Half-Year Results (Part 1 of 2)

RNS Number : 2151R

Kingfisher PLC

20 September 2017

 

Half year results and ONE Kingfisher update for the 6 months ended 31 July 2017

(Year 2 of our 5 year transformation)

Financial highlights % Total Change % Total Change % LFL* Change 2017/18 2016/17 Reported Constant currency Constant currency Sales* £6,008m £5,749m +4.5% (1.3)% (1.3)% Retail profit* £467m £464m +0.5% (4.6)% Underlying pre-tax profit* £440m £436m +0.9% Adjusted* pre-tax profit £394m £418m (5.7)% Underlying basic EPS* 14.5p 14.2p +2.1% Adjusted basic EPS 13.0p 13.6p (4.4)% Half year dividend 3.33p 3.25p +2.5% Net cash* £650m £898m n/a

5 year transformation continues at pace

·     Significant step up in level of transformation activity in H1, as planned

·     H1 group results reflect

o  c.2% LFL impact from business disruption, albeit with an overall improving trend, and continued weaker sales in France, offset by

o  continued solid growth at Screwfix and Poland, and self-help initiatives, including £10m Goods Not for Resale* (GNFR) benefits

·     Acting on root causes of business disruption, continue to adapt our approach e.g.

o  re-phasing rollout of unified IT platform prioritising larger OpCos to start H2 17/18 instead of FY 18/19 and enabling earlier launch of stronger digital offer

o  smoothing roll out of unified cost of goods sold for next 2 years whilst maintaining 90% target for FY 20/21

·     Plans in place to support overall FY 17/18 performance

o  remain comfortable with FY consensus underlying EPS expectations ⁽¹⁾, though remain cautious on H2 backdrop

Transformation is being delivered, confident in benefits it will generate

·     For the second year in a row, on track to deliver strategic milestones

o  Unified & unique offer: positive early customer reaction to new ranges, now at 16% unified cost of goods sold, cost price reduction (CPR) and cost of change in line with expectations

o  Digital: unified IT platform now in all Castorama France stores with back office underway

o  Operational efficiency: encouraging delivery of GNFR benefits, FY 17/18 guidance now c.£25m (up from c.£20m previously)

Delivering shareholder returns

·     Returned £359m of cash to shareholders year to date

o  £159m via ordinary dividend

o  £200m via share buyback (completed £400m of the c.£600m, next tranche of up to £60m to commence shortly)

Statutory reporting 2017/18 2016/17 % Change Statutory pre-tax profit £402m £427m (5.9)% Statutory post-tax profit £295m £321m (8.1)% Basic EPS 13.3p 14.1p (5.7)%

*Throughout this release '*' indicates first instance of a term defined and explained in the Glossary (section 5). Not all of the figures and ratios used are readily available from the unaudited half year results included in part 2 of this announcement These non-GAAP measures, including constant currency and like-for-like sales growth, underlying and adjusted profit measures, management believes are both useful and necessary to better understand the Group's results. Where required, a reconciliation to statutory amounts is set out in the Financial Review (Section 4).

Véronique Laury, Chief Executive Officer, said:

"As planned, this first half has seen a significant increase in the level of transformation activity. Changes are now visible in our stores with new product ranges being well received by customers. We are also changing our ways of working alongside the continued rollout of our unified IT platform. The pace is quick and impactful and is reflected in our performance. We continue to have a flexible approach as our transformation progresses, adapting as necessary, and this will support the significant amount of change planned for the second half and beyond.

"Looking across our markets, we have seen solid growth at Screwfix and Poland, offset by continued weaker sales in France and some business disruption, principally reflecting product availability and clearance. We are aware of and are acting on the causes of this disruption, which we are confident will ease. For the full year, we have self-help plans in place to support our overall performance and remain comfortable with full year profit expectations, though we remain cautious on the second half backdrop in the UK and France. 

"We are on track to deliver our full year strategic milestones for the second year in a row. We understand the reality of our customers' lives and are creating a unified and unique offer based on their needs. We are buying as ONE and are starting to see the customer and financial benefits coming through. This is all underpinned by our IT rollout which remains on track, and efficiency benefits which continue to deliver. 

"We remain confident in our ability to deliver our five year plan and in the benefits it will generate, supported by our great team of hard-working and enthusiastic colleagues."

⁽¹⁾  Analyst consensus of underlying earnings per share* of 26p for FY 2017/18, see http://www.kingfisher.com/index.asp?pageid=79 at FX Euro GBP rate of 1.13

Contacts

Investor Relations	Tel: [phone]	Email: [e-mail]
Media Relations	[phone]	[e-mail]
Teneo Blue Rubicon	[phone]	[e-mail]

This announcement can be downloaded from www.kingfisher.com. We can be followed on Twitter @kingfisherplc with the half year results tag #KGFHY. At 07.30 (UK time) on 20 September, a webcast covering the half year results will be available at www.kingfisher.com. At 10.00 (UK time), Kingfisher will host a Q&A conference call for analysts and investors only. To join the call please use the password already sent to you or email [e-mail].

