Interim Results
Wolseley PLC
21 March 2006
NEWS RELEASE
21 March 2006
Wolseley plc
Unaudited Interim Results for the half year ended 31 January 2006
Wolseley plc announces a tenth set of record first half results
Summary of Results
Financial highlights
Change
-------------------
Half year Half year to Reported In constant
to 31 January to 31 January currency
2006 2005
£m £m % %
--------------------------------------------------------------------------------
Group revenue 6,734.5 5,331.9 +26.3 +22.3
--------------------------------------------------------------------------------
Group trading profit (1) 384.9 315.6 +21.9 +17.8
Group operating profit 371.1 314.9 +17.8 +13.7
profit
--------------------------------------------------------------------------------
Group profit before tax, 359.8 297.5 +20.9 +17.1
before amortisation of
acquired intangibles
Group profit before tax 346.0 296.8 +16.6 +12.9
--------------------------------------------------------------------------------
Earnings per share, before 43.91p 36.44p +20.5 +17.6
amortisation of acquired
intangibles
Basic earnings per share 41.58p 36.32p +14.5 +11.7
--------------------------------------------------------------------------------
Interim dividend per share 9.85p 8.80p +11.9
--------------------------------------------------------------------------------
• Group revenue up 26.3%, including organic growth of 12.2%.
• Significant increase in Group half year profits:
o Operating profit up 17.8%
o Trading profit up 21.9%
o Profit before tax and before amortisation of acquired intangibles up 20.9%.
• Operating cash flow of £258.1 million (2005: £303.1 million). Reduction
compared to prior year principally reflects higher rates of organic growth in
North America.
• Strong financial position with gearing(2) of 68.1% (2005: 58.6%) and interest
cover(3) of 15 times (2005: 21 times).
• Return on gross capital employed (ROGCE(4)) at 18.8%, well ahead of the
Group's weighted average cost of capital and demonstrating significant
shareholder value creation.
Operating highlights
--------------------
• Record first half results achieved, despite generally flat European
markets and significant investment in the business to position the Group for
continued growth.
• Increased diversity of the business as the Group has expanded into
distribution of electrical products and insulation materials, achieved an
entry into the Belgian market and increased its presence in installed
services in the USA.
• North American revenues up 40.1% and trading profit up 39.0%.
• European revenues up 7.6% but trading profit marginally down, reflecting
the more difficult market environment in the UK and restructuring in France.
UK and Ireland revenues up 9.3%, including 1.5% organic growth and trading
profit up 5.9%.
• Market outperformance in all of the Group's principal markets except France,
mainly due to restructuring to accelerate future growth.
• Acquisition investment of £436 million for 22 acquisitions completed in the
first half, which are expected to add £701 million of revenues in a full year.
A further £162 million of investment in the second half so far to bring
aggregate investment to £598 million, a record in any one year for the Group.
Outlook
-------
• Market conditions in North America are expected to remain favourable and
Wolseley's North American operations are expected to make good progress in
the second half. This is against the background of an improving industrial
and commercial market, a growing RMI market and a strong housing market,
although the number of starts may show a small decline.
• For Europe, overall, it is likely that trading profit for the second half
will be broadly flat compared to the equivalent period in the prior year,
reflecting the generally flat market conditions.
• The UK business expects to see a gradual but steady improvement in the RMI
and housing markets as the second half progresses.
• The business improvement initiatives relating to information technology,
supply chain, sourcing and procurement will continue as the Group pursues
its double-digit growth targets.
• The acquisition pipeline remains strong and the Group will continue to pursue
opportunities for product and geographic diversity.
• The Board expects another year of good progress, driven by strong growth in
North America and the benefits from recent acquisitions.
(1) Trading profit, a term used throughout this announcement, is defined as
operating profit before the amortisation of acquired intangibles. Trading
margin is the ratio of trading profit to revenues expressed as a percentage.
Organic change is the total increase or decrease in the year adjusted for
the impact of exchange rates, new acquisitions in 2006 and the incremental
impact of acquisitions in 2005.
(2) Gearing ratio is the ratio of net borrowings, excluding construction loan
borrowings, to shareholders' funds.
(3) Interest cover is trading profit divided by net finance costs, excluding net
pension related finance costs.
(4) Return on gross capital employed is the ratio of trading profit (before loss
on disposal of operations and goodwill) to the aggregate of average
shareholders' funds, minority interests, net debt and cumulative goodwill
written off.
SUMMARY OF RESULTS
------------------
As at, and for the six months
ended 31 January
2006 2005 Change
Revenue £6,734.5m £5,331.9m +26.3%
Operating profit
- before amortisation of acquired
intangibles £384.9m £315.6m +21.9%
- amortisation of acquired intangibles £(13.8)m £(0.7)m
Operating profit £371.1m £314.9m +17.8%
Net finance costs £(25.1)m £(18.1)m
Profit before tax
- before amortisation of acquired
intangibles £359.8m £297.5m +20.9%
- amortisation of acquired intangibles £(13.8)m £(0.7)m
Profit before tax £346.0m £296.8m +16.6%
Earnings per share
- before amortisation of acquired
intangibles 43.91p 36.44p +20.5%
- amortisation of acquired intangibles (2.33)p (0.12)p
Basic earnings per share 41.58p 36.32p +14.5%
Dividend per share 9.85p 8.80p +11.9%
Net borrowings £1,670.7m £1, 144.0m
Gearing 68.1% 58.6%
Interest cover (times) 15x 21x
Operating cash flow £258.1m £303.1m
Charles Banks, Wolseley plc Group Chief Executive said:
'We are delighted to report record half-year results for the tenth consecutive
time. Overall, revenue increased by more than 26% and trading profit was up more
than 21%. We are continuing to invest significantly in further improving our
supply chain, sourcing and procurement to deliver growth and enhanced
operational efficiency. The business is performing well, we are finding good
acquisitions and the economic outlook for the rest of the year gives us
confidence going forward.'
ENQUIRIES:
Investors/Analysts:
Guy Stainer +44 (0)118 929 8744
Head of Investor Relations +44 (0)7739 778 187
John English +1 513 771-9000
Director of Investor Relations, North America +1 513 328-4900
Press:
Penny Studholme +44 (0)118 929 8886
Director of Corporate Communications +44 (0)7860 553 834
Brunswick +44 (0)20 7404 5959
Andrew Fenwick
Nina Coad
An interview with Charles Banks, Group Chief Executive and Steve Webster, Group
Finance Director, in video/audio and text will be available from 0700 on
www.wolseley.com and www.cantos.com
There will be an analyst and investor meeting at 0930 at UBS Presentation Suite,
100 Liverpool Street, London EC2M 2RH. A live audio cast and slide presentation
of this event will be available at 0930 on www.wolseley.com.
There will be a conference call at 1500 (UK time):
UK/European dial-in number: + 44 (0)20 7162 0125
US dial-in number: + 1 334 323 6203
The call will be recorded and available for playback until 4 April 2006 on the
following numbers:
UK/European replay dial-in number: +44 (0)20 7031 4064 Passcode: 695501
UK-only free phone number: 0800 358 1860
North American replay dial-in number: +1 954 334 0342 Passcode: 695501
North American free phone number: +1 888 365 0240
NEWS RELEASE
21 March 2006
Wolseley plc
Unaudited Interim Results for the half year ended 31 January 2006
Wolseley plc announces a tenth set of record first half results
Announcement of Interim Results
-------------------------------
Wolseley, the world's largest specialist trade distributor of plumbing and
heating products and a leading supplier of building materials and services to
professional contractors, is pleased to announce another set of record first
half results, the tenth consecutive improvement in its interim figures. These
results reflect strong organic growth, particularly in North America and the
additional contribution from acquisitions. They have been achieved whilst the
Group continues to invest in people, facilities and technology to secure future
growth.
Wolseley's US plumbing and heating business, Ferguson, performed very strongly
in the first six months of the year, achieving organic revenue growth of 27.0%
and trading profit growth, including acquisitions, up 36.4%. Stock Building
Supply ('Stock') achieved growth in revenue, including acquisitions, of 34.0%
and trading profit up 59.6%. The businesses in the UK, Ireland, Canada, the
Netherlands, Italy and Switzerland also performed well in their respective
markets although Brossette in France lost ground mainly due to its
restructuring.
After taking account of currency translation, Group revenue increased by 26.3%
from £5,331.9 million to £6,734.5 million. Trading profit rose by 21.9% from
£315.6 million to £384.9 million. After deducting amortisation of acquired
intangibles of £13.8 million (2005: £0.7 million), operating profit increased by
17.8% from £314.9 million to £371.1 million.
On a constant currency basis, Group revenue increased by 22.3% and trading
profit by 17.8% for the first six months compared to the previous comparable
period. Currency translation increased Group revenue by £175.8 million (3.3%)
and Group trading profit by £11.3 million (3.6%) in the six month period.
Profit before tax and amortisation of acquired intangibles increased by 20.9%
from £297.5 million to £359.8 million. Profit before tax, after amortisation of
acquired intangibles, increased by 16.6% from £296.8 million to £346.0 million.
The increase in earnings per share before amortisation of acquired intangibles
was 20.5%, from 36.44 pence to 43.91 pence. Basic earnings per share were up
14.5%, from 36.32 pence to 41.58 pence.
North America
-------------
Wolseley's North American division performed strongly with significant rises in
revenue and profits, maintaining its position as the leading distributor of
construction products to the professional contractor in North America.
Reported revenue of the division was up 40.1% from £3,076.9 million to £4,309.3
million, reflecting organic growth of 19.2%, acquisitions and the beneficial
impact of currency translation. Trading profit, in sterling, increased by 39.1%
from £194.2 million to £270.0 million, after North American central costs.
Currency translation increased divisional revenue by £181.5 million (5.9%) and
trading profit by £11.6 million (6.0%). There was a net increase of 175 branches
in North America from 1,434 at 31 July 2005 to 1,609 locations at 31 January
2006.
North American central costs increased by £4.9 million, reflecting the creation
of the new North American management structure with effect from 1 August 2005.
US Plumbing and Heating
-----------------------
Ferguson produced an outstanding performance generating strong organic growth
from its focus on selected markets, from new branch openings and driving further
commercial advantage from its distribution centre ('DC') network. These factors
contributed to significant market outperformance in the first half.
Local currency revenue in the US plumbing and heating operations rose by 37.8%
to $4,530.5 million (2005: $3,287.1 million) with trading profit up by 29.5%.
Organic revenue growth was 27.0%. Gross margin fell slightly due to the absence
of commodity price benefits in the first half compared to the prior year, partly
offset by the continuing benefits from the distribution centre network, a focus
on organic growth and operational leverage. As expected, the trading margin of
6.5% was marginally lower in the first half compared to the prior year's first
half margin of 6.9%, which included one-off commodity price gains.
Volumes through the DC network grew by 44% in the first half compared to the
first half last year and more than 50% of branch sales now go through the DC
network. Further investment continues in the DCs and in the first half an
additional 200,000 square feet of capacity was added through the expansion of
the DC in McGregor, Texas. Further expansion of the DC network is planned in the
current financial year to build on Ferguson's competitive advantage and Board
approval has recently been given for new DCs in Florida and northern California.
