Interim Results
Travis Perkins PLC
01 August 2006
1 August 2006
TRAVIS PERKINS PLC
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2006
Highlights
• Turnover up 9.3% to £1,411.7m
• Profit before tax increased by 0.4% to £110.4m
• Operating profit up by 1.3% to £139.2m
• Basic earnings per share improved by 2.4% to 63.3p
• Free cash flow up 54.8% to £161.3m
• Interim dividend per share increased by 10% from 11p to 12.1p
• Targeted year 2 synergies and buying gains from Wickes integration £55m
secured
• 19 New branches opened taking total to 1,002
• Benchmarx launched - a new brand serving the small specialist joiner
Geoff Cooper, Chief Executive, said:
'Against a background of improving yet still challenging market conditions, we
have delivered improved Group operating profits, profits before tax, earnings
per share and cash flow. Both our merchant and retail divisions have achieved
increases in market share, profit before tax and productivity. We have secured
our targeted year two synergy and buying gains from the Wickes transaction, with
those targets some £20 million in excess of the estimated for synergies made
when the transaction was commenced.
'We maintain our view that there will be a gradual recovery in market activity
in the second half and we are well positioned to benefit from this.'
Enquiries:
Geoff Cooper, Chief Executive
Paul Hampden Smith, Finance Director
Travis Perkins plc +44 (0) 160 468 3221
David Bick/Trevor Phillips
Holborn Public Relations +44 (0) 207 929 5599
Interim Results
6 Months 6 Months Increase
30 June 30 June
2006 2005
£m £m
Turnover 1,411.7 1,291.2 9.3%
Operating profit 139.2 137.4 1.3%
Profit before taxation 110.4 110.0 0.4%
Free cash flow (note 12) 161.3 104.2 54.8%
Basic earnings per ordinary share 63.3p 61.8p 2.4%
Interim dividend per share 12.1p 11.0p 10.0%
Overview
Our results for the six months to June show good progress in improving, yet
still challenging market conditions.
As expected, our markets are recovering gradually from the poor trading
conditions experienced in 2005. The rate of the recovery in the retail market is
being held back by further pressures on consumers' disposable incomes. However,
a stronger housing market over the past winter has boosted the trade market,
where repair and maintenance activity has increased.
Although activity levels in both our markets were lower in the first half of
2006 than in the comparable period in 2005, we have achieved an improved
financial performance on all main key indicators. A series of measures to
further improve customer service, product ranges and operational performance
have helped us grow market share on a like-for-like basis in both our divisions.
This, together with the growth in our business derived from our branch expansion
programme, has enabled us to continue capturing scale benefits.
Turnover, at £1,412 million, was up by 9% over the comparable period last year,
mainly reflecting an extra 6 weeks trading at Wickes and the impact of our
branch expansion programme. Group operating profits were up by 1.3% with the
Group's operating margin decreasing from 10.6% to 9.9% - mainly reflecting the
impact of Wickes' structurally lower margin, and the full year effect of the
successful investment in trade pricing started at the end of the second quarter
in 2005. Profit before tax increased by 0.4% to £110.4 million with a
year-on-year improvement from both the Wickes related business and from the rest
of the Group. Basic earnings per share increased by 2.4% to 63.3p.
In addition to improved profits, we have focussed on improving returns by
generating an increased cash flow. Like-for-like free cash flow (as shown in
note 12), calculated before expansionary capital expenditure, special pension
contributions and dividends increased by 55%. Despite our continued expansionary
capital expenditure and a special pension contribution, we generated £110
million of cash in the period. At 30 June 2006 net debt was £845.2 million. On a
rolling 12 month basis our interest cover (shown in note 4) is 4.7 times and our
net debt/EBITDA ratio (shown in note 13) has reduced to 2.6 times.
The integration of Wickes continues to progress smoothly. The first phase of
rationalisation has been successfully completed, with a second and final phase
expected to be largely complete in early 2007. We are particularly pleased that
by the half way stage in the year, we have secured our targeted year two synergy
and buying gains from the Wickes transaction, with those targets some £20
million in excess of the estimate for synergies made when the transaction was
announced. Apart from the slow market recovery, all other aspects of the Wickes
transaction have proceeded as expected and we have confirmed our plans to expand
its estate.
Our network expansion programme has continued to deliver good growth to all our
merchant and retail brands, with 19 new branches added in the first half. As a
further development of our strategy, we entered the specialist trade joinery
market in July, with the launch of our first 'Benchmarx' store.
During the first half we made significant progress with the integration and
funding of the Group's two final salary pension schemes. On 3 July 2006, the
Wickes' pension scheme was merged into the Travis Perkins' scheme whilst
maintaining the benefit profiles of the predecessor schemes. A top-up payment
of £8.5 million was made to bring the funding level of the Wickes' scheme in
line with that of the TP scheme. Agreement has been reached with the Trustees
for a payment schedule which is aimed at eliminating the deficit of the newly
combined scheme over a period of nine years. At the end of June 2006, the
pension deficit net of tax was £70 million, a reduction of £30 million since
December reflecting higher corporate bond yields and a special contribution into
the TP and Wickes pension schemes over the six month period of £3.3 million.
With gradually recovering markets, an internal strategy which is delivering
improved performance and a proven expansion strategy, the Board is increasing
the interim dividend by 10% from 11p to 12.1p reflecting our strong cash
generation and continued confidence in the prospects of the Group.