Our next announcement will be the Q3 trading update for the period ended 31 October 2017 on 21 November 2017.

Kingfisher American Depository Receipts are traded in the US on the OTCQX platform: (OTCQX: KGFHY) http://www.otcmarkets.com/stock/KGFHY/quote

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

1)   ONE Kingfisher update

2)   Trading review by division

3)   FY 2017/18 Technical guidance

4)   HY 2017/18 Financial review and, in part 2 of this announcement, the half year condensed Financial Statements

5)   Glossary

6)   Forward-looking statements

Section 1: ONE Kingfisher update

The ONE Kingfisher five year plan, which started in FY 16/17, is starting to leverage the scale of the business by creating a unified company, where customer needs always come first.

Our intention is that this five year transformation plan will deliver a £500m sustainable annual profit uplift by the end of FY 20/21, over and above business as usual (BAU)*. Until we have unified our customer offer, we will have limited expansion, the focus of which will be Screwfix UK and Europe in the medium-term. The total expected cash cost of the transformation is £800m (P&L, exceptional and capex).

The focus of the transformation plan is on three key strategic pillars:

1.   creating a unified, unique and leading home improvement offer;

2.   driving our digital capability; and

3.   optimising our operational efficiency.

The following update covers:

·     Progress against these three strategic pillars and our FY 17/18 strategic milestones

·     Adapting our transformation approach as we progress

Progress against our three key strategic pillars 

1.   Unified, unique and leading offer We are unifying our offer, with the same products, presented everywhere in the same way. This will deliver significant customer benefits (newer products, higher quality, better sustainability, lower prices, simpler ranges, clearer merchandising and better packaging) alongside significant business benefits (higher sales, fewer SKUs*, fewer suppliers, cost price reduction (CPR) and improved processes). FY 17/18 strategic milestone: ·     Achieve 20% unified cost of goods sold (COGS) We have now achieved 16% unified COGS* and are on track to deliver the full year target of 20% with an exit rate of c.30%. By year end we will have significantly reduced the number of global suppliers and SKUs, relating to the 20% unified COGS target, by around 80%, but are still offering customers similar breadth of choice. In H1 we landed our first unique ranges (outdoor & bathroom). Sales of categories that have been unified were impacted by last year's B&Q store closures. Despite this, unified and unique sales, excluding clearance, were broadly flat compared to last year. Including clearance, they were only slightly down on last year. The new bathroom ranges which have been widely implemented (except the UK where they are launching now), are outperforming old ranges with improving sales trends. We have also received positive feedback from both colleagues and customers about these ranges. Cost of change (including clearance) and CPR remain in-line with expectations and we remain confident in our target to deliver £350m annual profit uplift by FY 20/21, which broadly equates to a 5% reduction in cost of goods sold. Group gross margins were flat in H1 but were up 0.3% before clearance of old ranges.

2.   Driving our digital capability Implementation of a unified IT system is a key enabler of our ONE Kingfisher plan. It will also provide a significant opportunity, with a seamless and stronger digital offer for our customers, to substantially increase sales and digital penetration. This is expected to generate £50m annual profit uplift by FY 20/21. FY 17/18 strategic milestone: ·     Deliver Year 2 of 3 year unified IT platform roll out alongside Brilliant Basics This involves investing in our core e-commerce platforms, enabled by the new unified IT infrastructure, and leveraging our Screwfix best-in-class capability covering e.g. upweighted digital marketing, improved site search and new checkout. The unified IT rollout remains on track to be completed by the end of FY 18/19. During H1 we implemented all Castorama France stores with back office and supply chain to be completed in Q1 2018, meaning that by the end of FY 17/18 over 50% of Group sales will be operating on the new platform. We will also start implementation at Brico Dépôt France in H2. Our Brilliant Basics initiatives continue to progress well. We have now built a new group mobile platform, which will be launching soon at B&Q, and we are on track to re-launch the new castorama.fr website in H2 with mobile to follow shortly after. One hour click & collect is now available in all B&Q stores. Total group online sales* are now at 5%, up from 4% last year.

3.   Optimising our operational efficiency The main driver will come from unifying as ONE the c.£1bn annual spend on GNFR. This programme is a combination of cost savings, and an opportunity to work in a simpler and more effective way across the business, and is expected to generate £100m annual profit uplift by FY20/21. FY 17/18 strategic milestone: ·     Deliver a further £20m benefits from unified GNFR programme Having achieved £30m of cost savings in FY 16/17, in H1 17/18 we delivered a further £10m benefit. This included categories such as media buying, moving to a global supplier for the first time; standardising the way we operate (e.g. security, mechanical handling equipment); and several local retenders consolidating the number of suppliers. We have now raised our FY 17/18 target benefit to c.£25m (from up to c.£20m previously).