Of the markets in which Ferguson operates, housing related activity remained
strong with the more positive economic environment benefiting the repairs,
maintenance and improvement ('RMI') sector. RMI is becoming an increasingly
important element of overall construction spend in the USA. To benefit from this
opportunity, Ferguson is rolling out both the XpressNet branch format and also
continuing to expand its very successful showrooms. Furthermore, greater
emphasis is being placed on opening new specialist branches for heating,
ventilation, and air-conditioning (HVAC) and waterworks and this focus should
lead to further growth opportunities. The commercial and industrial sectors
continue to show signs of improvement.
Investment in people and IT continued during the period. More than 2,500 people
joined the business and the rollout of the new warehouse management system to
large branches started. This should lead to better customer service as a result
of faster and more accurate product picking and more accurate and efficient
inventory management.
Ferguson's total branch numbers increased by 156 during the first half to 1,097
locations (31 July 2005: 941).
US Building Materials
---------------------
The strong performance of Stock benefited from improved market focus which was
brought about by the recent business restructuring and from strong organic
growth, partly offset by lower lumber prices. Reported figures also benefited
from currency translation and slightly higher structural panel prices.
In local currency, Stock's revenue was up 27.2% to $2,497.2 million (2005:
$1,962.9 million) with trading profit up by 51.5% from $104.0 million to $157.3
million. Organic revenue growth was 7.9% reflecting some commodity price
deflation in lumber and structural panels. These commodity price movements had
the effect of decreasing Stock's local currency revenue by $39 million (2.0%) in
the first half compared to the first half of last year. Acquisitions contributed
$378 million (19.3%) to revenue growth.
Stock's trading margin increased significantly from 5.3% to 6.3% primarily due
to a more favourable sales mix arising from increased value added products and
installed services.
New housing, which accounted for 87% of the activity in this business in the
first half, has generally continued to be a bright spot in the US economy.
Aggregate housing starts during the period continued at a high annual rate of
around two million. Whilst the inventory of unsold new homes has been rising
recently, reaching 5.2 months in January 2006, it remains below the long term
average of around 6 months, demonstrating the current strength of the housing
market. There continue to be significant variations in regional housing markets
in which Stock operates. The markets in Florida, Georgia, Utah and the Carolinas
have been strong. Texas and California have enjoyed an improving trend although
Michigan, Ohio, Indiana, Colorado and the North East have been more challenging.
Plans to increase the range of value-added products and services being offered
and increase the penetration of the RMI and commercial markets continue to be
implemented. Value-added sales were up 41%, installed business sales up more
than 100% and sales to commercial and RMI contractors increased by 10%. As well
as achieving this through its existing branch network and acquisitions, Stock
opened a number of new facilities and has expanded its turnkey supply model from
the Las Vegas market into Denver. These initiatives further complement Stock's
installed service expertise.
Stock's branch numbers increased by 17 during the first half to 272 locations
(31 July 2005: 255). Since 31 January 2006, the branch opening programme has
continued so that Stock currently operates in 33 states. The latest is a joint
facility with Ferguson in New Orleans, which takes Stock into Louisiana for the
first time.
Wolseley Canada
---------------
In Canada, the construction and housing markets remained strong with the buoyant
energy sector in Western Canada helping sales in the industrial and commercial
sector.
Local currency revenue increased by 14.9% to C$655.8 million (2005: C$570.7
million). More than 11% of the revenue growth was organic, ahead of the market
generally. Local currency trading profit rose by 4.4% reflecting pricing
pressure and the investment to position the business for future growth.
Work continued to consolidate back offices, recruit additional people to fill
management and trainee positions and to improve logistics. The second of three
regional supply centres for larger inventory items was opened in Quebec in
October 2005. These regional supply centres should lead to lower inventory
levels and enable the branch network to be utilised more effectively.
Wolseley Canada's total branch numbers increased from 238 to 240 locations.
Europe
------
The markets in Europe showed very little growth in the first half. Nonetheless,
with the exception of CFM in Luxembourg, which had marginally lower revenue, all
of the Continental European operations increased revenue and most achieved
profit improvements. The results in Europe also benefited from acquisitions and
from the net benefit of the matters unrelated to normal trading in France,
described below.
Reported revenue for this division increased by 7.6% from £2,255.0 million to
£2,425.2 million, of which 2% was from organic growth. Recent acquisitions
accounted for £129.8 million (5.8%) of revenue growth, including William Wilson
and Encon (UK) in October 2005 and Iser Zauli (Italy) in January 2005. Trading
profit, after the allocation of European central costs, fell 3.0% from £139.3
million to £135.2 million. European central costs rose by £2.7 million due to
the planned expansion of the European infrastructure to drive future growth
initiatives.
The overall divisional trading margin, after the allocation of central costs,
reduced from 6.2% to 5.6% of revenue, primarily due to acquisitions and the
lower trading margins in Brossette and Austria. Margin improvements were
achieved in PBM (France), Manzardo (Italy), Cesaro (Czech Republic), Electro Oil
(Denmark) and Wasco (Netherlands).
In the first six months a further net 146 branches were added to the European
network, giving a total of 2,632 locations (31 July 2005: 2,486).
UK and Ireland
--------------
Wolseley UK's performance held up well against a UK market which is estimated to
be around 4% down on the prior period. Whilst the fundamentals of the UK economy
remained positive, with relatively low interest rates and low unemployment, RMI
spending slowed in the first half of the financial year in response to weaker
consumer confidence. Government spending remains a relative bright spot although
there have been noticeable delays on planned social housing expenditure.
Against this more challenging background, Wolseley UK, which includes Ireland,
recorded a 9.3% increase in revenue to £1,262.1 million (2005: £1,155.0
million). Organic growth of 1.5% outperformed the market generally, with
Bathstore, the retail bathroom offering, and Heatmerchants and Brooks, the Irish
businesses, performing particularly well.
Wolseley UK's trading profit increased by 5.9% in the first half compared to the
equivalent period in the prior year mainly as a result of the acquisitions of
William Wilson and Encon in October 2005, both of which have outperformed
expectations at the time of acquisition. Although the trading margin increased
before taking account of the dilutive effect of acquisitions, Wolseley UK's
overall reported trading margin fell slightly from 7.3% to 7.1%.
The new national DC in Leamington Spa, which is to be located alongside Wolseley
UK's new headquarters, is expected to be operational by autumn 2006. The
regional DC, in the North West, should open around a year later. These
investments and the current initiatives to centralise control of transport and
branch inventory management, should enhance customer service and support
continued growth in the business. Early trials from the central branch
replenishment programme were very encouraging with improved inventory turn and
increased stock availability in the branches.
Within Wolseley UK, the Irish businesses, Heatmerchants and Brooks, both
produced double digit organic revenue growth, benefiting from a strong local
economy.
During the first six months, 100 net new locations were added in the UK and
Ireland taking the total number of branches for Wolseley UK to 1,670 (31 July
2005: 1,570), including 67 branches added as a result of the William Wilson and
Encon acquisitions. 23 new Bathstore branches were opened in the first half and
this opening programme will continue in the second half, together with new
electrical and insulation branch openings and the expansion of the Unifix direct
sales offering, through mail order and e-commerce channels to the RMI market.
France
------
In France, government tax incentives continue to underpin growth in the new
residential market, but RMI, representing approximately two thirds of revenue
for both Brossette and PBM, continues to show only marginal improvement against
the background of little growth in the overall economy, weak consumer confidence
and persistent high levels of unemployment.
Wolseley's French operations generated first half revenue up 2.6% to €1,170.3
million (2005: €1,140.3 million), including organic growth of 1.1%. Trading
profit for France was down to €52.4 million (2005: €59.2 million) as a result of
the lower level of profitability in Brossette.
As previously announced, the French results for the first half have benefited
from matters unrelated to normal trading. An outstanding claim with the French
customs authorities relating to wood import duties has been settled in PBM's
favour, resulting in a benefit to trading profit and interest of €11.5 million
(£8 million) and €5 million (£3 million), respectively. In addition, Brossette
(together with many other French companies) has been fined by the French
Competition Authorities. A provision for €7.6 million (£5 million) has been
charged against trading profit in the period but relates to matters which took
place more than ten years ago. Overall, therefore, there was a net £3 million
benefit at the trading profit level and £3 million benefit on the interest line
arising from matters unrelated to normal trading.
Local currency revenue in Brossette was 2.3% up on the first half last year. T
rading profit was lower, before taking account of the fine from the French
Competition Authorities. Brossette's results reflect the ongoing reorganisation
of the district, branch and management structures and the move to centralisation
of purchasing and logistics, all of which are designed to enhance customer
service and facilitate future expansion. Another new customer delivery centre
opened in the first half. A significant number of management changes have been
made with associated one off severance costs.
PBM achieved an increase in revenue of 2.9% in local currency, more than half of
which was organic growth. The sales trends in PBM improved in the second quarter
and this upward momentum is expected to continue. Five new satellites and ten
hire locations were added in the first half and a further six satellites and
eight hire locations are planned for the second half. The underlying trading
profit, before taking account of the wood import duties rebate referred to above
and other one off items, showed an improvement, as did the underlying trading
margin. PBM is expanding the number of joint sites with Brossette and exploiting
opportunities to create purchasing synergies and indirect cost savings in
co-operation with other group companies.
Central Europe
--------------
Revenue in the Group's other Continental European operations were up by 14.6%
reflecting organic growth of 6.3% and the benefit of acquisitions. Trading
profit was down due to the lower level of profitability in Austria.
Tobler, in Switzerland, had a strong half with revenue up 20%, including 13%
organic growth. Despite competitive market conditions putting some pressure on
prices and a change in the business mix to lower margin products, trading profit
was up 14%. During the first half, two new branches were opened and three
branches from previous acquisitions were rebranded.
OAG, in Austria, increased revenue slightly although trading profit fell due to
continued competitive pressure on prices as a consequence of difficult housing
and RMI markets and business restructuring. In Hungary and the Czech Republic,
local market conditions remained difficult but both businesses improved revenue,
with Cesaro in the Czech Republic also increasing trading profit. Hungary
experienced a higher level of provisions for bad debts reflecting slower
payments from customers.
In Italy, revenue in the first half increased by 49% and profits more than
doubled, compared to the comparable period in the prior year, mainly due to the
acquisition of Iser Zauli in January 2005. Despite a flat economy, the
aggressive branch opening programme of the past few years continued to benefit
Manzardo with organic revenue and trading profit growth up more than 10%. Three
new branches were opened in the first half. Iser Zauli traded ahead of
expectations and is currently being integrated into the Manzardo operations. In
addition, purchasing synergies between the two companies have exceeded
expectations. This acquisition makes Manzardo one of the largest companies in
the Italian sanitary/heating market. Progress on the €20 million new central DC
in northern Italy continues. This facility is expected to be completed around
autumn 2006 and will enable further expansion of the business.