Markets
The progress of our market so far this year has broadly followed the pattern we
expected for 2006, but with the recovery in our trade market running ahead of
the recovery in retail.
Conditions in both our markets in the first half year improved compared to the
trends seen at the end of 2005. Trading conditions in the second quarter were
stronger than the first. In particular the activity in the trade market, where
material supply is related more to repairs and maintenance, held up better than
in the more discretionary retail market, where activity is driven more by
improvement projects.
The 2005 trend of high product cost inflation caused mainly by rising energy and
raw material costs continued. This has had most impact on heavy building
materials and plumbing and heating products. Overall weighted average product
cost inflation was 3.1% in the trade business but zero in the retail business,
reflecting deflation in lightside products.
As we predicted, there has been a marked slowdown in the rate of space expansion
in both the trade and retail sectors, with retail space contracting for the
first time for many years. Trade capacity has grown by an estimated 3% - 1%
below the growth experienced in 2005 - and retail space reduced by an estimated
1% - compared with an expansion rate of 4% in 2005, with competitors closing and
downsizing stores.
Operational Performance
Against a background of improving yet still challenging market conditions, we
have continued the strategies implemented in 2005 to drive volumes profitably,
to exceed buying gain targets and to manage tightly both costs and cash. These
actions, despite the fact that markets have shrunk since the first half of 2005,
have delivered improved Group operating profits, profits before tax, earnings
per share and cash flow. Both our merchant and retail divisions have achieved
increases in market share, profit before tax and productivity.
Turnover at £1,412 million was 9.3% ahead of last year mainly reflecting
contributions of 7.1% from an additional one and a half months of Wickes
trading, 3.1% from other acquisitions and brown field expansion, and 0.6% from
one additional trading day. Like-for-like sales per trading day for the Group
were lower by 1.6%, an improvement on the trend seen at the end of 2005.
Like-for-like sales per trading day in merchanting improved by 0.2%, with our
specialist business 1.8% ahead and general merchanting lower by 0.7%. The
specialist division performance was driven by continued strong performance at
CCF and an improving trend in City Plumbing following management's successful
implementation of our recovery plan. In general merchanting, growth continues to
be strongest in the South East. All seven of our merchanting businesses showed
improved trading in the second quarter compared to the first.
Our retail business reported overall like-for-like performance of minus 7.0%,
the core business was 7.8% lower and showroom 2.8% lower. However, we have
achieved a significant improvement in like-for-like trends in the second
quarter. Total like-for-like turnover on a delivered basis has been lower by
4.4% in the last four weeks compared with last year and 1.6% on an ordered
basis. The relative strength of showrooms reflects gains made in our refreshed
kitchen range. Around one third of our retail business is from trade customers
with a higher bias towards trade in the South East. This is reflected in the
relative strength of both trade related products and the South East division.
Market data shows that we gained a small amount of like-for-like and overall
market share during the first half, as competitors' aggressive promotions were
scaled back from levels seen in the fourth quarter of 2005.
Merchanting gross margin before synergies is 1.3% lower than last year,
reflecting the full year effect of the selective margin investment we made from
the second quarter of 2005 onwards. Like-for-like sales growth, which had
previously been lagging the market, was brought up to market levels in the
second half of 2005 and is now ahead of the market for the first six months of
2006. Overall we continue to make a net positive profit contribution from this
investment.
Our retail business has improved pre-synergy gross margins by more than 1.5%
over the period. This has been achieved by a combination of positive mix as we
continue to invest in the breadth and depth of our ranges, together with other
buying improvements including gains on shrinkage. On average we anticipate
increasing the number of SKUs in our extra stores by around 1,500 to 9,000 this
year. This will benefit the rest of our estate as the most successful products
are rolled out. In total, some 15% of our retail sales are now generated from
the new products introduced since the acquisition of Wickes. This is enabled by
several other initiatives to improve space utilisation, including the selective
reallocation of showroom display areas in favour of faster selling products and
the twinning of showrooms in adjacent stores in single catchments.
Our continued robust controls on costs have been successful in driving improved
efficiency. Overall productivity per employee is 4.9% ahead in the trade
business reflecting a like-for-like reduction in employees of over 400, and 6.6%
ahead on the retail side, a like-for-like reduction in employee numbers of over
500 since June 2005. Our original projections for 2006 showed 4% inflation on
our like-for-like overhead base. We have saved £20 million against this
projection. In addition to productivity and other improvements, we have been
able to mitigate inflationary increases by several initiatives, which include
combining non-brand facing central support functions in merchanting and retail,
notably in finance and IT, the tight control of discretionary capital and
revenue expenditure and the improvement of procurement processes. Our senior
management team in addition to its functional responsibilities is tasked with
improving efficiency in specific areas of the whole business, for example by
improving distribution productivity. These 'best practice' projects have already
delivered good results.
Overall the merchanting business (including synergies but not property profit)
shows a sector leading earnings before interest, tax and amortisation margin ('
EBITA') of 11.0%.
Similarly, the retail business (including synergies but not property profit) is
delivering a sector leading EBITA margin of 6.2%.
Development of the Group
The Group went through the 1,000 site milestone during June reaching 1,002
branches by the end of the month, an increase of 19 in the period. To celebrate
this achievement we launched a major community initiative to help deliver '1,000
projects in 1,000 places in 1,000 days'. This is designed to engage all our
colleagues, working collaboratively with suppliers and customers in upgrading
community facilities in the places where we trade.
