Interim results part 1

RNS Number : 0449M

Kingfisher PLC

12 September 2012

 



Kingfisher reports half year sales down 3.3%, up 1% in constant currencies, adjusted pre-tax profits down 15.5% to £371 million

Group Financial Summary 26 weeks ended 28 July 2012	2012/13	2011/12	% Total Reported change	% Total Constant currency change	% Like-for-like (LFL) change
Sales	£5,478m	£5,662m	(3.3)%	1.0%	(2.8)%
Retail profit	£403m	£473m	(14.7)%	(10.0)%
Adjusted pre-tax profit	£371m	£439m	(15.5)%
Adjusted basic EPS	11.5p	13.5p	(14.8)%
Interim dividend	3.09p	2.47p	+25.1%
Net cash/ (financial net debt)	£29m	£(186)m	n/a

Note: Joint Venture (Koçtaş JV) and Associate (Hornbach) sales are not consolidated. Retail profit is operating profit stated before central costs, exceptional items, amortisation of acquisition intangibles and the Group's share of interest and tax of JVs and associates. Adjusted measures are before exceptional items, financing fair value remeasurements, amortisation of acquisition intangibles, related tax items and tax on prior year items. A reconciliation to statutory amounts is set out in the Financial Review (Section 5).

Highlights:

·    Results significantly impacted by

o £25 million adverse foreign exchange movements when translating euro and zloty overseas profits into sterling for reporting purposes

o Over £30 million less profit from record wet weather in the UK and Northern Europe, significantly impacting footfall. Seasonal product sales were down 7% resulting in higher seasonal markdowns to clear excess seasonal stocks and additional marketing to drive footfall and share

o Around £10 million cost of accelerating the national roll out of new common own brands in the UK

·    On-going self-help initiatives, including higher direct sourcing, helped limit the overall profit decline 

·    Free cash flow generation up year on year, ending H1 with £29 million net cash

·    'Creating the Leader' programme well underway, 2012/13 milestone delivery on track

·    £5 million net exceptional charge post tax, primarily relating to streamlining support offices offset by the closure of the final salary pension scheme to future accrual in the UK

·    Interim dividend up 25.1%, calculated automatically as 35% of the prior year's total dividend in line with stated policy

Statutory reporting	2012/13	2011/12	Reported Change
Profit before taxation	£364m	£438m	(16.9)%
Profit for the period	£259m	£320m	(19.1)%
Basic EPS	11.1p	13.7p	(19.0)%

Note: A reconciliation to adjusted measures above is set out in the Financial Review (Section 5).

Ian Cheshire, Group Chief Executive, said:

"This has been a tough first half with unprecedented wet weather throughout the key spring and summer seasons in Northern Europe. This affected footfall and demand for outdoor maintenance, gardening and leisure products, which normally account for a significant proportion of our first half sales.

"However, we took action to clear excess seasonal stocks, drive indoor product sales and tightly manage cash, as well as accelerating our self-help initiatives. Whilst we were unable to offset fully the adverse weather impacts, our efforts meant we exited the first half in as good shape as possible and with net cash on the balance sheet. Our new medium term self-help plan, 'Creating the Leader', is now well underway and we are on track to deliver our key milestones for 2012/13.

"Whilst an uncertain economic backdrop has been a feature of our markets for some time, we recognise that this is unlikely to improve for a while. In the short term we will continue to focus on trading effectively, whatever the market conditions, whilst accelerating our self-help initiatives where practical and remaining agile in order to capitalise on opportunities as they arise. Having got off to a good start with our new 'Creating the Leader' programme, I am very confident that we can create a world class home improvement retailer and unlock the full potential of our international talent and scale."

Enquiries:

Ian Harding, Group Communications Director	020 7644 1029
Sarah Levy, Head of Investor Relations	020 7644 1032
Nigel Cope, Head of Media Relations	020 7644 1030
Matt Duffy, Investor Relations Manager	020 7644 1082
Clare Haines, Media Relations Officer	020 7644 1286
Brunswick	020 7404 5959

Further copies of this announcement can be downloaded from www.kingfisher.com or viewed on the Kingfisher IR iPad App available for free at the Apple App store.