In The Netherlands, Wasco continued to make good progress expanding its product
range into sanitary ware, developing its offering to the more profitable RMI
market and focusing on cost control. It achieved organic revenue growth of 10%
and trading profit improved by 27%. In Luxembourg, CFM's revenue fell by 6%
principally due to the absence of large commercial orders for underground pipe
that occurred in the previous year. Centratec, the Belgian business acquired in
October 2005, performed in line with expectations and is now working with Wasco
and CFM to obtain improvements in sourcing, logistics and inventory management.
Interim Dividend
----------------
The Board has decided to pay an interim dividend of 9.85 pence per share (2005:
8.80 pence per share) to be paid on 31 May 2006 to shareholders on the register
on 31 March 2006, which will absorb £58.4 million of cash. This represents an
increase of 11.9% over last year's interim dividend and reflects the Board's
confidence in the future prospects of the Group and its strong financial
position. It is expected that the interim dividend will be approximately one
third of the total dividend for the year. The dividend reinvestment plan will
continue to be available to eligible shareholders.
International Integration and Infrastructure Developments
----------------------------------------------------------
In support of the Group's ambitious growth targets and as part of its continuous
improvement programme, Wolseley is bringing about greater cohesion across its
operating units through leveraging its international purchasing, international
sourcing and supply chain efficiencies. To achieve this, the Group continues to
make investments in its infrastructure in terms of systems, logistics and
people, with employee numbers increasing from 60,000 to more than 64,000 during
the first half.
With respect to IT systems development, two years ago the Group announced plans
to develop a common technology platform. The first phase of this project
included the development of common financial applications across the Group and,
in parallel, a number of other common applications were to be developed and
piloted including packages for a warehouse management system and a human
resource application. The implementation of the financial application is well on
the way to completion, with most of the Group's operating companies having
implemented the new system with the rest expected in the next 6 months. Work on
the human resource package, which is at an early stage of development, continues
to progress. The warehouse management system ('WMS'), which having been
successfully piloted in a Ferguson branch in the US, is currently being rolled
out across Ferguson's largest branches and will be used by locations in Europe
in due course, including the new DC's in Italy and the UK which will open later
this year.
The Group continues with initiatives such as global sourcing and creating a more
efficient supply chain, supported by the implementation of the WMS, described
above. Significant benefits are expected to arise over future years from the
Group's continuous improvement programmes enabled by the common technology
platform. Through its investments today, the Group is committed to creating a
sustainable competitive advantage to meet customers changing needs. This will be
built around strong human resources, supported by efficient processes,
technology driven supply chain management and logistics.
Financial Review
----------------
Net finance costs of £25.1 million (2005: £18.1 million) reflect an increase in
Group debt as a result of acquisitions and an increase in interest rates, partly
offset by operating cash flow and interest on the French customs refund. Net
interest receivable on construction loans amounted to £5.4 million (2005: £4.3
million). Interest cover was 15 times (2005: 21 times).
The effective tax rate decreased marginally from 28.3% to 27.9%. The effective
tax rate for the half-year to 31 January 2006 is consistent with the rate
expected for the year to 31 July 2006.
Before the amortisation of acquired intangibles, earnings per share increased by
20.5% from 36.44 pence to 43.91 pence. Basic earnings per share were up by 14.5%
to 41.58 pence (2005: 36.32 pence). The average number of shares in issue during
the first half was 590.4 million (2005: 585.5 million).
Net cash flow from operating activities reduced from £303.1 million to £258.1
million, mainly due to the increase in working capital to support higher organic
growth in the USA, partly offset by higher operating profit.
Capital expenditure increased from £109.7 million to £143.5 million reflecting
continued investment in the business. During the period the DC and branch
network in the USA was expanded, investment commenced on DCs in the UK and Italy
and further expenditure was incurred on the common IT platform. Brossette and
Wolseley UK moved into new corporate offices.
Cash received on the sale of fixed assets was £11.2 million, compared with £57.1
million in the comparable period when receipts were higher due to the sale of
properties acquired as part of the Brooks acquisition.
Investment in acquisitions completed during the first half, including any
deferred consideration and net debt, amounted to £436 million (2005: £218
million). These 22 acquisitions are expected to add around £701 million per
annum of incremental revenues in a full year. Ten additional acquisitions, for a
consideration of £162 million, have been completed since 31 January 2006.
Details of the three acquisitions not previously announced are set out below.
On 10 March 2006, Ferguson acquired Indiana Plumbing Supply Co., Inc., ('The
Plumbers Warehouse') a plumbing wholesaler, from John Muckel and Russ Long. In
the year ended 31 December 2004 Indiana had sales of $63.9 million (£36.5
million) and gross assets of $12.5 million (£7.2 million) at that date.
On 10 March 2006, Wolseley Canada acquired Can-Con Industries Inc. ('Can-Con'),
a fabricator and distributor of pipe fittings for the natural gas, oil and water
industries, from Mark Mercier, Brian Cropley, Garry Pickieson and Scott Toshack.
Can-Con has one outlet in Edmonton, Alberta. In the year ended 31 January 2005
it had sales of C$6.6 million (£3.3 million) and gross assets of C$3.4 million
(£1.7 million) at that date.
On 13 March 2006, Ferguson acquired the assets of Alamo Pipe and Supply
('Alamo') a plumbing distributor based in Ruidoso, New Mexico. In the year ended
31 December 2004 Alamo had sales of $2.3 million (£1.3 million) and gross assets
of $0.5 million (£0.3 million) at that date.
Further details regarding acquisitions are included in note 9.
The Group's branch network during the first half has been extended through
acquisitions and branch openings by a net of 321 branches, bringing the total to
4,241 (31 July 2005: 3,920).
Net borrowings, excluding construction loan borrowings, at 31 January 2006
amounted to £1,670.7 million compared to £1,170.5 million at 31 July 2005,
giving gearing of 68.1% compared to 50.8% at the previous year end and 58.6% at
31 January 2005. The increase principally relates to acquisitions.
In the USA, construction loan receivables, financed by an equivalent amount of
construction loan borrowings, were £293.7 million compared to £262.0 million at
31 July 2005. The increase is due to an expanding loan book.
Return on gross capital employed (ROGCE) fell from 19.1% for the year to 31 July
2005 to 18.8% in the first half of 2006 as a result of acquisitions partly
offset by the significant organic growth in profit. The ROGCE remains well above
the Group's weighted average cost of capital, demonstrating significant
shareholder value creation.
Provisions for liabilities and charges in the balance sheet include the
estimated liability for asbestos claims on a discounted basis. This liability
has been determined by independent professional actuarial advisors. The asbestos
related litigation is fully covered by insurance and accordingly an equivalent
insurance receivable has been included in debtors. The level of insurance cover
available significantly exceeds the expected level of future claims and no
profit or cash flow impact is therefore expected to arise in the foreseeable
future. There were 235 claims outstanding at 31 July 2005 (31 July 2004: 308).
An update on the estimated liability and number of claims outstanding will be
provided with the Group's Preliminary Results announcement.
Outlook
-------
Market conditions in North America are expected to remain favourable for the
remainder of this financial year and should enable the Group's North American
businesses to achieve further good progress.
It is expected that the US housing market will remain strong, although the
number of housing starts may show a small decline as a result of higher interest
rates. The positive RMI market is expected to continue and the strong US economy
should present further opportunities for organic growth, albeit at a lower rate
than the first half. The improvement in the industrial and commercial sectors is
also expected to continue.
Stock should continue to make further good progress and benefit from a more
favourable product mix, allowing continued margin progression. Although lumber
and panel prices are expected to hold up relatively well, there is likely to be
some price deflation in the second half compared to the comparable period in the
prior year.
In Canada, the overall environment is expected to remain positive although the
new residential housing market may fall slightly from recent high levels.
For Europe overall, it is likely that trading profit for the second half will be
broadly flat compared to the equivalent period in the prior year, reflecting the
generally flat market conditions.
The fundamentals of the UK economy are expected to remain positive and there are
indicators which would suggest a gradual but steady improvement in the UK RMI
and housing markets as the second half progresses. Against this background, the
UK business is expected to show modest profit growth in the second half compared
to the corresponding period in the prior financial year as the business
continues to invest in branch openings and infrastructure, and obtains further
benefits from recent acquisitions.
In France, growth in the RMI market is likely to remain modest. PBM is expected
to show progress compared to the second half, benefiting from acquisitions, new
branch openings and other business improvement initiatives. Investments to
accelerate future growth will continue.
The reorganisation of Brossette will continue throughout the second half and
further investments in the business will be made to create a platform for future
growth. It is unlikely that the trading profit in Brossette will match that of
the equivalent period in the prior year.
Whilst the markets in the rest of Continental Europe are likely to remain
broadly flat and competitive, Wolseley's operations are expected to show solid
progress, particularly in Italy, Switzerland and the Netherlands.
There are a number of business improvement initiatives in place relating to
supply chain, sourcing and procurement that should deliver increasing benefits
to the bottom line. The Group will continue to pursue its objective of
achieving, on average, double digit sales and profit improvements through a
combination of organic growth and acquisitions. The acquisition pipeline remains
strong and the Group will continue to pursue opportunities for product and
geographic diversity.
The Board expects another year of good progress, driven by strong growth in
North America and the benefits of recent acquisitions.
--------------------------------------------------------------------------------
Certain information included in this release is forward-looking and involves
risks and uncertainties that could cause actual results to differ materially
from those expressed or implied by forward looking statements. Forward-looking
statements include, without limitation, projections relating to results of
operations and financial conditions and the Company's plans and objectives for
future operations, including, without limitation, discussions of expected future
revenues, financing plans and expected expenditures and divestments. All
forward-looking statements in this release are based upon information known to
the Company on the date of this report. The Company undertakes no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
It is not reasonably possible to itemise all of the many factors and specific
events that could cause the Company's forward looking statements to be incorrect
or that could otherwise have a material adverse effect on the future operations
or results of an international Group such as Wolseley. Information on some
factors which could result in material difference to the results is available in
the Company's SEC filings, including, without limitation, the Company's Report
on Form 20-F for the year ended 31 July 2005.
--------------------------------------------------------------------------------
FINANCIAL CALENDER FOR 2006
2006
----
29 March - Shares quoted ex-dividend
31 March - Record date for final dividend
31 May - Interim dividend payment date
17 July - Trading update for 11 months to 30 June 2006
31 July - Financial year end
25 September* - Announcement of Preliminary results
4 October* - Shares quoted ex-dividend
6 October* - Record date for final dividend
9 November* - Final date for DRIP elections
29 November* - Annual General Meeting
30 November* - Final dividend payment date
(*) expected
A copy of this Interim Announcement, together with all other recent public
announcements can be found on Wolseley's web site at www.wolseley.com.
Copies of the Preliminary Results' presentation given to stockbrokers' analysts
are also available on this site.