The merchanting business added a net 16 new branches being 5 acquisitions and 12
brownfields less one consolidation. The pipeline for new openings continues to
be strong.
We are making good progress against our objective of driving additional value
from our trade freehold property portfolio. We are progressing a modest sale
and leaseback of a small number of sites, and will be reinvesting the proceeds,
not expected to be more than £40 million, in business expansion. We continue to
search for alternative locations for sites with a high alternative use value.
We have also approved several projects to develop a multi brand presence in
selected sites.
The retail business has added 3 stores including 1 small store and 2 standard
stores. In addition we have converted 1 standard store to an extra store. This
has added 3.8% space to the business. There are an additional 7 stores and 5
conversions to extras committed which will open in the next 18 months. Net of
consolidations, this will add 7% space to the business. The largest proportion
of these stores are expected to open in the first quarter of 2007, with some
2006 launch costs and nearly a full year of extra revenue occurring next year.
Following a strategic review in 2005 which examined new opportunities in
specialist distribution, we determined the specialist small joiner market to be
the most attractive in terms of our current activities, scale and potential for
future expansion.
In early July we launched an additional brand, Benchmarx, to serve the specific
needs of specialist trade joiners, who install kitchens, doors and windows in
new and existing homes and other buildings. Our research shows that this group
of tradesmen do not often have their supply needs fully met by current
providers. Our first branch was opened in Croydon on 10 July 2006. We expect to
have at least 6 branches trading by the year-end. We already supply all the
required products to retail and general trade customers through our existing
businesses, and anticipate synergies with our existing supplier base as we
quickly establish a national presence, starting in the South East. The Managing
Director of this, our eighth division is Rob Gladwin who has been promoted to
Retail Director of Wickes.
Health, Safety and Environment
We remain committed to the achievement and maintenance of the highest standards
in health and safety. Accident frequency and severity rates have shown a small
improvement during the first half of 2006.
We have updated our Environmental Management System to be compliant with
revisions to the International Standard (ISO 14001 (2004)) and we continue to
develop our environmental management approach. Our core environmental objectives
are to continue to; manage down carbon emissions, decrease the amount of waste
going to landfill and have zero notifiable environmental incidents across the
estate.
People and Organisation
We were delighted to welcome Andrew Simon and Stephen Carter to our Board in
February and April respectively as Non-executive Directors. Andrew previously
held roles as Chairman and Chief Executive of Evode plc and holds a number of
other non-executive positions. Stephen is Chief Executive of Ofcom and was
previously Managing Director and Chief Operating Officer for UK and Ireland for
NTL.
We continue to strengthen our senior management team. Carol Kavanagh will be
joining us as Group Human Resources Director in September from a FTSE 100
retailer. In addition Robin Proctor will join us in September as Group Supply
Chain Director. His previous role was with a FTSE 250 retailer and trade
supplier. We are making good progress in our search for the Managing Director
of Wickes following the announcement of Richard Bird's retirement as planned, at
the end of 2006.
This period has also seen improvements in a number of central functions. We have
created a Group risk and assurance function, including audit and security,
together with new Group property and IT structures. We have also appointed a new
Group toolhire director and a new health and safety director. We will
increasingly leverage best practice across the Group. It is our intention to
continue to run those elements of the organisation delivering the Wickes' brand
proposition separately, reporting to the Wickes' Managing Director.
We have initiated a campaign to reduce employee turnover across the Group by a
series of initiatives starting with a rigorous induction programme. Turnover has
now fallen to 21.5% having reduced to 24.6% in the full year 2005.
Outlook
The overall progress of the market so far this year has been in line with our
original expectations, although trade has been stronger and retail weaker. We
still expect a gradual improvement in the second half of the year. Our July
sales performance is in line with the improving trend experienced in the last
quarter. The majority of lead indicators continue to exhibit a positive trend
including property transactions, house price inflation, new house starts,
consumer confidence and mortgage equity withdrawal. These need to be balanced
with some uncertainty about unemployment levels and interest rate expectations.
Against this overall background, we have, in both our merchant and retail
divisions, gained market share, extended our branch network, lowered the cost of
products for resale, raised productivity and cost performance and across the
Group we have strengthened both our organisational structure and senior
management team. We are well placed to take advantage of the anticipated market
growth.
Consolidated income statement
Six months 30 June 2006 Six months 30 June 2005 Year 31 December 2005
(Reviewed) (Reviewed) (Audited)
Non- Identified Total Non- Identified Total Non- Identified Total
Wickes impact of Wickes impact of Wickes impact of
related Wickes related Wickes related Wickes
(Note (Note (Note
below) below) below)
£m £m £m £m £m £m £m £m £m
Revenue 987.2 424.5 1,411.7 938.5 352.7 1,291.2 1,881.0 759.8 2,640.8
Operating
profit before
property
profits 101.8 33.4 135.2 106.2 31.2 137.4 208.3 59.7 268.0
Property profits - 4.0 4.0 - - - - - -
Operating
profit 101.8 37.4 139.2 106.2 31.2 137.4 208.3 59.7 268.0
Finance income
(Note 4) 0.7 0.9 1.6 0.3 - 0.3 0.4 - 0.4
Finance costs
(Note 4) (0.6) (29.8) (30.4) (4.9) (22.8) (27.7) (10.8) (50.9) (61.7)
Profit before
taxation 101.9 8.5 110.4 101.6 8.4 110.0 197.9 8.8 206.7
Tax (Note 5) (32.2) (1.7) (33.9) (32.3) (3.2) (35.5) (61.9) (4.0) (65.9)
Profit for the
period 69.7 6.8 76.5 69.3 5.2 74.5 136.0 4.8 140.8
Earnings per
ordinary share
(Note 6)
Basic 63.3p 61.8p 116.8p
Diluted 62.8p 61.0p 115.6p
Proposed dividend
per ordinary
share (Note 7) 12.1p 11.0p 34.0p
All results relate to continuing operations.
