Annual Financial Report

RNS Number : 8225W

Kingfisher PLC

29 April 2016

 

29 April 2016

 

KINGFISHER PLC

(the "Company")

Annual Report and Accounts 2015/16

In compliance with Listing Rule 9.6.1, the Company announces that the following documents have today been submitted to the UK Listing Authority and will shortly be available for inspection via the National Store Mechanism at www.hemscott.com/nsm.do

§ Annual Report and Accounts for the year ended 31 January 2016 (the "2015/16 Annual Report")

§ Notice of Annual General Meeting 2016

§ Proxy Form in respect of the Annual General Meeting 2016

The above documents have also been posted or otherwise made available to shareholders. The 2015/16 Annual Report and the Notice of Annual General Meeting 2016 have also been published on the Company's website at www.kingfisher.com/investors. 

Additional Information required by Disclosure and Transparency Rule 6.3.5

In compliance with DTR 6.3.5, the following information is extracted from the 2015/16 Annual Report and should be read in conjunction with the Company's Final Results announcement for the year ended 31 January 2016 issued on 23 March 2016.  Both documents are available at www.kingfisher.com and together constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service.  Page and note references in the text refer to page numbers and notes contained in the 2015/16 Annual Report.  This announcement is not a substitute for reading the 2015/16 Annual Report in full.

1.       Principal Risk Factors

Given the scale of our businesses, the Board of Directors recognises that the nature, scope and potential impact of our business and strategic risks is subject to constant change. As such, the Board has implemented the necessary framework to ensure that it has sufficient visibility of the principal risks and the opportunity to regularly review the adequacy and effectiveness of our mitigating controls and strategies. The approach combines a top-down strategic view at Company level and a bottom-up operational view of the risks at Operating Company level.

This year the Company has carried out a strategic review and prepared a plan for the next five years. The Board has considered the risks following the strategic review of the business. Even with the changes made to our plan, our risks remain unchanged, apart from one. The risk relating to our investments failing to deliver has been separated into two risks, reflecting the importance of the Unified IT platform in delivering the strategic initiatives. We have also added information relating to the movement in the level of risk exposure during the year. We have considered the risk exposure in the last year and whether the risk exposure is increasing, decreasing or remains unchanged.

During the year the Board has also considered the nature and level of risk that we are prepared to accept in order to deliver our business strategies, and has reviewed and approved our internal statement of risk appetite. This describes both the current and desired levels of acceptable risk, supported by high level qualitative risk statements, ensuring that risks are proactively managed to the level agreed by the Board.

The Corporate Governance report on page 39 describes the systems and processes through which the directors manage and mitigate risks. The Board considers that the principal risks to achieving its strategic aims are set out below.