We can also be followed on twitter @kingfisherplc.

A video interview with Ian Cheshire and Kevin O'Byrne is available on the website.

Company Profile:

Kingfisher plc is Europe's leading home improvement retail group and the third largest in the world, with 988 stores in eight countries in Europe and Asia. Its main retail brands are B&Q, Castorama, Brico Dépôt and Screwfix. Kingfisher also has a 50% joint venture business in Turkey with Koç Group, and a 21% interest in, and strategic alliance with Hornbach, Germany's leading large format DIY retailer.

The remainder of this release is broken down into five main sections:

1)   'Creating the Leader' update

2)   Trading review by major geography

3)   Country data

4)   Second quarter by major geography - 13 weeks ended 28 July 2012

5)   Financial Review and, in part 2 of the announcement, the interim condensed Financial Statements

Section 1

'CREATING THE LEADER' UPDATE

Our unique contribution as a business to our customers is that we can harness our international scale, our sourcing capability, our heritage as a leader in sustainability and our home improvement experience to bring new, more sustainable and more affordable products to market. By also providing our customers with project advice and new shopping channels to complement our stores we will make it easier for them to adapt their homes to their evolving needs. Our shorthand for describing this new purpose is "Better Homes, Better Lives".

'Creating the Leader' H1 progress and milestones for H2

In March 2012, we set out four areas (Easier, Common, Expand and One Team) with eight specific steps that make up 'Creating the Leader' along with their associated key success measures and short term annual milestones.

Today we update on the progress we have made towards each of the 2012/13 milestones:

EASIER

1.   Making it easier for our customers to improve their home

2.   Giving our customers more ways to shop

2012/13 first half progress

·    Completed UK roll out of DIY training classes

·    Launched B&Q YouTube channel with over 100 'how to' videos available for the most popular DIY projects

·    Trialling new 'easier' store formats (e.g. higher in-store availability, more self-service, more in-store learning aids/demonstrations) in France & Russia  

·     Prepared for the UK's 'Green Deal'

o  'Eco' shops now being trialled in 5 B&Q UK stores

o  Started providing home efficiency assessments

·    Launched Screwfix mobile 'click, pay & collect' offer, already accounting for 50% of total mobile sales

·    Launched a multi-channel platform in Screwfix

2012/13 second half milestones

·    Roll out Group multi-channel platform to B&Q's 'TradePoint'

·    Upgrade B&Q's on-line offer

·    Trial 'click & collect' in Castorama France

COMMON 

3.   Building innovative common brands

4.   Driving efficiency and effectiveness everywhere

2012/13 first half progress

·    Grown the proportion of sales of direct sourced and common* own brands, on track to reach full year targets

·    Opened new direct sourcing office in Turkey 

·    Extended 'Trade' common own brands in Screwfix and Brico Dépôt

o Mid-range 'Titan' hand power tools launched in 2010 now being extended to other products e.g. vacuums and pressure washers

o Developed new 'Site' work wear brand

·    Developed a Group-wide stock forecasting and replenishment IT solution, now in full roll out in B&Q UK & Ireland, improving availability and reducing stock levels

·    Driven Group-wide cost efficiencies

o GNFR (Goods not for resale) savings secured from European-wide supply negotiations including marketing catalogue printing and store fixture and fittings costs

o SAP contract re-negotiated on a Group-wide basis and extended

2012/13 second half milestones

·    18% of sales to be direct sourced, 7% of sales to be common* own brands

·    Double direct sourcing in our developing markets (Poland, Russia, Turkey & China)

·    Launch 'Site' workwear brand in Screwfix (replacing previous brands) and trial in Brico Dépôt

·    Launch a new opening price point hand power tool range in Screwfix and Brico Dépôt under the brand name 'Energer'

* common means same product or same supplier where common product is not possible due to market / legal reasons e.g. electrical extension cable which is the same supplier but with different electrical sockets

