5th Sep 2005 07:01
Travis Perkins PLC05 September 2005 5 September 2005 TRAVIS PERKINS PLC INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2005 Highlights • Acquisition of Wickes, a leading UK DIY retailer• Overall benefits from programme to integrate Wickes running ahead of expectations• Solid profit performance in tougher markets with operating profit up 29% to £137m• Like for like free cash flow up 22% to £104m• Interim dividend increased by 16% to 11.0p per share• Record number of new branches added in the first half and now trading from 972 locations in the UK Geoff Cooper, Chief Executive, said: "The group has achieved a solid performance in tougher markets and made goodprogress in integrating the Wickes business. Our merchanting business isperforming well and our retail business is beginning to gain market share.While we anticipate that trading will remain challenging, we are confident thatthe group will make further progress." Enquiries: Geoff Cooper, Chief ExecutivePaul Hampden Smith, Finance Director Travis Perkins plc +44 (0) 1604 683131 David Bick/Trevor PhillipsHolborn Public Relations +44 (0) 207 929 5599 Interim Results 2005 6 Months 6 Months Increase 30 June 30 June 2005 2004 £m £m %Turnover 1,291.2 913.6 41.3Operating profit 137.4 106.5 29.0Profit before taxation 110.0 100.6 9.3Profit after taxation 74.5 68.8 8.3Like-for-like free cash flow (note 15) 104.2 85.7 21.6Basic earnings per ordinary share 61.8p 60.6p 2.0Diluted earnings per ordinary share 61.0p 59.6p 2.3Interim dividend per share 11.0p 9.5p 15.8 Financial Performance Good progress has been made across the group, as enlarged by the Wickesacquisition, in what has proved to be a more difficult market than the group hasexperienced for some years. The benefits being delivered from the integrationof Wickes are running ahead of plan. Overall group turnover was up by 41.3% to £1,291.2 million, with 38.6%contributed by the acquisition of Wickes. Operating profit was £137.4 million,compared with £106.5 million in 2004, an increase of 29% and profit before taxat £110 million was up by 9.3%. Our operating margin was 10.6% compared to 11.7% in the first half of 2004,reflecting the structural changes following the incorporation of Wickes in thegroup's results for the first time (0.7%) and acceleration of our brown fieldbranch opening programme (0.2%). Turnover and profit before tax in thenon-Wickes related operations were £938.5 million and £101.6 millionrespectively and in respect of the Wickes acquisition £352.7 million and £8.4million respectively. The results are presented for the first time under International FinancialReporting Standards ("IFRS"). Profit before taxation is £5.1 million lower underIFRS than UK GAAP (excluding the effect of goodwill amortisation). A provisionof £3.0 million for outstanding holiday entitlement at June 30, and the £1.3million cost of share option schemes are the major components of the difference. Basic earnings per share were up 2.0% at 61.8 pence, compared with 60.6 pence in2004. Operating cash flows before movements in working capital at £165.4 million wereagain very strong and 32.9% higher than in the first half of 2004.Like-for-like free cash flow (as shown note 15) was up 21.6% at £104.2 millionagainst £85.7 million in 2004. In addition to the outlay on Wickes, cash outflow on expansion capitalexpenditure and acquisitions amounted to £39.1 million in the period compared to£35.1 million last year. Interest cover remained robust at 5.7 times for the sixmonths to June. The Wickes acquisition increased proforma bank debt (as shown in note 13) at 31December 2004, by £1,004.1 million, and the adoption of IAS 17 increased financelease debt by a further £20 million. After allowing for these, our strong cashflows have reduced debt by £40.9 million over the six months to the end of June2005. Equity increased by £41.4 million during the first half to £692.0 million.Gearing reduced from a proforma level of 156.9% (as shown in note 13) at 31December 2004 to 142.6% (as shown on note 12) at 30 June 2005. Our return onequity in the period (as shown in note 17) was 25.2% compared to 29.2% for theyear ended 31 December 2004. The board is increasing the interim dividend by 15.8% from 9.5p per share to11.0p per share, reflecting its continued confidence in the future prospects ofthe company. Markets Underlying drivers of long-term growth in our markets remain strong. Demand fornew dwellings continues to run ahead of current supply, with a 2005 forecast of183,000 completions, some 90,000 short of the estimated annual requirement.Government surveys of the backlog of investment in public sector infrastructuresuch as schools and hospitals, including repairs and new builds, indicatessignificant extra investment is still required. The estimates of "non-decent"homes provided by local authorities and social housing schemes that requirerepair