Adapting our transformation approach as we progress

Aware of the challenges this year given the significant increase in the level of transformation activity, we continue to adapt our approach as our transformation progresses.

During H1 we experienced some business disruption principally reflecting product availability issues and the clearance of old ranges. We estimate a c.2% LFL impact from business disruption during H1. Availability of this year's unified and unique ranges has improved during H1 and is now approaching normal levels.

The root causes of this disruption relate to the combined impact of:

·     Clearing of old ranges and remerchandising of new ranges as we physically impact 25% of our company wide store space this year (with a lot more change to come in H2)

·     Systems and data - the roll out of our unified IT platform remains on track, however the implementation process applies stress to some of the business functions

·     New processes - transitioning to new ways of working takes time e.g. our new Offer and Supply Chain organisation has only been in place for around a year, working as ONE team with unified global functions with new processes and accountabilities for the first time

We are acting on these root causes of business disruption and we are adapting our approach as we progress. Given the increased level of change, we have appointed Steve Willett as Chief Transformation Officer, and we are prioritising the multiple transformation workstreams with a new phased approach e.g.

·     to prioritise the larger operating companies first and to enable their earlier launch of a stronger digital offer, the roll out of our unified IT platform is being re-phased, to commence their implementation in H2 17/18 instead of FY 18/19

·     having reviewed the phasing of our initial unified COGS roll out plans for the next two years, and whilst maintaining our 90% target for FY 20/21, we have decided to smooth the profile for FY 18/19 and FY 19/20, moving from 55% to 40% and from 80% to 65% respectively

Summary & outlook

We are on track to achieve our FY 17/18 strategic milestones and our FY 20/21 targets remain unchanged. However, we have experienced some business disruption reflecting the significant increase in transformation activity. We understand and are acting on the root causes, continuing to have a flexible approach, adapting as necessary as our transformation progresses.

We always recognised that this year would be challenging and we already have self-help plans in place to support our overall FY 17/18 performance. We therefore remain comfortable with consensus full year expectations ⁽¹⁾ though remain cautious on the backdrop for the second half in the UK and France, as previously guided.

Section 2: Trading review by division 

Note: all commentary below is in constant currencies

UK & IRELAND

£m	2017/18	2016/17	% Reported Change	% Constant Currency Change	% LFL Change
Sales	2,602	2,609	(0.3)%	(0.4)%	+1.1%
Retail profit	215	211	+1.7%	+1.7%

Kingfisher UK & Ireland sales were down 0.4% (+1.1% LFL) to £2,602 million reflecting the impact of B&Q store closures last year and transformation business disruption, offset by the continued strong Screwfix performance and modest price inflation. Retail profit grew by 1.7% to £215 million. Gross margins were flat and focus on cost control continued.

B&Q total sales declined by 6.3% to £1,875 million reflecting annualisation of the completed store closure programme. LFL sales declined by 2.3% after a c.1% benefit from sales transference associated with the store closures. LFL sales of seasonal products were down 1.0% while sales of non-seasonal products, including showroom, were down 2.8%.

B&Q's click & collect is now available on over 34,000 products. Total online sales, including home delivery, continued to make good progress with sales growing by 17% and now representing 4% of total sales.

Screwfix grew total sales by 18.7% (+11.7% LFL) to £727 million, driven by strong growth from the specialist trade desks exclusive to plumbers and electricians, strong digital growth (e.g. mobile +109%; click & collect +47%); and the continued roll out of new outlets. 16 net new outlets were opened in H1, taking the total to 533.

FRANCE

£m	2017/18	2016/17	% Reported Change	% Constant Currency Change	% LFL Change
Sales	2,273	2,175	+4.5%	(4.1)%	(4.6)%
Retail profit	174	187	(6.9)%	(14.6)%

Kingfisher France sales decreased by 4.1% (-4.6% LFL) to £2,273 million reflecting continuing weaker performance versus the market and the impact of transformation business disruption. According to Banque de France data*, sales for the home improvement market were down 0.2%.

Castorama total sales declined by 3.1% (-3.5% LFL) to £1,255 million. LFL sales of outdoor seasonal products were down 2.3% and sales of non-seasonal, including showroom, were down 4.2%. Brico Dépôt total sales declined by 5.4% (-5.9% LFL) to £1,018 million. Across the two businesses, one net new store was opened and one store was revamped, adding 0.6% new space.