EXPAND

5.   Growing our presence in existing markets

6.   Expanding in new and developing markets

2012/13 half year progress

·    Opened 35 new stores (UK 28*, France 2, Russia 1, Turkey 1 & Spain 3)

·    Revamped and extended four Castorama France stores, 70% of stores now in modern format

·    Successfully converted and integrated 28 Focus DIY stores, contributing 3% to B&Q total sales growth, pay back slightly ahead of expectations

·     Secured site for a new small store model in China. Around a third of the size of a current B&Q China store, the trial store will target the Do-it-For-Me apartment design market

2012/13 second half milestones

·    Open 37 new stores (UK 32*, Poland 5)

·    Revamp and extend one Castorama France store

·    Trial a 4,000m² standalone B&Q Design Centre store in China

o Based on the productive existing Design Centre area of the much larger (c10,000m²) 'Big Box' stores 

o Incorporating higher levels of service in store, better displays, more exclusive Group own brand product, improved web offer and stock held centrally for home delivery

o An additional P&L cost of around £3 million will be invested in H2 in this trial

*principally Screwfix outlets

ONE TEAM

7.   Developing leaders and connecting people

8.   Sustainability: becoming 'Net Positive'

2012/13 half year progress

·    Launched the Kingfisher Academy

·    Top 250 managers attended change management and finance training (including a deeper understanding of Kingfisher Economic Profit)

·    Announced our new sustainability plan, becoming 'Net Positive'.

o Establishes our aim to give back more than we take: to seek to make a positive contribution to the world's future by having a net positive impact as a business.

o Four key priority areas established: timber, energy, innovation and communities

o Launched microsite at www.kingfisher.com/netpositive 

o Targets set and agreed with all operating companies

2012/13 second half milestones

·    Extend the Kingfisher Academy modules

·    Formally launch 'Net Positive' and associated scorecard

Section 2

TRADING REVIEW BY MAJOR GEOGRAPHY

FRANCE

Sales £m	2012/13	2011/12	% Reported Change	% Constant Change	% LFL Change
France	2,206	2,341	(5.8)%	1.1%	(0.6)%

Retail profit £m	2012/13	2011/12	% Reported Change	% Constant Change
France	191	201	(4.9)%	2.0%

France includes Castorama and Brico Dépôt

2012/13: £1 = 1.23 euro (2011/12: 1.14 euro) 

All trading commentary below is in constant currencies

Kingfisher France

According to Banque de France data, which excludes the heavier trade market, sales for the home improvement market⁽¹⁾ were up 1.0%. The market was impacted by the unusually wet weather in Northern France with the worst weather-affected month of April seeing the market declining by 9%. In H1, Kingfisher France sales grew 1.1% to £2.2 billion (-0.6% LFL, +0.4% on a comparable store basis⁽¹⁾). In the North of France, LFL sales were down 1.2% with footfall down around 2%. In the South of France, LFL sales and footfall were flat. Across the two businesses, one net new store was opened and five were revamped, adding around 1% new space.

Retail profit grew by 2.0%, slightly ahead of sales growth, with gross margin percentage up 10 basis points reflecting on-going sourcing initiatives offsetting some investment in pricing. Costs were also tightly controlled with £3 million of unplanned increased social charges on profit sharing schemes being absorbed in H1, with around a further £4 million expected to arise in H2.  

Castorama total sales grew by 2.2% to £1.2 billion (-0.3% LFL, +1.4% on a comparable store basis⁽¹⁾). Castorama continued to gain market share benefiting from its innovative 'Do-it-Smart' approach aimed at making home improvement projects easier for customers.

Sales of outdoor seasonal products were down around 2% impacted by the adverse weather. Sales of indoor and building products were up around 1% with sales of new kitchen and tiling ranges performing particularly well.

Brico Dépôt, which more specifically targets trade professionals and heavy DIYers, was impacted by the slower house building market, with new housing start and planning consent data⁽²⁾ down around 3% for the last three months. Total sales were broadly flat at £1.0 billion (-0.9% LFL). New ranges introduced last year (e.g. heating and joinery ranges) performed particularly well (+20% LFL).