ranges between 1.2 and 2.2 million. Similarly, surveys of the state ofdilapidation in private housing indicate over 30 per cent of homes requirerenovation. By early 2006 we expect to see the beneficial effect ofinfrastructure investment related to the 2012 London Olympics, estimated tocontribute between half and one percent annually to the national constructionmarket. During the first half, those elements of our markets related to government andcommercial projects remained robust. However, the weakness in consumer spendingexperienced after the post-Christmas sales season particularly affected the homeimprovement market, with a sharp decline experienced in February exacerbated bythe poor weather. Trading has remained fragile and those elements of ourbusiness directly serving retail customers - for example in Wickes and inshowrooms in our merchant outlets - have not achieved expected volumes ofactivity. In contrast, activity in the trade related parts of our business, includingapproximately one-third of Wickes activity, which is represented by tradecustomers, continued at satisfactory levels through the first quarter. Wesubsequently saw a small dip in trade market activity in the second quarter.Activity in trade markets has remained steady at this slightly lower level, withlittle perceptible change in levels of customer confidence. We have also experienced an acceleration in product cost inflation to an averageof 4.8% in the merchant business, as manufacturers seek to compensate for therecent sharp increase in input costs. This has particularly affected metalproducts, cement, and oil-based products such as plastic drainage. Capacity in both the merchant and retail sectors of the building materialsdistribution market has continued to expand. We estimate the annual rate ofexpansion for 2005 at 4.2% overall in merchanting, with the greatest increase inplumbing and heating, and 5.3% in home improvement retailing. Our own rate ofexpansion in merchanting is in line with the market rate. Trading Like-for-like turnover per working day was down by 0.5%, with an increase of1.6% in the Travis Perkins' builders merchant business and a decrease of 4.1% inthe specialist merchanting division (when combined defined as "Non-Wickesrelated" or "existing business"). This mainly reflected tough trading conditionsin the plumbing and heating market. Like-for-like turnover in Wickes' core business (representing 83% of itsturnover) in the 26 weeks to June 26, 2005 was down by 4.2%, whilst turnover inits showroom business was down by 8.4%. Overall Wickes like-for-like turnoverwas lower by 4.9%. The result in the showroom category reflected both reducedconsumer spending on 'big ticket' items within home improvement and the entry ofnew competitors. The lower levels of activity in both the retail and trade segments of therepair, maintenance and improvement ("RMI") market were not fully compensatedfor by government and commercial sectors. Our managers responded to the morechallenging conditions and managed successfully to maintain trading margins,principally through improved mix, notwithstanding the impact of increasedproduct inflation. Product cost inflation also eased deflationary pressures in the retail market ashome improvement retailers sought to offset lower volumes with higher margins.Wickes also reined back expenditure on planned marketing and brand buildingactivity in response to consumers' unwillingness to maintain spending levels.Recent data shows Wickes gaining market share slightly on a like-for-like basis.This supports our view that the Wickes proposition has enduring appeal to homeimprovers, and is less susceptible to seasonal and fashion-related trends thanits competitors. Against the background of a tough trading environment, our businesses reducedcosts, tightened controls on discretionary expenditures and took steps toimprove productivity. Group like-for-like sales per employee increased by 451compared to the first half last year, with like-for-like numbers employed overthe period falling by 451 (4.7%) in the merchanting businesses and by 284 (6.1%)in the retail business. These actions have enabled us to mitigate much of the effect of the lower thananticipated volumes traded. Business integration and expansion The acquisition of the home improvement retailer, Wickes, was completed inFebruary, adding a significant new channel to the group's building materialsdistribution business, which now comprises eight distinct operations servingover 190,000 trade customers and millions of consumers. Following the acquisition, a major integration programme was launched to pursuethe synergies identified from the combination of the Wickes' retail businesswith the merchanting businesses of Travis Perkins. The bulk of this workinvolves teams of executives from Wickes and Travis Perkins implementing aseries of projects together to achieve lower costs in both