Group Income Statement (unaudited)
Year to Half year to Half year to
31 July 31 January 31 January
2005 2006 2005
£m £m £m
--------------------------------------------------------------------------------
11,256.3 Revenue 6,734.5 5,331.9
--------- -------- --------
(5.8) Operating costs: amortisation of (13.8) (0.7)
acquired intangibles
(10,548.5) Operating costs: other (6,349.6) (5,016.3)
---------- -------- --------
(10,554.3) Operating costs: total (6,363.4) (5,017.0)
---------- -------- --------
702.0 Operating profit 371.1 314.9
26.7 Finance revenue (note 3) 19.8 12.0
(63.5) Finance costs (note 3) (44.9) (30.1)
---------- -------- --------
665.2 Profit before tax 346.0 296.8
(186.0) Tax expense (note 4) (100.5) (84.3)
---------- -------- --------
479.2 Profit for the period attributable 245.5 212.5
to equity shareholders
---------- -------- --------
Earnings per share (note 6)
81.61p Basic earnings per share 41.58p 36.32p
---------- -------- --------
80.75p Diluted earnings per share 41.13p 35.87p
---------- -------- --------
26.40p Dividends per share 9.85p 8.80p
Non-GAAP measures of performance (note 10)
707.8 Trading profit 384.9 315.6
671.0 Profit before tax and the amortisation 359.8 297.5
of acquired intangibles
---------- -------- --------
Translation rates
1.8514 US dollars 1.7604 1.8548
1.4587 Euro 1.4619 1.4546
Group Statement of Recognised Income and Expense (unaudited)
Year to Half year to Half year to
31 July 31 January 31 January
2005 2006 2005
£m £m £m
--------------------------------------------------------------------------------
479.2 Profit for the period 245.5 212.5
56.9 Currency translation differences (16.9) (25.7)
(4.1) Actuarial losses (4.1) (15.4)
(10.9) Cash flow hedges 12.6 (0.7)
30.2 Tax on gains/(losses) not recognised in (11.3) 5.6
the income statement
-------- -------- --------
72.1 Net (losses)/gains not recognised in (19.7) (36.2)
the income statement
-------- -------- --------
551.3 Total recognised income and expense 225.8 176.3
-------- -------- --------
Group Balance Sheet (unaudited)
As at As at As at
31 July 31 January 31 January
2005 2006 2005
£m £m £m
--------------------------------------------------------------------------------
ASSETS
Non-current assets
815.6 Intangible fixed assets - goodwill 1,004.2 729.0
132.8 Intangible fixed assets - other 230.1 56.1
882.9 Property, plant and equipment ('PPE') 990.0 771.3
54.8 Deferred income tax assets 34.4 117.2
5.7 Available for sale financial assets 4.3 2.9
--------------------------------------------------------------------------------
1,891.8 2,263.0 1,676.5
--------------------------------------------------------------------------------
Current assets
1,706.1 Inventories 1,886.6 1,589.5
2,241.4 Trade and other receivables 2,312.6 1,839.2
262.0 Financial receivables - construction 293.7 209.3
loans (secured)
3.3 Derivative financial instruments 14.5 1.1
4.8 Trading investments 4.5 6.8
381.1 Cash and cash equivalents 438.8 246.3
--------------------------------------------------------------------------------
4,598.7 4,950.7 3,892.2
--------------------------------------------------------------------------------
8.1 Assets held for resale 5.9 4.4
--------------------------------------------------------------------------------
6,498.6 Total assets 7,219.6 5,573.1
--------------------------------------------------------------------------------
EQUITY
Capital and reserves attributable to
equity shareholders
389.3 Share capital and share premium 419.2 363.0
81.5 Foreign currency translation reserve 56.1 (25.7)
1,829.9 Retained earnings 1,979.7 1,615.1
--------------------------------------------------------------------------------
2,300.7 2,455.0 1,952.4
--------------------------------------------------------------------------------
LIABILITIES
Non-current liabilities
18.0 Trade and other payables 18.0 -
1,044.6 Bank loans 1,351.9 879.8
57.9 Obligations under finance leases 49.2 42.6
61.5 Deferred income tax liabilities 79.3 32.4
181.1 Retirement benefit obligations 190.6 194.1
63.5 Provisions 78.1 83.1
--------------------------------------------------------------------------------
1,426.6 1,767.1 1,232.0
--------------------------------------------------------------------------------
Current liabilities
1,943.4 Trade and other payables 1,867.7 1,553.5
70.3 Corporation tax payable 61.1 124.9
262.0 Borrowings - construction loans 293.7 209.3
(unsecured)
439.0 Bank loans and overdrafts 699.0 458.3
4.0 Obligations under finance leases 15.7 15.0
14.2 Derivative financial instruments 12.7 2.5
16.5 Retirement benefit obligations 17.1 15.8
21.9 Provisions 30.5 9.4
--------------------------------------------------------------------------------
2,771.3 2,997.5 2,388.7
--------------------------------------------------------------------------------
4,197.9 Total liabilities 4,764.6 3,620.7
--------------------------------------------------------------------------------
6,498.6 Total equity and liabilities 7,219.6 5,573.1
--------------------------------------------------------------------------------
Translation rates
1.7564 US dollars 1.7787 1.8833
--------------------------------------------------------------------------------
1.4479 Euro 1.4631 1.4449
--------------------------------------------------------------------------------
Group Cash Flow Statement (unaudited)
As at As at As at
31 July 31 January 31 January
2005 2006 2005
£m £m £m
--------------------------------------------------------------------------------
Cash flows from operating activities:
765.1 Cash generated from operations 258.1 303.1
26.1 Interest received 14.2 11.5
(57.4) Interest paid (32.0) (23.9)
(150.7) Income tax paid (95.2) (97.1)
--------------------------------------------------------------------------------
583.1 Net cash generated from operating activities 145.1 193.6
--------------------------------------------------------------------------------
Cash flows from investing activities:
(405.5) Acquisitions of businesses, net of cash (420.5) (206.5)
acquired
4.5 Disposals of businesses, net of cash - -
disposed of
(217.5) Purchases of property, plant and (138.7) (97.3)
equipment
73.9 Proceeds from sale of property, plant 11.2 57.1
and equipment
(21.4) Purchases of intangible assets (4.8) (12.4)
- Purchases of trading investments - (0.6)
1.6 Proceeds from disposal of trading investments 0.5 -
--------------------------------------------------------------------------------
(564.4) Net cash used in investing activities (552.3) (259.7)
--------------------------------------------------------------------------------
Cash flows from financing activities:
32.7 Proceeds from the issue of shares to 13.1 16.8
shareholders
(18.6) Purchases of shares by Employee Benefit (10.7) (18.6)
Trusts
409.9 New borrowings 854.4 182.4
(233.9) Repayments of borrowings and (149.8) (65.7)
derivatives
(5.2) Finance lease capital payments (4.3) (4.3)
(145.4) Dividends paid to shareholders (104.0) (93.6)
--------------------------------------------------------------------------------
39.5 Net cash generated from financing activities 598.7 17.0
--------------------------------------------------------------------------------
58.2 Net increase/(decrease) in cash and 191.5 (49.1)
bank overdrafts
(87.7) Cash and bank overdrafts at the (56.0) (87.7)
beginning of the period
(26.5) Exchange (losses)/gains on cash and (17.4) 9.8
bank overdrafts
--------------------------------------------------------------------------------
(56.0) Cash and bank overdrafts at the end of 118.1 (127.0)
the period
--------------------------------------------------------------------------------
Reconciliation of Profit to Net Cash Flow from Operating Activities (unaudited)
As at As at As at
31 July 31 January 31 January
2005 2006 2005
£m £m £m
--------------------------------------------------------------------------------
479.2 Profit for the period 245.5 212.5
36.8 Finance costs - net 25.1 18.1
186.0 Income tax expense 100.5 84.3
116.5 Depreciation of PPE and amortisation of 61.5 55.9
non-acquired intangibles
5.8 Amortisation of acquired intangibles 13.8 0.7
(11.1) Profit on disposal of PPE (2.5) (4.3)
(55.3) Increase in inventories (119.8) (47.5)
(180.2) Decrease/(increase) in trade and other 70.7 95.5
receivables
168.1 (Decrease)/increase in trade and other (169.6) (124.8)
payables
(0.3) Increase/(decrease) in provisions and 20.3 (0.8)
other liabilities
19.6 Share based payments and other non cash 12.6 13.5
items
--------------------------------------------------------------------------------
765.1 Net cash generated from operations 258.1 303.1
--------------------------------------------------------------------------------
Notes to the interim financial information for the six months ended
31 January 2006
------------------------------------------------------------------------------
1 Basis of preparation
The next annual financial statements of the Group will be prepared in accordance
with International Financial Reporting Standards (IFRS) as adopted by the
European Union, and to those parts of the Companies Act 1985 applicable to
companies reporting under IFRS. The financial information contained in these
interim financial statements has been prepared on the basis of IFRS that the
directors expect to be applicable as at 31 July 2006. IFRS is subject to
amendment and interpretation by the IASB and there is an ongoing process of
review and endorsement by the European Commission. For these reasons, it is
possible that the information presented here may be subject to change before its
inclusion in the 2006 Report and Accounts, which will be the Group's first
complete financial statements prepared in accordance with IFRS.
The accounting policies followed in the interim financial statements are set out
in Appendix 1.
The results for the first half of the financial year have not been audited and
were approved by the Board of Directors on 20 March 2006. The summary of results
for the year ended 31 July 2005 does not constitute the full financial
statements within the meaning of s240 of the Companies Act 1985. The full
financial statements for that year, prepared under UK GAAP, have been reported
on by the Group's auditors and delivered to the Registrar of Companies. The
audit report was unqualified and did not contain a statement under s237(2) or
s237(3) of the Companies Act 1985.
2 Segmental analysis of results
The Group has a single business segment, the distribution and supply of
construction materials.
The Group's geographical segments are Europe, consisting of UK and Ireland,
France and Central Europe, and North America. The Group has determined that its
geographical segments are its primary segments for IFRS reporting purposes. The
revenue, operating profit and trading profit of the Group's geographical
segments are detailed in the following tables.