By the end of next year, our ONE Kingfisher plan will renew our customer proposition as over half of France's offer will be unified and unique. In H1 this year, we have already seen good early customer feedback to our first unique bathroom furniture ranges, with sales up nearly 30%. Some of the CPR benefits are being reinvested in price, supporting our goal of making home improvement more affordable for customers. Lower prices are starting to resonate with customers and customer price perception has improved compared to last year. In addition, we remain on track to complete the roll out of the unified IT platform in Castorama France in early 2018. It is now in all stores with back office underway, enabling us to build a stronger digital offer, starting with a new website in H2 followed shortly after by the new mobile platform.

Retail profit decreased by 14.6% to £174 million, reflecting the weaker sales, slightly lower gross margins (-30 basis points) partly offset by continued focus on cost control.

OTHER INTERNATIONAL

£m	2017/18	2016/17	% Reported Change	% Constant Currency Change	% LFL Change
Sales	1,133	965	+17.4%	+2.7%	+0.3%
Retail profit
Other International (established)	88	77	+15.7%	+3.7%
New Country Development*	(10)	(11)	n/a	n/a
Total	78	66	+17.4%	+4.7%

Other International total sales increased by 2.7% (+0.3% LFL) to £1,133 million and retail profit increased by 4.7% to £78 million, driven by Poland. During H1 one store was closed in Poland due to a relocation.

Other International (established):

Sales in Poland were up 5.7% (+3.8% LFL) to £694 million reflecting a continued good performance in a supportive market. LFL sales of seasonal products were down 1.5% with sales of non-seasonal, including showroom, up 4.9%. Gross margins were slightly down (-20 basis points). Retail profit grew by 2.9% to £84 million.

In Russia sales declined by 4.6% (-9.1% LFL) to £196 million. The business delivered a loss of £3 million (2016/17: breakeven reported retail profit) reflecting weaker sales in a challenging environment. In Spain sales decreased by 4.9% (-3.2% LFL) to £169 million, delivering a £4 million retail profit (2016/17: £3 million reported retail profit). Turkey, Kingfisher's 50% JV, Koçtaş, contributed retail profit of £3 million (2016/17: £1 million reported retail profit).

New Country Development:

New Country Development includes operations in Romania, Portugal and Germany. Sales were £74 million with losses of £10 million (2016/17: £11 million reported retail loss). In August 2017, we entered into a binding acquisition agreement, subject to regulatory approval, to significantly strengthen our position in Romania.

Section 3: FY 2017/18 Technical guidance

Employee, new stores and space growth:

	Employees (FTE) at 31 Jul 2017	Store Numbers at 31 Jul 2017	Sales area (1) (000s m2) at 31 Jul 2017	Net new stores FY 2017/18	Space % change FY 2017/18
B&Q UK & Ireland	18,101	296	2,222	1	+0.1%
Screwfix	7,299	533	32	60	+8.7%
UK & Ireland	25,400	829	2,254	61	+0.2%
Castorama	12,669	102	1,255	-	+0.6%(2)
Brico Dépôt	7,454	120	837	2	+1.4%
France	20,123	222	2,092	2	+0.9%
Poland	11,041	74	631	1	+2.3%
Portugal	161	3	20	-	-
Romania	964	15	114	-	-
Russia	3,232	21	211	(1)	(3.9)%
Spain	1,524	28	175	-	-
Screwfix Germany	181	19	1	-	-
Other International	17,103	160	1,152	-	+0.6%
Total	62,626	1,211	5,498	63	+0.5%

⁽¹⁾ Screwfix sales area relates to the front of counter area of an outlet

⁽²⁾ Includes one closure and one opening

Income statement:

·     Broadly flat gross margin assuming Unified & Unique Offer CPR benefits are offset by some price reinvestment and clearance

·     Underlying profit expected to include a further c.£25m operational efficiency benefits (previously c.£20m)

·     Total 5 year transformation costs £800m

o  Transformation P&L costs of c.£310m over 5 years to FY 2020/21, to be mostly incurred over first 3 years. FY 2017/18 expected to be c.£130m (previously £150m)

o  Transformation exceptional costs of c.£170m over 5 years to FY 2020/21, to be incurred over first 4 years. FY 2017/18 transformation exceptional costs expected to be c.£30m

·     c.1% B&Q LFL sales transference benefit from B&Q store closures

·     Retail losses from new country development activity expected to be c.£15m driven by Screwfix Europe*

·     Group interest charge expected to be less than £5m (excluding FFVR* and exceptionals)

·     Effective tax rate expected to be around 27%, subject to the blend of profit within the companies' various jurisdictions

Cash flow:

·     Total capex including transformation of up to £375m for FY 2017/18 (previously up to £450m)

·     Capital return of c.£600m by the end of FY 2018/19 expected to be via share buyback (£400m completed to date)