goods-for-resale andbought in goods and services. At the same time, each team of executives wastasked with achieving a further set of stretched targets to build a contingencyagainst possible price pressure in our markets and improve the overallresilience of the programme. The overall benefits achieved from the programme are running ahead of ouroriginal expectations and, despite lower than anticipated base volumes in bothretailing and merchanting, we expect to beat our targets for benefits from thiswork for both 2005 and 2006. In addition to 171 Wickes' branches, the group added 37 new branches to itsmerchanting operations, comprising 9 acquisitions and 28 brown field openingsahead of the record level achieved in the first half last year. Of these, 28new branches were in the Travis Perkins builders merchant division, with 8branches added to the specialist merchanting businesses and 1 to the retaildivision. Our potential deal flow remains strong, and we expect to exceed the full year2004 total of 51 net new branches in the merchanting division. Since the end ofJune we have added a further 15 new branches to all our businesses and we nowtrade from 972 locations in the UK. Given current market conditions, an increasing number of independent merchantsare seeking to sell. Our regular post-investment audits continue to show thatour new branches exceed the predicted financial performance made at the time ofacquisition or opening, making a positive impact on overall return on capital. Management and Organisation Following the acquisition of Wickes, we have implemented a series of changes toour management arrangements and strengthened our management capabilities. A newexecutive committee of the board has been constituted, comprising the executivedirectors together with selected managing directors from the group's eightbusinesses and central functions. The executive committee formalisespre-existing arrangements and facilitates more effective management of the widerspan of activities now represented in the group. In addition, the Wickes' boardmembers have joined the pre-existing group trading board. We have strengthened our property management through the appointment of MartinMeech as Group Property Director, who joins us in September from a FTSE 100retailer. This will help us in an important aspect of our plans for the furtherdevelopment of the group through network expansion. We replaced the head of ourplumbing and heating business with John Frost, the Managing Director responsiblefor building our highly successful Travis Perkins business in the South West.Norman Bell an external appointee with experience in both the trade and retailsectors, including a brief period at Wickes, has taken over responsibility forthe South West. Outlook The group has improved considerably its potential to grow in the UK buildingmaterials distribution market through a combination of acquisitions and brownfield openings. We intend to maintain the increased pace of branch expansion,increasing our ability to compete through scale advantages, and growing groupreturns. The strength of our current pipeline, for both new merchant outlets andretail sites, gives us confidence we will meet our business expansion targets. The excellent progress made on the integration of Wickes and on achieving ourstretched targets for benefits will help us cope with the adverse effects of thedownturn in consumer sentiment. We aim to drive further improvements inperformance and to this end we have accelerated integration of back office andother functions at Wickes with their counterparts at Travis Perkins. We are alsotaking steps to improve the attractiveness of the Wickes' proposition. We expect the tougher trading environment experienced in recent months tocontinue for the remainder of the year. Since the end of the first half-year,the merchanting market has been stable and the trend of our like-for-like salesper working day in July and August improved slightly to minus 0.1%. However,the UK retail environment has experienced a tough summer, with the DIY sectorsuffering more than most other non-food sectors. Our retail like-for-like salesper working day in July and August down 7.4% on last year in the core business.The recent cut in interest rates, although helpful, has not resulted in asignificant change in sentiment. Further reductions in borrowing costs and inother pressures on disposable incomes are likely to be necessary before thegroup can expect stronger markets in 2006. With anticipated lower volume growth, we have taken early action to cut costs,reduce headcount, and to build on our traditional strengths to serve customersbetter. Looking beyond 2005, we intend to continue this approach to drivefurther improvements in performance so as to combat anticipated marketconditions and deal with impending cost pressures, particularly in energy, fueland pensions. Our executive teams have managed the challenging conditions well and this givesus confidence that, as we leverage our increased scale we can continue to growprofits and return on capital. Consolidated income statement Non- Wickes Impact of Six months Six months Year. Related Wickes 30 June 2005 30 June 31 Dec.