⁽¹⁾Banque de France data is based on comparable store data, which includes relocated and extended stores

⁽²⁾Service de l'observation et des statistiques July 2012

UK & IRELAND

Sales £m	2012/13	2011/12	% Reported Change	% Constant Change	% LFL Change
UK & Ireland	2,264	2,306	(1.8)%	(1.7)%	(5.5)%

Retail profit £m	2012/13	2011/12	% Reported Change	% Constant Change
UK & Ireland	145	182	(20.2)%	(20.2)%

UK & Ireland includes B&Q in the UK & Ireland and Screwfix

2012/13: £1 = 1.23 euro (2011/12: 1.14 euro)

All trading commentary below is in constant currencies

Kingfisher UK & Ireland

According to GfK, the market for the UK's leading home improvement retailers⁽¹⁾ was down around 6% across the first half, including seasonal ranges down 14%. The smaller tradesman market declined by 1%⁽²⁾.

Kingfisher UK & Ireland total sales were down 1.7% to £2.3 billion (-5.5% LFL) in a continuing challenging consumer environment which was further impacted by record adverse weather. Retail profit declined by 20.2% to £145 million principally reflecting weak seasonal sales, additional markdowns to clear seasonal stocks and accelerated range change.  

B&Q UK & Ireland'stotal sales were down 3.0% (-6.0% LFL) to £2.0 billion. Sales of outdoor seasonal products were down around 11% with average footfall down 20% in the severely weather-affected weeks. Sales of building products were also impacted by the adverse weather. Sales of indoor decorative products were up as customers switched some of their home improvement activities indoors.

Retail profit declined by 24.1% to £125 million. Gross margins were down 40 basis points, despite on-going sourcing benefits, reflecting the markdowns needed to successfully clear seasonal stocks and the decision to accelerate clearance ahead of the national rollout of new, common own brand ranges of tiling and décor products into Q2. A strong focus on operating cost efficiencies continued and in addition a one-off construction related claim for around £5 million was settled and received.

Screwfix grew total sales by 8.9% to £273 million, despite the challenging smaller tradesman market⁽²⁾, benefiting from the continued rollout of new outlets, the success of 'click, pay & collect' and the more recent introduction of a mobile 'click, pay & collect' offer. Twenty-five new outlets were opened during H1, taking the total to 240. Around a further 30 new outlets are planned for H2.

Retail profit was up 19.1% to £20 million, reflecting the strong sales growth, gross margins benefiting from more direct sourcing, distribution efficiencies and continued tight cost control.

UK reporting

B&Q and Screwfix are increasingly operating together, sharing a distribution network, jointly developing several major initiatives together including multi-channel and Eco and adopting a complementary strategy for UK growth. As a result, from next year (2013/14) reporting in the UK will mirror our current practice in France and provide one overall profit figure along with a commentary on the sales performance of each major business. 

⁽¹⁾This GfK data includes new space added but excludes certain retailers e.g. IKEA,Topps Tiles and other smaller independents

⁽²⁾ Based on the Builders' Merchants Federation lightside data April-June 2012

OTHER INTERNATIONAL

Sales £m	2012/13	2011/12	% Reported Change	% Constant Change	% LFL Change
Other International	1,008	1,015	(0.8)%	7.4%	(1.0)%

Retail profit £m	2012/13	2011/12	% Reported Change	% Constant Change
Other International	67	90	(25.3)%	(15.1)%

Other International includes Poland, China, Spain, Russia, Turkey JV and Hornbach in Germany. Joint Venture (Koçtaş JV) and Associate (Hornbach) sales are not consolidated

2012/13: £1 = 1.23 euro (2011/12: 1.14 euro); 2012/13: £1 = 5.16 Polish zloty (2011/12: £1 = 4.54 Polish zloty)

2012/13: £1 = 9.99 Chinese renminbi (2011/12: £1 = 10.56 Chinese renminbi)

All trading commentary below is in constant currencies

Other International total sales increased by 7.4% to £1.0 billion (-1.0% LFL) driven by new store openings. However, the uncertain European economic backdrop and adverse weather impacted LFL sales and profitability in each of our territories with the exception of Russia. Retail profit declined by 15.1% to £67 million.