Note
The column headed 'Identified impact of Wickes' includes the post acquisition
result of Wickes, together with the synergies that have arisen from specific
projects and the additional finance related costs 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
2006 2005 2005
(Reviewed) (Reviewed) (Audited)
£m £m £m
Actuarial gains and losses on defined benefit pension scheme 39.6 (8.6) 2.4
Gains/(losses) on cash flow hedges 5.0 - (5.0)
Tax on items taken directly to equity (14.4) 1.7 10.1
Net income/(expense) recognised directly in equity 30.2 (6.9) 7.5
Transferred to income statement on cash flow hedges 0.6 - 0.5
Tax on items transferred from equity (0.2) - (0.1)
Profit for the period 76.5 74.5 140.8
Total recognised income and expense for the period 107.1 67.6 148.7
Consolidated balance sheet
As at As at As at
30 June 30 June 31 Dec
2006 2005 2005
(Reviewed) (Reviewed) (Audited)
£m £m £m
ASSETS
Non-current assets
Property, plant and equipment 439.2 452.3 445.2
Goodwill 1,279.9 1,239.2 1,273.8
Other intangible assets 162.5 162.5 162.5
Derivative financial instruments - - 1.3
Investment property 4.0 4.0 4.1
Deferred tax asset 30.0 53.8 42.9
Total non-current assets 1,915.6 1,911.8 1,929.8
Current assets
Inventories 270.1 277.2 263.2
Derivative financial instruments 0.3 - -
Trade and other receivables 393.4 361.8 322.4
Cash and cash equivalents 130.8 26.1 56.1
Total current assets 794.6 665.1 641.7
Total assets 2,710.2 2,576.9 2,571.5
Consolidated balance sheet (continued)
As at As at As at
30 June 30 June 31 Dec
2006 2005 2005
(Reviewed) (Reviewed) (Audited)
£m £m £m
EQUITY AND LIABILITIES
Capital and reserves
Issued capital 12.2 12.1 12.1
Share premium account 168.2 161.8 165.6
Revaluation reserves 26.2 26.5 26.3
Own shares (8.1) - (8.1)
Hedging reserve 0.7 (5.3) (3.2)
Accumulated profits 643.0 496.9 565.3
Total equity 842.2 692.0 758.0
Non-current liabilities
Interest bearing loans and borrowings 965.2 1,025.8 1,027.4
Retirement benefit obligation 99.9 179.5 142.8
Long-term provisions 11.9 7.6 13.2
Deferred tax liabilities 73.2 79.0 72.6
Derivative financial instruments 25.4 - -
Total non-current liabilities 1,175.6 1,291.9 1,256.0
Current liabilities
Interest bearing loans and borrowings 2.8 5.3 2.9
Unsecured loan notes 8.0 8.9 8.2
Derivative financial instruments - - 5.1
Trade and other payables 609.8 490.3 482.3
Tax liabilities 39.2 61.2 33.3
Short-term provisions 32.6 27.3 25.7
Total current liabilities 692.4 593.0 557.5
Total liabilities 1,868.0 1,884.9 1,813.5
Total equity and liabilities 2,710.2 2,576.9 2,571.5
The interim financial statements were approved by the board of directors on 31
July 2006.
Signed on behalf of the board of directors.
G. I. Cooper )
P. N. Hampden Smith ) Directors
Consolidated cash flow statement
Six months Six months Year
30 June 30 June 31 Dec
2006 2005 2005
(Reviewed) (Reviewed) (Audited)
£m £m £m
Operating profit 139.2 137.4 268.0
Adjustments for:
Depreciation of property, plant and equipment 26.9 26.8 54.5
Other non cash movements 1.7 1.3 2.4
(Gain)/loss on disposal of property, plant and equipment (4.3) (0.1) 0.7
Operating cash flows before movements in working capital 163.5 165.4 325.6
(Increase)/decrease in inventories (6.0) (3.9) 12.4
Increase in receivables (67.9) (44.0) (1.5)
Increase in payables 130.8 42.0 2.8
Cash payments to the pension scheme in excess of the charge to
income statement (3.3) (1.5) (28.5)
Cash generated from operations 217.1 158.0 310.8
Interest paid (28.9) (14.7) (38.6)
Income taxes paid (28.9) (26.7) (47.0)
Net cash from operating activities 159.3 116.6 225.2
Cash flows from investing activities
Interest received 0.7 0.2 0.4
Proceeds on disposal of property, plant and equipment 5.1 3.1 1.4
Purchases of property, plant and equipment (21.0) (39.7) (71.6)
Acquisition of businesses net of cash acquired (8.9) (1,020.7) (1,045.5)
Net cash used in investing activities (24.1) (1,057.1) (1,115.3)
Financing activities
Proceeds from the issue of share capital 2.7 2.6 6.4
Purchase of own shares - - (8.1)
Payment of finance lease liabilities (2.4) (1.1) (2.3)
Repayment of unsecured loan notes (0.2) (0.1) (0.8)
(Decrease)/increase in bank loans (32.8) 873.6 872.7
Dividends paid (27.8) (25.3) (38.6)
Net cash (used in)/from financing activities (60.5) 849.7 829.3
Net increase/(decrease) in cash and cash equivalents 74.7 (90.8) (60.8)
Cash and cash equivalents at beginning of period 56.1 116.9 116.9
Cash and cash equivalents at end of period 130.8 26.1 56.1
Notes to the interim financial statements
1 General information and accounting policies
The Interim Financial Statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) adopted for use in the
European Union.
