Publication of the Annual Rep
ANNUAL REPORT 2009
Publication of the Annual Report
14th April 2010
Travis Perkins plc announces that its Annual Report for the year ended 31st December 2009, and the Notice of Annual General Meeting, are now available on the company's website - www.travisperkinsplc.com.
Printed copies of these documents will be posted to shareholders on or around 14th April 2010 and they will shortly be available for inspection at the UK Listing Authorities document viewing facility at 25 The North Colonnade, Canary Wharf, London E14 5HS.
In accordance with paragraph 6.3.5 of the Disclosure and Transparency Rules, we set out below the following extracts from the Annual Report in unedited full text. Accordingly, page references in the text below refer to page numbers in the Annual Report.
· Financial Highlights
· Chairman's Statement
· Chief Executive's Review of the Year
· Chief Operating Officer's Review of the Year
· Finance Director's Review of the Year
· Statement of Director's Responsibilities
· Financial Statements
· Selected Notes to the Financial Statements
Directors' responsibility statement.
We confirm to the best of our knowledge:
o the financial statements, which have been prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group taken as a whole; and
o the reports of the directors include a fair review of the development and performance of the business and the position of the Group taken as a whole, together with a description of the principal risks and uncertainties they face.
On behalf of the Board:
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Geoff Cooper - Chief Executive |
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Paul Hamden Smith - Finance Director |
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The Annual General Meeting of the company will take place at 11.45 a.m. on Monday, 17th May 2010 at Northampton Rugby Football Club, Franklin's Gardens, Weedon Road, Northampton NN5 5BG.
Enquiries:
Geoff Cooper
Chief Executive
Travis Perkins plc
Tel No: +44 (0)1604 683030
Paul Hampden Smith
Finance Director
Travis Perkins plc
Tel No: +44 (0)1604 683112
David Bick / Mark Longson
Square1 Consulting Ltd
Tel No: +44 (0)207 929 5599
FINANCIAL HIGHLIGHTS
For the year ended 31 December 2009
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FINANCIAL HIGHLIGHTS |
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· Group revenue down 8% at £2,931m |
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· Adjusted operating profit down 17% to £225m |
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· Adjusted profit before tax of £180m |
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· Adjusted EPS down 22% to 75p |
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· Gross operating cost savings of £60m achieved ahead of target |
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· Retail operating profit up 19% with increased operating margin |
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· Free cash flow £294m up 59% (Note 35) |
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· Capital base strengthened through rights issue with net debt more than halved to £467m |
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OPERATING HIGHLIGHTS |
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· Like-for-like headcount reduced by 13% since start of recession |
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· Operating focus shifted to cost and debt reduction |
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· Merchanting business rated top amongst national merchants |
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· Successful Wickes marketing campaign delivers market share gain |
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2009 |
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2008 |
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£m |
% |
£m |
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Revenue |
2,930.9 |
(7.8) |
3,178.6 |
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Adjusted*: |
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Operating profit (note 5a) |
224.6 |
(17.3) |
271.5 |
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Profit before taxation (note 5b) |
180.0 |
(11.1) |
202.5 |
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Profit after taxation (note 5b) |
133.9 |
(6.9) |
143.9 |
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Basic earnings per ordinary share (pence) (note 12) |
75.2 |
(22.4) |
96.9 |
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Statutory: |
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Operating profit |
257.3 |
19.5 |
215.3 |
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Profit before taxation |
212.7 |
45.4 |
146.3 |
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Profit after taxation |
157.4 |
54.5 |
101.9 |
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Basic earnings per ordinary share (pence) |
88.4 |
28.9 |
68.6 |
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Total dividend declared per ordinary share (pence) (note13) |
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14.5 |
*With effect from the 1 December 2009 the Company and the Trustees of the Travis Perkins' defined benefits pension scheme agreed to cap future pensionable salary increases at a maximum 3% per annum. This created a curtailment event. The resulting exceptional reduction in the benefit obligation of £32.7m has been included in other operating income. In 2008 the Group incurred an exceptional charge of £56.2m associated with the severe downturn in the construction market. Throughout these financial statements the term "adjusted" has been used to signify that the effect of these exceptional items has been excluded from the disclosure being made.
CHAIRMAN'S STATEMENT
For the year ended 31 December 2009
Like many other company chairmen, my report this year is set against a background of the most difficult trading conditions your Company has faced in recent memory. During 2009, our sector, along with the rest of the UK economy, was impacted by the worst recession in 80 years. This resulted in our markets becoming even more competitive, and made our decision to take pre-emptive action to reduce costs and conserve cash of even greater importance.
RESULTS
Group revenue for 2009 fell by 7.8% to £2,930.9m, whilst adjusted profit before tax (i.e. on an underlying basis) declined by 11.1% and adjusted earnings per share were down by 22.4% after restating for the effect of the rights issue.
Overheads were reduced by approximately £60m during the year through a combination of careful cost control and improved productivity. Peak to trough headcount was reduced by 13%.
A combination of the mid-year rights issue, which raised £300m after expenses, and strong free cash flow, resulted in net debt reducing by £550m to £467m. Gearing is now 28%, having fallen 62% during 2009.
Net expenditure on capital and acquisitions was £8.8m compared with £105m in 2008. In addition, we provided a further £12.9m of funds to our associate company ToolStation, to fund its continuing expansion.
In December, the Company and the Pension Scheme Trustees implemented a 3% cap on future pensionable salary increases for members of the Group's final salary pension scheme. This resulted in a one off pension liability curtailment gain of £32.7m, which is treated as exceptional in the income statement.
DIVIDEND
Although the Company has performed well during 2009 and exits the year in a strong position, the Board has concluded that there remains too much economic uncertainty for it to be able to recommend to shareholders the reinstatement of the dividend at this time. We expect to resume dividend payments once uncertainty is reduced and improved prospects for our markets are visible.
BOARD OF DIRECTORS
I am pleased to welcome both Philip Jansen and Robert Walker onto our Board of Directors. Philip joined the Board in April 2009, following a search, which I referred to last year, to replace Mike Dearden who retired in November 2008. Philip's marketing experience and current executive responsibilities are already enabling him to add much to our Board discussions. Robert joined us in September 2009, following a search specifically to identify a new Chairman for the business: he will succeed me as Chairman after the AGM on 17 May. He brings a wealth of experience to the Group gained over many years whilst working for a number of major companies. He already has great knowledge of both the retail and builders merchanting sectors and I am confident that in the coming years he will make a valuable contribution to the continuing success of the business.
I step down as Chairman of your company after more than 8 years in post. It has been a privilege to lead the Board during that period. I leave with regret: working with Travis Perkins, and board colleagues of very high calibre, has been a major highlight of my business career. But it is right to move on, and certainly good to be doing so at a point where I am totally confident that the business and its future are in such good hands. Throughout the 8 year period of varied economic conditions, the business has consistently demonstrated its underlying strength and the depth and quality of its management - and that is particularly true of the way in which the business has been managed through the recent period of deep recession by the exceptionally able management team.
EMPLOYEES
During 2009, the recession has made huge demands on all of the people employed by the Group. At a time of great uncertainty they have risen magnificently to the challenge of controlling overheads, maximising revenues and generating cash. On behalf of both the Board and of Shareholders I would like to thank them all.
OUTLOOK
Our markets appear to have stabilised following a sharp decline at the start of the recession. However, much uncertainty remains about the condition of the UK economy and the prospects for construction markets. We are prepared for a long period of probable low growth and difficult trading conditions before we can anticipate a return to growth in our markets. Whilst the long-term prospects for construction remain strong, particularly when considering the ever rising demand for better environmental performance from buildings, the affordability of many types of industry investment remains weak.
Against this relatively unpromising background, the condition of your Company remains remarkably strong. The Group has delivered another market leading performance in a year that saw the most difficult trading conditions in the Group's history. Management has taken decisive and resolute action to deal with the impact of the downturn and in doing so has maintained Travis Perkins as one of the strongest operators in the sector. Our core strengths have been retained whilst costs have been reduced. Our profitability, although lower than in pre-recession conditions compares well with our competitors.
Having managed effectively through the recession the Group's strategy is to focus on organic growth in this low growth environment. Our stable and experienced management team has a proven track record of driving organic growth in these market conditions.
Tim Stevenson
Chairman
23 February 2010
CHIEF EXECUTIVE'S REVIEW OF THE YEAR
For the year ended 31 December 2009
INTRODUCTION
In 2009 the Group's priorities were almost exclusively focussed on dealing with the unprecedented downturn in construction activity. Our principal focus was on cutting costs and trading profitably to deal with a predicted 25% fall in activity levels, and on taking a range of actions aimed at reducing net debt.
Whilst our overall forecast of activity levels for 2009 proved broadly correct, the retail market held up much better than expected following actions taken by monetary authorities to boost consumer sentiment. In contrast, the trade market fared a little worse than expected. The Group, in comparison with competitors with a more narrow focus, has benefited from its breadth of business activities across these two segments of the building materials market. This benefit was further boosted in 2009 by the success of Wickes' refreshed commercial strategy, which led to market share gains, profit growth, and operating margin expansion.
PERFORMANCE
Summary The Group's results reflect the impact of the early action taken to prepare for the recession, the divergent fortunes of our two divisions, and the successful rights issue completed in the first half of 2009.
Throughout this annual report, consistent with our approach last year, the term "adjusted" has been used to signify that the effects of exceptional items have been excluded from the disclosures being made.
Before adjusting for the effect of exceptional items in both years, the Group recorded an increase of 45% in PBT to £212.7m and an increase of 29% in earnings per share to 88.4 pence. Including the effect of our £300.3m rights issue, shareholders' funds increased by £442.2m.
The Group incurred an exceptional charge of £56.2m in the prior year as a result of actions taken in response to the downturn in construction markets. In 2009 the exceptional item related to a £32.7m pension scheme curtailment gain which arose in December when future increases in pension scheme members' pensionable salaries were capped.
For 2009, the Group reported revenue down £247.7m at £2,930.9m (2008: £3,178.6). This revenue decline drove adjusted operating profit down 17% to £224.6m (2008: £271.5m), adjusted profit before tax down 11% to £180.0m (2008: £202.5m), and adjusted earnings per share down by 22.4% to 75.2 pence (2008: 96.9 pence). The revenue decrease of 7.8% comprised a decline of 8.6% in like-for-like ("LFL") sales, with network expansion accounting for growth of 1.0% with a reduction in trading days accounting for 0.2%.
Adjusted group operating margin fell by 0.88% to 7.66% (2008: 8.54%) (note 5c). Whilst adjusted operating margin in the retail division improved by 0.7% to 5.81%, merchanting division adjusted operating margin fell by 1.29% to 8.76%, reflecting the challenge of reducing fixed costs in line with the significant fall in volume experienced by the market.
The actions we implemented in late 2008 ahead of the expected sharp downturn in construction activity in 2009 served us well. We exceeded our original target for cost savings, with the 2009 cost base of the Company being over £60m lower than in 2008, against an original target of £50m, having made additional headcount and distribution savings. These savings would have been higher were it not for our initiatives to invest in opportunities to grow revenue in the retail market. Our cost reduction programme combined with initiatives to improve stock ratios and constrain capital expenditure, have helped boost cash flow. The Group generated free cash flow of £294.4m in 2009, a 58.9% increase on last year. Overall, including net proceeds from the rights issue of £300.3m, net debt was reduced to £467.2m. For covenant purposes net debt was £413.1m, giving a net debt / EBITDA ratio of 1.47 times and interest cover of 10.7 times.
As expected, with less construction work available, competition in merchanting intensified during the course of 2009, with a related deterioration in pricing conditions. Product cost and price inflation continued to be relatively strong by historical standards. In these circumstances, we sought to trade flexibly, preferring to protect our gross margin rather than fill our capacity with low margin work, and re-doubled our efforts to obtain favourable input prices through a range of procurement initiatives. We estimate these actions helped to offset over half of the fall in gross margins in the merchanting market. In contrast, the pricing environment in retail remained relatively benign as competitors sought to restore their low operating margin and achieve an economic return. Overall, gross margin percentage for the Group decreased slightly, mainly reflecting a decline in the merchanting division margin.