£m Total 2004 2004. (Note Below) (Reviewed) (Reviewed) (Audited) (Restated) (Restated) Revenue 938.5 352.7 1,291.2 913.6 1,828.6 Operating profit 106.2 31.2 137.4 106.5 217.7 Finance costs (Note 4) (4.6) (22.8) (27.4) (5.9) (11.2) Profit before taxation 101.6 8.4 110.0 100.6 206.5 Income tax expense (Note 5) (32.3) (3.2) (35.5) (31.8) (64.4) Retained profit transferredto reserves 69.3 5.2 74.5 68.8 142.1 Earnings per ordinary share (Note 6) Basic 61.8p 60.6p 124.4p Diluted 61.0p 59.6p 123.0p Proposed dividend per ordinary share 11.0p 9.5p 30.5p(Note 7) All results relate to continuing operations. Note The column headed "Impact of Wickes" includes the post acquisition result ofWickes, together with the synergies that have arisen, and the additional financecosts incurred by the group, as a result of the acquisition. Statement of recognised income and expense Six months 30 Six months Year June 30 June 31 Dec 2005 2004 2004 (Reviewed) (Reviewed) (Audited)£m (Restated) (Restated) Actuarial gains and losses on defined benefit pension (8.6) 10.8 (32.5)schemeDeferred tax on pension deficit 1.7 (4.8) 2.0Net income recognised directly in equity (6.9) 6.0 (30.5)Profit for the period 74.5 68.8 142.1Total recognised income and expense for the period 67.6 74.8 111.6 Consolidated balance sheet As at As at As at 30 June 30 June 31 Dec£m 2005 2004 2004 (Reviewed) (Reviewed) (Audited) (Restated) (Restated)ASSETSNon-current assets Property, plant and equipment 452.3 320.9 340.7Goodwill 1,239.2 294.1 304.8Other intangible assets 162.5 - -Investment property 4.0 4.2 4.2Deferred tax asset 53.8 31.7 38.5Total non-current assets 1,911.8 650.9 688.2 Current assets Inventories 277.2 184.6 200.6 Trade and other receivables 361.8 308.6 287.8 Cash and cash equivalents 26.1 33.9 116.9 Total current assets 665.1 527.1 605.3 Total assets 2,576.9 1,178.0 1,293.5 Consolidated balance sheet (continued) £m As at As at As at 30 June 30 June 31 Dec 2005 2004 2004 (Reviewed) (Reviewed) (Audited) (Restated) (Restated)EQUITY AND LIABILITIES Capital and reserves Issued capital 12.1 11.3 12.1 Share premium account 161.8 70.0 159.2 Revaluation reserves 26.5 27.1 26.7 Hedging reserve (5.3) - - Accumulated profits 496.9 424.1 452.6 Total equity 692.0 532.5 650.6 Non-current liabilities Interest bearing loans and borrowings 1,025.8 142.9 137.8 Deferred tax liabilities 79.0 28.6 38.3 Retirement benefit obligation 179.5 105.7 128.3 Long-term provisions 7.6 - - Total non-current liabilities 1,291.9 277.2 304.4 Current liabilities Trade and other payables 490.3 293.7 272.5 Tax liabilities 61.2 51.5 43.5 Interest bearing loans and borrowings 5.3 1.2 0.8 Unsecured loan notes 8.9 10.6 9.0 Short-term provisions 27.3 11.3 12.7 Total current liabilities 593.0 368.3 338.5 Total liabilities 1,884.9 645.5 642.9 Total equity and liabilities 2,576.9 1,178.0 1,293.5 The interim financial statements were approved by the board of directors on 2September 2005. 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£m 2005 2004 2004 (Reviewed) Restated Restated (Reviewed) (Audited) Operating profit 137.4 106.5 217.7Adjustments for: Depreciation of property, plant and equipment 26.8 16.0 33.1 Other non cash movements 1.3 2.3 (0.3) Gain on disposal of property, plant and equipment (0.1) (0.3) (0.2)Operating cash flows before movements in working capital 165.4 124.5 250.3 Increase in inventories (3.9) (2.3) (15.7) Increase in receivables (44.0) (37.8) (14.3) Increase in payables 42.0 49.7 28.4 Additional cash payments to the pension scheme (1.5) (5.1) (25.8)Cash generated from operations 158.0 129.0 222.9Interest paid (14.7) (3.6) (8.5) Income taxes paid (26.7) (26.9) (54.2) Net cash from operating activities 116.6 98.5 160.2 Cash flows for investing activities Interest received 0.2 0.2 0.5 Proceeds on disposal of property, plant and equipment 3.1 1.3 2.2 Purchase of property, plant and equipment (39.7) (33.5) (67.3) Acquisition of businesses net of cash acquired (1,020.7) (21.0) (39.0) Net cash used in investing activities (1,057.1) (53.0) (103.6) Financing activities Proceeds from issuance of share capital 2.6 0.6 90.6 Dividends paid (25.3) (19.0) (30.0) Payments of finance leases liabilities (1.1) (0.5) (1.0) Repayment of unsecured loan notes (0.1) (1.6) (3.2) Increase/(decrease) in bank loans 873.6 (25.0) (30.0) Net cash from/(used in) financing activities 849.7 (45.5) 26.4 Net (decrease)/increase in cash and cash equivalents (90.8) - 83.0 Cash and cash equivalents at beginning of period 116.9 33.9 33.9 Cash and cash equivalents at end of period 26.1 33.9 116.9 Notes to the interim financial statements 1 General