Revenue by geographical segment
Year to Half year to Half year to
31 July 31 January 31 January
2005 2006 2005
£m £m £m
--------------------------------------------------------------------------------
2,353.9 UK and Ireland 1,262.1 1,155.0
1,644.4 France 800.6 783.9
638.7 Central Europe 362.5 316.1
--------- -------- --------
4,637.0 Europe 2,425.2 2,255.0
--------- -------- --------
--------- -------- --------
6,619.3 North America 4,309.3 3,076.9
--------- -------- --------
--------- -------- --------
11,256.3 Total 6,734.5 5,331.9
--------- -------- --------
Operating profit by geographical segment
Year to Half year to Half year to
31 July 31 January 31 January
2005 2006 2005
£m £m £m
--------------------------------------------------------------------------------
181.2 UK and Ireland 86.6 84.2
97.4 France 35.6 40.7
29.8 Central Europe 13.7 15.7
(3.0) European central costs (4.5) (1.8)
--------- -------- --------
305.4 Europe 131.4 138.8
--------- -------- --------
--------- -------- --------
422.8 North America 260.0 194.0
--------- -------- --------
--------- -------- --------
(26.2) Group central costs (20.3) (17.9)
--------- -------- --------
--------- -------- --------
702.0 Total 371.1 314.9
--------- -------- --------
Trading profit by geographical segment
Year to Half year to Half year to
31 July 31 January 31 January
2005 2006 2005
£m £m £m
--------------------------------------------------------------------------------
182.9 UK and Ireland 89.6 84.7
97.8 France 35.8 40.7
30.2 Central Europe 14.3 15.7
(3.0) European central costs (4.5) (1.8)
--------- -------- --------
307.9 Europe 135.2 139.3
--------- -------- --------
--------- -------- --------
426.1 North America 270.0 194.2
--------- -------- --------
--------- -------- --------
(26.2) Group central costs (20.3) (17.9)
--------- -------- --------
--------- -------- --------
707.8 Total trading profit (note 10) 384.9 315.6
(5.8) Amortisation of acquired intangibles (13.8) (0.7)
--------- -------- --------
702.0 Total operating profit 371.1 314.9
--------- -------- --------
The amortisation of acquired intangibles for the six months ended 31 January
2006 attributable to the above segments is UK and Ireland £3.0 million (31
January 2005: £0.5 million); France £0.2 million (31 January 2005: £nil);
Central Europe £0.6 million (31 January 2005: £nil); North America £10.0 million
(31 January 2005: £0.2 million).
The Group will prepare segmental disclosures in accordance with US GAAP and
include them in its Form 20-F for the full year ending 31 July 2006. The
disclosure requirements under US GAAP differ from those under IFRS, such that
revenue and operating profit for North America will be further analysed by
operating segment in the Form 20-F. In order to ensure consistency of
information disclosed to all investors, the following table is included in these
interim financial statements.
Year to Half year to Half year to
31 July 31 January 31 January
2005 2006 2005
£m £m £m
--------------------------------------------------------------------------------
Revenue
3,858.6 US Plumbing and Heating 2,573.6 1,772.2
2,248.9 US Building Materials 1,418.5 1,058.3
511.8 Canada 317.2 246.4
--------- -------- --------
6,619.3 North America 4,309.3 3,076.9
--------- -------- --------
Operating profit (before amortisation
of acquired intangibles)
260.0 US Plumbing and Heating 166.9 122.4
131.6 US Building Materials 89.4 56.0
35.6 Canada 19.2 16.4
(1.1) North American central costs (5.5) (0.6)
--------- -------- --------
426.1 North America 270.0 194.2
--------- -------- --------
The amortisation of acquired intangibles for the six months ended 31 January
2006 attributable to the above segments is US Plumbing and Heating £2.8 million
(31 January 2005: £0.2 million); US Building Materials £7.1 million (31 January
2005: £nil); Canada £0.1 million (31 January 2005: £nil).
Analysis of movement in revenue
New Acquisitions
Acqs Increment Organic Change 2006
2005 Exchange 2006 2005
£m £m £m £m £m % £m
--------------------------------------------------------------------------------
UK and Ireland 1,155.0 - 75.8 13.9 17.4 1.5 1,262.1
France 783.9 (3.9) 0.9 10.8 8.9 1.1 800.6
Central Europe 316.1 (1.8) 11.1 17.3 19.8 6.3 362.5
--------- ------- ------ -------- ------ ------ ------
Europe 2,255.0 (5.7) 87.8 42.0 46.1 2.0 2,425.2
--------- ------- ------ -------- ------ ------ ------
US Plumbing and
Heating 1,772.2 95.0 72.9 129.4 504.1 27.0 2,573.6
US Building
Materials 1,058.3 56.8 45.3 169.5 88.6 7.9 1,418.5
Canada 246.4 29.7 1.2 8.0 31.9 11.6 317.2
------- -------- -------- ------- ------ ------ ------
North America 3,076.9 181.5 119.4 306.9 624.6 19.2 4,309.3
------- -------- -------- ------- ------ ------ ------
------- -------- -------- -------- ------ ------ ------
TOTAL 5,331.9 175.8 207.2 348.9 670.7 12.2 6,734.5
------- -------- -------- -------- ------ ------ ------
Analysis of movement in operating profit (before amortisation of acquired
intangibles)
New Acquisitions
Acqs Increment Organic Change 2006
2005 Exchange 2006 2005
£m £m £m £m £m % £m
--------------------------------------------------------------------------------
UK and Ireland 84.7 - 2.6 0.7 1.6 2.0 89.6
France 40.7 (0.2) - 0.2 (4.9) (12.0) 35.8
Central Europe 15.7 (0.1) 0.8 0.7 (2.8) (18.0) 14.3
European
central costs (1.8) - - - (2.7) (4.5)
------- -------- ------- -------- ------ ------ ------
Europe 139.3 (0.3) 3.4 1.6 (8.8) (6.2) 135.2
------- -------- ------- -------- ------ ------ ------
US Plumbing
and Heating 122.4 6.6 4.4 7.8 25.7 20.0 166.9
US Building
Materials 56.0 3.0 2.3 17.0 11.1 18.7 89.4
Canada 16.4 2.0 - 0.4 0.4 2.1 19.2
North American
central costs (0.6) - - - (4.9) (5.5)
------- -------- ------ ------- ----- ----- ------
North America 194.2 11.6 6.7 25.2 32.3 15.7 270.0
------- -------- ------ ------- ------ ------ ------
------- -------- ------ ------- ------ ------ ------
Group central
costs (17.9) - - - (2.4) (20.3)
------- -------- ------- -------- ------ ------ -----
------- -------- ------- -------- ------ ------ -----
TOTAL 315.6 11.3 10.1 26.8 21.1 6.5 384.9
------- -------- ------- -------- ------ ----- -----
3 Net finance costs
Year to Half year to Half year to
31 July 31 January 31 January
2005 2006 2005
£m £m £m
-------------------------------------------------------------------------------
26.7 Interest receivable 19.2 12.0
- Net pension finance income 0.6 -
-------- -------- --------
26.7 Finance revenue 19.8 12.0
-------- -------- --------
(55.2) Interest payable on loans and (42.9) (25.8)
overdrafts
(2.3) Interest payable on finance leases (1.2) (1.0)
0.6 Fair value (losses)/gains on (0.8) (0.1)
derivatives
(6.6) Net pension finance cost - (3.2)
-------- -------- --------
(63.5) Finance costs (44.9) (30.1)
-------- -------- --------
-------- -------- --------
(36.8) Net finance costs (25.1) (18.1)
-------- -------- --------
4 Taxation
The tax charge on ordinary activities for the half year has been calculated at
the rate which it is expected will apply for the year ending 31 July 2006 and
comprises the following elements:
Year to Half year to Half year to
31 July 31 January 31 January
2005 2006 2005
£m £m £m
-------------------------------------------------------------------------------
Tax on profit for the period
38.0 - UK 11.1 21.7
103.8 - Overseas 67.8 65.5
-------- ------------------------- -------- --------
141.8 78.9 87.2
44.2 Deferred tax 21.6 (2.9)
-------- ------------------------- -------- --------
186.0 100.5 84.3
-------- ------------------------- -------- --------
5 Dividends
Year to Half year to Half year to
31 July 31 January 31 January
2005 2006 2005
£m £m £m
-------------------------------------------------------------------------------
51.7 Interim paid - -
93.6 Final paid 104.0 93.6
-------- ------------------------- -------- --------
145.3 Dividends charge for the period 104.0 93.6
-------- ------------------------- -------- --------
6 Earnings per share
Earnings per share, calculated on an average of 590.4 million (2005: 585.5
million) ordinary shares in issue, are as follows:
Year to Half year to Half year to
31 July 31 January 31 January
2005 2006 2005
Pence per Pence per share Pence per share
share
-------------------------------------------------------------------------------
82.60p Before amortisation of acquired 43.91p 36.44p
intangibles
(0.99)p Amortisation of acquired (2.33)p (0.12)p
intangibles
-------------------------------------------------------------------------------
81.61p Basic earnings per share 41.58p 36.32p
-------------------------------------------------------------------------------
The impact of all potentially dilutive share options on earnings per share would
be to increase the weighted average number of shares in issue to 596.9 million
and to reduce basic earnings per share to 41.13p. Diluted earnings per share
before amortisation of acquired intangibles is 43.44p.
7 Reconciliation of movements in capital and reserves
Year to Half year to Half year to
31 July 31 January 31 January
2005 2006 2005
-------------------------------------------------------------------------------
479.2 Profit for the period 245.5 212.5
72.1 Other recognised income and expense (19.7) (36.2)
(145.3) Dividends paid (104.0) (93.6)
22.7 Credit to equity for share based 26.0 15.9
payments
3.5 Deferred tax on share based payments 4.1 1.2
32.7 New share capital subscribed 13.1 16.8
(18.6) Purchase of own shares (10.7) (18.6)
-------- -------- --------
446.3 Net addition to shareholders' funds 154.3 98.0
1,854.4 Opening shareholders' funds 2,300.7 1,854.4
-------- -------- --------
2,300.7 Closing shareholders' funds 2,455.0 1,952.4
-------- -------- --------
8 Analysis of change in net debt
At Non cash Exchange At
31 July movements movement 31 January
2005 Cashflow Aquisitions 2006
£m £m £m £m £m £m
--------------------------------------------------------------------------------
Cash and cash
equivalents 381.1 77.2 - - (19.5) 438.8
Bank
overdrafts (437.1) 114.3 - - 2.1 (320.7)
-------- -------- -------- -------- -------- --------
(56.0) 191.5 - - (17.4) 118.1
Trading
investments 4.8 (0.5) 0.2 - - 4.5
Derivative
financial
instruments (10.9) 5.6 - 5.9 1.2 1.8
Bank loans (1,046.5) (710.2) (9.0) (0.9) 36.4 (1,730.2)
Obligations
under finance
leases (61.9) 4.3 (0.1) (7.6) 0.4 (64.9)
-------- -------- -------- -------- -------- --------
Total net debt (1,170.5) (509.3) (8.9) (2.6) 20.6 (1,670.7)
-------- -------- -------- -------- -------- --------
9 Acquisitions
The following table summarises the investment in acquisitions made during the
half year. In certain cases the consideration is deferred or subject to
adjustment and includes net borrowings acquired.
Estimated Expected
consideration contribution to
Acquistions including debt Group revenue
in a full year
£m £m
----------------------- --------------- ---------------
UK and Ireland 225 280
France 5 9
Central Europe 21 34
---------- ----------
Europe 251 323
---------- ----------
US Plumbing and Heating 110 214
US Building Materials 74 162
Canada 1 2
---------- ----------
North America 185 378
---------- ----------
---------- ----------
Total Group 436 701
---------- ----------
Ten additional acquisitions, for a combined consideration of £162 million, have
been completed since 31 January 2006 with three in US Plumbing and Heating, two
in US Building Materials and one in Canada in North America and four in France.
They are expected to contribute £224 million to Group turnover in a full year.