Section 4: HY 2017/18 Financial review

A summary of the reported financial results for the half year ended 31 July 2017 is set out below:

	2017/18	2016/17	% Reported Change	% Constant Currency Change
Sales	£6,008m	£5,749m	+4.5%	(1.3)%
Retail profit	£467m	£464m	+0.5%	(4.6)%
Underlying pre-tax profit	£440m	£436m	+0.9%
Transformation P&L costs (1)	£46m	£18m	n/a
Adjusted pre-tax profit	£394m	£418m	(5.7)%
Statutory pre-tax profit	£402m	£427m	(5.9)%
Exceptional items (post-tax) (1)	£7m	£9m	n/a
Underlying basic earnings per share	14.5p	14.2p	+2.1%
Adjusted basic earnings per share	13.0p	13.6p	(4.4)%
Basic earnings per share	13.3p	14.1p	(5.7)%
Dividends - half year ordinary	3.33p	3.25p	+2.5%
Effective tax rate	27%	26%
Net cash	£650m	£898m
Capital return - share buyback	£149m	£126m

⁽¹⁾ Kingfisher separately reports exceptional items and transformation costs in order to calculate adjusted and underlying results, as it believes these measures provide additional useful information on underlying performance and trends

Total sales declined by 1.3%, on a constant currency basis, to £6.0 billion, with LFL sales down 1.3%. On a reported rate basis, which includes the impact of exchange rates, sales increased by 4.5%. During H1, sales growth benefited from 17 net new stores, driven by 16 Screwfix outlet openings in the UK, offset by the annualisation impact from the completed B&Q store closure programme.

Reported retail profit increased by 0.5% including £25 million of favourable foreign exchange movement on translating foreign currency results into sterling. In constant currencies, retail profit declined by 4.6%, with strong growth at Screwfix and good growth in Poland offset by ONE Kingfisher business disruption and continued weakness in France.

Underlying pre-tax profit, which excludes the impact of transformation P&L costs and exceptional items and FFVR, increased by 0.9%, to £440 million.  

Adjusted pre-tax profit, which excludes the impact of exceptional items and FFVR, decreased by 5.7% to £394 million, reflecting £46 million of transformation P&L costs.

Statutory pre-tax profit, which includes the impact of transformation costs, exceptional items and FFVR, decreased by 5.9% to £402 million. A reconciliation from the underlying basis to the statutory basis for pre-tax profit is set out below:

	2017/18 £m	2016/17 £m	Change
Retail profit	467	464	+0.5%
Central costs	(25)	(22)	n/a
Share of interest and tax of joint ventures & associates	(3)	(2)	n/a
Finance costs before exceptional items & financing fair value remeasurements (FFVR)	1	(4)	n/a
Underlying pre-tax profit	440	436	+0.9%
Transformation P&L costs	(46)	(18)	n/a
Adjusted pre-tax profit	394	418	(5.7)%
FFVR	-	(2)
Profit before exceptional items and tax	394	416	(5.3)%
Exceptional items before tax	8	11	n/a
Statutory pre-tax profit	402	427	(5.9)%

Transformation P&L costs of £46 million principally relate to the unified and unique offer range implementation and the digital strategic pillar.

Exceptional items (post tax) were a net gain of £7 million (2016/17: £9 million gain) as detailed below:

	2017/18 £m	2016/17 £m
Transformation exceptional costs	(5)	(1)
UK & Ireland and Europe restructuring	13	9
Profit on disposal of B&Q China	-	3
Exceptional items before tax	8	11
Exceptional tax items	(1)	(2)
Net exceptional items	7	9

Transformation exceptional costs of £5 million have been recorded in the period driven by changes associated with the new Offer and Supply Chain organisation, and other restructuring and efficiency costs in the UK relating to the Group's five year transformation programme.

UK & Ireland and Europe restructuring - as previously announced, the total store rationalisation programme was originally expected to give rise to an exceptional charge of around £350 million, relating principally to onerous lease provisions. This was to cover the closure of 65 B&Q stores, which is now complete, and the closure of around 10 European loss-making stores, which remains ongoing. In Q1 2016/17, B&Q entered into a lease liability transaction with a third party to dispose of any remaining leases, the success of which is expected to result in a lower total net exceptional charge of around £300 million, having so far recognised £277 million.