information and accounting policies Basis of preparation From 2005 the group will prepare its consolidated accounts in accordance withInternational Financial Reporting Standards ("IFRS") as adopted for use in theEuropean Union. The group's first IFRS based results are its interim results forthe six months ended 30 June 2005 and the first Annual Report under IFRS will befor the year ending 31 December 2005. As a result, the comparative amountsincluded in these Interim Financial Statements that are shown in theconsolidated balance sheet, consolidated income statement and statement ofrecognised income and expense have been restated under IFRS from the UKFinancial Reporting Standard ("UK GAAP") values originally published by thegroup. Reconciliations of the group's UK GAAP balance sheets to its preliminary IFRSbalance sheets at 1 January 2004 ("the opening balance sheet"), 30 June 2004 and31 December 2004 together with reconciliations of the group's UK GAAP profit andloss accounts to its preliminary IFRS income statement for the six months to 30June 2004 and year to 31 December 2004 are shown in note 11. These preliminaryIFRS financial statements will form the basis of the comparative information inthe group's first IFRS Annual Report. IFRS are subject to continuing review and amendment by the InternationalAccounting Standards Board ("IASB") and subsequent endorsement by the EuropeanCommission and, therefore, are subject to change. Therefore, in determining thegroup's IFRS accounting policies, the Board of Directors has used its bestendeavours in making assumptions about those IFRS expected to be effective oravailable for adoption when the first IFRS annual financial statements areprepared for the year ending 31 December 2005. In particular, the Directors haveassumed that the European Commission will endorse the amendment to IAS 19 "Employee Benefits" - Actuarial Gains and Losses, Group Plans and Disclosuresissued by the International Accounting Standards Board in December 2004. Inaddition, the Directors have taken advantage of the exemption available underIFRS 1 to only apply IAS 32 "Financial Instruments: Disclosure and Presentation"and IAS 39 "Financial Instruments: Recognition and Measurement" from 1 January2005. As the accounting policies used to prepare the Interim FinancialStatement may need to be updated for any subsequent amendment to IFRS requiredfor first time adoption, or any new IFRS the group may elect to adopt early, itis possible that the preliminary opening balance sheet and IFRS comparatives mayrequire adjustment before being finalised. The Interim Financial Statements have been prepared on the historic cost basis,except that derivative financial instruments are stated at their fair value.The consolidated Interim Financial Statements include the accounts of thecompany and all its subsidiaries. The financial information for the six months ended 30 June 2005 and 30 June 2004is 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 onthe last page* of this Interim Report. A copy of the statutory accounts for theyear ended 31 December 2004 as prepared under UK GAAP has been delivered to theRegistrar of Companies. The auditors' report on those accounts was unqualified. The principal accounting policies applied in preparing the Interim FinancialStatement 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 All business combinations are accounted for using the purchase method. Inaccordance with the transitional provisions of IFRS 1, the basis of accountingfor pre-transition (1 January 2004) combinations under UK GAAP has not beenrevisited. The initial carrying amount of assets and liabilities acquired insuch business combinations is deemed to be equivalent to cost. The cost of an acquisition represents the cash value of the consideration and/orthe fair value of the shares issued on the date the offer became unconditional,plus expenses. At the date of the acquisition an assessment is made of the fairvalue of the net assets. It is this fair value, which is incorporated into theconsolidated accounts. Goodwill Goodwill represents the excess of the cost of acquisition over the share of thefair value of identifiable net assets (including intangible assets) of abusiness or a subsidiary at the date of acquisition. In accordance with IFRS 3,with effect from 1 January 2004, goodwill allocated to cash generating units isnot amortised, but is reviewed annually for impairment and as such is stated inthe balance sheet at cost less any provision 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 consolidatedincome statement on a straight-line basis over a maximum of 20 years exceptwhere they are considered to have an indefinite useful life. In the latterinstance they are reviewed annually for impairment. Notes to the interim financial statements 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 the lease. Properties held for resale Properties held for resale are surplus to the group's requirements and aretransferred to current assets and shown at the lower of cost and net realisablevalue. The appropriate transfer from revaluation reserves is offset against thevalue transferred from fixed assets. Profits on the sale of properties arecalculated by deducting the amounts at which they were stated in the balancesheet from the sale proceeds net of expenses. Investment properties Investment properties are properties held to earn rental income and are statedat cost less depreciation. Properties are depreciated to their estimatedresidual value on a straight-line basis over their estimated useful lives, up toa 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. 