Acquisition cash expenditure during the period, including any deferred
consideration in respect of prior period acquisitions and net cash balances
acquired, amounted to £420.5 million (2005: £206.5 million).
10 Non-GAAP measures of performance
Trading profit is defined as operating profit before the amortisation of
acquired intangibles and is a non-GAAP measure. The current businesses within
Wolseley have arisen through internal organic growth and through acquisition.
Operating profit includes the amortisation of acquired intangibles arising on
those businesses that have been acquired subsequent to 31 July 2004 and as such
does not reflect equally the performance of businesses acquired prior to 31 July
2004 (where no amortisation of acquired intangibles was recognised), businesses
that have developed organically where no intangibles are attributed and those
businesses more recently acquired. Wolseley believes that trading profit
provides valuable additional information for users of the interim financial
statement in assessing the Group's performance since it provides information on
the performance of the business that local managers are more directly able to
influence and on a basis consistent across businesses.
Year to Half year to Half year to
31 July 31 January 31 January
2005 2006 2005
-------------------------------------------------------------------------------
702.0 Operating profit 371.1 314.9
5.8 Add back: amortisation of acquired 13.8 0.7
-------- intangibles -------- --------
707.8 Trading profit 384.9 315.6
-------- -------- --------
665.2 Profit before tax 346.0 296.8
5.8 Add back: amortisation of acquired 13.8 0.7
-------- intangibles -------- --------
671.0 Profit before tax and the amortisation 359.8 297.5
-------- of acquired intangibles -------- --------
11 Exchange rates
The results of overseas subsidiaries have been translated into sterling using
average rates of exchange. The period end rates of exchange have been used to
convert balance sheet amounts.
The average profit and loss account translation rate for the first six months
was $1.7604 to the £1 compared to $1.8548 for the comparable period last year,
an increase of 5.4%, and €1.4619 to the £1 compared to €1.4546, a decrease of
0.5%. Should the exchange rates between the US$ and £, and the € and the £,
remain at the 31 January 2006 spot rates used to translate the 31 January 2006
balance sheet ($1.7787 and €1.4631) then the averages for the year as a whole
would be $1.7688 and €1.4624 and this would have the effect of decreasing sales
and trading profit for the first half by £19.4 million and £0.8 million,
respectively.
12 Adoption of International Financial Reporting Standards
As at As at As at
31 July 31 January 1 August
2005 2005 2004
£m £m £m
--------------------------------------------------------------------------------
Net assets under UK GAAP 2,306.9 2,026.3 1,901.9
Adjustments (before taxation)
Intangible assets (i) 50.9 27.8 0.7
Post employment benefits (ii) (152.1) (162.1) (147.6)
Share based payments (iii) (12.5) (11.2) (14.3)
Leases (iv) (7.8) (7.1) (6.5)
Derivatives (v) (10.9) (1.4) (0.5)
Post balance sheet events (vi) 104.0 51.7 93.6
Other (16.0) (10.8) (13.6)
--------------------------------------------------------------------------------
(44.4) (113.1) (88.2)
Taxation (vii) 38.2 39.2 40.7
--------------------------------------------------------------------------------
Net assets
under IFRS 2,300.7 1,952.4 1,854.4
--------------------------------------------------------------------------------
Year to Half year to
31 July 2005 31 January 2005
£m £m
--------------------------------------------------------------------------------
Net income under UK GAAP 461.2 204.0
Adjustments (before taxation)
Intangible assets (i) 37.3 20.2
Post employment benefits (ii) 0.6 0.7
Share based payments (iii) (21.6) (12.8)
Leases (iv) (1.3) (0.6)
Foreign exchange gains and losses (viii) 3.9 (0.7)
Other (1.5) 2.8
--------------------------------------------------------------------------------
17.4 9.6
Taxation (vii) 0.6 (1.1)
--------------------------------------------------------------------------------
Net income under IFRS 479.2 212.5
--------------------------------------------------------------------------------
The adjustments made in converting UK GAAP financial information into IFRS
financial information are summarised below. A more comprehensive review of the
adjustments made in respect of the year ended 31 July 2005 can be found in the
Group's IFRS Statement dated 22 November 2005 on its website www.wolseley.com in
the 'Investor Centre' section. The net assets of the Group under IFRS contained
in that statement have been reduced by £13 million in order to reflect the
Group's most recent interpretation of its IFRS deferred tax position.
(i) Intangible assets
Under UK GAAP, goodwill was amortised over its useful economic life, tested for
impairment and provided against as necessary. Under IFRS, goodwill is no longer
amortised but must be tested for impairment as at 1 August 2004 (the transition
date) and at least annually thereafter. Goodwill amortisation charged under UK
GAAP during the year ended 31 July 2005 has been credited back to the income
statement under IFRS.
In addition IFRS requires identifiable intangible assets to be recognised
separately on the balance sheet and consequently certain intangible assets, such
as contractual customer relationships and trade names, which were previously
recorded as part of goodwill under UK GAAP, have been separately recognised as
intangible assets under IFRS and amortised over their expected useful lives.
(ii) Post-employment benefits
Under UK GAAP, the Group accounted for post-employment benefits under SSAP 24,
'Accounting for pension costs', whereby the cost of providing defined benefit
pensions and post-retirement healthcare benefits was charged against operating
profit on a systematic basis with surpluses and deficits arising recognised over
the expected average remaining service lives of participating employees.
Actuarial gains and losses are charged to equity and the net deficit on the
Group's defined benefit pension schemes is carried in full in the Group's IFRS
balance sheet.
(iii) Share-based payments
Under UK GAAP, the cost of awards made under the Group's employee share schemes
was based on the intrinsic value of the awards, with the exception of SAYE
schemes for which no cost was recognised. Under IFRS 2, 'Share-based Payment',
the cost of employee share schemes, including SAYE schemes, is based on the fair
value of the awards that must be assessed using an option-pricing model. The
Group has principally used a binomial model for this purpose.
Generally, for an equity-settled award, the fair value of the award at the grant
date is expensed on a straight-line basis over the vesting period, with
adjustments being made to reflect expected and actual forfeitures during the
vesting period due to failure to satisfy service conditions or achieve
non-market performance conditions, such as EPS growth targets. For a
cash-settled award, the fair value of the award at each balance sheet date is
used to calculate the probable liability of the Group; changes in this liability
from the opening to closing balance sheet are charged or credited to the income
statement.
(iv) Leases
IAS 17, 'Leases' requires that the land and buildings elements of property
leases are considered separately for the purposes of determining whether the
lease is a finance or operating lease. The majority of the Group's leased
buildings are on short-term leases and, consistent with UK GAAP, are classified
as operating leases under IFRS. There are, however, a small number of leases
where the building element of the lease has been reclassified as a finance lease
based on the criteria set out in IAS 17.
Under UK GAAP, committed rental increases, which could be considered in the same
way as inflationary increases and increases due to market comparables, were
generally recognised as they arose and property lease incentives were generally
recognised over the period to the first market rent review. Under IFRS,
committed rental increases and lease incentives are required to be spread over
the entire lease term.
(v) Derivatives and hedge accounting
The Group uses derivative contracts to manage economic exposure to movements in
interest rates and currency exchange rates. Under UK GAAP, such derivative
contracts were not recognised as assets and liabilities on the balance sheet and
gains or losses arising on them were not recognised until the hedged item had
itself been recognised in the financial statements.
Under IFRS all derivative financial instruments are accounted for at fair market
value whilst other financial instruments are accounted for either at amortised
cost or at fair value depending on their classification. Subject to stringent
criteria, derivative financial instruments, financial assets and financial
liabilities may be designated as forming hedge relationships as a result of
which fair value changes are offset in the income statement or charged/credited
to equity depending on the nature of the hedge relationship. Hedge accounting
has been applied to the Group's interest rate swaps (which are hedging floating
rate debt) and foreign currency financial instruments (which are hedging the net
assets of the Group's foreign operations).
(vi) Post balance sheet events
Under UK GAAP dividends were recognised in the period to which they related. IAS
10, 'Events after the Balance Sheet Date' requires that dividends declared or
approved after the balance sheet date should not be recognised as a liability at
that balance sheet date as the liability does not represent a present obligation
as defined by IAS 37, 'Provisions, Contingent Liabilities and Contingent
Assets'.
(vii) Taxation
Under UK GAAP, deferred tax was provided on timing differences between the
accounting and taxable profit (an income statement approach). Under IFRS,
deferred tax is provided on temporary differences between the book carrying
value and tax base of assets and liabilities (a balance sheet approach). As a
result, the Group's IFRS balance sheet includes an additional deferred tax
liability in respect of fair value property revaluations on acquisitions and
property roll-over gains.
In addition, deferred tax has been recognised on the adjustments between UK GAAP
and IFRS with the majority of the net deferred tax asset relating to the
adjustments for share options and post-employment benefits (reflecting the
substantially increased defined benefit liability under IFRS).
(viii) Foreign exchange gains and losses
A small number of the Group's subsidiary companies have changed their functional
currency in order to comply with the more stringent functional currency
requirements of IAS 21, 'The Effects of Changes in Foreign Exchange Rates' which
requires companies that are acting on behalf of the parent company to have the
same functional currency as the parent company. As a result, some foreign
exchange differences arising in these companies have been recorded in the
Group's income statement under IFRS rather than in equity, under UK GAAP.
Independent review report to Wolseley plc
-----------------------------------------
Introduction
We have been instructed by the company to review the financial information for
the six months ended 31 January 2006 which comprises the consolidated interim
balance sheet as at 31 January 2006 and the related consolidated interim income
statement, cash flow statement, statement of recognised income and expense for
the six months then ended and related notes. 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.
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.
As disclosed in note 1, the next annual financial statements of the group will
be prepared in accordance with International Financial Reporting Standards
adopted by the European Union. This interim report has been prepared in
accordance with the basis set out in note 1.
The accounting policies are consistent with those that the directors intend to
use in the next annual financial statements. As explained in note 1, there is,
however, a possibility that the directors may determine that some changes are
necessary when preparing the full annual financial statements for the first time
in accordance with International Financial Reporting Standards adopted by the
European Union. The IFRS standards and IFRIC interpretations that will be
applicable and adopted for use in the European Union at 31 July 2006 are not
known with certainty at the time of preparing this interim financial
information.
Review work performed
We conducted our review in accordance with 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 disclosed accounting policies have
been applied. 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 and therefore provides a lower level of assurance.
Accordingly we do not express an audit opinion on the financial information.
This report, including the conclusion, has been prepared for and only for the
company for the purpose of the Listing Rules of the Financial Services Authority
and for no other purpose. We do not, in producing this report, accept or assume
responsibility for any other purpose or to any other person to whom this report
is shown or into whose hands it may come save where expressly agreed by our
prior consent in writing.
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 31 January 2006.
PricewaterhouseCoopers LLP
Chartered Accountants
London
21 March 2006
Notes:
(a) The maintenance and integrity of the Wolseley plc web site is the
responsibility of the directors; the work carried out by the auditors does not
involve consideration of these matters and, accordingly, the auditors accept no
responsibility for any changes that may have occurred to the interim report
since it was initially presented on the web site.