Basis of preparation
The Interim Financial Statements have been prepared on the historic cost basis,
except that derivative financial instruments are stated at their fair value.
The Interim Financial Statements include the accounts of the company and all its
subsidiaries.
The financial information for the six months ended 30 June 2006 and 30 June 2005
is unaudited and does not constitute statutory accounts as defined in section
240 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 on
page 22 of this Interim Report. A copy of the statutory accounts for the year
ended 31 December 2005 as prepared under IFRS has been delivered to the
Registrar of Companies. The auditors' report on those accounts was unqualified.
The principal accounting policies applied in preparing the Interim Financial
Statements are set out below.
Revenue recognition
Revenue is recognised when goods or services are received by the customer and
the risks and rewards of ownership have passed to them. Revenue is measured at
the fair value of consideration received or receivable and represents amounts
receivable for goods and services provided in the normal course of business, net
of discounts and value added tax.
Business combinations and goodwill
All business combinations are accounted for using the purchase method. The cost
of an acquisition represents the cash value of the consideration and/or the 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 aggregate
fair value of the net assets acquired. It is this fair value, which is
incorporated into the consolidated accounts.
Goodwill represents the excess of the cost of acquisition over the share of the
aggregate fair value of identifiable net assets (including intangible assets) of
a business or a subsidiary at the date of acquisition. Goodwill is initially
recognised as an asset and allocated to cash generating units, then at least
annually, is reviewed for impairment. Any impairment is recognised immediately
in the income statement and is not subsequently reversed, as such, goodwill is
stated in the balance sheet at cost less any provisions for impairment in value.
Intangible assets
Intangible assets identified as part of the assets of an acquired business are
capitalised separately from goodwill if the fair value can be measured reliably
on initial recognition. Intangible assets are amortised to the income statement
on a straight-line basis over a maximum of 20 years except where they are
considered to have an indefinite useful life. In the latter instance they are
reviewed annually for impairment.
Property, plant and equipment
Property, plant and equipment is stated at cost or deemed cost less accumulated
depreciation and any impairment in value. Assets are depreciated to their
estimated residual value on a straight-line basis over their estimated useful
lives 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 useful
lives on the same basis as owned assets, or where shorter the term of the
relevant lease.
The gain or loss arising on the disposal or retirement of an asset is determined
as the difference between the sale proceeds net of expenses and the carrying
amount of the asset in the balance sheet and is recognised in the income
statement. Where appropriate, the attributable revaluation reserve remaining in
respect of properties revalued prior to the adoption of IFRS is transferred
directly to accumulated profits.
Investment properties
Investment properties, which are held to earn rental income or for capital
appreciation or for both, are stated at deemed cost less depreciation.
Properties are depreciated to their estimated residual value on a straight-line
basis over their estimated useful lives, up to a maximum of 50 years.
Rental income from investment property is recognised in the income statement on
a straight-line basis over the term of the lease.
Notes to the interim financial statements
1 General information and accounting policies (continued)
Leases
Finance leases, which transfer to the group substantially all the risks and
benefits incidental to ownership of the leased item, are capitalised at the
inception of the lease at the fair value of the leased asset or, if lower, at
the present value of the minimum lease payments. Lease payments are apportioned
between the finance charges and reduction of the lease liability so as to
achieve a constant rate of interest on the remaining balance of the liability.
Finance charges are charged directly against income. Capitalised leased assets
are depreciated over the shorter of the estimated useful life of the asset or
the lease term. Leases where the lessor retains substantially all the risks and
benefits of ownership of the asset are classified as operating leases.
Operating lease rental payments are recognised as an expense in the income
statement on a straight-line basis over the lease term.
Reverse lease premia and other incentives receivable for entering into a lease
agreement are recognised in the income statement over the life of the lease.
Impairment of tangible and intangible assets excluding goodwill
The carrying amounts of the group's tangible and intangible assets are reviewed
at each balance sheet date to determine whether there is any indication of
impairment. If such an indication exists, the asset's recoverable amount is
estimated and compared to its carrying value. Where the asset does not generate
cash flows that are independent from other assets, the group estimates the
recoverable amount of the cash generating unit ('CGU') to which the asset
belongs. Where the carrying value exceeds the recoverable amount a provision
for the impairment loss is established with a charge being made to the income
statement.
For intangible assets that have an indefinite useful life the recoverable amount
is estimated at each annual balance sheet date.