Principal risk	How we manage and monitor the risk	Movement in the period
Unified and unique offer
Organising Kingfisher as a more unified company with a unified customer offer rather than a collection of individual businesses fails to deliver the anticipated benefits	We are organising the business differently, becoming more of a single unified company rather than a collection of individual businesses. The new Leadership Team structure reflects the new organisational design. As with all initiatives undertaken, the Leadership Team monitors the programme and benefits realisation on a regular basis, ensuring sufficient resources are available to deliver the requirements. A Business Transformation function has been created to coordinate and monitor progress. KPIs and key milestones have been identified and tracking put in place. The Board also monitors progress via regular updates from the Business Transformation function and the leaders of the strategic initiatives. We will continue to ensure that changes are only implemented once we have completed an appropriate level of planning and testing, relative to the risk. In addition, we ensure that the assumptions and insight that support the introduction of new products or services will deliver the benefits to both our customers and our shareholders prior to their introduction.	No Change. At this stage of the transformation our risk exposure has not changed in the last year. As we progress through the transformation the level of risk we are exposed to will increase as larger parts of our structure and supply chain are impacted. Therefore in each area we are ensuring we have plans in place to mitigate the increasing risk.
We fail to deliver the benefits of a more unified and unique offer and standardised activities and processes	We aim to offer customers a product range which is differentiated from that of our competitors through innovation and exclusivity. We are creating a complete, unified, unique and leading offer. In doing so we are developing a new organisational design and a new set of accountabilities. We have: •  project teams to identify the optimum opportunities for presenting the same products in our stores across Europe in six leading ranges with bathroom and outdoor being focused upon first; •  strong project management processes in place, including capturing lessons learned for continuous improvement; •  initiatives to take the best practice and best product from across the Company; •  validation and governance processes in place for business case approvals of range and procurement decisions, including approvals of Operating Company-based exceptions; •  clearly defined range and purchasing standards, principles and methodology with guidance and support from expert leads; •  performance of the ranges and brands is tracked and strategies updated accordingly; and •  a strong sourcing network which is focused on securing Company buying opportunities.	No Change. We believe our risk exposure is currently stable given the stage of the project. As we progress and the level of Cost of Goods Sold (COGS) impacted increases this may change.
A lack of perceived price competitiveness, particularly when compared to more discount based or online competitors, would affect our ability to maintain or grow market share	Significant investment in pricing to reinforce and communicate our value credentials. This is supported by: •  the use of improved customer insight and analytical tools to optimise product ranging and pricing strategies; and •  more targeted use of online and mass media tools to communicate and reinforce price perception (for example, price comparison websites, such as www.kitchen-compare.com and www.bathroomcompare.com in the UK).	No Change. This continues to be a key area of focus for us and we believe we are taking the necessary steps to stabilise our risk exposure.
We fail to deliver our sustainability targets due to not integrating our sustainability plan into the day-to-day operations of the business	Our commitment to sustainability remains one of Kingfisher's key values and across the organisation we continue to ensure that we engage with and take advice from our expert partners (BioRegional and Forum for the Future). We have the following steps in place to manage and monitor this risk: •  as part of our business planning process we set and annually review sustainability plans for each business; •  monthly Board reports monitor the progress of our largest Operating Companies in achieving their sustainability targets; •  data is reported annually to the Company and signed off by the local boards; •  within each business responsibility has been assigned to a team or individual for the delivery of the sustainability targets; •  meetings of the sustainability teams are held twice a year to exchange best practice and progress common initiatives; and •  we have appointed a Sustainability Director for Offer and Supply Chain to develop specific delivery plans for implementing the Company's sustainability targets and policies relating to products and supply chain.	No Change. The risk exposure in this area may increase as we develop our unified offer and we will be more reliant on sustainability being integrated in the operations.
Digital, Retail operations, Unified and unique offer
We fail to create a culture of innovation in our offer, format and digital channels to stimulate consumer spend and deliver desired sales growth	We continue to invest in our omnichannel strategy and technologies, and take learnings from our businesses that have well developed models e.g. Screwfix. We are developing a platform which will be rolled out across the Company to offer alternative channels for customers. Our investment in the IT strategy programme will provide systems and capabilities to respond to the changing ways that customers shop. 'Brilliant Basics' are being developed for each step of the customer journey. This is managed and monitored by our Digital Forum. We are enhancing the skills and experience in the Digital area to deliver the strategy. We continue to invest in our existing store portfolio whilst seeking to minimise its cost base and optimise sales densities. Where there are opportunities to expand and innovate we will do so using a combination of existing and new formats. We will pursue low risk market entry and new flexible store format strategies based on the utilisation of current skills and capabilities available within the Company.	No Change. We are exposed to risk in this area, particularly in failing to keep pace within the digital area. However, we feel the steps we have taken this year have ensured that we are better positioned to fulfil our digital ambitions.
Operational efficiency
Our investments fail to deliver value to the Company	We continually review and assess opportunities for expansion, in terms of both online and bricks and mortar retail, across all of the territories and regions in which we operate. We are investing in our financial and operational systems to develop a Company-wide IT solution. The Unified IT platform is supported and monitored via the programme team and programme office. Each Operating Company is represented and the idea is to standardise as far as possible. Regular updates are given to the Leadership Team and all decisions are approved in line with our investment methodology. Country and market entry strategies are based on the application of a proven operating model and supported by the part of the business with the most relevant experience, capabilities and capacity to successfully lead a market entry strategy. We also ensure that any proposed acquisition or market entry strategy is subject to an appropriate level of challenge and due diligence from both the Leadership Team and specialist Company functions which may include Tax, Treasury, Legal, Finance and Risk and Internal Audit. This due diligence is also supported by external and independent advisers when necessary. Following an acquisition, integration plans are prepared and monitored at Operating Company and Company levels. Existing management teams are supplemented with Company resources to monitor and assist with the integration. All investments are evaluated and monitored via our post investment review methodology in place across the business.	Increasing. We are investing significant capital expenditure over the first three years of the transformation. This is therefore an area of increased focus for us to ensure we take the steps to deliver value.