Underlying basic earnings per share grew by 2.1% to 14.5p, which excludes the impact of transformation costs, exceptional items, FFVR and the effect of prior year tax items. Adjusted basic earnings per share decreased by 4.4% to 13.0p (2016/17: 13.6p), which excludes the impact of exceptional items, FFVR and prior year tax items. Basic earnings per share decreased by 5.7% to 13.3p (2016/17: 14.1p) as set out below:

	Earnings £m	2017/18 EPS pence	Earnings £m	2016/17 EPS Pence
Underlying basic earnings per share	322	14.5	323	14.2
Transformation P&L costs (net of tax)	(34)	(1.5)	(13)	(0.6)
Adjusted basic earnings per share	288	13.0	310	13.6
Net exceptional items	7	0.3	9	0.4
Prior year tax items	-	-	4	0.2
FFVR (net of tax)	-	-	(2)	(0.1)
Basic earnings per share	295	13.3	321	14.1

Dividends and capital returns

The Board has declared an interim dividend of 3.33p, an increase of 2.5% (2016/17: 3.25p). We continue to be comfortable with medium term dividend cover in the range of 2.0 to 2.5 times based on adjusted basic earnings per share, a level the Board believes is prudent and consistent with the capital needs of the business.

The interim dividend will be paid on 10 November 2017 to shareholders on the register at close of business on 6 October 2017. A dividend reinvestment plan (DRIP) is available to shareholders who would prefer to invest their dividends in the shares of the Company. The shares will go ex-dividend on 5 October 2017. For those shareholders electing to receive the DRIP the last date for receipt of election is 20 October 2017.

On 25 January 2016 Kingfisher announced its intention to return around £600 million of surplus capital to shareholders in the following three financial years. During FY 2016/17 £200 million of shares (58 million) were repurchased via share buyback. During H1 2017/18 £149 million of shares (46 million) were repurchased via share buyback with a further £51 million of shares (17 million) since 31 July. Cumulatively therefore, £400 million of shares (121 million) have now been repurchased.

Taxation

The adjusted effective rate of tax, calculated on the best estimate of full year profit before exceptional items, prior year tax adjustments and the impact of rate changes is 27% (2016/17: 26%). The overall rate of tax includes the impact of exceptional items and prior year adjustments.

Effective tax rate calculation	Profit £m	Tax £m	2017/18 %	2016/17 %
Profit before tax and exceptional items	394	(106)	27%	26%
Exceptional items	8	(1)
Prior year items		-
Total	402	(107)	27%	25%

The statutory rates for the Group's main operating companies during FY 2017/18 are:

·     UK: 19%

·     France: 34%

·     Poland: 19%

The Group's effective tax rate is sensitive to the blend of tax rates and profits in the Group's various jurisdictions. The effective rate of tax is higher than the UK statutory rate because of the amount of Group profit that is earned in higher tax jurisdictions.

During the period, and following an assessment by the French Tax Authority, the Group entered into a bank guarantee for €49 million in respect of a contingent tax liability, which we believe is unlikely to materialise. Further details are provided in note 17 of the half year condensed financial statements (part 2 of this announcement).

Free cash flow*

A reconciliation of free cash flow is set out below:

	2017/18 £m		2016/17 £m
Operating profit		401	439
Exceptional items		(8)	(17)
Operating profit (before exceptional items)		393	422
Other non-cash items(1)		143	140
Change in working capital		39	200
Pensions and provisions		(19)	(21)
Operating cash flow		556	741
Net interest paid		(1)	(4)
Tax paid		(99)	(63)
Gross capital expenditure		(129)	(141)
Free cash flow		327	533
Ordinary dividends paid		(159)	(157)
Share buyback		(149)	(126)
Disposal of B&Q China (net of disposal costs)		-	63
Disposal of assets and other(2)		(56)	(37)
Net cash flow		(37)	276
Opening net cash		641	546
Other movement including foreign exchange		46	76
Closing net cash		650	898

⁽¹⁾ Other non-cash items include depreciation and amortisation, share-based compensation charge, share of post-tax results of JVs and associates, pension operating cost and profit/loss on non-property disposals

⁽²⁾ Includes exceptional cash flow items (excluding property disposals), principally relating to B&Q closures and issue of shares

Net cash at the end of the period was £650 million (H1 2016/17: £898 million net cash; FY 2016/17: £641 million net cash). Free cash flow of £327 million was generated in the period, a decrease of £205 million against the prior period, largely reflecting lower working capital inflow during the period.

Gross capital expenditure for H1 was £129 million (2016/17: £141 million). Of this 30% was invested in refreshing and maintaining existing stores, 11% on new stores, 28% on IT and digital development and 26% on the transformation.

Of free cash flow, £308 million was returned to shareholders in the form of the ordinary dividend and share buybacks.

Management of balance sheet and liquidity risk and financing

The Group finished the period with £650 million of net cash on the balance sheet. However, the Group's overall leverage is more significant when including capitalised lease debt that in accordance with current accounting standards does not appear on the balance sheet. The ratio of the Group's lease adjusted net debt (capitalising leases at 8 times annual rent) to EBITDAR* on a moving annual total basis is 1.8 times as at 31 July 2017. At this level, the Group has financial flexibility whilst retaining an efficient cost of capital.