For the 7 weeks to 20 February group LFL sales performance was down 2.7%, with our merchanting division down by 2.8% and our retail division down by 2.4% with our core and kitchen and bathrooms ("K&B") down 8.0% and up 23.3% respectively.
Merchanting Division Our merchanting division continued its work to ensure we offer superior services and products to customers. Our research continues to indicate the success of this strategy, and overall merchant customer satisfaction improved in 2009. Our merchanting branch network is rated as a preferred source of building materials amongst national merchants in 8 out of the top 13 criteria used by customers when selecting a provider of materials. Whilst this is lower than in 2008, the differences mainly relate to our pricing stance, where we chose not to seek low margin work.
Merchanting division sales fell by 12.9%, with sales from new branch openings contributing 1.0% and LFL sales falling by 13.5% and a reduction in trading days accounting for a further decline of 0.4%. The LFL decline comprised 3.6% of price inflation offset by a 17.1% decline in volume. Given our trading stance on low margin work, we estimate that both our general and specialist merchanting operations recorded a LFL performance behind the market, with LFL sales in general merchanting falling by 14.1% and specialist merchanting falling by 12.6%. Independent merchants, who traditionally accept lower operating margins, appear to have increased their market share at the expense of national merchants, with our trend of LFL sales now very similar to other national merchants. We judge our trading stance in the recession to have been successful, particularly when compared to the operating profit and margin trends of most competitors.
Retail Division The retail division enjoyed relatively stronger market conditions as consumers found their discretionary spending power increasing materially following cuts in mortgage costs, utility bills and other elements of their non-discretionary spend. This meant that despite the general economic uncertainty, the value of the DIY retail market increased by an estimated 3%, over 2009, considerably better than expected. Retail division total sales were up by 4.3% to £980.7m, with sales from new branch openings contributing 1.2%, LFL sales increasing by 3.2% (3.8% price inflation and a 0.6% volume decrease) and a reduction in trading days accounting for a decline of 0.1%.
LFL sales for the full year of Wickes' core products were down only slightly, by 0.8%, and on the same basis K&B sales were ahead by 27.7%. Wickes' strong K&B sales performance reflects Wickes' initiative to capture market share following the withdrawal from the market in late 2008 of a significant K&B competitor. Wickes enjoyed great success with this initiative, exceeding its targets for share gain and taking more share than its overall market presence.
MARKETS
Overall Evidence of stabilisation in our markets emerged in the second half of the year. Shortly after the outset of the downturn we estimated that in response to the underlying difficult economic circumstances in the UK, volumes in our markets would fall from their peak in late 2008 by about 25% and reach a low point in mid 2009. Our view of 2009 now points to an overall trough of 25%, but the trough in merchanting, of a little over 30%, occurred a few months later than we forecast whilst the retail trough, of around 15%, occurred in the first quarter of 2009. Again, here we have seen the benefit of our spread of businesses across the retail and merchanting segments of the market.
Although the recession has broadly followed our forecasts, there have been a few noteworthy differences from our predictions. The retail market performed more strongly boosted by good weather and surviving operators benefited from the exit of a competitor from the showroom market. By contrast the merchanting market performed less well due to exposure to the heavier end of the market serving large construction projects, where the reduction in activity has been more severe.
Retail Market As noted above, consumers found themselves better off as a result of falling housing and related costs. Although savings rates climbed and mortgage equity withdrawal turned negative, consumers were prepared to spend more in a few selected markets - such as improving their homes. In addition, the moribund nature of the housing market meant many householders were spurred to improve their existing home in preference to extending their borrowings to acquire a new home. In addition, worry about jobs and a search for value seems to have boosted the proportion of householders 'doing it themselves', with less use of small building firms. This category of trade customer is important to both Wickes and Travis Perkins. Also, Wickes has little presence in seasonal categories, such as outdoor living, which were increased by the generally benign weather in 2009. Compared to other DIY retailers, Wickes were therefore faced with additional challenges without the relief to revenue trends available from seasonally sensitive products.
Although the decline in retail markets followed our expectations at the beginning of the year, the boost to consumers' spending power meant we saw a steady improvement in rates of decline over the year, with the market returning to growth in the fourth quarter. Overall we estimate the DIY shed market over the year as a whole was down in volume by 3.5%, and up in value by 3%
Merchanting Market Markets for our merchanting businesses, including Travis Perkins, fared less well. We estimate that nearly 60% of the merchant-supplied part of the construction materials market comprises repair, maintenance and improvement ("RMI") activity, with new housing and new commercial / public sector construction each taking up roughly half of the remainder.
With little exposure to consumers purchasing directly from merchants, and a greater reliance on the small building firms referred to above, the merchant supplied part of the RMI market suffered the full force of the recession. Whilst this segment of the market is normally quite resilient since many building jobs are non-discretionary, we estimate that activity levels fell by 11% - an unprecedented level of volatility. This fall would have been much worse had it not been for the expansion of public sector refurbishment work, such as programmes to upgrade social housing.
New construction fared even worse than RMI activity. Much attention has been given to the very sharp - we estimate some 50 to 60% peak to trough - dip in new housing activity. However, new construction of retail, commercial and industrial buildings suffered an even sharper and deeper decline. Again, an expansion of public sector work softened the blow, with a continuation of the hospitals programme, expansion of the schools and colleges programme, and extra investment in infrastructure. This latter category sources most of its material requirements directly from manufacturers, and only specialist civils merchants, like our own Keyline business, derive any significant benefit from this additional spend.
After taking into account the differential level of penetration of merchant-sourced supplies into the various segments of the market, and the annualisation of the month-on-month peak to trough trend, we estimate that the merchant market declined by 12% in value and 15% in volume for the year as a whole compared to 2008.
Again, the impact of this decline was softened by the closure of some competitor businesses and branches. We now estimate that since the start of the recession, around 500 merchant branches have closed, taking 5% of capacity out of the market, allowing for the transfer of business to surviving branches where competitors have consolidated branches. In our own case we have only closed 3 merchant branches over the year, with our greater profitability sustaining branch contribution levels despite falling volumes.
MANAGING THROUGH THE DOWNTURN
In last year's report to shareholders we described the actions we had taken in 2008, and our priorities for 2009, to deal with the downturn in our markets - as shown below. The following analysis indicates the extent to which we have been successful in these plans:
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Actions and Priorities
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Achievements and Performance
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Management Focus:
· Scale back development activities;
· Prioritise short pay back projects;
· Boost service levels;
· Increase branch supervision;
· Reduce central function headcount.
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· All but key projects terminated;
· Cash projects ahead of plan;
· Higher customer ratings recorded;
· Field management prioritised;
· Peak to trough central function headcount down by 9%.
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Market Share Gains:
· Generate sector leading performance;
· Increase penetration of growing customer segments.
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· Share lost in merchanting due to margin, stance, retail share up by 0.3%;
· Further gains in social housing, cash based builders, major contractors and interiors.
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Gross Margin Protection:
· Increase common and direct sourcing;
· Extend use of new pricing tools;
· Sustain higher price inflation;
· Overall, seek to compensate for anticipated market price pressure.
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· Increased our direct purchases by 50% and added c.30bps to our margin;
· Over 15 bps margin gained in the merchanting division;
· Full year 1.7% ahead of plan;
· Group gross margin percentage down slightly
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Cost Reduction:
· Sustain the late 2008 cuts in headcount;
· Reduce transport costs;
· Achieve £50m net reduction in overhead cost (i.e. after absorbing inflation on the cost base).
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· Peak to trough headcount down by 13%;
· Delivery cost to sales ratio lower than 2008;
· Cost reduced by over £60m compared to 2008, after absorbing inflation.
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Working Capital Efficiency:
· Manage any supplier pressures from the difficult credit insurance market;
· Use new supply chain capabilities to reduce stock by £20m;
· Limit the deterioration of debtor and bad debt ratios.
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· All suppliers maintained trading on normal terms, with average creditor days improving by 5 days;
· Stock (LFL adjusting for inflation) reduced by £34m from initiatives;
· Debtor days improved by 3 days and bad debt ratio improved by 0.11% (0.92% to 0.81%).
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Property Realisations:
· Generate in excess of £16m of cash;
· Contribute in excess of £10m to EBIT as a ‘steady stream’;
· Maintain the quality of the freehold estate.
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· £19m of cash generated from 17 property projects;
· 2009 profits before taxation of £11m;
· Freeholds (incl. long leaseholds) maintained at 30% of the estate.
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Reduce Capital Expenditure
· Constrain 2009 capex to £37m, limiting new works;
· Target £60m capex for 2010.
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· Capex kept to £28m, with all essential works completed;
· Capex forecast for 2010 of £60m.
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Further Cost and Cash Actions
· Reduced energy, transport and waste costs.
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· These costs reduced by £4m (within total noted above).
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Overall we succeeded in achieving the majority of the challenges we set ourselves when plotting a course through the difficult market conditions we faced. This demonstrated yet again the strength of our operational management when executing difficult change programmes.
DEVELOPMENT
The onset of the recession altered dramatically our stance on expansion, with the cancellation of many projects and withdrawal from acquisition negotiations. We continued brownfield expansion at Tile Giant in 2009, where new stores enjoy a good cash payback profile, and ToolStation, under the terms of our development agreement. Most development work in other brands in 2009 therefore involved a range of projects to evolve our offer to customers.
Wickes There was limited network expansion in 2009 with total retail selling space expanded by 0.4%. Only stores under contract opened in the year and as a result we launched a net 2 new stores having relocated our Oldham, Reading and Slough stores and rebuilt our store at Chadwell Heath, destroyed by fire in 2008. At 31 December, we traded from 195 stores.
We continued to invest in new products and new formats during the year, we opened our smallest ever full range store with an extended multi-channel offer reflecting our continued view that the lower fixed costs of smaller stores, backed by the efficiency of smarter supply chains, are right for the future. Several stores were refitted or relocated giving a net improvement in the quality of the estate during the year.
We completed a successful refresh of our showrooms, eliminating the poorly performing conservatory and bedroom categories, and expanding our bathroom offer. Showrooms are now dedicated to kitchens and bathrooms. Use of this new space was supported by the employment of new design consultants and a strong television advertising campaign, which significantly improved both brand awareness and recognition of the high quality of product we offer.
Travis Perkins Expansion for Travis Perkins was limited predominately to the opening of 6 new sites to support local authority stores contracts won during the year and 1 other branch. We had 25 managed stores, in partnership with Local Authorities or their contractors by the end of 2009, out of a total of 618 sites, of which 174 incorporated a tool-hire outlet.
An extension of the concept of stand alone stores that service individual local authorities is 'in-branch' local authority contract point. These meet the demands of individual authorities that do not require a stand alone branch, but still want the benefit of centralising purchases made by their employees and sub-contractors. In 2009 we established 8 of these dedicated service points within existing branches and currently have secured agreement to open a further 3 in 2010.
We continue introducing initiatives to secure new business. During the year we focussed on increasing the number of active trade cash cards and active trading accounts. By the end of 2009 we had achieved a 7% uplift.
We have successfully trialled a new tool that better enables the external sales force to target new and dormant customers, which will be rolled out across the business during the first few months of 2010. This tool, together with the team of territory managers we are currently building, will further increase the sales opportunities available to the business.
Stock availability and control remain at the core of our efforts. We have trialled 'Branch Select' to our larger or more specialist branches, which for them is an extension of our already successful company-wide mandated stock requirement, where all branches have to maintain certain stocks in project quantities. In addition we have introduced auto-replenishment of planed square edged timber and mouldings from our timber supply centres. This improves colleague productivity and helps optimise branch stocks quantities and availability.
Keyline Our 83 branch heavy building materials and civils and drainage specialist, is the most exposed of our brands to new construction activity, since it specialises in serving ground workers and civil engineering contractors.