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. Impairment The carrying amounts of the group's assets other than inventories 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 carrying value exceedsthe recoverable amount a provision for the impairment loss is established with acharge being made to the income statement. For goodwill and intangible assets that have an indefinite useful life therecoverable amount is estimated at each annual balance sheet date. Impairment losses recognised in respect of cash generating units ("CGU") areallocated first to reduce the carrying amount of any goodwill allocated to theCGU and then to reduce the carrying amount of the other assets in the unit on apro-rata basis. Goodwill was tested for impairment at the date of transition to IFRS, 1 January2004, even though no indication of impairment existed. Inventories Inventories are stated at the lower of cost and net realisable value. Netrealisable value is the estimated selling price less the estimated costs ofdisposal. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with anoriginal maturity of three months or less. Bank overdrafts that are repayableon demand and short term draw downs of the revolving credit facility which forman integral part of the group's cash management are included as a component ofcash and cash equivalents for the purposes of the statement of cash flows. Arrangement fees Costs associated with arranging a bank facility are recognised in the incomestatement over the life of the facility. Notes to the interim financial statements Derivative financial instruments The group uses derivative financial instruments to hedge its exposure tointerest rate risks arising from financing activities. The group does not enterinto speculative financial instruments. In accordance with its treasury policy,the group does not hold or issue derivative financial instruments for tradingpurposes. Derivative financial instruments are recognised initially at cost. Subsequent toinitial recognition, derivative financial instruments are stated at fair value.The fair value of interest rate derivatives is the estimated amount the groupwould receive or pay to terminate the derivative at the balance sheet date,taking into account current interest rates and the current creditworthiness ofthe swap counterparties. Where conditions for hedge accounting are met the portion of the gains or losseson the hedging instrument that are determined to be an effective hedge arerecognised directly in equity and the ineffective portion is recognised in theincome statement. The gains or losses that are recognised in equity aretransferred to the income statement in the same period in which the hedged firmcommitment affects the income statement. For derivatives that do not qualify for hedge accounting, any gains or lossesarising from changes in fair value are taken directly to the income statement. 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, and 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 plan The group issues equity-settled share-based payments to certain employees(Executive share options and Save As You Earn), which do not include marketrelated conditions. These payments are measured at fair value at the date ofgrant by use of the Black Scholes model taking into account the terms andconditions upon which the options were granted. The cost of equity settledawards is recognised on a straight-line basis over the vesting period, based onthe group's estimate of the number of shares that will eventually vest. No costis 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. 