsInventories 7.1 7.1Trade and other receivables 39.5 0.1) 39.4Derivative financial instruments - -Cash and cash equivalents 0.9 0.9 ---------------------------------------------- 47.5 (0.1) 47.4 ---------------------------------------------- Total assets 81.8 10.0 1.4 93.2 ---------------------------------------------- LiabilitiesCurrent liabilitiesTrade and other payables (33.4) (0.1) (33.5)Current income tax liabilities (0.8) (0.8)Borrowings (0.4) (0.4)Derivative financial instruments - - ---------------------------------------------- (34.6) (0.1) (34.7) ---------------------------------------------- Non current liabilitiesTrade and other payables (1.9) (1.9)Borrowings (13.4) (10.5) (23.9)Deferred income tax liabilities (1.1) 0.2 (0.3) (1.2)Retirement benefit obligations (3.2) (1.4) (4.6) ---------------------------------------------- (19.6) (10.3) (1.7) (31.6) ---------------------------------------------- Total liabilities (54.2) (10.3) (1.7) (0.1) (66.3) ---------------------------------------------- Net assets 27.6 (0.3) (0.3) (0.1) 26.9 ============================================== Total shareholders' equity 27.6 (0.3) (0.3) (0.1) 26.9 ============================================== Adjustments (1) The buildings elements of certain property leases, previously classified asoperating leases, are now treated as finance leases in accordance with IAS 17'Leases'. The net present value of attributable lease payments has beencapitalised and depreciated over the period of the lease, with finance chargesallocated to accounting periods so as to produce a constant periodic interestrate.(2) Not applicable.(3) Deferred tax adjustments comprising:- (a) Reclassification of deferred tax asset arising on defined pension scheme deficit as non current asset, in accordance with IAS 19 'Employee Benefits' (offset against deficit value under FRS 17 'Retirement Benefits') (b) In accordance with IAS 12 'Income Taxes', additional deferred tax liability arising on certain property, plant and equipment included as a result of the acquisition of shares in subsidiary companies in previous periods.(4) Miscellaneous other adjustments, principally comprising reclassification ofcomputer software from property, plant and equipment to intangible assets. Group balance sheet As at 31 May 2007 UK (1) (2) (3) (4) IFRS GAAP ------------------------------------------------ £m £m £m £m £m £mAssetsNon current assetsProperty, plant and equipment 44.3 9.8 (0.4) 53.7Intangible assets 9.3 0.5 0.3 10.1Deferred income tax assets - 1.1 1.1 ------------------------------------------------ 53.6 9.8 0.5 1.1 (0.1) 64.9 ------------------------------------------------ Current assetsInventories 8.1 8.1Trade and other receivables 40.0 (0.1) 39.9Derivative financial instruments - 0.2 0.2Cash and cash equivalents 0.1 0.1 ------------------------------------------------ 48.2 (0.1) 0.2 48.3 ------------------------------------------------ Total assets 101.8 9.7 0.5 1.1 0.1 113.2 ------------------------------------------------ LiabilitiesCurrent liabilitiesTrade and other payables (36.6) (0.1) (36.7)Current income tax liabilities (1.0) (1.0)Borrowings (10.0) (10.0)Derivative financial instruments - - ------------------------------------------------ (47.6) (0.1) (47.7) ------------------------------------------------ Non current liabilitiesTrade and other payables (0.6) (0.6)Borrowings (19.5) (10.5) (30.0)Deferred income tax liabilities (1.2) 0.3 (0.1) (0.3) (1.3)Retirement benefit obligations (2.5) (1.0) (3.5) ------------------------------------------------ (23.8) (10.2) (0.1) (1.3) (35.4) ------------------------------------------------ Total liabilities (71.4) (10.2) (0.1) (1.3) (0.1) (83.1) ------------------------------------------------- Net assets 30.4 (0.5) 0.4 (0.2) - 30.1 ================================================= Total shareholders' equity 30.4 (0.5) 0.4 (0.2) - 30.1 ================================================= Adjustments (1) The buildings elements of certain property leases, previously classified asoperating leases, are now treated as finance leases in accordance with IAS 17'Leases'. The net present value of attributable lease payments has beencapitalised and depreciated over the period of the lease, with finance chargesallocated to accounting periods so as to produce a constant periodic interestrate.