After a difficult start to the year, Keyline found its markets stabilising in Q3. Whilst we have therefore chosen to constrain its expansion, its longer-term prospects are positive, linked to a recovery in housing and continued good prospects for investment in infrastructure. In 2009 we appointed a new Managing Director, Andrew Harrison, to Keyline. Andrew is a very experienced Managing Director, having previously led CCF and Benchmarx. Upon arrival at Keyline, Andrew and the team launched a new initiative to concentrate on refining its specialist offer under the "best in town" banner, which is aimed at demonstrating to customers that Keyline should be their first choice in civils products. Alongside this, it strengthened its sales team to enable it to make further inroads into the infrastructure sector.
City Plumbing Supplies City Plumbing Supplies ("CPS"), via its 194 branches, made good progress during the year by adding sales from market share growth to its well-managed overhead base. It focused on local customers by offering an enlarged range of products supported by an enhanced service from our distribution centre.
With a newly refined and better balanced business model serving plumbing contractors and the installed bathroom sector, CPS offers good potential for expansion. Having held back any branch developments in 2009 CPS continues to trade from 194 locations. CPS is the smallest of 4 national businesses serving the plumbing heating and ventilation market, and we have significant scope for growth once market conditions become more favourable. Development work in CPS in 2009 focussed on trading 'smartly' to maximise the opportunities available from this highly competitive market, with a number of refinements to ranges, promotional schemes and customer incentives.
As an important addition to our customer offer, CPS has invested in a management team to establish a heating spare parts business which will be led by Ian Tillotson, our Group Spares Director.
CCF Our dry-lining, screeding, ceilings and insulation specialist is more exposed to late cycle trends. This means it enjoyed better volumes in 2009 than the rest of the merchanting businesses. However, we are now seeing a similar sharp downturn in this specialist market, which could well be longer and deeper than in the general trade market. We are therefore holding back on any physical developments until we can see better market prospects. This means the CCF business continued to operate from 33 branches at the end of the year.
CCF's market is now very largely held in the hands of major national or international distributors who have recently invested in the sector, and with only a few suppliers of the key products, competitive conditions remained very tight. Despite this, CCF's 'one-stop shop' offer to contractors means it enjoys a good reputation and indeed it was accredited as best distributor by the influential Federation of Plastering and Dry Lining Contractors, by coming first in seven out of eight service categories.
Re-invigorated commercial activities resulted in CCF gaining significant market share. It established a new flooring division and in addition, invested resources in partitions, and acoustics to good effect, whilst improving overall overhead management.
Benchmarx 2009 was another year of improved trading performance. A new managing director, Chris Larkin, a former Travis Perkins regional director, was appointed in mid 2009 to Benchmarx, our specialist kitchen and joinery business for the trade which was launched in 2006. Prior to Chris' arrival, we had spent time refining the Benchmarx business model to improve new branch breakeven volumes and cash payback profile. Chris and his team have built on this platform by improving the sales and marketing focus, and have succeeded in increasing Benchmarx' customer base and revenues.
We took further market share, improved our doors range through centralisation of distribution and established a contract sales presence to service the social housing sector. We also developed a successful implant branch model for use within the wider merchant network affording us a low cost route to expansion.
Benchmarx' 29 kitchen & joinery branches serve a market with attractive returns and growth characteristics and our offer has scored very highly with our new customers in this market. We plan further branch openings and we remain committed to creating a business with a significant market share in this sector.
Tile Giant We entered the retail tile market at the end of 2007 via the acquisition of Tile Giant, a 29-store chain operating mainly in the Midlands. This business has subsequently been expanded rapidly through 2 acquisitions, Tile Magic and Tile It All, and a number of brown-field openings, including 10 stores opened in 2009. It traded from 86 stores at the year-end and we have a good pipeline of further opportunities to expand.
In 2009 we completed the rebranding of the businesses acquired during 2008 so all stores now trade under the Tile Giant banner. Our new stores are performing well and we plan to increase the rate of openings in 2010.
On 1st August 2009, we added a further channel to Tile Giant when we acquired Tile HQ, an internet-based seller of tiles and developed its range into natural stone products, a faster growing segment of the market via the part acquisition of one of our key suppliers The Mosaic Tile Company. This will enable us to improve the supply of natural stone products and so remain ahead of the market in this area.
Using the acquired expertise we are completely redeveloping the Tile Giant website and aim to relaunch it as a fully transactional offering in the first quarter of 2010.
ToolStation In April 2008, the Group acquired a 30% equity interest in ToolStation, a rapidly growing direct retailer of lightside products. Since then, under a development agreement, the Group has funded a rapid roll-out of 47 new stores.
ToolStation added an additional 25 stores in the year, bringing the total trading at the end of the year up to 59. In July 2009 it opened a new distribution centre at Redditch to support its plans to rapidly grow its footprint across the UK. This enabled the Bridgwater distribution centre to return to it's originally designed function of servicing the mail order and Internet businesses.
ToolStation's development in 2009 has created 175 new jobs in the UK which means that since Travis Perkins became a shareholder Toolstation has created 381 new jobs, and with its rate of LFL sales growth significantly outstripping its peers, we are confident of further growth.
The Group has an option to acquire the outstanding portion of ToolStation's equity, under certain conditions, in 2012.
ORGANISATIONAL CAPABILITIES
Under a strategy of cost reduction in response to the recession, our organisational capabilities were shrunk in 2009, leaving us with not much more than the essential requirements to continue running the business. However, we have been careful to maintain the core capabilities of the Group, for example by retaining key staff but re-deploying them as a substitute for bought in services, allowing us to cut back on the costs of using these external providers. This leaves us well positioned to take advantage of opportunities that may arise when volume growth returns.
As well as the re-deployment of staff, we have streamlined management structures, eliminated some departments, cut discretionary expenditures and reduced headcount required in activities related to the volume of business we handle. We expect to make a number of these changes permanent, having proved we can operate satisfactorily with fewer resources in a number of aspects of the Group. However, in 2010 we will also selectively invest in new resources to support improvement of our customer offer in our businesses. This will involve some new activities in market research, marketing, sales, multi-channel operations, IT and supply chain.
In 2009 we took specific actions aimed at maintaining morale and employee engagement in difficult trading conditions. This included removing less engaged colleagues as we reduced costs, improving remuneration for the remaining employees, increasing internal communication activities and removing unnecessary and burdensome procedures.
As we reported last year, our senior management group experienced an increased and unusual level of turnover at the end of 2008 as we cut costs. In 2009 stability returned, with only 11 departures - 10 planned and 1 unplanned and undesirable. After promotions and restructuring to support our streamlining of management structures, the management group now comprises 187 executives. In addition to the appointment of new Managing Directors to Keyline (Andrew Harrison, an experienced MD of a number of our businesses) and Benchmarx (Chris Larkin, a successful TP South East regional director) described above, we made 3 further changes to responsibilities. Norman Bell, our Managing Director of Travis Perkins in the South West was promoted to the Executive Committee to spearhead further development of our product offer. Norman's role was taken up by Mark Nottingham, our Managing Director for Travis Perkins in the North, and Andrew Popple, a Regional Director in the North was promoted to replace Mark.
The action we have taken to deal with the contraction in our markets and to pursue our stretched targets has increased the demands on our people. The effect of seeking to reduce variable costs in line with sales trends, seize opportunities from failing competitors and continue to serve customers well has manifested itself in an increased and more diverse workload for many of our people. They have responded superbly. In 2009 I continued my programme of regular visits to our branches, stores, distribution centres and offices and by the end of the year had seen 470 sites since joining the Company. I also continued to meet with all colleagues in our support functions over a rolling series of communication and feedback sessions during the year. I am continually impressed by the dedication and commitment of my colleagues and would like, on behalf of the Board, to express my thanks to all of them for all their hard work.
ENVIRONMENT
With the help of our Non Executive Environmental Advisory Panel ("NEEAP"), we took a more active stance in 2009 to the development, scope and pace of our environmental activity. Therefore, in a year littered with government and ministerial announcements and consultations about initiatives designed to reduce environmental harm, we have confirmed our intention to go beyond demonstrable compliance, and in some cases best practice. Our plans take into account commercial opportunities available and regard the environment as a stakeholder in the long-term survival of the business.
Our objectives remain broadly the same and cover:
· Responsible procurement;
· Carbon management;
· Resource efficiency;
· Local pollution prevention.
We have invested in capital projects and in systems in pursuit of these priorities in 2009 with the aim of seeking a quantified commercial return and environmental benefit.
Continuous Improvement We monitor, review and improve our environmental performance via an environmental management system certified to the ISO 14001 standard. All our timber purchasing, tracking and resale activity, across all divisions, is governed by our Chain of Custody procedures, certified to external standards. This allows us to bring FSC and PEFC certified product to market.
In this environmental review we present our latest quantitative and qualitative measures of performance. Lloyds Register of Quality Assurance have examined how we have calculated and estimated our performance and have commented on the completeness and materiality of this review. Their assurance statement can be found on our web site - www.travisperkinsplc.co.uk/environment.
Performance trends can be seen by examining the graphs in this report. The final indicators are a combination of measured, averaged and estimated performance. Wherever possible we have used standardised data collection and reporting techniques and we continue to work to improve the accuracy of the measures reported.
We have adjusted historical data, as noted below, in order to increase reporting accuracy. In 2010 we expect to improve further our accuracy by installing automatic meter reading equipment in many sites. The equipment will improve our reporting of carbon emissions and will allow us to improve our targeting of consumption at site level.
· Historic carbon dioxide emissions, from utility consumption, have been amended to take into account increased data accuracy from the annual apportionment of kWh consumption. This has resulted in a minor change (under 1%), of previously reported carbon dioxide tonnage data.
· The natural gas carbon dioxide emissions factor has changed from net calorific value to gross calorific value basis, in accordance with the '2009 Guidelines to Defra / DECC's GHG Conversion Factors for Company Reporting.' (Version 2, 30/09/2009).
· The waste tonnage charts reported in the 2008 environment report incorrectly showed total waste produced and the amount recycled. The charts should have shown waste sent to landfill and the amount recycled. The chart has been corrected for the 2009 report.
· Estimated 2008 packaging tonnage of 64,041 is adjusted to 63,332 due to increased data accuracy
· The 2008 water consumption baseline has been revised from 403,779 m3 to 349,390 m3 due to increased data accuracy.
Engagement Dialogue with stakeholders is an important part of our approach to environmental improvement. In 2009, in addition to consulting with our NEEAP (see the box below), we consulted with over 60 groups or individuals about aspects of our performance to help us to set priorities on environmental issues. Customers and regulators were the most well represented stakeholder groups in our consultations. Our financial stakeholders were least well represented.
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Statement of the Activities of the Travis Perkins Non Executive Environmental Advisory Panel Approved by the Panel The Travis Perkins Group values the contribution made by its Non Executive Environmental Advisory Panel. This panel, representative of the main stakeholders of the Group, meets twice a year and is chaired by the CEO, Geoff Cooper. The Panel's role is to inform and guide the Group's environmental objectives and to help Travis Perkins identify a clear response to environmental issues which can generate heat but with inadequate light. The panel is particularly encouraged to examine emerging issues and areas where clear government environmental policy or best practice doesn't yet exist. The Panel currently has 5 independent members drawn from the financial, construction product manufacture, house building, repair and maintenance and environmental regulatory sectors. Each panel member offers a different perspective on the issues, the solutions and the driving forces behind the solutions. The Panel has so far reviewed the approach taken by Travis Perkins and offered comment on the objectives of the Group in light of emerging practice and the response in the finance market and the construction and retail industry. The Panel has significantly helped Travis Perkins to understand its role in the supply chain and the contribution to improved environmental sustainability that it might make in fulfilling this role. The Panel has particularly encouraged the Group to adopt a clearer environmental vision that encompasses this. The Panel's role is exclusively forward looking and it does not provide any kind of assurance or verification to Travis Perkins' current environmental performance. Travis Perkins will continue to use a credible 3rd party to verify the accuracy of its environmental reporting. Travis Perkins will also continue to draw on all its experience of the market and on other sources of information on policy and good and emerging sustainable practice when considering its environmental position. The Panel complements the Group's understanding of environmental policy and best practice. It also enhances the Group's dialogue with the broadest range of stakeholders ensuring that their views are considered by Travis Perkins in determining its environmental objectives. |
As well as listening to the views of our stakeholders, we also contribute to debate and seek to influence opinion about business' role in environmental issues. In particular we are active in environmental forums in the Construction Product Association, British Retail Consortium and the WWF Forest and Trade Network.