A reconciliation of lease adjusted net debt to EBITDAR is set out below:

	2017/18 Moving annual total £m	2016/17 Year end £m
EBITDA*	981	1,008
Property operating lease rentals	400	399
EBITDAR	1,381	1,407
Net cash	(650)	(641)
Property operating lease rentals (8x)(1)	3,200	3,192
Lease adjusted net debt	2,550	2,551
Lease adjusted net debt to EBITDAR	1.8	1.8

 ⁽¹⁾ Kingfisher believes 8x is a reasonable industry standard for estimating the economic value of its leased assets

Kingfisher holds a BBB credit rating with all three rating agencies. Kingfisher aims to maintain its solid investment grade credit rating whilst investing in the business where economic returns are attractive and paying a healthy annual dividend to shareholders. After satisfying these key aims and taking into account the economic and trading outlook, any surplus capital would be returned to shareholders. On 25 January 2016, Kingfisher announced its intention to return around £600 million of surplus capital to shareholders during the three years to FY 2018/19, of which £400 million has now been returned. Based on our cash flow expectations for the remainder of this period, we do not expect to return more than the original guidance of £600 million.

Kingfisher regularly reviews the level of cash and debt facilities required to fund its activities. This involves preparing a prudent cash flow forecast for the medium term, determining the level of debt facilities required to fund the business, planning for repayments of debt at its maturity and identifying an appropriate amount of headroom to provide a reserve against unexpected outflows.

The Group has two committed facilities: £400 million that expires in November 2018 and £225 million that expires in March 2022. Both were undrawn at 31 July 2017. The next significant debt maturity is in May 2018 when the Group is required to repay US Private Placement debt with a notional value of $179 million.

The maturity profile of Kingfisher's debt is illustrated at: www.kingfisher.com/index.asp?pageid=74

Acquisitions

On 1 August 2017, the Group signed an agreement to purchase 100% of the shares in Praktiker Romania SRL, a Romanian home improvement company. Subject to regulatory approval, the transaction is expected to complete towards the end of FY 2017/18.

Pensions

At the period end, the Group had a net surplus of £119 million (£131 million net surplus at 31 January 2017) in relation to defined benefit pension arrangements, of which a £236 million surplus (£239 million surplus at 31 January 2017) was in relation to the UK scheme. This accounting valuation is sensitive to a number of assumptions and market rates which are likely to fluctuate in the future.

Risks

The principal risks and uncertainties have been reviewed and updated as part of our half year procedures and are listed below:

·     We fail to manage the transformation of organising Kingfisher as a more unified company with a unified customer offer rather than a collection of individual businesses, impacting the delivery of the anticipated benefits and disrupting the underlying business

·     We fail to deliver the benefits of a more unified and unique offer and standardised activities and processes

·     A lack of actual or perceived price competitiveness, particularly when compared to more discount based or online competitors, would affect our ability to maintain or grow market share

·     We fail to deliver our sustainability targets due to not integrating our sustainability plan into the day-to-day operations of the business

·     We fail to create a culture of innovation in our offer, format and digital channels to stimulate consumer spend and deliver desired sales growth

·     Our investments fail to deliver value to the Company

·     Our Unified IT platform fails to deliver the requirements in line with the plan needed to enable and support the delivery of the Company strategy

·     We fail to identify and maximise potential cost reductions and efficiency savings

·     We do not make the necessary investment in our people to ensure that we have the appropriate capacity, skills and experience

·     Geopolitical uncertainty, the resilience of the global economy and volatility within the UK market as a consequence of Brexit, may impact both consumer confidence and the long-term sustainability and capabilities of our supplier base

·     We fail to maintain a safe environment for our customers and store colleagues which results in a major incident or fatality that is directly attributable to a failure in our health and safety management systems

·     Kingfisher's reputation and brand are affected by a major environmental or ethical failure, major corporate issue or crisis, a significant corporate fraud or material non-compliance with legislative or regulatory requirements resulting in punitive or custodial procedures

Further details of the Group risks and risk management process can be found on pages 38 to 46 of the 2016/17 Annual Report and Accounts.

Section 5: Glossary (terms are listed in alphabetical order)

Adjusted measures are before exceptional items, FFVR, amortisation of acquisition intangibles, related tax items and tax on prior year items including the impact of rate changes on deferred tax.

Adjusted pre-tax profit is used to report the performance of the business at a Group level including both the benefits of our transformation programme and the associated costs. This is stated before exceptional items and FFVR.

Banque de France data includes relocated and extended stores.

http://webstat.banque-france.fr/en/browse.do?node=5384326

BAU (business as usual) refers to activity without the transformation.  When referring to our performance, we would expect this to be broadly in line with the macroeconomic backdrop in our respective markets.