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. Notes to the interim financial statements 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. Segmentinformation about these businesses for the six months ended 30 June 2005 ispresented below. Builders DIY Retailing Eliminations Consolidated Merchanting£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 are no inter-segment sales or charges.Other informationSegment assets 1,233.1 1,316.9 - 2,550.0Unallocated corporate assets 26.9Consolidated total assets 2,576.9 Segment liabilities (503.4) (298.8) - (802.2)Unallocated corporate (1,082.7)liabilitiesConsolidated total liabilities (1,884.9) Consolidated net assets 729.7 1,018.1 Capital expenditure 30.9 8.8 39.7Depreciation 18.9 7.9 26.8 Notes to the interim financial statements 3 Pension scheme Builders Merchanting £m DIY Retailing Total Gross deficit 1 January 2005 (128.3) - (128.3)Deficit at date of acquisition - (45.4) (45.4)Current service costs (6.0) - (6.0)Contributions 11.0 - 11.0Other finance costs (1.6) (0.6) (2.2)Actuarial (loss)/gain - corporate bond yields (27.0) (0.3) (27.3) - return on assets 10.4 1.2 11.6 - other 6.6 0.5 7.1Gross deficit at 30 June 2005 (134.9) (44.6) (179.5)Deferred tax asset 40.4 13.4 53.8Net deficit at 30 June 2005 (94.5) (31.2) (125.7) 4 Finance costs Six months Six months Year£m 30 June 30 June 31 Dec 2005 2004 2004 Loan and other bank interest 23.9 4.1 8.4Finance lease charges 1.3 - -Other finance costs - pension schemes 2.2 1.8 2.8 27.4 5.9 11.2 Interest cover (times) 5.7 26.0 25.9 Interest cover is calculated by dividing operating profit by loan and otherbank interest. 5 Income tax expense Six months Six months Year£m 30 June 30 June 31 Dec 2005 2004 2004Current tax:UK corporation tax - current year 36.0 30.5 54.3 - prior year - - 0.9 36.0 30.5 55.2Deferred tax: - current year (0.5) 1.3 10.1 - prior year - - (0.9)Total deferred tax (0.5) 1.3 9.2Total tax charge 35.5 31.8 64.4 Tax for the interim period is charged at 32.3% (Year to 31 December 2004:31.2%), representing the best estimate of the weighted average annualcorporation tax rate expected for the full financial year. Notes to the interim financial statements 6 Earnings per share Six months Six months Year£m 30 June 30 June 31 Dec 2005 2004 2004EarningsEarnings for the purposes of basic and diluted 74.5 68.8 142.1earnings per share being net profit attributable toequity holders of the parent Number of sharesWeighted average number of ordinary shares for the 120,657,659 113,452,820purposes of basic earnings per share 114,232,096Dilutive effect of share options on potential 1,538,168 2,023,619ordinary shares 1,322,132Weighted average number of ordinary shares for the 122,195,827 115,476,439 115,554,228purposes of diluted earnings per share 7 Dividends Amounts were recognised in the financial statements as distributions to equityshareholders in the following periods: Six months Six months Year£m 30 June 30 June 31 Dec 2005 2004 2004 Final dividend for the year ended 31 December 25.3 19.02004 of 21.0 pence (2003: 16.8 pence) per ordinaryshare 19.0Interim dividend for the year ended 31 - - December 2004 of 9.5 pence per ordinary share 11.0 The proposed interim dividend of 11 pence per ordinary share in respect of theyear ending 31 December 2005 was approved by the Board on 2 September 2005 andin accordance with IFRS has not been included as a liability as at 30 June 2005. 8 Bank overdrafts and loans On completion of the acquisition of Wickes Limited on 11 February 2005, a newfive-year facility comprising a £500 million term loan and a £700 millionrevolving credit facility was partly drawn. At 30 June 2005 the group had thefollowing bank facilities available: 30 June 30 June 31 Dec£m 2005 2004 2004 Drawn facilities5 year term loan 500.0 - -5 year revolving credit facility 500.0 - -Bilateral loans - 125.0 120.0 1,000.0 125.0 120.0Undrawn facilities5 year term loan - - 500.05 year revolving credit facility 200.0 - 700.0Bank overdrafts 25.0 54.0 54.0364 day uncommitted facilities - 78.0 78.0 225.0 132.0 1,332.0 Notes to the interim financial statements 9 Share capital Authorised AllottedOrdinary shares of 10p No. £m No. £m At 1 January 2005 135,000,000 13.5 120,519,379 12.1Allotted under share option schemes - - 290,692 -At 30 June 2005 135,000,000 13.5 120,810,071 12.1 10 Acquisition of businesses On 11 February 2005, the group acquired 100% of the issued share capital ofWickes Limited for cash consideration of £1,010.8 million. This transaction hasbeen accounted for by the purchase method of accounting. Wickes fair value table£m IFRS book value Provisional Provisional fair fair value value adjustmentsNet assets acquiredProperty plant and equipment 105.4 (6.0) 99.4Inventories 69.4 0.4 69.8Trade and other receivables 27.6 (1.7) 25.9Cash and cash equivalents 6.7 - 6.7Trade and other payables (190.1) (11.5) (201.6)Retirement benefit obligations (12.1) (19.7) (31.8)Tax liabilities (0.6) 4.9 4.3 6.3 (33.6) (27.3) Other intangible assets (net of deferred tax) 113.7Goodwill 917.5Costs not charged to goodwill 6.9 1,010.8Satisfied by:Cash 994.3Directly attributable costs included in goodwill 9.6 1,003.9Directly attributable costs not included in 6.9goodwill 1,010.8 The net amount paid after deducting £6.7m of cash in Wickes at the date ofacquisition was £1,004.1m. In addition during the period the group has acquired 7 new businesses with 9branches for a combined value of £23.5m (after adjusting for