Information about our environmental performance is accessible by a wide range of stakeholders via our web site. We also provide detailed reports to rating agencies such as the Carbon Disclosure Project and Forest Footprint Disclosure Project, disclose much detail on our timber buying to the WWF through the Forest and Trade Network and are involved in sector performance agreements and reporting such as the BRC's "A better Retailing Climate".
In 2009, via Wickes, we signed the Waste Reduction Action Programme ("WRAP") voluntary home improvement sector commitment to optimise packaging. Through this we expect to make progress over the next few years.
We expect our NEEAP to become more influential in framing our internal decision making about our environmental objectives. We have rejoined the Timber Trade Federation, partly for the opportunity to influence the responsible sourcing debate.
We will continue to engage in dialogue with a wide selection of groups and individuals but in particular will concentrate on our employees, an under-represented group. Both our employees' enthusiasm to adopt new and better environmental practice, and their ability to generate improvements and to come up with ideas is largely untapped.
Responsible Timber Trading We estimate that in 2009 we purchased 84% by value of timber products from material that came from certified well managed or controlled forests. This continues our record of consistent improvement in recent years and suggests that we will achieve our 90% interim target by 2011. We do best in those categories with the shortest supply chains between us and the forest, and those where we are the importer and distributor for a large amount of the category volume.
Last year we successfully introduced important and significant changes to our timber product Chain of Custody procedures in the merchant and specialist divisions. These have ensured that certified product remains on offer in all branches and stores that sell timber - over 800 sites. The changes support our efforts to enhance the robustness of chain of custody as responsible sourcing comes under increased scrutiny. Revisions to public procurement standards and building codes now require an increase in the demand for demonstrably certified product.
In 2010 we will focus on increasing certified product purchases from the harder to influence product categories such as flooring and doors. In these product categories, the supply chain between ourselves and the forest tends to be longer and be filled with small intermediaries. This raises the need to adopt a stewardship role over the whole supply chain.
Carbon Management In 2009 we emitted 154,818 tonnes of carbon - 8% less than in 2008. The biggest contributor to this reduction was lower emissions from our consumption of gas. Our carbon dioxide emissions from burning gas were down 7% over 2008 despite the 2009 winter being colder. We attribute this reduction in emissions to the work we have done in installing heating controls in Wickes - our highest consumer of gas. The work started in 2008 and all stores had been fitted with these controls by Autumn 2009.
In the supply chain we have had some success in improving efficiencies from customer deliveries and these also contributed to our absolute carbon reduction. On a LFL basis, carbon dioxide emissions from branch to customer deliveries were 4% lower for 2009 than for the 2005 baseline year. The monitoring capability of our fleet management process, has helped to achieve these efficiencies over 2009 and indicates that there are more savings to be made.
Unfortunately, the negative operating leverage effect of falling market volumes has meant that our measured carbon footprint of 59.1 tonnes per million pounds of inflation adjusted turnover does not reflect these efficiency gains. However, our average emissions per occupied building have been falling year on year over the last 5 years and our 2009 rate of 125 tonnes of carbon dioxide per site is 24% less than it was in the baseline year of 2005.
We do not believe that our emissions per site will rise significantly as turnover starts to grow and, while we may miss our interim 15% reduction target in 2010, we still expect to achieve our 20% reduction in emissions per million pounds of adjusted sales by 2013.
In 2010 we will concentrate much of our effort in establishing the ability to monitor electricity consumption at a site level more accurately. In turn, this will allow us to engage the site management and target reduced consumption. Both of these activities will increase our efficiency and also allow us to enter into the Carbon Reduction Commitment Energy Efficiency Scheme with an early adoption credit and a reducing emission trend.
We also intend to continue to deliver carbon efficiencies in the supply chain and to examine how we can quantify this more accurately by including the parts of the distribution chain that are currently outside of our direct control.
Waste Management In 2009, we sent 29,148 tonnes of waste to landfill, some 35% less than in 2008 and 41% less than our baseline year of 2005. We believe that this rate of improvement in performance will be sustained and will allow us to deliver, by 2013, the target we have set ourselves of a 50% reduction in landfill.
Much of the success we have had in reducing waste to landfill last year has stemmed from the gradual removal of large open skips because these do not encourage reduction, re-use or recycling. In 2010 we intend to pursue this with greater vigour with many sites being reduced to 1,100 litre "wheelie bins". We have also provided branches with simple, lower cost alternative waste recycling options, both via backhaul through our internal supply chain for packaging and cardboard and through specialist partners for other materials. Since July 2009 all of our 7 distribution centres have collected bagged up waste plastic and cardboard from our stores and branches. We have bailers installed at each distribution centre to enable us to compact and then sell the waste. Over the half year we have picked up, bailed an sold on to the reprocessing market, 2,139 tonnes of material and estimate that we have reduced the demand for general waste capacity in branch and store skips by up to 30%. Our recycling rate in 2009 was almost 30%.
In 2010, we will increase the segregation of our waste at source and expect to take advantage of our distribution network to accumulate sorted waste. We have made a promising start in 2010 already and all pallets, including damaged ones, can now be returned via our distribution network for re-use or recycling.
Packaging In 2009, we estimate that we sold 59,484 tonnes of packaging. This is 6% down on our revised 2008 estimate of 63,332 tonnes. On a like-for-like basis, the equates to 20.7 tonnes per million pounds of sales in 2009 compared to 19.9 in 2008. We have spent some time in 2009 consulting with WRAP, particularly about retail packaging. Wickes was the first business to sign up to WRAP's home improvement sector commitment. We have also been vocal in the Construction Product Association ("CPA") about packaging reduction. Both the WRAP agreement and CPA packaging reduction forum will be important in delivering our packaging reduction ambitions which are split between improving packaging specification for our own branded products and influencing propriety branded suppliers to reduce packaging for the branded product we sell.
Work on packaging specification changes will start in 2010 to deliver a 3-year programme aimed at achieving a 20% reduction in tonnes of packaging per million pounds of adjusted turnover by the end of 2013.
Water In 2009, we estimate that we used 330,086 m3 of water. On a consumption to real turnover basis our 2009 consumption is slightly up on 2008. We have done some work on improving the accuracy of billing but have not yet addressed water efficiency. This is not a priority area for us in 2010 although the target of reducing water consumption by 5% per million pounds of adjusted turnover by 2013 remains.
Pollution Prevention We reported 3 incidents of high level hazardous waste fly tipping at our sites to environmental regulators in 2009. In addition, we recorded 3 minor spills of fuel, but these were not notified to regulators as the spills were prevented from entering any water courses.
We had no prosecutions for any environmental offence in 2009. However, we did receive one enforcement notice from a regulator to clean up one of our sites. We also entered into a dialogue with three regulators who were seeking confirmation about possible statutory nuisances and a failure to meet essential packaging requirements. We do not believe that there is any planned action by any regulator relating to these incidents, which we have recorded as complaints.
In addition, we received 2 complaints from neighbours about noise and in each case have worked to resolve the complaint by either changing working hours or installing white noise beepers on vehicles.
Even though the level of complaint and incidents in 2009 was at a 5 year low, we remain committed to improving our performance. We have a target of zero incidents and complaints and will remain diligent in our site operations. In 2010 we will continue to communicate with our branches and stores to ensure that the site noise level control adequately reflects the environmental impact and environmental risk.
Community Activities
Our relationships with local communities and the public at large are deeply embedded in our heritage and culture, and are strongly highlighted through our work with charities. The partnerships with our chosen charities continue to thrive through a variety of activities across all of our 1,238 stores and branches in the UK. As a Group, we have raised over £1.8m over the last three years for our chosen charities.
This year, Wickes became the first of our businesses to succeed in raising more than £1 million for its nominated charity, Leukaemia Research. Since the partnership with Leukaemia Research began 3 years ago, the enthusiasm and support of colleagues has been overwhelming, and reaching the £1 million mark is a testament to the dedication of all employees in our retail stores and teams. In October 2009, a group of Wickes colleagues successfully climbed Mount Kilimanjaro, raising over £75,000.
Wickes colleagues play a vital role in organising many local fundraising events such as football tournaments and golf competitions, as well in-store events such as fancy dress days and car washes. They also participate in larger public events including marathons, triathlons and 'bikeathons'. Our top fund raising store last year raised over £9,000.
Despite more difficult trading conditions, the rest of the Group raised over £850,000 for Action for Children (formally NCH) and Mencap (with its sister charity ENABLE in Scotland) over a three-year period.
In 2009, the merchanting businesses and our Northampton Head Office raised over £230,000 through a variety of fundraising activities. 63 employees from our Travis Perkins business and Head Office took on a "Beat the Moon" challenge, which saw them cycle, walk, ride and canoe over 31 miles in one day, raising £43,000 through this achievement. Two of our Travis Perkins' businesses both held a charity ball raising almost £70,000 between them.
From 2010, each of our businesses will adopt its own nominated charity or charities. This will enable further worthwhile causes to benefit from the fundraising efforts and generosity of our employees. This means that starting in 2010, the Group as a whole will be supporting 11 charities - Breast Cancer Campaign, Children's Hospices UK, The Prostate Cancer Charity, Childline, Happy Days, CLIC Sargent, Donna Louise Hospice, Keech Hospice Care for Children, Warwickshire and Northamptonshire Air Ambulance and Whiz-Kidz. Wickes will continue to support Leukaemia and Lymphoma Research as they celebrate 50 years as a charity.
In 2009, we continued our role as main sponsor of Northampton Saints rugby club and continued to involve our Northamptonshire colleagues in joint community activities including Sportsmatch - the Government-funded scheme that gives local primary schools rugby coaching sessions, assembly visits and class-based Tag Rugby competitions. Our '1,000 Projects…' initiative continues to forge and develop relationships with local communities in the towns and cities in which we trade. More than 700 local projects, schools, charities and amenities across the UK have benefited from the time and talent, and often materials, donated by our employees.
Each project involves our teams giving their own time and working with suppliers, local customers and community organisations to deliver a building project of real value to the communities in the towns and cities where we trade. Some recent examples include:
Year on year, the '1,000 Projects…' initiative proves to be instrumental in helping our branch teams cultivate and develop relationships with the local community, to develop team morale and 'togetherness', and gain excellent local publicity.
INVESTORS
The rights issue in May removed the market uncertainty about the robustness of the Group's balance sheet and spurred a lot of activity in trading of the Group's shares.
Responsibility for communications with shareholders and debt providers rests directly with me and Paul Hampden Smith, our Finance Director, with support and advice from the Company's brokers. We do not employ an investor relations manager. The Company Chairman and Senior Independent Director attend a selection of investor meetings throughout the year, and the Company Chairman attends the meetings at which we present the Group's interim and preliminary results to buy-side and sell-side analysts. In addition to these meetings, at least one day per month is set aside to meet investors and analysts.
This regular programme is supplemented with one trip per year to meet with investors in Eire, Canada and the USA, and we host a visit for analysts to a selection of our businesses once per year.
In 2009 we conducted nearly 155 meetings with investors. Activity levels, again boosted by the rights issue, increased in 2009. As part of each exercise to present interim and preliminary results, we typically meet shareholders representing around 60% of the shares outstanding. This includes a 'family lunch' where we meet with representatives of the Travis and Perkins families.
STRATEGY
We have developed our strategy to respond to three distinct phases of the recession: managing the downturn; stabilisation; and exploiting opportunities. Our priorities in managing the downturn are described above, and we have now turned our attention to the prospects for our markets in this next phase, of stabilisation.
Although forecasts are particularly problematic in this recession, we estimate our markets are now stabilising, having fallen sharply from the third quarter of 2008. We are now in a phase of stabilisation, which present its own difficulties, with no growth, some exaggerated short term volatility in market trends, continued intense competition and business failures, and the potential for material shortages following the large cuts in manufacturing capacity implemented by manufacturers. At this stage there is no clear indication of when our markets might return to growth again. Although we believe this might be evident by the end of 2010, we are also wary of the probable 'false starts' that we expect to see.