Impairment losses recognised in respect of a CGU are allocated first to reduce
the carrying amount of any goodwill allocated to the CGU and then to reduce the
carrying amount of the other assets in the unit on a pro-rata basis.
Inventories
Inventories, which consist of goods for resale, are stated at the lower of cost
and net realisable value. Cost comprises direct materials and, where
applicable, direct labour costs and those overheads that have been incurred in
bringing the inventories to their present location and condition. Net
realisable value is the estimated selling price less the estimated costs of
disposal.
Financial instruments
Financial assets and liabilities are recognised in the balance sheet when the
group becomes a party to the contractual provision of the instrument.
Trade receivables
Trade receivables are measured at amortised cost which is carrying amount less
provision for irrecoverable amounts. Allowances for the estimated irrecoverable
amounts are made in the income statement when the receivable is considered to be
uncollectable.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits with an
original maturity of three months or less.
Bank and other borrowings
Interest bearing bank loans and overdrafts and other loans are recognised in the
balance sheet at amortised cost. Costs associated with arranging a bank
facility are recognised in the income statement over the life of the facility.
All other borrowing costs are recognised in the income statement in the period
in which they are incurred.
Trade payables
Trade payables are measured at amortised cost.
Foreign currencies
Transactions denominated in foreign currencies are recorded at the rates ruling
on the date of transaction. At the consolidated balance sheet date, unhedged
monetary assets and liabilities denominated in foreign currencies are translated
at the rate of exchange ruling at that date. Foreign exchange differences
arising on translation are recognised in the income statement.
Derivative financial instruments and hedge accounting
The group uses derivative financial instruments to hedge its exposure to
interest rate and foreign exchange risks arising from financing activities. The
group does not enter into speculative financial instruments. In accordance with
its treasury policy, the group does not hold or issue derivative financial
instruments for trading purposes.
Notes to the interim financial statements
1 General information and accounting policies (continued)
Derivative financial instruments and hedge accounting (continued)
Derivative financial instruments are stated at fair value. The fair value of
derivative financial instruments is the estimated amount the group would receive
or pay to terminate the derivative at the balance sheet date, taking into
account current interest and exchange rates and the current creditworthiness of
the counterparties.
Changes in the fair value of derivative financial instruments, that are
designated and effective as hedges of the future variability of cash flows, are
recognised directly in equity and the ineffective portion is recognised
immediately in the income statement.
For an effective hedge of an exposure to changes in the fair value of a hedged
item, the hedged item is adjusted for changes in fair value attributable to the
risk being hedged with the corresponding entry in the income statement.
For derivatives that do not qualify for hedge accounting, any gains or losses
arising from changes in fair value are taken to the income statement as they
arise.
Derivatives embedded in commercial contracts are treated as separate derivatives
when their risks and characteristics are not closely related to those of the
underlying contracts, with unrealised gains or losses being reported in the
income statement.
Taxation
The tax expense represents the sum of the tax currently payable and the deferred
tax.
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the income statement because it
excludes items of income and expense that are taxable or deductible in other
years and it further excludes items which are never taxable or deductible. The
group's liability for current tax is calculated using tax rates that have been
enacted or substantially enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit. This is accounted for using the balance sheet liability method. Deferred
tax liabilities are generally recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary differences
can be utilised. Such assets and liabilities are not recognised if the temporary
difference arises from goodwill or from the initial recognition (other than in a
business combination) of other assets and liabilities in a transaction that
affects neither the tax profit nor the accounting profit.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset realised. Deferred tax is
charged or credited in the income statement, except when it relates to items
charged or credited directly to equity, in which case the deferred tax is also
dealt with in equity.
Pensions and other post-employment benefits
For defined benefit schemes, operating profit is charged with the cost of
providing pension benefits earned by employees in the period. The expected
return on pension scheme assets less the interest on pension scheme liabilities
is shown as a finance cost within the income statement.
Actuarial gains and losses arising in the period from the difference between
actual and expected returns on pension scheme assets, experience gains and
losses on pension scheme liabilities and the effects of changes in demographics
and financial assumptions are included in the statement of recognised income and
expense.
Recoverable pension scheme surpluses and pension scheme deficits and the
associated deferred tax balances are recognised in full in the period in which
they occur and are included in the balance sheet.
Obligations for contributions to defined contribution pension plans are
recognised as an expense in the income statement as incurred.
Employee share incentive plans
The group issues equity-settled share-based payments to certain employees (long
term incentives, executive share options and Save As You Earn), which do not
include market related conditions. These payments are measured at fair value at
the date of grant by use of the Black Scholes option-pricing model taking into
account the terms and conditions upon which the options were granted. The cost
of equity-settled awards is recognised on a straight-line basis over the vesting
period, based on the group's estimate of the number of shares that will
eventually vest. No cost is recognised for awards that do not ultimately vest.
Provisions
A provision is recognised in the balance sheet when the group has a present
legal or constructive obligation as a result of a past event, and it is probable
that an outflow of economic benefits will be required to settle the obligation.
Provisions are measured at the directors' best estimate of the expenditure
required to settle the obligation at the balance sheet date, and are discounted
to present value where the effect is material.
Equity instruments and own shares
Equity instruments represent the ordinary share capital of the group and are
recorded at the proceeds received, net of directly attributable incremental
issue costs.