(2) Reversal of amortisation of goodwill previously charged under FRS 10'Goodwill and Intangible Assets'; in accordance with IFRS 3 'BusinessCombinations' goodwill is no longer amortised but tested annually forimpairment.(3) Deferred tax adjustments comprising:- (a) Reclassification of deferred tax asset arising on defined pension scheme deficit as non current asset in accordance with IAS 19 'Employee Benefits' (offset against deficit value under FRS 17 'Retirement Benefits') (b) In accordance with IAS 12 'Income Taxes', additional deferred tax liability arising on certain property, plant and equipment included as a result of the acquisition of shares in subsidiary companies in previous periods.(4) Miscellaneous other adjustments, principally comprising:- (a) Reclassification of computer software from property, plant and equipment to intangible assets (b) Recognition of certain derivative financial instruments at fair value, in accordance with IAS 39 'Financial Instruments: Recognition and Measurement'. Group balance sheet As at 30 November 2006 UK (1) (2) (3) (4) IFRS GAAP ------------------------------------------------ £m £m £m £m £m £mAssetsNon current assetsProperty, plant and equipment 33.5 9.9 (0.3) 43.1Intangible assets 9.5 0.3 0.3 10.1Deferred income tax assets - 1.4 1.4 ------------------------------------------------ 43.0 9.9 0.3 1.4 - 54.6 ------------------------------------------------ Current assetsInventories 7.7 7.7Trade and other receivables 41.0 (0.1) 40.9Derivative financial instruments - 0.3 0.3Cash and cash equivalents 0.1 0.1 ------------------------------------------------ 48.8 (0.1) 0.3 49.0 ------------------------------------------------ Total assets 91.8 9.8 0.3 1.4 0.3 103.6 ------------------------------------------------ LiabilitiesCurrent liabilitiesTrade and other payables (32.6) (32.6)Current income tax liabilities (0.8) (0.8)Borrowings (10.9) (10.9)Derivative financial instruments - (0.2) (0.2) ------------------------------------------------ (44.3) (0.2) (44.5) ------------------------------------------------ Non current liabilitiesTrade and other payables (0.6) (0.6)Borrowings (14.7) (10.5) (25.2)Deferred income tax liabilities (1.2) 0.2 (0.3) (1.3)Retirement benefit obligations (3.2) (1.3) (4.5) ------------------------------------------------ (19.7) (10.3) (1.6) (31.6) ------------------------------------------------ Total liabilities (64.0) (10.3) (1.6) (0.2) (76.1) ------------------------------------------------- Net assets 27.8 (0.5) 0.3 (0.2) 0.1 27.5 ================================================= Total shareholders' equity 27.8 (0.5) 0.3 (0.2) 0.1 27.5 ================================================= Adjustments (1) The buildings elements of certain property leases, previously classified asoperating leases, are now treated as finance leases in accordance with IAS 17'Leases'. The net present value of attributable lease payments has beencapitalised and depreciated over the period of the lease, with finance chargesallocated to accounting periods so as to produce a constant periodic interestrate.(2) Reversal of amortisation of goodwill previously charged under FRS 10'Goodwill and Intangible Assets'; in accordance with IFRS 3 'BusinessCombinations' goodwill is no longer amortised but tested annually forimpairment.(3) Deferred tax adjustments comprising:- (a) Reclassification of deferred tax asset arising on defined pension scheme deficit as non current asset in accordance with IAS 19 'Employee Benefits' (offset against deficit value under FRS 17 'Retirement Benefits') (b) In accordance with IAS 12 'Income Taxes', additional deferred tax liability arising on certain property, plant and equipment included as a result of the acquisition of shares in subsidiary companies in previous periods.(4) Miscellaneous other adjustments, principally comprising:- (a) Reclassification of computer software from property, plant and equipment to intangible assets (b) Recognition of certain derivative financial instruments at fair value, in accordance with IAS 39 'Financial Instruments: Recognition and Measurement'. 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