Whilst our markets are no longer exhibiting the abrupt declines in volume that characterised the start of the recession, activity levels remain fragile. We are concerned in particular about weak consumer spending trends in 2010 as inflation rises and the cushion of falling mortgage costs annualises out. We expect the home improvement market to contract further in 2010, but with only limited benefit from competitors going out of business in contrast to the large capacity reductions seen in 2009. Against this background, we expect pricing discipline to be maintained since returns for most operators remain at sub-economic levels. However, there is always a risk of sporadic price aggression from less disciplined operators.
We also expect a contraction in the merchanting market, although it will be slight, and will simply reflect the annualisation of the trough. Although there will be significant variations in the fortunes of the various segments of the market, increased activity in housing construction, albeit from a low base, and expanded public sector investment in the built environment will provide a 'floor' to activity levels.
In an anticipated period of low growth our focus is shifting to driving organic performance.
Against the fragile market background, we remain vigilant, keeping a tight control on our core operating costs and looking to maintain gross margins wherever possible. The structural improvements in our overhead base will be sustained, with no re-instatement of management posts removed in late 2008, and cash generation will continue as a priority through pursuit of supply chain initiatives. We will adopt a flexible stance to: expansion of our successful retail marketing investments; credit levels extended to trade customers; and sales prospecting activity in trade markets. In each case we will seek to match the costs of these against the strength of activity levels.
Whilst remaining vigilant, we have made provision in our cost plans in 2010 to selectively invest in a number of new activities that have direct benefits to customers in the form of a steadily more attractive offer.
Until we can see signs of a recovery in our markets, we do not think it worthwhile to comment on, or further develop, our strategy for exploiting opportunities. The outline of these strategies can be defined, but it is difficult to determine, in present conditions, when they are likely to become relevant.
Our businesses have strong brands, experienced management teams and market leading financial performance. These strengths mean we remain confident of our ability to position the Group to continue creating shareholder value when our sector returns to growth.
Geoff Cooper
Chief Executive
23 February 2010
CHIEF OPERATING OFFICER'S REVIEW OF THE YEAR
For the year ended 31 December 2009
Introduction
We entered 2009 with sharply declining markets in both the merchanting and retail sides of our business. We cut overheads early and swiftly in the latter part of 2008 which helped mitigate the effect of a difficult start to 2009. The themes of tight overhead control, capital expenditure and working capital control present in 2008 were repeated in 2009. We have the strongest and most experienced operational management team in our sector and we implemented a significant number of self-help initiatives across our business to enable us to weather the recession better than most; we now look to build on this position when better times return.
Our People
Our vision - to create a 'people first' environment that facilitates high performance and provides the opportunity for career progression, while celebrating and rewarding success. Through this vision we encourage everyone to play their part in making the Travis Perkins Group both a great place to work, and a safe place to work. Writing these words is easy - we try hard to ensure we take concrete steps to put our vision into action, allocating personal responsibility to individuals to make this happen.
Putting our Vision into Action In delivering this Vision engaging our people, in the progress and development of the business and their part in it, is paramount. More than ever before, our achievements in 2009 relied on our people and their close working relationships with customers, suppliers and each other, at all levels in the business. We always actively encourage colleague engagement with the business as we believe it directly contributes to high morale, to their well-being and to healthy operating margins and returns. However, in response to the difficult market conditions we have faced, in 2009 we re-doubled our efforts to maintain this engagement. In support of this, we enhanced incentive schemes to enable every colleague in the Group to have the opportunity to share in our ongoing success.
Throughout the year, and against a recessionary backdrop, our people demonstrated yet again their never-ending ability to find new ways to improve our business through working in collaboration with colleagues across the organisation. This resulted in a year of outstanding achievements, some of which are detailed below, which we were delighted to celebrate internally. Many of these were, to our further delight, recognised externally.
All of these achievements are a tribute to the dedicated people in our Group who design, promote, and execute each programme.
The start of 2009 saw a very different trading landscape for all of our people. For many of them it was the first time they had experienced a steep decline in trading, rather than growth. Furthermore, about 2,000 of their colleagues across the Group had left the business as we re-aligned staffing levels to meet reduced construction activity in the market. Nevertheless, throughout the whole of 2009, the depth and strength of our people's engagement and their pride in the Group ensured that it retained and enhanced its strong position within the British Merchanting and Retail sectors.
Pride is a cornerstone of our 'Building People, Building Britain' employment brand, and that pride is evident in all our branches and stores and in our central functions - pride in working for the organisation, in their collective contribution to the organisation and in their individual efforts to ensure continued success.
Managing costs was important for all our businesses, and as a result of involving our people and communicating with them about the changing nature of the business and their role within it, they 'bought into' the changes that needed to be made. More importantly, they continued to look for, and achieve, new ways to serve our customers and to provide them with the products and services that they needed. Some examples of new employee-driven initiatives were:
Great collaborationalso resulted in:
In the extremely challenging environment in which we operated, our central functions continued to give excellent support to our branches and stores. They also looked for innovative ways of giving that support:
As we move further into 2010, the challenges of improving the Group's performance in an extremely testing trading period remain. To help us meet these challenges, we will look to build on the innovation and collaboration that has been developed during this recession. Our focus will be on ensuring that we offer a compelling service to our customers - from every part of the business, through whatever channel. This will ensure our continued differentiation of the Travis Perkins Group from its competitors. Most importantly, equipping our people with new skills and knowledge to succeed personally and collectively, will form a key focus for all of our leadership teams.
Training and Developing for Success This year has seen a wide range of significant initiatives in training and development across the Group. We have demonstrated an ability to provide quality training that delivers tangible business benefits. Having reviewed our costs and priorities, investment in training and development has been aligned with key business priorities. Our focus has been on training for sales and basic job-skills, including product knowledge and customer service. This approach is designed to reinforce our very high standards of customer relationship management and sales delivery. Reflecting the trading environment being faced, we developed and delivered "Train the Trainer" workshops to equip a greater number of our people to be able to provide training across the Group in a very cost effective way. We plan to extend this in 2010.
We are delighted that the Travis Perkins Group gained the two prestigious National Training Awards described earlier.
With our focus on training for basic job-skills and product knowledge, and with a view to developing our own pipeline of quality people for the future, we were pleased to be awarded a Government Funding contract for an apprenticeship programme within Wickes. This programme, launched in January 2010, provides all new employees within Wickes the opportunity to gain a Level 2 Retail Apprenticeship. We are looking to extend the opportunities for apprenticeships to other parts of our business during 2010.
Our training and development team play a pivotal role in the progress of the Group. This team gives support to our businesses by aligning our work to three key priorities: the development of leadership and management potential; sales improvement; and improving core skills for the benefit of customers. These will remain our priorities for 2010.
Our Management Trainee scheme has continued to deliver quality people, with 79 of our 80 trainees securing positions within the business on completion of their training. Our current trainees are in the second year of their programme in preparation for appointment in the summer of 2010. A decision was taken not to recruit for the scheme in 2009 and to take the opportunity to thoroughly review the content in line with our changing business needs. The revised programme will be agreed early in 2010 with the aim of recruiting trainees in 2011.
Rewarding and Recognising Success Annual bonus and long term incentive plans are now in place to ensure that all colleagues have the potential to share in the Group's success.
We aligned all bonus plans to reflect our priority of driving current results. Despite the challenging trading environment in 2009, as a result of the achievements of our people in our general and specialist divisions, almost 40% of branches will receive a bonus payment under the "All Colleague Bonus Plan".
All Wickes employees will receive a special bonus payment in March 2010 to reflect their outstanding performance during 2009, in addition to a reward payment made to each of them in April 2009. During the year, and following the successful example in the merchanting division, we designed a new bonus scheme for Wickes based on a "balanced scorecard" approach. The scheme will reward colleagues in stores who achieve high performance against financial and non-financial targets.
In Wickes, a new commission plan was introduced for kitchen and bathroom design consultants. The scheme rewards exceptional performance and we are delighted that a number of our high performers shared in the success of the kitchen and bathroom business in 2009.
Our Reward Gateway scheme goes from strength to strength. It enables employees to take advantage of a number of voluntary benefits together with discounts on everyday items bought from high street stores, and provide assistance with their household finances. An increasing number of employees are taking advantage of the discounts available.
In the interests of the welfare of our people, in 2009, we introduced life assurance cover to all employees who do not participate in a pension plan - where life assurance is already provided - giving peace of mind to all colleagues and their families. Our approach to reward remains to enhance our position as an employer of choice by continuing to offer a range of attractive pay and benefits packages to our people including:
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· Staff discount – Reward Gateway and purchases from Group brands;
· Pension plans;
· Life assurance cover;
· Private health care;
· Salary exchange scheme - childcare vouchers, Cycle2Work, Give As You Earn, Small Change Big Difference;
· Enhanced annual leave;
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· Loyalty awards;
· Employee assistance programme;
· Flexible working options;
· Share Save scheme;
· Recognition awards – Getting It Right, branch / store Manager of the year in each business unit, management trainee of the year, special achievement awards and the CEO award for manager of the year.
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Engagement and Communication - Building on Our Success A direct relationship exists between the level of engagement of our people and their retention in the business. Our own data is confirmed by external research, which shows that highly engaged employees are more than twice as likely to be top performers and will have 40% fewer days off work due to illness.
Our belief in the link between colleague involvement and business performance continues to drive our approach to people policies and practises in the business. We recognise that the high standards of service we provide are dependent on the contribution, application and loyalty of our people. The 'Great Place to Work' people strategy now implemented in Wickes is based on what our colleagues have told us about working in the business. Over the past 3 years we have developed a suite of programmes, initiatives and policies to build and maintain their engagement. These are now an integral part of our culture and way of working: for example, the introduction of our Bright Sparks initiative in Wickes; and the "Skip Spotters" initiative across the Group. In 2010, we plan to introduce an innovation recognition scheme - IDEAS, aimed at encouraging and rewarding new ideas across the Group. This will be supported by an investment of up to £1 million in cash prizes.
The Building Britain Award programme is now well established and provides annual recognition of those colleagues who consistently deliver excellence in their roles. Our loyalty award programme continues to provide the opportunity for the Group to demonstrate that the contribution of long serving colleagues will always be valued. Over 20 of our people were recognised in 2009 for achieving 40 years of service with the Group. One, Brian Ward reached an outstanding 50 years of dedicated service and this was recognised by us organising a celebratory trip he had always wanted to complete on the Orient Express.
Our special achievement awards, part of our "Building Britain Awards" initiative, continues to showcase those colleagues, as nominated by their peers, who have gone that 'extra mile' by excelling in customer service or by championing our values. The additional workload generated by the recession brought out the best in our people and this made judging these awards exceedingly difficult. Nevertheless we are proud to again showcase:
· Jan Atkins from Travis Perkins who proved a real winner despite the downturn in trade, turning enquiries into healthy sales and championing our Trade Cash Card with new customers;
· Chris Thompson, who focused his attention on delivering the best customer service by ensuring their experience and standards at his branch were the best they could possibly be;
· Dan Brookes from City Plumbing also focussed his attention on customers, consistently delivering first class service to trade account holders and cash customers, often in his own time;
· Non-customer facing colleagues were recognised too. In Wickes, caretaker Ian Miller is often referred to as an 'unsung hero', always on hand to keep the offices in perfect working order, and Debbie Sweeney who continues to organise highly profitable fundraising activities for the Group's nominated and other charities.
Our commitment to ensuring regular, two-way communications with our people continued in 2009 through regular head office, site and store briefings by our business leaders. We launched a quarterly Colleague Liaison Forum in our head office campus enabling employees to have an opportunity to discuss business issues. The liaison forum concept is already well established in Wickes and we will seek opportunities to extend it further through our estate in 2010.
Our focus on engagement extends to the way we go about charity fundraising, when we continue to find ways of capturing our people's imagination through different initiatives. In 2009, these included the landmark expedition of Group and Wickes colleagues, led by Jeremy Bird, Managing Director of Wickes, to the summit of Mount Kilimanjaro; and also the launch of a monthly colleague lottery with more than 70% of colleagues taking part and 50% of monies raised being pledged to our nominated charities.