Five new stores opened during H1, three in Spain, one in Russia and one in Turkey, adding around 2% new space. There are five new stores planned for H2 all in Poland.

In Eastern Europe sales in Poland were up 2.3% (-4.1% LFL) to £513 million. Gross margins were held flat benefiting from sourcing initiatives offset by some investment in pricing in an on-going weak market. Tight cost control partially offset cost inflation resulting in a 12.6% decline in retail profit to £54 million. In Russia, where the economic backdrop remains relatively strong, sales were up 48.3% to £198 million (+19.3% LFL) benefiting from new store openings. Retail profit was £2 million, compared to a loss of £1 million in H1 last year. In Turkey, Kingfisher's 50% JV, Koçtaş, grew sales by 6.8% (-4.2% LFL) to £162 million reflecting a new store opening offset by weather impacted seasonal sales (e.g. cooling ranges) and a slower economic environment. Retail profit contribution was £5 million, 30.2% down year on year.

Elsewhere, Brico Dépôt Spain grew sales by 2.1% (-4.8% LFL) to £129 million driven by new store openings. Retail profit was £3 million, half the level of last year, reflecting a difficult market and £1 million of pre-opening costs after the resumption of new store openings. Hornbach, in which Kingfisher has a 21% economic interest, contributed £9 million to retail profit, down 22.9% on last year, largely reflecting a £5 million loss in Q1.

B&Q China sales declined by 5.5% (-4.7% LFL) to £168 million reflecting one less store compared with last year and a more challenging housing market than anticipated (down 7%*). Losses of £6 million were flat year on year. 

*New property transaction sales for 17 cities in which B&Q operates July 2011-June 2012 according to the China Real Estate Exchange Centre 

Section 3

COUNTRY DATA

As at 28 July 2012

	Store numbers	Selling space (000s sq.m.)	Employees (FTE)
Castorama	103	1,075	12,211
Brico Dépôt	103	571	6,577
Total France	206	1,646	18,788
B&Q UK & Ireland	360	2,587	23,122
Screwfix	240	18	3,533
Total UK & Ireland	600	2,605	26,655
Poland	67	493	10,912
China	39	325	4,482
Spain Russia Turkey JV	20 19 37	116 170 194	1,108 2,681 3,316
Total Other International	182	1,298	22,499
Total	988	5,549	67,942

Section 4

SECOND QUARTER BY MAJOR GEOGRAPHY - 13 weeks ended 28 July 2012

	Sales	% Total	% Total	% LFL	Retail Profit	% Total	% Total
	2012/13 £m	Change (Reported)	Change (Constant currency)	Change (Constant currency)	2012/13   £m	Change (Reported)	Change (Constant currency)
France	1,117	(9.3)%	0.1%	(1.7)%	113	(8.1)%	0.6%
UK & Ireland	1,159	3.7%	3.9%	(0.3)%	70	(28.8)%	(28.8)%
Other International	570	(2.1)%	8.6%	(0.2)%	60	(20.9)%	(11.4)%
Total Group	2,846	(2.9)%	3.2%	(0.8)%	243	(18.2)%	(12.7)%

Note: Joint Venture (JV) and Associate sales are not consolidated. Retail profit is operating profit stated before central costs, exceptional items, amortisation of acquisition intangibles and the Group's share of interest and tax of JVs and associates.