CPR (cost price reduction) refers to the savings made on cost of goods sold.

EBITDA (earnings before interest, tax, depreciation and amortisation) is calculated as retail profit less central and transformation P&L costs and before depreciation and amortisation.

EBITDAR (earnings before interest, tax, depreciation, amortisation and property operating lease rentals) is calculated as retail profit less central and transformation P&L costs, before depreciation and amortisation and property operating lease rentals.

FFVR (financing fair value remeasurements) represents fair value fluctuations from financial instruments.

France consists of Castorama France and Brico Dépôt France.

Free cash flow represents cash generated from operations (excluding exceptional items) less the amount spent on interest, tax and capital expenditure during the year (excluding business acquisitions and disposals and asset disposals). A reconciliation from operating profit (before exceptional items) is set out in the Financial Review (Section 4).

GNFR (Goods Not For Resale) covers the procurement of all goods and services a retailer consumes (including media buying, mechanical handling equipment, printing & paper).

LFL stands for like-for-like sales growth representing the constant currency, year on year sales growth for stores that have been open for more than a year.

Net cash comprises cash and cash equivalents and short-term deposits, less borrowings and financing derivatives (excluding accrued interest).

New Country Development consists of Screwfix Europe, Portugal and Romania.

Online sales are sales derived from online transactions, including click & collect. This includes sales transacted on any device, however not sales through a call centre.

Other International consists of Poland, Portugal, Romania, Russia, Screwfix Europe, Spain and Turkey (Koçtaş JV).

Retail profit is our operating profit measure used to report the performance of the underlying retail businesses including the sustainable benefits of our transformation programme. This is stated before central costs, transformation costs, exceptional items and the Group's share of interest and tax of JVs and associates.

Screwfix Europe refers to Screwfix outside of UK in continental Europe.

Sales refers to Group sales excluding Joint Venture (Koçtaş JV) sales.

SKU (Stock Keeping Unit) - the number of individual variants of products sold or remaining in stock. It is a distinct type of item for sale, such as a product and all attributes associated with the item type that distinguish it from others. These attributes could include, but are not limited to, manufacturer, description, material, size, colour, packaging and warranty terms.

Transformation costs represent the additional costs of the ONE Kingfisher transformation programme launched in 2016/17. They comprise 'transformation exceptional costs', 'transformation P&L costs' (i.e. non-exceptional items) and 'transformation capex' (capital expenditure).

Underlying earnings per share is used to report the performance of the underlying business at a Group level, including the sustainable benefits of our transformation programme. This is stated before the short-term costs associated with our transformation programme, exceptional items and FFVR, related tax items and prior year tax items.

Underlying pre-tax profit is used to report the performance of the underlying business at a Group level, including the sustainable benefits of our transformation programme. This is stated before the short-term costs associated with our transformation programme, exceptional items and FFVR.

UK & Ireland consists of B&Q in the UK & Ireland and Screwfix UK.

Section 6: Forward-looking statements

You are not to construe the content of this announcement as investment, legal or tax advice and you should make your own evaluation of the Company and the market. If you are in any doubt about the contents of this announcement or the action you should take, you should consult a person authorised under the Financial Services and Markets Act 2000 (as amended) (or if you are a person outside the UK, otherwise duly qualified in your jurisdiction).

This announcement has been prepared in relation to the financial results for the Half Year ended 31 July 2017. The financial information referenced in this announcement is not audited and does not contain sufficient detail to allow a full understanding of the results of the group. Nothing in this announcement should be construed as either an offer or invitation to sell or any offering of securities or any invitation or inducement to any person to underwrite, subscribe for or otherwise acquire securities in any company within the group or an invitation or inducement to engage in investment activity under section 21 of the Financial Services and Markets Act 2000 (as amended).

Certain information contained in this announcement may constitute "forward-looking statements" (including within the meaning of the safe harbour provisions of the United States Private Securities Litigation Reform Act of 1995), which can be identified by the use of terms such as "may", "will", "would", "could", "should", "expect", "anticipate", "project", "estimate", "intend", "continue", "target", "plan", "goal", "aim" or "believe" (or the negatives thereof) or other variations thereon or comparable terminology. These forward-looking statements include all matters that are not historical facts and include statements regarding the Company's intentions, beliefs or current expectations concerning, among other things, the Company's results of operations, financial condition, changes in global or regional trade conditions, changes in tax rates, liquidity, prospects, growth and strategies. By their nature, forward-looking statements involve risks, assumptions and uncertainties that could cause actual events or results or actual performance of the Company to differ materially from those reflected or contemplated in such forward-looking statements. No representation or warranty is made as to the achievement or reasonableness of and no reliance should be placed on such forward-looking statements.

The Company does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances or in the Company's expectations.

 

END

 

 

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