Through our colleague attitude survey work in recent years, we have established a strong correlation between colleague engagement and labour turnover. We are extremely encouraged by the significant increase in group labour retention, from 82% in 2008 to 89% in 2009. Despite the recession, we see this as evidence and confirmation that the people policies outlined above are having a really positive impact on our people and on business performance. We will be conducting another colleague survey in 2010.
We are pleased that during such a tough trading period, our focus on continuing to be a great place to work has been recognised through our selection as one of Britain's top ten employers for 2010.
Keeping Our People Safe Such is the profile and importance of health and safety throughout the Group, we have created its own section within these accounts on pages 51 to 52.
However, on a personal note, I am pleased to report a strong performance from all parts of the business in supporting our vision of 'making injuries rare'.
Across the Group in 2009, we have achieved a 12% reduction in the lost time injury frequency rate (lost time injuries per million hours worked) and a 29% reduction in the lost time injury severity rate (days lost per thousand hours worked). These significant achievements have been made possible by each of our business leaders embracing our Health & Safety vision, collaborating to share ideas and involving and engaging colleagues at all levels.
I, and my senior operating team, remain absolutely committed to our Stay Safe programme, designed to ensure that all colleagues, customers and contractors who deal with the Travis Perkins Group return home safely at the end of every working day.
Operational Performance
Merchanting Division
The Travis Perkins brand remains the cornerstone of the Group's activities and comprises 4 discreet business units, namely South East, South West, Midlands, and Northern, each with its own managing director and management team. It is a generalist mixed merchant, trading across the main product groups offering a 'best in class' service to small and mid-sized builders and contractors, as well as larger contractors and housebuilders across many segments of the building sector.
Throughout the year we continued to focus on product availability, customer service and pricing systems.
Availability was improved to over 96% while overstocks were significantly reduced, releasing working capital. We realigned our external sales-force to deal with the changed market conditions, and promoted out trade cash card offer. This meant we actually ended the year with 7% more trading customers than the previous year-end.
Across all four businesses, gross margin was maintained at the previous year's level, due in part to mix benefits from lower direct to site sales, but also to the efforts of the business unit management teams to protect margin in a tight market, including extended use of new pricing tools.
Overheads were tightly controlled throughout the year. Our workforce was reduced by a further 5% on top of a 13% reduction in 2008, and with the aid of our vehicle tracking system and utilisation data we succeeded in reducing distribution expenses by a further 15% (well in excess of the decline in delivered sales) without compromising our delivery service. Capital expenditure was tightly controlled, except for health & safety issues where we continued to invest for the wellbeing of our colleagues and customers. Overall annualised overhead savings of over £21m were achieved against the previous year.
Although not a separate business unit in its own right, Tool Hire is embedded within the branch network and has its own management structure, led by Richard Dey. Throughout the year a number of initiatives were undertaken to enhance customer service. Tool utilisation levels increased versus 2008 and a further repair facility was introduced in collaboration with the prison service; this particular initiative has received positive feedback from the relevant authorities and the team has won a National Training Award as a result.
During the year our management teams within the four specialist businesses continued to devote their activities towards cost containment, cash generation and customer capture. This proved to be an effective strategy. Capital expenditure, both for replacement and development, was cancelled unless health & safety related. Further refinement of product ranges enabled us to improve stock availability and release cash, some of which was re-invested to take advantage of pre-price-increase buying, which supported gross margins. Credit management teams performed well in testing circumstances and maintained good cash collection standards throughout the year. Management focused on keeping morale high among our people despite the need to implement further headcount reductions, carefully made to avoid cutting into the muscle of our businesses. We rolled out the benefits of vehicle tracking into CCF and Keyline, enabling us to reduce fleet size and the average age of the remaining fleet. We strengthened our selling capability through the appointment of David Stewart as the Division's Commercial Sales Director. In order to accelerate customer capture, sales teams were re-trained and linked to in-house sales tracking systems, all to good effect. Marketing resource was focused on re-activating dormant and low-spending accounts and on attracting new accounts using the strength of group brands.
National Sales Effort, and Managed Services
The Group's dedicated national sales team manages relationships with major house builder and construction customers, as well as a number of other customers with significant geographic coverage.
We restructured our team in late 2008 and have successfully increased our share of business with a number of contractors working in buoyant markets such as infrastructure, health, social housing, education and facilities management. Having secured new long-term framework agreements we have continued to enhance the team and widen our customer base, ultimately delivering more sales for our merchant brands. The team is structured to allow flexibility and alignment with key publicly funded projects as they are released as well as reacting to trends in the private sector. In 2010 we are also focussing more resource on customers operating in the retail and leisure sectors.
Towards the end of 2009 we started to see early signs of increased activity from national house builders. Albeit at lower levels than before the recession, factors such as the change in mix away from apartments to traditional housing provide us with additional opportunities.
Our Managed Services team has continued to target opportunities within the affordable housing repair, maintenance and improvement ("RMI") sector, delivering and managing bespoke supply chain solutions to organisations and their partners operating within the social housing market throughout the UK. During 2009 we experienced further significant sales growth, with stores exclusively supplying local authorities, housing associations, and contractors increasing from 20 in 2008 to 27 during 2009. Additionally, the Group is now servicing in excess of another 50 similar clients through its existing branch network. Whilst we anticipate public expenditure will come under pressure during the course of 2010 and beyond, we believe that the drive for greater efficiencies within this sector should result in more outsourcing opportunities for the Group.
In 2009 we maintained our merchanting marketing focus on retaining customers and growing our share of their spend, driving footfall into our branches and increasing our number of trading accounts. Direct marketing played a major and increasing part of our activity during the year and we continued to give priority to improving the quality of our customer data. As business became tougher for our customers they focussed increasingly on value for money. In response we accelerated the development of our own brand offering to give our customers a great deal on quality products. We continued to develop our Iflo and 4Trade own label product range, offering professional quality alternatives to branded products at lower prices.
Our sponsorships of the Travis Perkins plc Senior Masters at Woburn Golf Club and the Northampton Saints Rugby Club continue. This helps build customer relationships through hospitality, increase awareness of our corporate and business brands and promote our product and service offering to current and potential customers. As a major Northamptonshire employer, we also work with The Saints in the local community to provide rugby coaching to primary, secondary and special schools promoting issues including motivation, healthy living and education.
Retail Division
All indicators led us to expect that the economy would remain weak throughout 2009 and that the only growth prospects for Wickes would be from self-help activity and a gain in market share. Whilst the market was stronger than we anticipated, the work done before the end of 2008 to remodel our cost structure for a recession paid off from the start of the year.
Favourable weather and slightly better than expected DIY consumer activity, probably driven by the significant drop in housing transactions and subsequent home improvement projects, led to stronger than anticipated sales, particularly in the first half.
The loss of a principal competitor at the beginning of the year led to considerable gains in kitchens and bathrooms ("K&B"). In anticipating this event we made substantial investment in new products and in refurbished showrooms, putting us in a unique position to be able to capitalise on the available market.
We adopted an entirely new marketing strategy in 2009 designed to increase awareness, differentiate the brand from competitors and drive footfall into stores. At the heart of the new strategy was a shift in investment from the Wickes Booklet, which had served the business well for many years, but had reduced in effectiveness, to TV advertising. Scale economies from our own growth in recent years and the reduced costs of broadcast media meant that television advertising became viable. We launched a highly successful campaign designed by Wickes' new Marketing Director, Rob Murray, that ran throughout the year in support of a number of product categories and of the brand as a whole. In this first year the TV campaign focused on the quality of Wickes own label products, which is a key source of differentiation and featured the line "It's got our name on it". Research has shown that this campaign has resulted in strong positive shifts in brand equity and econometric modelling has shown a very strong sales impact and resultant high rates of return on investment.
The television campaign was one element of a radical overhaul of our customer communication strategy. At the same time we launched a new multi-channel catalogue to run alongside our fast growing online business and introduced increased delivery options for customers.
The year also saw the launch of a new CRM strategy including the introduction of "MyCard". With small Tradesmen being a key target for Wickes, our ability to develop strong relationships with our customers is important. MyCard rewards loyalty and provides valuable data relating to individual customers' shopping behaviour. Initial results suggest a positive impact on shopping behaviour and CRM will be a key element of the Wickes' marketing strategy going forward.
Market downturns usually favour those with strong value credentials and we gained market share for the third consecutive year in 2009 as more customers discovered the great quality and value proposition offered by the Wickes own brand products.
As Wickes has continued to strengthen its marketing capability, significant share gains have been achieved in a number of product categories. This is most notable in K&B where we have achieved more than our fair share of the opportunity presented by the failure of MFI due to investment in bathroom displays, strong ranging and competitive pricing.
We believe that we have one of the strongest brands, the best management and the greatest long-term scope for growth anywhere in the sector. These things leave us best placed to outperform the industry in difficult economic conditions as well as in any recovery.
Tile Giant had another year of growth although the rate of growth was reduced from 2008. Whilst business has been tough, we performed ahead of the market throughout the year and the teams in our stores deserve credit for the way they have applied themselves during this time.
Investing in our people is important at Tile Giant and we have taken significant steps forward in terms of new joiner inductions, manager training and product knowledge.
ToolStation
ToolStation continued to expand its branch network across the country, increasing it by a third. Expanding the branch network has helped to grow overall sales by 69% with the established branches and mail order operations seeing LFL growth of 27%.
Exceptional value for money combined with very high levels of availability and customer service have enabled ToolStation to increase its market share in difficult trading conditions.
The ToolStation catalogue contains approximately 10,000 products which are stocked and available in all of the branches. During the year we introduced to our range a selection of Wickes doors. These are shipped through the Wickes delivery network on a next day service directly to ToolStation customers.
Supply Chain
Supply chain management is now a well established new function in our group, and yet has significant development potential. Our investment, over the last three years, in skills and physical resources is generating significant returns through customer focused, sales based projects such as product availability improvements and cost based innovation like delivery vehicle utilisation tracking. The most tangible example of how timely an investment this has been was our ability, in the challenging 2009 market, to not only maintain availability of product for customers, but improve it while reducing our stock holding by £34m before inflation.
We supported over 30 initiatives across the Group last year including:
Quality Assurance ("QA") and Corporate Social Responsibility ("CSR")
The prime responsibility of the Group Quality Assurance Department continues to be to protect all of the Group's brands with two key objectives to ensure that Travis Perkins companies only:
During 2009 we have continued to invest in the QA department with additional resource to meet the demands of our growth in direct sourcing (particularly relating to product quality) and our packaging reduction programme. In addition, a major IT project was initiated to introduce an on-line QA management system, due for launch early 2010.
By the end of 2009 we used just over 400 primary suppliers supplying in excess of 130,000 product lines. Within the supplier base there are 1,470 known manufacturing sites of own brand or own label products, of which 622 are based in Asia - an increase of 10% and 14% respectively against 2008. This was slightly lower than the growth we saw in 2008. The increase in the number of factories in Asia was almost entirely due to our increased global sourcing activities.
We rank all our manufacturing sites through site audits and our policy is to terminate relationships if they do not meet our exacting criteria. We consider all Asia operations to be 'High Risk' and will not commit to supply until our team have audited a site. We continue to maintain a Group QA Asia office based in Shenzhen, southern China, to fully support the Asia supplier base, in addition to the Group QA UK offices in the Merchant and Retail divisions. 2009 saw an extension of our activities directly relating to our growth in direct sourcing increasing factory assessments in Asia and product compliance audits in both the UK and Asia.
We also increased our activity in customer product returns and product quality improvement. As a result of this work carried out during 2009 we now have greater visibility of product quality levels and the framework for continuous product improvement.
Objectives for 2010 include continuing focus on product failure and customer returns and continuing development of the QA strategy for direct sourcing.
Global Sourcing
Direct sourced products doubled in 2009 from $15m to $31m and are forecast to grow to $55m in 2010. The Number of direct sourced products increased from 250 in 2008 to 1,100 in 2009 and will increase to 3,000 by the end of 2010. The main focus on product is within plumbing and heating, with great success in brassware and sanitaryware, but direct sourcing has also expanded considerably in hardware and decorative accessories.