Notes to the interim financial statements
1 General information and accounting policies (continued)
Equity instruments and own shares (continued)
Consideration paid by the group for its own shares is deducted from total
shareholder equity. Where such shares vest to employees under the terms of the
group's share option or the group's share saving schemes or are sold, any
consideration received is included in shareholder equity.
Dividends
Dividends proposed by the board of directors and unpaid at the period end are
not recognised in the financial statements until they have been approved by
shareholders at the annual general meeting.
2 Business segments
For management purposes, the group is currently organised into two operating
divisions - Builders Merchanting and DIY Retailing. These divisions are the
basis on which the group reports its primary segment information. Segment
results include items directly attributable to segments as well as those that
can be allocated on a reasonable basis. Unallocated items comprise mainly
corporate expenses.
Segment information
Six months ended 30 June 2006
Builders DIY Eliminations Consolidated
Merchanting Retailing
£m £m £m £m
Revenue 988.3 424.5 (1.1) 1,411.7
Result
Segment result 110.0 30.4 - 140.4
Unallocated corporate expenses (1.2)
Finance costs (28.8)
Profit before taxation 110.4
Taxation (33.9)
Net profit 76.5
Six months ended 30 June 2005
Builders DIY Eliminations Consolidated
Merchanting Retailing
£m £m £m £m
Revenue 938.5 352.7 - 1,291.2
Result
Segment result 107.0 31.2 - 138.2
Unallocated corporate expenses (0.8)
Finance costs (27.4)
Profit before taxation 110.0
Taxation (35.5)
Net profit 74.5
There were no inter-segment sales or charges.
Notes to the interim financial statements
2. Business segments (continued)
Year ended 31 December 2005
Builders DIY Eliminations Consolidated
Merchanting Retailing
£m £m £m £m
Revenue 1,881.0 759.8 - 2,640.8
Result
Segment result 213.3 55.9 - 269.2
Unallocated corporate expenses (1.2)
Finance costs (61.3)
Profit before taxation 206.7
Taxation (65.9)
Net profit 140.8
There were no inter-segment sales or charges.
3 Pension scheme
Builders DIY Total
Merchanting Retailing
£m £m £m
Gross deficit 1 January 2006 (100.8) (42.0) (142.8)
Current service costs (6.8) - (6.8)
Contributions 9.3 1.2 10.5
Other finance income/(costs) 0.3 (0.7) (0.4)
Actuarial gains and losses 29.2 10.4 39.6
Gross deficit at 30 June 2006 (68.8) (31.1) (99.9)
Deferred tax asset 20.7 9.3 30.0
Net deficit at 30 June 2006 (48.1) (21.8) (69.9)
Notes to the interim financial statements
4 Finance costs
Year Six months Six months Year
30 June 30 June 30 June 31 Dec
2006 2006 2005 2005
£m £m £m
£m
Loan and other bank interest (57.6) (27.9) (23.8) (53.5)
Interest on obligations under finance leases (1.9) (1.2) (1.3) (2.0)
Other finance costs - pension schemes (1.9) (0.4) (2.2) (3.7)
Unwinding of discounts in provisions (1.5) (0.6) - (0.9)
Net loss on re-measurement of derivatives at
fair value (0.6) - - (0.6)
Amortisation of issue costs of bank loans (0.9) (0.3) (0.4) (1.0)
Finance costs (64.4) (30.4) (27.7) (61.7)
Interest on bank deposits 0.8 0.7 0.3 0.4
Net gain on re-measurement of derivatives at
fair value 0.9 0.9 - -
Finance income 1.7 1.6 0.3 0.4
Net finance costs (62.7) (28.8) (27.4) (61.3)
Interest cover finance costs (see below) (58.3) (27.8) (23.5) (54.0)
Operating profit 269.8 139.2 137.4 268.0
IFRS adjustment 4.1 5.4 3.6 2.3
2005 UK GAAP operating profit 273.9 144.6 141.0 270.3
Interest cover (times) per chairman's
statement 4.7 - - 5.0
Interest cover is calculated by dividing 2005 UK GAAP operating profit by
the combined value of interest on bank loans, discounts and interest on bank
deposits. Interest cover for 2005 has been restated to reflect this
methodology.
5 Tax
Six months Six months Year
30 June 30 June 31 Dec
2006 2005 2005
£m £m £m
Current tax
UK corporation tax
- current year 34.5 36.0 59.1
- prior year - - (0.4)
34.5 36.0 58.7
Deferred tax
- current year (0.6) (0.5) 7.0
- prior year - - 0.2
Total deferred tax (0.6) (0.5) 7.2
Total tax charge 33.9 35.5 65.9
Notes to the interim financial statements
5 Tax (continued)
Tax for the interim period is charged at 31.9% on profits before tax and
property profits (Year to 31 December 2005: 31.9%), representing the best
estimate of the weighted average annual corporation tax rate expected for the
full financial year. Profits on property disposals will be offset against
previously unprovided capital losses.
6 Earnings per share
Six months Six months Year
30 June 30 June 31 Dec
2006 2005 2005
£m £m £m
Earnings
Earnings for the purposes of basic and diluted
earnings per share being net profit attributable
to equity holders of the parent 76.5 74.5 140.8
Number of shares No. No.
No.