cash acquired atthe date of acquisition) which resulted in goodwill of £16.9m. Notes to the interim financial statements 11 Explanation of transition to IFRS The reconciliations of equity at 1 January 2004 (date of transition to IFRS), at31 December 2004 (date of last UK GAAP financial statements) and at 30 June 2004have been included below to enable a comparison of the 2005 published interimfigures with those published in the corresponding period of the previousfinancial year. In addition, there is also the reconciliation of the UK GAAPprofit for the year ended 31 December 2004 and six months ended 30 June 2004 tothe profit restated under IFRS. The significant changes as a result of the transition to IFRS and of adoptingthe IFRS group accounting policies are described below. IFRS 2 Share-based payments In accordance with IFRS 2, the group has recognised a charge reflecting the fairvalue of outstanding share options granted to employees since 7 November 2002.The fair value has been calculated using the Black Scholes valuation model andis charged to profit over the relevant option vesting period, adjusted toreflect actual and expected levels of vesting. The impact of this change hasbeen a charge of £1.4m to operating profit for the year to 31 December 2004 andof £0.7m for the six months to 30 June 2004. IFRS 3 Business combinations IFRS 3 prohibits the amortisation of goodwill. The standard requires goodwill tobe carried at cost less impairment. Impairment reviews should be carried outannually and also when there are indications that the carrying value may not berecoverable. As permitted by IFRS 1, the Group has chosen to apply IFRS 3prospectively from 1 January 2004, the date of transition, and has chosen not torestate previous business combinations. Therefore, goodwill is stated in theopening balance sheet at 1 January 2004 at its UK GAAP carrying value of £285.7mwith the subsequent 2004 amortisation being reversed. The impact on operatingprofit is a credit of £17.4m for the year ended 31 December 2004 and a credit of£8.5m for the six months ended 30 June 2004. IAS 12 Income taxes IAS 12 requires entities to calculate deferred taxation based on temporarydifferences, which are defined as the difference between the carrying amount ofassets/liabilities and their tax base. As a result, the group has provided anadditional £19.1m of deferred tax liabilities in its opening balance sheet,£16.7m at 30 June 2004 and £18.8m at 31 December 2004 that were not requiredunder UK GAAP. These arise from the potential tax gains on the revaluation offixed assets, on certain acquired buildings that do not qualify for industrialbuilding allowances and from the effect of implementing IFRS 2. Where required,deferred tax has been provided on all other IFRS adjustments. IAS 16 Property, plant and equipment In accordance with IFRS 1, the group has elected, where appropriate, to use therevaluation carrying amount of certain properties as the "deemed cost" ontransition to IFRS. IAS 17 Leases Under IAS 17, a lease is classified as a finance lease if it transferssubstantially all the risks and rewards of ownership to the lessee. Assets heldunder finance leases and the related lease obligations are recorded in thebalance sheet at the lower of the fair value of the property and the presentvalue of the minimum lease payments at inception of the leases. The impact ofthe new standard means that a number of property leases will now be capitalised.This has resulted in an increase to fixed assets of £14.4m and creditors of£18.5m giving a net decrease to net assets of £4.1m and a credit of £1.0m tooperating profit for the year to 31 December 2004, with a decrease to net assetsof £4.2m and a credit of £0.5m to operating profit (£0.1m to profit before tax)for the six months to 30 June 2004. IAS 19 Employee benefits As the group has an obligation to its employees to pay accrued holidayentitlement, IAS 19 requires it to accrue for holidays earned by its employees,but not taken by the balance sheet date. Whilst the holiday pay year isco-terminus with the statutory year-end, at the half-year employees have earnedbut not taken holidays. Therefore, whilst it is expected that the accrual in theInterim Financial Statements will be broadly similar in magnitude each year,there is a balance sheet movement and income statement impact between the firstand second half of the financial year. This has resulted in a charge of £2.5mto operating profit for the six months ended 30 June 2004, which has beenreversed in the second half. IAS 37 Provisions Under IAS 37, a provision should only be recognised when there is a presentlegal or constructive obligation to transfer resources. For Travis Perkins plc,no such obligation to pay a dividend exists until the shareholders give formalapproval to the proposed dividend at the annual general meeting. Therefore underRelated Shares:
Travis Perkins