Merchanting Suppliers
During the year we have continued to focus on building relationships with our key branded suppliers. Whilst we have a large number of suppliers to support the local needs of our business, these are managed into 3 supplier categories. 100 suppliers represent 70% of our merchanting spend. We have worked closely with them and our internal supply chain to improve availability within our branch network: 2 key initiatives were undertaken in 2009:
In these difficult times for the industry we challenged ourselves and suppliers on 3 specific areas of risk:
Despite lower volume in the sector as a whole, we experienced fewer supplier business failures than we feared might happen, and expect 2010 to be similarly stable. We have continued to develop strategic relationships with key suppliers. The successful development of our K&B business in 2009 partly depended on this approach.
We will further develop our purchasing strategy in 2010 by sourcing more product directly from manufacturers and expanding our supplier relationships. This will result in a significant increase, year on year, in the number of products we buy direct.
We will continue to focus on our drive for full availability in store and at the same time develop innovative ways to drive out costs within the supply chain, utilising different methods of distribution to get the product to our customers. One such development of this is the use of our hub and spoke network of stores. In this instance we are able to optimise the cost of distributing product to customers using our store network more effectively and ultimately continue to maximise availability.
Total merchanting business*
2009 2008
Number of product suppliers 7,372 7,050
Total purchases represented by the top 50 59% 59%
Wickes
Number of product suppliers 181 179
Total purchases represented by the top 50 86% 86%
*(Includes Tile Giant)
And Finally ….
2009 has been a tough year, but our smaller operating teams have risen to the challenge and improved service standards as perceived by our customers. This is a tremendous achievement and I express my continued thanks to all our colleagues for their excellent performance in such an unprecedented year.
John Carter
Chief Operating Officer
23 February 2010
FINANCE DIRECTOR'S REVIEW OF THE YEAR
For the year ended 31 December 2009
INTRODUCTION
The actions we implemented in 2008 to prepare the Group for the sharp downturn in construction activity worked well, with all main financial targets achieved or bettered. In 2009 we have realised substantial cost savings, improved our productivity ratios and significantly boosted cash flows. In April we restructured our interest rate derivative portfolio to improve our interest cover ratio and in June the over-subscribed rights issue yielded net proceeds of £300.3m which significantly strengthened our balance sheet whilst giving us greater flexibility. As a result of these actions we enter 2010 in a strong financial position.
During the year we have taken steps to reduce the Group's final salary pension scheme deficit. In April employee contribution rates were increased by 1%, and in December future pensionable salary increases were capped at 3% and before the year-end we agreed a revised schedule of payments with the Scheme Trustees that is expected to eliminate the ongoing funding deficit over 8 years. From 2009 additional payments, in excess of ongoing funding commitments, of £20.4m p.a. are being made to the scheme (2008: £11.5m).
As a result of introducing the pensionable salary cap the pension scheme gross deficit at 31 December 2009 has been reduced by a one-off £32.7m curtailment gain. This gain has been credited to the income statement, but due to its magnitude it is disclosed as an exceptional item.
FINANCIAL OBJECTIVES
Despite the difficult trading conditions during late 2008 and throughout 2009 the Directors of the Group remain committed to the long-term creation of shareholder value, which they believe is achieved through:
· Increasing the Group's market share via a combination of LFL sales growth and targeted expansion through acquisitions, brown field openings and in-store development;
· Improving profitability with a medium term target for profit growth in percentage terms exceeding that for sales;
· Investing in projects and acquisitions where the post-tax return on capital employed exceeds the weighted average cost of capital of the Group by a minimum of 4%;
· Generating sufficient free cash flow to enable the Group to expand its operations whilst funding attractive returns to shareholders, reducing its debt and pension deficit;
· Operating an efficient balance sheet, by structuring sources of capital to minimise the Group's weighted average cost of capital consistent with maintaining an investment grade financial profile with the ratio of net debt to EBITDA being between one and two and a half times;
· Maintaining long-term dividend cover at between two and a half and three and a half times earnings.
Whilst the above are appropriate long-term objectives, our short-term objectives continue to give priority to maximising cash generation.
FINANCIAL REVIEW
Results
|
|
2009 |
2008 |
2007 |
2006 |
|
Revenue (decline) / growth |
(7.8) |
(0.3)% |
11.9% |
7.9% |
|
LFL revenue (decline) / growth |
(8.6) |
(4.5)% |
8.1% |
1.4% |
|
Adjusted operating profit to sales ratio |
7.7% |
8.5% |
10.0% |
9.8% |
|
Profit before tax growth / (decline) |
45.4% |
(44.0)% |
12.7% |
12.2% |
|
Adjusted profit before tax (decline) / growth |
(11.3)% |
(22.5)% |
18.7% |
6.6% |
|
Net debt to adjusted EDITDA |
1.5x |
2.8x |
2.5x |
2.4x |
|
Adjusted interest cover (note 10) |
10.7x |
4.3x |
5.4x |
4.9x |
|
Adjusted return on capital (note 36) |
10.9% |
12.9% |
15.9% |
14.6% |
|
Adjusted free cash flow (note 35) |
£294.4m |
£185.3m |
£157.8m |
£216.6m |
|
Adjusted dividend cover (note 13) |
- |
8.5x |
3.3x |
3.4x |
To ensure the business is focused on the achievement of appropriate targets, a series of key financial performance indicators are monitored throughout the business. A selection are shown in the table above. Where indicated, for 2009 these measures are stated on an adjusted basis stripping out the effects of an exceptional pension curtailment gain and for 2008 the exceptional reorganisation costs.
Adjusted earnings before interest, tax, depreciation and amortisation ("EBITDA") (note 37) were £280.8m (2008: £330.3m), a decrease of 15.0%.
In May 2009, as part of our efforts to increase interest cover, we spent £28.7m exiting 7 interest rate swaps and a cap and collar arrangement with a combined average fixed rate of 4.8% at that point, and replaced them with 8 new fixed interest rate swaps with an average interest rate of 1.5% at inception. The £28.7m payment is being amortised against profits over the original remaining lives of the cancelled swaps. Overall, lower interest rates combined with significantly lower borrowings have reduced our net finance charges, excluding other finance income and charges associated with the pension scheme, by £31.8m (43.1%). The average interest rate during the year was 3.7% (2008: 4.9%) whilst adjusted interest cover (note 10), was approximately 10.7 times (2008: 4.3 times).
Adjusted group profit before tax (note 5b) was £22.5m or 11.1% lower than last year at £180.0m (2008: £202.5m).
The tax charge was £55.3m, an effective rate of 26.0% compared with £44.4m (30.3%) in 2008. The effective rate is lower than the standard UK corporation tax rate principally due to property profits, which are not chargeable to tax.
Profit after tax was £157.4m an increase of 54.5%. Adjusted profit after tax (note 5b) was £133.9m, a decrease of £10.0m (6.9%) compared to 2008.
After allowing for the effect of the rights issue, basic earnings per share were 88.4 pence (2008: 68.6 pence). Adjusted earnings per share (note 12b) were 75.2 pence (2008: 96.9 pence) a reduction of 22.4%. There is no significant difference between basic and diluted earnings per share. The weighted average number of shares in issue was 178.0m (2008: 148.5m).
Cash Flow
Despite the difficult trading conditions, which have resulted in adjusted operating profits falling 17.3%, strong cash control has enabled the Group to generate £319.8m of cash from operations (2008: £337.6m), a decrease of only 5.3%.
Free cash flow, (calculated before, expansionary capital expenditure, additional pension contributions, exceptional reorganisation costs and dividends) was £294.4m (note 35), 58.9% higher than for 2008. Most of the free cash generated has been retained by the group as part of its debt reduction programme. As a result, expansion capital expenditure in existing businesses was significantly curtailed at £11.1m (2008: £53.5m) and whilst there were no branch acquisitions during the year (2008: £22m), further small investments totalling £13.9m were made, particularly in the Group's associate company ToolStation (2008: £21.0m).
Pensions
During the year the triennial actuarial valuation of the pension scheme determined that the deficit on an ongoing funding basis at 30 September 2008 was £132.0m. Negotiations with the Scheme Trustees about the level of future funding rates were concluded in December with the result that the Group has agreed to eliminate the funding deficit over 8 years through increasing contributions by £10.3m p.a. to £20.4m.
At 31 December 2009, the gross accounting deficit of the pension scheme was £43.0m (31 December 2008: gross accounting deficit £69.9m). The net deficit after allowing for deferred tax was £31.0m (2008: net deficit £50.4m).
The deficit has fallen as a result of a £32.7m curtailment of pension liabilities following the introduction of an annual 3% cap on the increase in pensionable salaries for active scheme members. The combination of lower yields on corporate bonds and a higher projected inflation rate resulted in scheme liabilities increasing by £121m, but these were largely offset by returns on investments, which increased in value by £90.1m, and £25.1m of company contributions in excess of current service costs.
The scheme is now 92% funded (2008: 86%) with the net deficit representing approximately 2% (2008: 12%) of the Company's market capitalisation at 31 December 2009.
Equity
The rights issue which was completed in June 2009 resulted in the issue of 86m new shares at £3.65 each, raising £300.3m of new equity, net of costs of £13.2m.
Total equity at 31 December 2009 was £1,460.4m. After allowing for the rights issue the £141.9m increase in equity arose from £157.4m of retained profits, partially offset by a net £20.4m of actuarial loses arising in respect of the pension scheme and changes in the value of cash flow hedges.
The Group's adjusted return on capital in 2009 (note 36) was 10.9% (2008: 12.9%), which remains higher than the Group's weighted average cost of capital.
During the year, the daily closing share price (restated for the rights issue) ranged between 880 pence and 228 pence. At the year-end the share price was 852 pence (2008: 268 pence restated for the rights issue) and the market capitalisation £1.8bn (2008: £0.4bn), representing 1.2 times (2008: 0.4 times) shareholders' funds.
Properties
At 31 December 2009, the carrying value of the Group's 336 freehold and 57 long leasehold property portfolio, which was last revalued in 1999 on an existing use basis, was £247.2m (2008: £257.3m).
Goodwill and Other Intangibles
At the year-end, a series of tests were undertaken to determine whether there had been any impairment to the balance sheet carrying values of goodwill and other intangible assets. The key assumptions behind the calculations are as follows:
Approximately 58% of the carrying value of the Group's goodwill and intangible assets is allocated to the Wickes cash-generating unit. On the basis of the assumptions stated above, the calculations show that for there to be no impairment, the minimum profit for Wickes in 2014 would need to be £58m, the same as was achieved in 2009.
Whilst the Directors consider that their assumptions are realistic, it is possible an impairment might occur if any of the above key assumptions were changed significantly.
The net book value of goodwill and other intangibles in the balance sheet is £1,515.3m (2008: £1,513.9m).
PRINCIPAL RISKS AND UNCERTAINTIES
Going Concern
A review of the Group's business activities, together with the factors likely to affect its future development, performance and position are set out on pages 10 to 24 of the Chief Executive's review of the year. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are shown in the balance sheet, cash flow statement and accompanying notes in the financial statements. Further information concerning the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk can be found below.
The Board of Directors is currently of the opinion that having reviewed the Group's cash forecasts and revenue projections, and after taking account of reasonably possible changes in trading performance, the Group should be able to operate within its current facilities and comply with its banking covenants for the foreseeable future. In arriving at its conclusion, the Board was mindful of the:
· Group's robust policy towards liquidity and cash flow management;
· Group's abilities to manage its business risks successfully during periods of uncertain economic outlook and challenging macro economic conditions;
· The committed facilities available to the Group to early 2013;
· £300.3m of equity raised during the year, which has significantly reduced the Group's indebtedness.
After reviewing the Group's forecasts and making other enquiries, the Directors have formed a judgement at the time of approving the financial statements, that there is a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
Financial Risk Management
Financial risk management is an integral part of the way the Group is managed. In the course of its business, the Group is exposed primarily to liquidity risk, interest rate risk, foreign exchange risk, credit risk, capital risk and tax risk. The overall aim of the Group's financial risk management policies is to minimise potential adverse effects on financial performance and net assets. The Group manages the principal financial risks within policies and operating parameters approved by the Board of Directors and does not enter into speculative transactions.