(b) Legislation in the United Kingdom governing the preparation and
dissemination of financial information may differ from legislation in other
jurisdictions.
Appendix 1 - Accounting Policies
--------------------------------
The consolidated interim financial statements have been prepared in accordance
with International Financial Reporting Standards ('IFRS') as adopted by the
European Union, including interpretations issued by the International Accounting
Standards Board ('IASB') and its committees and with those parts of the
Companies Act 1985 applicable to companies reporting under IFRS. The disclosures
required by IFRS1, 'First Time Adoption of International Financial Reporting
Standards' concerning the transition from UK GAAP to IFRS are given in note 12.
The date of transition to IFRS is 1 August 2004.
A summary of the principal accounting policies applied by the Group in the
preparation of the consolidated interim financial statements is set out below.
Basis of accounting
-------------------
The consolidated financial information has been prepared under the historical
cost convention as modified by the revaluation of available for sale investments
and financial assets and liabilities held for trading.
First time adoption of International Financial Reporting Standards
------------------------------------------------------------------
IFRS 1, 'First-time Adoption of International Financial Reporting Standards'
sets out the procedures that the Group must follow when it adopts IFRS for the
first time as the basis for preparing its consolidated financial statements. The
Group is required to establish its IFRS accounting policies as at 31 July 2006
and, in general, apply these retrospectively to determine the IFRS opening
balance sheet at its date of transition, 1 August 2004.
Certain optional exemptions to this general principle are available under IFRS 1
and the significant first-time adoption choices made by the Group are as
follows.
• The Group has elected not to apply IFRS 3 retrospectively to business
combinations that took place before 1 August 2004. As a result, in the IFRS
opening balance sheet, goodwill arising from past business combinations of
£665.9 million remains as stated under UK GAAP at that date.
• The Group has elected to recognise all cumulative actuarial gains and losses
in relation to post employment defined benefit schemes at the date of
transition. In addition, the Group has elected to recognise actuarial gains
and losses in full in the period in which they occur in a statement of
recognised income and expense.
• The Group has elected to apply IFRS 2, 'Share Based Payment' only to
equity-settled awards that had not vested as at 1 August 2004 and were
granted on or after 7 November 2002 and cash-settled awards that had not
vested as at 1 August 2004.
• The Group has elected to reset the foreign currency translation reserve to
zero at 1 August 2004. Going forward, IFRS requires amounts taken to reserves
on the retranslation of foreign subsidiaries to be recorded in a separate
foreign currency translation reserve and be included in the future calculation
of profit or loss on sale of the subsidiary.
• The Group has elected to implement IAS 39, 'Financial Instruments:
Recognition and Measurement' and IAS 32, 'Financial Instruments: Disclosure
and Presentation' at its date of transition, 1 August 2004, and apply hedge
accounting where the requirements of IAS 39 are met.
Consolidation
-------------
The consolidated financial information includes the results of the parent
Company and its subsidiary undertakings drawn up to 31 January 2006.
The trading results of businesses acquired, sold or discontinued during the year
are included in profit on ordinary activities from the date of effective
acquisition or up to the date of sale or discontinuance.
Intra-group transactions and balances and any unrealised gains and losses
arising from intra-group transactions are eliminated on consolidation.
Foreign currencies
------------------
Items included in the financial statements of each of the Group's subsidiary
undertakings are measured using the currency of the primary economic environment
in which the subsidiary undertaking operates (the 'functional currency'). The
consolidated financial statements are presented in sterling, which is the
presentational currency of the Group and the functional currency of the parent
Company.
The trading results of overseas subsidiary undertakings are translated into
sterling using average rates of exchange ruling during the relevant financial
period.
The balance sheets of overseas subsidiary undertakings are translated into
sterling at the rates of exchange ruling at the period end. Exchange differences
arising between the translation into sterling of the net assets of these
subsidiary undertakings at rates ruling at the beginning and end of the year are
recognised in the currency translation reserve as are exchange differences on
foreign currency borrowings to the extent that they are used to finance or
provide a hedge against foreign currency net assets.
Changes in the fair value and the final settlement value of derivative financial
instruments, entered into to hedge foreign currency net assets and that satisfy
the hedging conditions of IAS 39, are recognised in the currency translation
reserve (see the separate accounting policy on derivative financial
instruments).
In the event that an overseas subsidiary undertaking is sold, the gain or loss
on disposal recognised in the income statement is determined after taking into
account the cumulative currency translation differences that are attributable to
the subsidiary undertaking concerned. As permitted by IFRS 1, the Group has
elected to deem the cumulative currency translation differences of the Group to
be £nil as at 1 August 2004. As a result the gain or loss on disposal of an
overseas subsidiary undertaking does not include currency translation
differences arising before 1 August 2004.
Foreign currency transactions entered into during the year are translated into
sterling at the rates of exchange ruling on the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies are
retranslated at the rate of exchange ruling at the balance sheet date. All
currency translation differences are taken to the income statement with the
exception of differences on foreign currency borrowings to the extent that they
are used to finance or provide a hedge against foreign currency net assets as
detailed above.
Revenue
-------
Revenue is the amount receivable for the provision of goods and services falling
within the Group's ordinary activities, excluding intra-group sales, estimated
and actual sales returns, trade and early settlement discounts, value added tax
and similar sales taxes.
Revenue from the provision of goods is recognised when the risks and rewards of
ownership of goods have been transferred to the customer. The risks and rewards
of ownership of goods are deemed to have been transferred when the goods are
shipped to, or are picked up by, the customer.
Revenue from services, other than those that arise from construction service
contracts (see below), are recognised when the service provided to the customer
has been completed.
Revenue in respect of construction service contracts, where the Group is
providing framing lumber installation services to residential property
companies, is recognised using the percentage of completion method, with the
percentage complete being determined by comparing the percentage of costs
incurred to date with the estimated total costs of the contract. Losses on these
contracts, if any, are recognised in the period when such losses become probable
and can be reasonably estimated.
Revenue from the provision of goods and all services is only recognised when the
amounts to be recognised are fixed or determinable and collectibility is
reasonably assured.
Vendor rebates
--------------
The Group enters into agreements with certain vendors providing for inventory
purchase rebates. These purchase rebates are accrued as earned and are recorded
initially as a reduction in inventory with a subsequent reduction in cost of
sales when the related product is sold.
Business Combinations
---------------------
The Group has applied the purchase method in its accounting for the acquisition
of subsidiaries.
As permitted by IFRS 1, the Group has elected not to apply IFRS 3 'Business
Combinations' to acquisitions of subsidiaries that were recognised before 1
August 2004 and as a result the carrying amount of goodwill recognised as an
asset under UK GAAP has been brought forward unadjusted as the cost of goodwill
recognised under IFRS as at 1 August 2004. IFRS 3 has been applied with effect
from 1 August 2004 and goodwill amortisation ceased from that date.
The cost of an acquisition is measured as the fair value of the assets given,
equity instruments issued and liabilities incurred or assumed at the date of
exchange, plus costs directly attributable to the acquisition. Identifiable
assets acquired and liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the acquisition date,
irrespective of the extent of any minority interest.
The excess of the cost of acquisition over the fair value of the Group's share
of the identifiable net assets acquired is recorded as goodwill. If the cost of
acquisition is less than the fair value of the group's share of the net assets
of the subsidiary acquired, the difference is recognised directly in the income
statement.
Intangible assets
-----------------
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value
of the Group's share of the net identifiable assets of the acquired subsidiary
undertaking at the date of acquisition. Goodwill on acquisitions of subsidiary
undertakings is included in intangible assets.
Goodwill is not amortised but is tested annually for impairment and carried at
cost less accumulated impairment losses. Gains and losses on the disposal of an
entity include the carrying amount of goodwill relating to the entity sold.
Goodwill is allocated to cash-generating units for the purpose of impairment
testing. Each of those cash-generating units represents the lowest level within
the Group at which the associated goodwill is monitored for management purposes
and is not larger than the primary or secondary reporting segments determined in
accordance with IAS 14 'Segmental Reporting'.
Other intangible assets
An intangible asset, which is an identifiable non-monetary asset without
physical substance, is recognised to the extent that it is probable that the
expected future economic benefits attributable to the asset will flow to the
Group and that its cost can be measured reliably. The asset is deemed to be
identifiable when it is separable or when it arises from contractual or other
legal rights.
Intangible assets, primarily brands, trade names and customer relationships,
acquired as part of a business combination are capitalised separately from
goodwill and are carried at cost less accumulated amortisation and accumulated
impairment losses. Amortisation is calculated using the reducing balance method
for customer relationships and the straight-line method for other intangible
assets. The cost of the intangible assets is amortised over their estimated
useful lives.
Computer software that is not integral to an item of property, plant and
equipment is recognised separately as an intangible asset and is carried at cost
less accumulated amortisation and accumulated impairment losses. Costs include
software licences, consulting costs attributable to the development, design and
implementation of the computer software and internal costs directly attributable
to the development, design and implementation of the computer software. Costs in
respect of training and data conversion are expensed as incurred. Amortisation
is calculated using the straight-line method so as to charge the cost of the
computer software to the income statement over its estimated useful life (3-5
years).
Property, plant and equipment ('PPE')
-------------------------------------
PPE is carried at cost less accumulated depreciation and accumulated impairment
losses, except for land and assets in the course of construction, which are not
depreciated and are carried at cost less accumulated impairment losses. Cost
includes expenditure that is directly attributable to the acquisition of the
items. In addition, subsequent costs are included in the asset's carrying amount
or recognised as a separate asset, as appropriate, only when it is probable that
future economic benefits associated with the item will flow to the Group and the
cost of the item can be measured reliably. All other repair and maintenance
costs are charged to the income statement during the financial period in which
they are incurred.
Depreciation on assets is calculated using the straight-line method to allocate
the cost of each asset to its residual value over its estimated useful life, as
follows:
Freehold buildings and long leaseholds 35-50 years;
Short leaseholds over the period of the lease
Plant and machinery 7-10 years
Fixtures and fittings 5-7 years
Computers 3-5 years
Motor vehicles 4 years
The residual values and useful lives of PPE are reviewed and adjusted if
appropriate at each balance sheet date.
Borrowing costs attributable to assets under construction are charged to the
income statement in the period in which they are incurred.
Leased assets
-------------
Assets held under finance leases, which are leases where substantially all the
risks and rewards of ownership of the asset have transferred to the Group, are
capitalised in the balance sheet and depreciated over the shorter of the lease
term or their useful lives. The asset is recorded at the lower of its fair value
and the present value of the minimum lease payments at the inception of the
lease. The capital elements of future obligations under finance leases are
included in liabilities in the balance sheet and analysed between current and
non-current amounts. The interest elements of future obligations under finance
leases are charged to the income statement over the periods of the leases and
represent a constant proportion of the balance of capital repayments outstanding
in accordance with the effective interest rate method.
Leases where the lessor retains substantially all the risks and rewards of
ownership are classified as operating leases. The cost of operating leases (net
of any incentives received from the lessor) is charged to the income statement
on a straight line basis over the periods of the leases.