Section 5

FINANCIAL REVIEW

A summary of the reported financial results for the six months ended 28 July 2012 is set out below:

	2012/13 £m	2011/12 £m	(Decrease) /Increase
Sales	5,478	5,662	(3.3)%
Adjusted pre-tax profit	371	439	(15.5)%
Profit before taxation after exceptional items	364	438	(16.9)%
Adjusted basic earnings per share	11.5p	13.5p	(14.8)%
Dividends	3.09p	2.47p	25.1%

A reconciliation of statutory profit to adjusted profit is set out below:

	2012/13 £m	2011/12 £m	Decrease
Profit before taxation	364	438	(16.9)%
Exceptional items	6	-	-
Profit before exceptional items and taxation	370	438	(15.5)%
Financing fair value remeasurements	1	1	-
Adjusted pre-tax profit	371	439	(15.5)%

Profit after tax and EPS including all exceptional items for the six months ended 28 July 2012 are set out below:

	2012/13	2011/12	Decrease
Profit after tax	£259m	£320m	(19.1)%
Basic EPS	11.1p	13.7p	(19.0)%

Overview

Total sales grew by 1.0% on a constant currency basis and declined by 3.3% to £5.5 billion (2011/12: £5.7 billion) on a reported rate basis. On a like-for-like basis, Group sales were down 2.8% (2011/12: +1.6%). During the period, a net additional 32 new stores were opened, including 25 Screwfix trade counters, taking the store network to 951 stores (excluding 37 Turkey JV stores).

Retail profit before exceptional items declined by 10.0% on a constant currency basis and by 14.7% to £403 million (2011/12: £473 million) on a reported rate basis. Including exceptional items, retail profit declined by 16.1% to £397 million (2011/12: £473 million).

The net interest charge for the six months was £4 million, down £1 million on the prior period. A breakdown of this is shown below.

Profit before tax declined by 16.9% to £364 million as a result of adverse weather patterns, challenging trading conditions and the currency translation impacts of a weaker euro and Polish zloty. After removing the impact of exceptional items and fair value remeasurements, adjusted pre-tax profit declined by 15.5% to £371 million.

Profit after tax for the period was £259 million (2011/12: £320 million). This resulted in the Group recording a basic EPS of 11.1p in the period (2011/12: 13.7p).

Net interest charge has fallen by £1 million in the period. The breakdown is as follows:

	2012/13 £m	2011/12 £m
Underlying net interest	(3)	(4)
Financing fair value remeasurements	(1)	(1)
Statutory net interest	(4)	(5)

Underlying net interest has fallen by £1 million driven by a fall in interest on net debt, reflecting higher average levels of net cash, offset by an increase in the net pensions interest cost, principally due to a reduction in the asset return assumption.

Taxation

The effective rate of tax, calculated on profit before exceptional items and prior year tax adjustments is 28% (2011/12: 28%). 

Effective tax rate calculation	Profit £m	Tax £m	2012/13 %	2011/12 %
Profit before tax and tax thereon	364	105	29	27
Add exceptional loss and tax thereon	6	1
Less prior year items	-	(2)
Total - adjusted	370	104	28	28

The overall rate of tax includes the impact of exceptional items and prior year tax adjustments. The impact of such items in the period was to raise the overall tax rate to 29%. In the prior year such items lowered the overall tax rate to 27%.

The Group's effective tax rate reflects the rates of tax and the proportion of profits generated in the various jurisdictions in which the Group operates. The statutory rates for the Group's main operating companies during 2012/13 are:

·    UK 24%

·    France 36.1%

·    Poland 19%

Because of the large differences between these rates some fluctuation in the Group's effective tax rate is possible in the future. Whilst we will continue to plan our tax affairs efficiently and adopt a prudent approach towards providing for uncertain tax positions, we are aware that with pressure on government finances the tax cost of multi-nationals may increase over time.

Exceptional items 

In the period the Group booked a net post-tax exceptional charge of £5 million (2011/12: £nil). The largest element is a £22 million reorganisation charge in the UK which is expected to pay back within 18 months from Q4 this year. The reorganisation includes streamlining:

·    B&Q's store support office, repositioning it as a more agile, customer-focused operation. This reorganisation is the final phase of the successful 'Martini' initiative that simplified processes, reduced costs and improved customer service in stores and supply chain in recent years

·    B&Q's kitchen, bathroom and bedroom business following the introduction of EDLP on these ranges. (EDLP - Every Day Low Pricing offers customers a consistently low price all year round. This results in a more even distribution of sales throughout the year and eliminates the need to resource the business for short term peaks)