Our Unified IT platform programme fails to deliver the requirements in line with the plan needed to enable and support the delivery of the Company strategy	The key aims of the Unified IT platform are to meet changing customer needs, make it easier for stores to serve customers, establish unified and integrated processes and systems across the Company and build a flexible and future proof systems architecture. The Unified IT platform will underpin the delivery of the other strategic pillars. It represents a significant change to the business. To ensure this change is managed alongside the interdependencies with the other projects, the programme is monitored via the Transformation reporting process. Within the programme: •  a rigorous change control procedure is in place with the Leadership Team having final approval on all functional changes; •  an extensive pilot has been completed, testing the end-to-end system and circa 80-90% of the overall functionality; •  the roll-out plan avoids a 'big bang' implementation approach, instead gradual increments are implemented over a short period of time, ensuring dual running kept to a minimum and allowing any issues to be identified and resolved before moving on; and •  the approach to implementation and business change has been established by the first Operating Company in the roll-out and is the foundation for all other roll-outs. In order to support the Company strategy it is essential that the solution takes advantage of emerging technologies and trends. Applications are being provided which provide flexibility to areas where innovative ideas are most likely, tools are typically agnostic and therefore can be interchanged in the event this is required. The digital IT team is integrated within the overall IT function with common release management and operations in place. Maintaining a team with the necessary skills, expertise and knowledge is important to maintain the pace and to mitigate risk of roll-out. We have used our existing partners to support our needs in some areas. We have maintained a central team who established the template and we supplement resources with local roll-out teams. The Leadership Team and the Board also receives regular updates to monitor progress.	No Change. Whilst we have successfully completed our pilot and roll-out has started, and is progressing to plan, we still have the majority of the implementation to deliver across our estate, therefore we feel that the risk remains unchanged.
We fail to identify and maximise potential cost reductions and efficiency savings	Ensuring we operate efficiently and reduce our costs is a key area of focus for us. As part of our five-year planning process each business reviews its cost base and identifies potential savings which are then monitored as part of the budgeting and forecasting processes. As part of our investment in IT we have identified a number of benefits and benchmarked these externally. One of our strategic pillars is optimising our operational efficiency which is driven by our goods not for resale (GNFR) opportunity. A project team is in place to review categories of spend across the Company and not only identify cost savings but also opportunities to work in a more effective way. The project teams are supported by a Steering Group whose responsibilities include monitoring plans, milestones and the financial impact for each category. New category solutions, including process changes, are reviewed in detail with operational experts, and where appropriate on a store-by-store basis. All aspects are appropriately considered before decisions are made.	No Change. Wave 1 is progressing well and therefore our risk exposure in this area has remained stable.
People
We do not make the necessary investment in our people to ensure that we have the appropriate capacity, skills and experience	Across our businesses we are developing our talent and building our leadership capacity. Specific examples of this include: •  The Chief People Officer is leading the work to improve our capabilities, ensuring we have effective KPIs and relevant reward structures. We are aligning reward structures across the Company. •  We continue to invest in development activities for our store-based colleagues and in how we support and recognise the role of our customer advisers across the organisation. •  We are creating a strong pipeline of developing talent through structured programmes including graduate and high potential schemes, for example the LEAD programme for the development of senior leaders.	No Change. We now have a clear understanding of the scale of the change and plans in place to deliver a more unified Company.
Operational risks
Uncertainty surrounding the resilience of the global economy and increased geopolitical volatility may impact both consumer confidence and the long-term sustainability and capabilities of our supplier base	The spread of countries within which the Company operates aids in the mitigation of this risk. However, with continuing market volatility and uncertainty across all of the economies in which we operate, particularly within the Eurozone, we continue to monitor potential exposures and risks and provide effective risk management solutions to both our businesses and our strategic suppliers. These include: •  the provision of supply chain finance programmes to support suppliers; •  support from a strong portfolio of international banking partners that provide flexibility, access to funding and reliable local retail cash and card payment processing services; •  diversification of cash holdings across a number of financial institutions with the strongest short-term credit rating; •  an appropriate and prudent mix of hedging policies, cash deposits and debt financing to minimise the impact of foreign exchange currency volatility on the Company; •  the geopolitical drivers for uncertainty and volatility in the Eurozone are being monitored continuously, such that if risks escalate, measures are implemented to ensure there is sufficient and co-ordinated contingency planning; •  a cross-functional steering group established to monitor developments in Russia, consider business continuity action and undertake scenario planning; and •  active monitoring of the Brexit situation via a cross-functional team consisting of our Government Affairs, Treasury and Tax teams. Work has begun to consider the implications of Brexit, including presenting potential implications of this to the Board.	Increasing. There are a number of uncertainties relating to the UK's potential exit from the EU and heightened geopolitical tensions within some of our markets.
We fail to maintain a safe environment for our customers and store colleagues which results in a major incident or fatality that is directly attributable to a failure in our health and safety management systems	With 74,000 employees and millions of customers visiting our stores each week, robust health and safety systems are a priority. The Board is committed to creating and sustaining a safe environment for both our staff and customers and regularly reviews and challenges health and safety performance, standards and targets across our businesses. As regulatory requirements vary from country to country, each Operating Company is required to designate a director with specific responsibility for health and safety. This person is then responsible for ensuring that a written health and safety policy is communicated, that appropriate health and safety arrangements are in place to protect our employees and customers and that we comply with local regulatory requirements. These individuals are supported by Health & Safety managers who are all members of our Safety Network. We also have Company-wide health and safety minimum standards in place to ensure consistent compliance across the Company. The Company Health & Safety Committee sets the policy and standards for the Company. Compliance is monitored across our businesses through a programme of self-certification and health and safety audits, with issues reported through local Audit Committees and escalated to the Leadership Team, Audit Committee or Board where necessary.	No Change. Our Safety Network is embedded in the business and is working with the Operating Companies to ensure our minimum standards are maintained during the transformation and adopted in new areas as needed.
Kingfisher's reputation and brand are affected by a major environmental or ethical failure, a significant corporate fraud or material non-compliance with legislative or regulatory requirements resulting in punitive or custodial procedures	Both employees and suppliers working for or with Kingfisher must conduct themselves according to our minimum standards of ethics and behaviours as defined by our Code of Conduct. Responsibility for compliance with our Code of Conduct rests with each Operating Company Chief Executive and appropriate resources are available to our businesses to ensure that both staff and suppliers are aware of and comply with the Code, and our businesses can manage the legislative or regulatory challenges presented by their respective jurisdictions. We have policies and procedures in place to support each of the environmental, ethical, fraud, legislative and regulatory areas. Experts in each field monitor and manage the risk in their respective areas at a local level and are supported by Company functions. For any new requirements introduced project teams are put in place to identify the additional steps needed and to ensure these are adopted across the Company. The Audit Committee and the Board receive information on any changes in this area and monitor any issues which occur.	No Change. Going forward some of our strategic initiatives may increase our exposure to regulatory and legislative requirements. However, we are putting steps in place to mitigate this.