Assets held for sale
--------------------
Assets are classified as held for sale if their carrying amount will be
recovered by sale rather than by continuing use in the business. For this to be
the case, the asset must be available for immediate sale in its present
condition, management must be committed to and have initiated a plan to sell the
asset which, when initiated, was expected to result in a completed sale within
twelve months. Assets that are classified as held for sale are not depreciated
and are measured at the lower of their carrying amount and fair value less costs
to sell.
Impairment of assets
--------------------
Assets that have an indefinite useful life, such as goodwill, are not subject to
amortisation and are tested annually for impairment and whenever events or
changes in circumstance indicate that the carrying amount may not be
recoverable. Assets that are subject to amortisation are tested for impairment
whenever events or changes in circumstance indicate that the carrying amount may
not be recoverable. An impairment loss is recognised for the amount by which the
asset's carrying amount exceeds its recoverable amount. The recoverable amount
is the higher of an asset's fair value less costs to sell and value in use. For
the purposes of assessing impairment, assets are grouped at the lowest levels
for which there are separately identifiable cash flows.
Inventories
-----------
Inventories are stated at the lower of cost and net realisable value. Cost is
determined using the first-in, first-out (FIFO) method or the average cost
method as appropriate to the nature of the transactions in those items of
inventory. The cost of goods purchased for resale includes import and custom
duties, transport and handling costs, freight and packing costs and other
attributable costs less trade discounts, rebates and other subsidies. It
excludes borrowing costs. Net realisable value is the estimated selling price in
the ordinary course of business, less applicable variable selling expenses.
Taxation
--------
Current tax represents the expected tax payable (or recoverable) on the taxable
income for the year using tax rates enacted or substantively enacted at the
balance sheet date and taking into account any adjustments arising from prior
years.
Deferred tax is provided in full, using the liability method, on temporary
differences arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. Deferred tax is not
accounted for if it arises from initial recognition of an asset or liability in
a transaction, other than a business combination, that at the time of the
transaction affects neither accounting nor taxable profit or loss.
Deferred tax is determined using tax rates (and laws) that have been enacted or
substantially enacted by the balance sheet date and are expected to apply when
the related deferred tax asset is realised or the deferred tax liability is
settled. Deferred tax assets are recognised to the extent that it is probable
that future taxable profit will be available against which the temporary
differences can be utilised.
Deferred tax is provided on temporary differences arising on investments in
subsidiaries except where the timing of the reversal of the temporary difference
is controlled by the Group and it is probable that the temporary difference will
not reverse in the foreseeable future.
Derivative financial instruments
--------------------------------
Derivative financial instruments, in particular, interest rate swaps and
currency swaps, are used to manage the financial risks arising from the business
activities of the Group and the financing of those activities. There is no
trading activity in derivative financial instruments.
At the inception of a hedging transaction entailing the use of derivative
financial instruments, the Group documents the relationship between the hedged
item and the hedging instrument together with its risk management objective and
the strategy underlying the proposed transaction. The Group also documents its
assessment, both at the inception of the hedging relationship and subsequently
on an ongoing basis, of the effectiveness of the hedge in offsetting movements
in the fair values or cash flows of the hedged items.
Derivative financial instruments are recognised as assets and liabilities
measured at their fair values at the balance sheet date. Where derivative
financial instruments do not fulfil the criteria for hedge accounting contained
in IAS 39, changes in their fair values are recognised in the income statement.
When hedge accounting is used, the relevant hedging relationships are classified
as fair value hedges, cash flow hedges or net investment hedges. Where the
hedging relationship is classified as a fair value hedge, the carrying amount of
the hedged asset or liability is adjusted by the increase or decrease in its
fair value attributable to the hedged risk and the resulting gain or loss is
recognised in the income statement where, to the extent that the hedge is
effective, it will be offset by the change in the fair value of the hedging
instrument. Where the hedging relationship is classified as a cash flow hedge or
as a net investment hedge, to the extent the hedge is effective, changes in the
fair value of the hedging instrument arising from the hedged risk are recognised
directly in equity rather than in the income statement. When the hedged item is
recognised in the financial statements, the accumulated gains and losses
recognised in equity are either recycled to the income statement or, if the
hedged item results in a non-financial asset, are recognised as adjustments to
its initial carrying amount.
Pensions and other post retirement benefits
--------------------------------------------
Contributions to defined contribution pension plans and other post retirement
benefits are charged to the income statement as incurred.
For defined benefit pension plans and other retirement benefits, the cost is
calculated annually using the projected unit credit method and is recognised
over the average expected remaining service lives of participating employees, in
accordance with the recommendations of independent qualified actuaries. The
current service cost of defined benefit plans is recorded within operating
profit, the expected return from pension scheme assets is recorded within
finance revenue and the interest on pension scheme liabilities is recorded
within finance costs. Past service costs resulting from enhanced benefits are
recorded within operating profit and recognised on a straight-line basis over
the vesting period, or immediately if the benefits have vested. Actuarial gains
and losses, which represent differences between the expected and actual returns
on the plan assets and the effect of changes in actuarial assumptions, are
recognised in full in the statement of recognised income and expense in the
period in which they occur. The defined benefit liability or asset recognised in
the balance sheet comprises the net total for each plan of the present value of
the benefit obligation at the balance sheet date, less any past service costs
not yet recognised, less the fair value of the plan assets, if any, at the
balance sheet date. Where a plan is in surplus, the asset recognised is limited
to the amount of any unrecognised past service costs and the present value of
any amount which the Group expects to recover by way of refunds or a reduction
in future contributions.
Trade receivables
-----------------
Trade receivables are recognised initially at fair value and measured
subsequently at amortised cost using the effective interest method, less
provision for impairment. A provision for impairment of trade receivables is
established when there is objective evidence that the Group will not be able to
collect all amounts due according to the original terms of the receivables.
Cash and cash equivalents
-------------------------
Cash and cash equivalents includes cash in hand, deposits held at call with
banks, other short-term highly liquid investments with original maturities of
three months or less, and bank overdrafts. Bank overdrafts are shown within
borrowings in current liabilities on the balance sheet to the extent that there
is no right of offset and practice of net settlement with cash balances.
Share capital
-------------
The Company only has one class of shares, ordinary shares, which are classified
as equity.
Incremental costs directly attributable to the issue of new shares or options
are shown in equity as a deduction from the proceeds, net of tax.
Where any Group company purchases the Company's equity share capital (treasury
shares), the consideration paid, including any directly attributable incremental
costs (net of tax), is deducted from equity attributable to the company's equity
holders until the shares are cancelled, reissued or disposed of. Where such
shares are subsequently sold or reissued, any consideration received, net of any
directly attributable incremental transaction costs and the related tax effects,
is included in equity attributable to the Company's equity holders.
Borrowings
----------
Borrowings are recognised initially at cost being the fair value of the
consideration received net of transaction costs incurred.
Borrowings are subsequently stated at amortised cost with any difference between
the proceeds (net of transaction costs) and the redemption value being
recognised in the income statement over the period of the borrowings using the
effective interest method.
Borrowings are classified as current liabilities unless the Group has an
unconditional right to defer settlement of the liability for at least 12 months
after the balance sheet date.
Investments
-----------
The Group classifies its investments in the following categories: financial
assets at fair value through profit or loss, loans and receivables,
held-to-maturity investments, and available-for-sale financial assets. The
classification depends on the purpose for which the investments were acquired.
Management determines the classification of its investments at initial
recognition and re-evaluates this designation at every reporting date.
(a) Financial assets at fair value through profit or loss
This category comprises financial assets held for trading which have been
acquired principally for the purpose of selling in the short term. Derivatives
also fall within this category unless they are designated as hedges and the
hedge is effective for accounting purposes. Assets in this category are
classified as current.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market and with no
intention of trading. They are included in current assets, except for maturities
greater than 12 months after the balance sheet date, which are classified as
non-current assets. Loans and receivables are included in trade and other
receivables in the balance sheet.
(c) Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets with fixed or
determinable payments and fixed maturities that the Group's management has the
positive intention and ability to hold to maturity. They are included in
non-current assets unless the investment is due to mature within 12 months of
the balance sheet date
(d) Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets that are
either designated in this category or not classified in any of the other
categories. They are included in non-current assets unless management intends to
dispose of the investment within 12 months of the balance sheet date.
Investments are initially recognised at fair value plus transaction costs for
all financial assets not carried at fair value through profit or loss.
Investments are derecognised when the rights to receive cash flows from the
investments have expired or have been transferred and the Group has transferred
substantially all risks and rewards of ownership.
Available-for-sale financial assets and financial assets at fair value through
profit or loss are subsequently carried at fair value. Loans and receivables and
held-to-maturity investments are subsequently carried at amortised cost using
the effective interest method. Realised and unrealised gains and losses arising
from changes in the fair value of the 'Financial assets at fair value through
profit or loss' category are included in the income statement in the period in
which they arise. Unrealised gains and losses arising from changes in the fair
value of non-monetary securities classified as available-for-sale are recognised
in equity. When securities classified as available for sale are sold or
impaired, the accumulated fair value adjustments are included in the income
statement as gains and losses from investment securities.
Provisions
----------
Provisions for environmental restoration, restructuring costs and legal claims
are recognised when: the Group has a present legal or constructive obligation as
a result of past events; it is more likely than not that an outflow of resources
will be required to settle the obligation; and the amount can be reliably
estimated. Such provisions are measured at the present value of management's
best estimate of the expenditure required to settle the present obligation at
the balance sheet date. The discount rate used to determine the present value
reflects current market assessments of the time value of money. Provisions are
not recognised for future operating losses.
Provisions for insurance represent an estimate, based on historical experience,
of the ultimate cost of settling outstanding claims and claims incurred but not
reported at the balance sheet.
Share based payments
--------------------
Share-based incentives are provided to employees under the Group's executive
share option, long term incentive and share purchase schemes. The Group
recognises a compensation cost in respect of these schemes that is based on the
fair value of the awards, measured using Black-Scholes, Binomial and Monte Carlo
valuation methodologies. For equity-settled schemes, the fair value is
determined at the date of grant and is not subsequently re-measured unless the
conditions on which the award was granted are modified. For cash-settled
schemes, the fair value is determined at the date of grant and is re-measured at
each balance sheet date until the liability is settled. Generally, the
compensation cost is recognised on a straight-line basis over the vesting
period. Adjustments are made to reflect expected and actual forfeitures during
the vesting period due to the failure to satisfy service conditions or achieve
non-market performance conditions.
As permitted by IFRS 1, the Group has applied IFRS2 'Share-based Payment'
retrospectively only to equity-settled awards that had not vested as at 1 August
2004 and were granted on or after 7 November 2002 and cash-settled awards that
had not vested as at 1 August 2004.
Dividends payable
-----------------
Dividends on ordinary shares are recognised as a liability in the Group's
financial statements in the period in which the dividends are approved by the
shareholders of the Company or paid.
- Ends -
This information is provided by RNS
The company news service from the London Stock Exchange