·    Kingfisher's IT services as the Group increasingly moves towards a common set of systems, including a number of services being consolidated with a third party

Netted against this charge are several exceptional credits comprising:

·    A net pensions accounting credit of £11 million (2011/12: £nil), see the pensions section below for details

·    A £1 million profit on disposal of properties (2011/12: £nil)

·    A £4 million release (2011/12: £2 million) of an onerous property contract provision for idle stores either sublet or exited in the period

·    Net tax credit on exceptional items of £1 million (2011/12: £nil)

Earnings per share

Basic earnings per share in the period is 11.1p (2011/12: 13.7p). On a more comparable basis, removing the impact of exceptional items and financing fair value remeasurements, adjusted basic earnings per share is 11.5p (2011/12: 13.5p).

	2012/13	2011/12
Basic earnings per share	11.1p	13.7p
Exceptional items and financing fair value remeasurements	0.3p	0.1p
Tax on exceptional and prior year items	0.1p	(0.3)p
Adjusted earnings per share	11.5p	13.5p

Dividends

The interim dividend has been calculated, as in the prior year, automatically as 35% of the prior year's total dividend. Any increase in the full year dividend is considered annually in March. As announced at the year end, the interim dividend is proposed at 3.09p per share (2011/12: 2.47p per share). The ex-dividend date will be 10 October 2012 and the dividend will be paid on 16 November 2012 to those shareholders who are on the Register of Members at the close of business on 12 October 2012. Shareholders are able to take this dividend as cash or in shares, through the Dividend Reinvestment Plan (DRIP). Shareholders who wish to elect for the DRIP for the forthcoming interim dividend but have not already done so must notify the Registrars, Computershare Investor Services plc, by 26 October 2012. 

Free cash flow

A reconciliation of free cash flow and cash flow movement in financial net debt/cash is set out below:

	2012/13 £m	2011/12 £m
Operating profit (before exceptional items)	374	443
Other non-cash items (1)	141	134
Change in working capital	55	(170)
Pensions and provisions (before exceptional items)	(24)	(26)
Operating cash flow	546	381
Net interest paid	(4)	(5)
Tax paid	(74)	(68)
Gross capital expenditure (before strategic investments)	(172)	(175)
Disposal of assets	6	-
Free cash flow	302	133
Dividends paid	(148)	(121)
Share purchase for employee incentive schemes	-	(117)
Strategic capex investments (2)
- Focus	-	(24)
- UK	-	(64)
Other (3)	4	(4)
Cash flow movement in net cash/(debt)	158	(197)
Opening net (debt)/cash	(88)	14
Other movement including foreign exchange	(41)	(3)
Closing net cash/(debt)	29	(186)

⁽¹⁾ Includes depreciation and amortisation, share-based compensation charge, pre-exceptional non cash movement in pensions and provisions, share of post-tax results of JVs and associates and profit/loss on retail disposals.

⁽²⁾ Investments of a one-off nature, such as bolt on acquisitions and buy outs of freeholds in existing leased stores.

⁽³⁾ Includes dividends received from JVs and associates, issue of shares, business acquisitions and exceptional items (excluding property disposals).

Free cash flow of £302 million was generated in the period (2011/12: £133 million) benefiting from the timing of stock purchases and month end payroll runs of around £150 million. This is expected to reverse in H2. In the prior period we invested additional funds outside of our normal 'free cash flow' with £88 million allocated to strategic capex investments and £117 million on acquiring our own shares. The strategic capex spend included £64 million in the UK where we had actively decided to purchase freeholds already occupied and £24 million on the acquisition of 29 Focus stores.

Financial net cash at the end of the period was £29 million (28 January 2012: £88 million net debt; 30 July 2011: £186 million net debt). The Group maintains a strong investment grade credit rating and has been upgraded during the period by two of the three rating agencies to BBB. The third agency remains at BBB- positive outlook. The Group has a £200 million committed facility that expires in 2016 and was undrawn at 28 July 2012. The next significant debt maturity is in November 2012 when the Group will repay bonds with a nominal value of €200 million.