2.       Details of Related Party Transactions

During the year, the Company carried out a number of transactions with related parties in the normal course of business and on an arm's length basis. The names of the related parties, the nature of these transactions and their total value are shown below:

	2015/16		2014/15
£millions	Income	Receivable	Income/ (expense)	Receivable
Transactions with Koçtas Yapi Marketleri Ticaret A.S. in which the Group holds a 50% interest   Provision of employee services   Commission and other income	- 1.2	- 0.1	(0.1) 1.2	(0.1) 0.2
Transactions with Crealfi S.A. in which the Group holds a 49% interest   Provision of employee services   Commission and other income	0.1 5.7	- 0.3	0.1 6.6	- 1.5
Transactions with Kingfisher Pension Scheme   Provision of administrative services	1.2	0.1	1.3	0.4

Services are usually negotiated with related parties on a cost-plus basis. Goods are sold or bought on the basis of the price lists in force with non-related parties.

The remuneration of key management personnel is given in note 8.

Other transactions with the Kingfisher Pension Scheme are detailed in note 27.

3.       Directors' Statement of Responsibility

The directors confirm that to the best of their knowledge:

-    the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole;

-    the strategic report includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face; and

-    the Annual Report and financial statements, taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the company's performance, business model and strategy.

Clare Wardle

Group General Counsel and Company Secretary

Tel:  [phone]

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