Weighted average number of ordinary shares for
the purposes of basic earnings per share 120,942,231 120,657,659 120,542,092
Dilutive effect of share options on potential
ordinary shares 896,273 1,538,168 1,205,748
Weighted average number of ordinary shares for
the purposes of diluted earnings per share 121,838,504 122,195,827 121,747,840
7 Dividends
Amounts were recognised in the financial statements as distributions to equity
shareholders in the following periods:
Six months Six months Year
30 June 30 June 31 Dec
2006 2005 2005
£m £m £m
Final dividend for the year ended 31 December
2005 of 23.0 pence (2004: 21.0 pence) per
ordinary share 27.8 25.3 25.3
Interim dividend for the year ended 31
December 2005 of 11.0 pence per ordinary share - - 13.3
The proposed interim dividend of 12.1 pence per ordinary share in respect of the
year ending 31 December 2006 was approved by the Board on 31 July 2006 and in
accordance with IFRS has not been included as a liability as at 30 June 2006.
It will be paid on 2 November 2006 to shareholders on the register on 6 October
2006. The shares will be quoted ex-dividend on 4 October 2006.
Notes to the interim financial statements
8 Borrowings
At 30 June 2006 the group had the following borrowing facilities available:
30 June 30 June 31 Dec
2006 2005 2005
£m £m £m
Drawn facilities
US guaranteed senior notes 231.2 - -
5 year term loan 270.0 500.0 500.0
5 year revolving credit facility 460.0 500.0 494.0
961.2 1,000.0 994.0
Undrawn facilities
5 year revolving credit facility 240.0 200.0 206.0
Bank overdrafts 25.0 25.0 25.0
265.0 225.0 231.0
9 Share capital
Authorised Allotted
Ordinary shares of 10p No. £m No. £m
At 1 January 2006 135,000,000 13.5 121,309,889 12.1
Allotted under share option schemes - - 282,895 0.1
At 30 June 2006 135,000,000 13.5 121,592,784 12.2
10 Acquisition of businesses
During the period the group has acquired 5 new businesses with 5 branches for a
combined value of £8.9m (after adjusting for cash acquired at the date of
acquisition) that resulted in goodwill of £6.1m.
11 Net debt reconciliation
30 June 30 June 31 Dec
2006 2005 2005
£m £m £m
Net debt at 1 January (982.4) (30.7) (30.7)
Increase/(decrease) in cash and cash equivalents 74.7 (90.8) (60.8)
Cash flows from debt 35.4 (878.9) (871.9)
Fair value of derivatives 27.4 - (1.3)
(Decrease)/increase in finance charges netted off
bank debt (0.3) 6.5 2.3
Finance leases acquired - (20.0) (20.0)
Net debt at 30 June / 31 December (845.2) (1,013.9) (982.4)
The presentation of the reconciliation for 30 June 2005 is restated
to agree to that applied at 31 December 2005.
Notes to the interim financial statements
12 Free cash flow
Six months Six months Year
30 June 30 June 31 Dec
2006 2005 2005
£m £m £m
Cash generated from operations 217.1 158.0 310.8
Special pension contributions 3.3 1.5 28.5
Net interest paid (28.2) (14.5) (38.2)
Income taxes paid (28.9) (26.7) (47.0)
Replacement capital expenditure (7.1) (17.2) (29.4)
Disposal proceeds 5.1 3.1 1.4
Free cash flow 161.3 104.2 226.1
13 Earnings before interest, tax and depreciation
Earnings before interest, tax and depreciation ('EBITDA') as referred to in the
chairman's statement is derived as follows:
Six months Six months
Year 30 June 30 June Year
30 June 2006 2005 31 Dec
2006 £m £m 2005
£m £m
Profit before taxation 207.1 110.4 110.0 206.7
Net finance costs 62.7 28.8 27.4 61.3
Depreciation and impairments 54.6 26.9 26.8 54.5
EBITDA under IFRS 324.4 166.1 164.2 322.5
Reversal of IFRS adjustments and Wickes' pre-
acquisition EBITDA 2.8 4.7 6.3 4.4
EBITDA as defined in UK banking agreements 327.2 170.8 170.5 326.9
Net debt under 2005 UK GAAP - see below 841.1 - - 950.7
Net debt to EBITDA 2.6 - - 2.9
30 June 30 June 31 Dec
2006 200 2005
£m £m £m
Net debt (845.2) (1,013.9) (982.4)
IAS 17 Finance leases 32.2 33.3 32.7
Fair value of derivatives (26.1) - 1.3
Finance charges netted off bank debt (2.0) (6.5) (2.3)
Net debt under 2005 UK GAAP (841.1) (987.1) (950.7)
Independent Review Report to Travis Perkins plc
Introduction
We have been instructed by the company to review the financial information for
the six months ended 30 June 2006 which comprises the income statement, the
balance sheet, the cash flow statement, the statement of recognised income and
expense and related notes 1 to 13. We have read the other information contained
in the interim report and considered whether it contains any apparent
misstatements or material inconsistencies with the financial information.
This report is made solely to the company in accordance with Bulletin 1999/4
issued by the Auditing Practices Board. Our work has been undertaken so that we
might state to the company those matters we are required to state to them in an
independent review report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than
the company, for our review work, for this report, or for the conclusions we
have formed.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures are consistent with
those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with the guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A
review consists principally of making enquiries of group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with International Standards on Auditing (UK and
Ireland) and therefore provides a lower level of assurance than an audit.
Accordingly, we do not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2006.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
Birmingham
31 July 2006
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