The maturity profile of Kingfisher's debt is illustrated in the 'debt investors' area under 'Financial information' in the 'Investors & Media' section of the Kingfisher website: www.kingfisher.com/index.asp?pageid=76

Pensions

The IAS 19 net pension position at 28 July 2012 was a deficit of £44 million, compared with £15 million at 28 January 2012. The decline in the position since 28 January 2012 is principally due to actuarial losses of £66 million offset by a £27 million curtailment gain.

During the period, and following consultation with the active members, the UK final salary pension scheme was closed to future benefit accrual with effect from 30 June 2012. The scheme had been closed to new entrants in 2004. A net exceptional pensions accounting credit of £11 million has been recognised. This includes a £27 million non-cash curtailment gain, representing the one-off reduction in accounting liabilities as benefits are no longer linked to future salary increases other than in line with inflation. It is offset by a £16 million charge for transitional payments to the active members. From July 2012 an enhanced defined contribution scheme has been offered to all UK employees and it is expected that the reduction in cash contributions to the final salary scheme will largely be offset by higher contributions to the defined contribution scheme.

Risks

The Board considers risk assessment, identification of mitigating actions and internal control to be fundamental to achieving Kingfisher's strategic objectives. The Board considers that the principal risks to achieving its objectives, which remain unchanged from those set in the 2011/12 Annual Report and Accounts, are summarised below:

·    Failure to drive demand and deliver value through the easier initiatives

·    Failure to invest in the systems and supply chain platforms necessary to maintain either competitive parity or advantage, amongst online or multi-national competitors

·    Failure to 'unlock' the potential to generate further shareholder value through the optimisation of combined purchasing and commercial synergies, while retaining accountability at the Operating Companies

·    Increased exposure to reputational damage resulting from significant product or service failures, due to poor quality of design, manufacture or installation, as the Group continues to invest in own brand and sourcing

·    Uncertainty surrounding the resilience of the global economy and the future of the Eurozone continues to impact both consumer confidence and the long-term sustainability and capabilities of the Group's supplier base

·    As retailing is changing due to the growth of online and multi-channel retailers, a failure to adapt the Group's business model and take advantage of the opportunities created by changes in technology, could result in being unable to maintain and grow market position

·    Not making the necessary investment in our people to ensure that the Group has the appropriate calibre of staff, skills and experience

·    The impact on Kingfisher's reputation and brand arising from a major environmental or ethical failure, a significant corporate fraud or material non-compliance with legislative or regulatory requirements resulting in punitive or custodial sentences

Further details of the Group risks and risk management process can be found on pages 18 to 20 of the 2011/12 Annual Report and Accounts.

Forward-looking statements

This press release contains certain statements that are forward-looking and are therefore subject to risks, assumptions and uncertainties that could cause actual results to differ materially from those expressed or implied because they relate to future events. These forward-looking statements include, but are not limited to, statements relating to the Company's expectations around the company's programme known as 'Creating the Leader' and its associated eight steps. 

Forward-looking statements can be identified by the use of relevant terminology including the words: "believes", "estimates", "anticipates", "expects", "intends", "plans", "goal", "target", "aim", "may", "will", "would", "could" or "should" or, in each case, their negative or other variations or comparable terminology and include all matters that are not historical facts. They appear in a number of places throughout this press release and include statements regarding our intentions, beliefs or current expectations and those of our officers, directors and employees concerning, amongst other things, our results of operations, financial condition, changes in tax rates, liquidity, prospects, growth, strategies and the businesses we operate.

Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements include, but are not limited to, global economic business conditions, monetary and interest rate policies, foreign currency exchange rates, equity and property prices, the impact of competition, inflation and deflation, changes to regulations, taxes and legislation, changes to consumer saving and spending habits; and our success in managing these factors.

Consequently, our actual future financial condition, performance and results could differ materially from the plans, goals and expectations set out in our forward-looking statements and reliance should not be placed on any forward-looking statement. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. Nothing in this press release should be construed as a profit forecast.

 

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