Treasury activities, which fall under the day-to-day responsibility of me as Finance Director, are managed centrally under a framework of policies and procedures approved by and monitored by the Board. The policies in respect of interest and currency hedging, the investment of surplus funds and the quality and acceptability of financial counterparties were reviewed and re-approved by the Board during the year.
The treasury department is not a profit centre. Its objectives are to protect the assets of the Group and to identify and then manage financial risk. In applying these policies, the Group will utilise derivative instruments, but only for risk management purposes.
The Board receives monthly reports on cash flows, debt levels and covenant compliance with comparisons to budgets and forecasts. In addition, all derivative related activity is reported to the Board at the immediate next board meeting. As described in the Corporate Governance Report on page 48, the Board receives regular reports on specific areas of risk. As part of these risk reviews papers are presented on areas such as budgeting and planning, debt strategy (including derivative policy) and banking relations and working capital control.
Liquidity and Net Debt (Note 24)
Liquidity Risk
The Group's policy on liquidity risk is to ensure that sufficient cash is available to fund on-going operations. The Board manages exposure to liquidity risk by maintaining adequate facilities to meet the future needs of thebusiness. Those needs are determined by continuously monitoring forecast and actual cash flows taking into account the maturity of financial assets and liabilities included in the balance sheet.
The Group's principal borrowing facilities are provided by a group of core relationship banks in the form of a term loan and a revolving credit facility and by US institutions in the form of US$ denominated notes. The quantum of committed borrowing facilities available to the Group is reviewed regularly and is designed to comfortably exceed forecast peak gross debt levels.
Liquidity Management
The Group's treasury team are responsible for monitoring the Group's short and medium term liquidity requirements using a combination of annual budgets which have been analysed on a daily basis using historic trends, quarterly trading and cash flow re-forecasts and short term forecasts adjusted for actual events as they occur. They are then charged with drawing down sufficient funds to meet those needs whilst minimising borrowing costs and reducing the incidences of investing surplus funds.
Medium term borrowing and hedging requirements (up to 5 years) are determined from the Group's annual budget and three-year plan, which are prepared to show monthly trading, cash flows and debt requirements for the entire period, and are updated and approved by the Board each year.
To ensure the Board takes pre-emptive action where necessary, the Group re-forecasts profits and cash flows on a quarterly basis.
Facilities
The Group has a £1bn syndicated credit facility provided by 15 banks. £525m of the facility is in the form of a fully drawn amortising term loan, the remainder being a revolving credit facility, which can be drawn down as required. In addition the Group had access to a £40m uncommitted overdraft facility at 31 December 2009.
Liquidity headroom was increased during the year by the rights issue. After careful consideration the Board decided that it was in the Group's best interests to maximise the Group's spending flexibility by retaining as much cash in the business as possible. As a result the Group's revolving credit facility was repaid in full, the £525m term loan was retained and at the year-end the Group had £347.2m of cash invested.
Liquidity headroom is expected to remain high with the term loan due to be repaid in six £35m tranches each half year, commencing April 2010, with the balance falling due in April 2013. The revolving credit facility is available to the Group until April 2013.
Tranches of the syndicated facility can be drawn down for weekly, monthly, three monthly and six monthly terms, with the actual duration of draw downs being dependent upon management's interest rate expectations. For all of 2009, due to the high differential between 6 month LIBOR and weekly and monthly LIBOR the Group has drawn funds on a weekly or monthly basis.
In early 2006 the Group issued $400m fixed rate guaranteed unsecured notes (the 'Notes') with a broad range of US financial institutions. The debt comprises $200m of Notes repayable in 2013 and the remainder in 2016. At inception, the fixed interest rate net proceeds were swapped into Sterling 6-month LIBOR determined variable rate debt.
Debt
As at 31 December 2009 the Group had net debt of £467.2m (2008: £1,017.4m) (note 33). However, if the currency retranslation effect caused by the changes to the Sterling US dollar exchange rates is eliminated debt at 31 December would have been £426.7m, a reduction of £510.5m over the year. The Notes are fully hedged and so by the dates they are redeemable in 2013 or 2016, the exchange effects will have fully reversed.
The peak and minimum levels of daily borrowings on a cleared basis during the year ended 31 December 2009 was £1,083m and £438m respectively (2008: £1,112m and £945m). The maximum month end cleared borrowings were £1,035m (2008: £1,043m). At 31 December 2009 the Group had undrawn facilities of £515m (2008: £353m).
Operating Leases
Note 30 gives details about the Group's operating lease commitments, most of which relate to properties occupied by the Group for trading purposes.
Covenant Compliance
The Group's borrowings are subject to covenants set by the lenders. Covenant compliance is measured semi-annually using financial results prepared under IFRS extant at 31 December 2007.
The key financial covenants are the ratio of net debt to earnings before interest tax, depreciation and amortisation "EBITDA" which must be less than 3.5 times, and the ratio of earnings before interest, tax and amortisation "EBITA" to net interest which must be above 3.5 times. At 31 December 2009 the Group achieved a net debt to EBITDA ratio of 1.5x (note 37) and interest cover of 10.7x (note 10).
In addition to these financial covenants the Group's borrowing agreements include general covenants and potential events of default. At the date of this report there had been no breaches of the financial covenants and the Group had complied in all other respects with the terms of its borrowing agreements.
Interest Rate and Currency Derivatives (Note 25)
Interest rate risk
One of the principal risks facing the Group is an exposure to interest rate fluctuations. The Group has borrowed in Sterling at floating rates, whilst its US$ denominated Notes have fixed rates of interest.
The Group's hedging policy is to generate its preferred interest rate profile, and so manage its exposure to interest rate fluctuations, through the use of interest rate derivatives. Currently the policy is to maintain between 33% and 75% of drawn borrowings at fixed interest rates.
The Group has entered into a number of interest rate derivatives designed to protect it from fluctuating interest and exchange rates on its borrowings. At the year-end, the Group had nine interest rate derivatives fixing interest rates on approximately 66% of the Group's cleared debt. The maturity of the Group's derivatives is as follows;
|
|
Term |
Maturity |
Notional Value |
|
Vanilla interest rate swaps |
Amortising |
May 2011 |
£430m |
|
Vanilla interest rate swaps |
Bullet |
May 2011 |
£100m |
|
Cancellable swap |
Bullet |
October 2013 |
£50m |
Currency risk
Having taken out 4 cross currency swaps, to protect it from exchange rate fluctuations, in respect of its $400m fixed rate guaranteed unsecured notes, the Group is not exposed to significant foreign exchange risk.
Whilst the majority of purchases of goods and services are invoiced in Sterling, goods acquired from overseas either directly from manufacturers or through UK based distributors continue to increase. Overseas originated purchases currently approximate to 40% of group purchases and so adverse movements in Sterling, could, to the extent they cannot be passed on to customers, affect profitability.
The Group settles its currency related trading obligations using a combination of currency purchased at spot rates and currency bought in advance on forward contracts. Its policy is to purchase forward contracts for between 30% and 70% of its anticipated requirements twelve months forward. At 31 December 2009 the nominal value of currency contracts, most of which were $US denominated, was $40m and €2m. At 31 December 2009, based upon forecast currency requirements for 2009, a US$10c change in the exchange rate would impact costs, before any corresponding selling price amendment, by approximately £1m.
Credit Risk
Financing
Credit risk refers to the risk that a counterparty will default on its contracted obligations resulting in loss to the Group. It arises on financial instruments such as trade receivables, short-term bank deposits, banking facilities, interest rate derivatives and foreign currency hedging transactions. To reduce the risk of loss arising from counterparty default, the Group has a policy of dealing with credit-worthy counterparties. The Group has policies and procedures to ensure that customers have an appropriate credit history and that account customers are given credit limits appropriate to their circumstances, which are regularly monitored.
The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics (other than banks providing banking facilities, interest rate derivatives and cross currency swaps). The Group defines counterparties as having similar characteristics if they are connected entities. The credit risk in liquid funds and derivative financial instruments is limited because the counterparties used are banks with high credit-ratings assigned by international credit-rating agencies.
At the year-end, the Group had open currency hedging contracts with four banks, open interest rate derivative contracts with 8 banks and had 15 banks within its banking syndicate. There were 19 companies holding the Group's US$ denominated Notes, of which the largest held 21% by value. All currency hedging contracts (with the exception of one with a member of a previous syndicate group) and swaps are held with members of the banking syndicate. On 23rd February 2010, the Group's banking counterparties had ratings of:
|
Rating |
Number of Banks |
Amount of UK Bank Facilities |
Notional Value of Interest Rate Derivatives |
Notional Value of Cross Currency Swaps |
|
|
No. |
£m |
£m |
$m |
|
AA+ to AA- |
8 |
707 |
365 |
290 |
|
A+ to A- |
6 |
224 |
130 |
110 |
|
Below A- |
1 |
64 |
85 |
- |
|
Not rated |
1 |
5 |
- |
- |
Customer Credit
Within the Group's merchanting division, one of the key aspects of service is the provision of credit to customers, with the Group carrying the associated credit risk.
Trade receivables consist of a large number of customers, none of which represents more than 0.5% of sales, spread across diverse industries and geographical areas. However, the nature of the industry is such that there is a risk that some of these customers will be unable to pay outstanding balances.
Ongoing evaluation of the financial condition of accounts receivable and reviews of the total credit exposure to all customers is performed monthly, using external credit risk services where necessary. Increased credit levels are approved by both operational and financial management with personal guarantees being obtained, where appropriate, before credit is advanced. Whilst day-to-day credit control is the responsibility of the centrally based teams, the Group also operates an in-house debt recovery team, headed by a qualified solicitor, that is responsible for recovering debt that remains unpaid. The Group does not have credit insurance.
During the recession of 1990/91, the Group experienced bad debt levels of up to 1.35% of credit sales. Over the past 10 years, the bad debt charge has averaged below 0.s5%, however,during the latter part of 2008 and the first half of 2009, the Group experienced an increasing level of bad debts, however the situation improved in the second half of 2009 with the bad debt charge for the year averaging 0.8% of credit sales (2008: 0.9%).
Debtor days at 31 December 2009 were 54 days (2008: 57 days). An increase in one debtor day at 31 December would have reduced cash flow by approximately £5m.
Capital Risk
The Group manages its capital risk by ensuring it has a capital structure appropriate to the ongoing needs of the business that ensures it remains within the covenant limits that apply to its banking arrangements. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 24, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in notes 21 to 23.
The capital structure is formally reviewed by the Board as part of its annual strategy review, but it is kept under review by me throughout the year. As necessary, the Company will rebalance its capital structure through raising or repaying debt, issuing equity or paying dividends.
Tax Risk
The Group seeks to efficiently manage its tax affairs whilst at the same time complying with the relevant laws and disclosure obligations placed upon it. However, the complexity of tax legislation means that there will always be an element of uncertainty when determining its tax liabilities.
To minimise compliance risk the Group utilises qualified in-house expertise and takes external advice when making judgements about the amount of tax to be paid and the level of provisions required.
Future tax charges and payments could be affected by changes in legislation and accounting standards beyond the control of the Group.
Market Conditions and Competitive Pressures
The Group's products are sold to tradesmen and retail customers for a broad range of end uses in the built environment. The performance of the market is affected by general economic conditions and a number of specific drivers of construction and DIY activity, including housing transactions, net disposable income, house price inflation, consumer confidence, interest rates and unemployment. The Board conducts an annual review of strategy, which includes an assessment of likely competitor activity, market forecasts and possible future trends in products, channels of distribution and customer behaviour. Significant events including those in the supply chain that may affect the Group are monitored by the Executive Committee and reported to the Board monthly by the Group CEO. Market trends and competitor performance are also tracked on an ongoing basis and reported to the Board each month.
Product Availability and Product Prices
Security of supply of products and product quality are monitored by product category directors in the trade and retail businesses. Supplier financial strength, product quality and service levels are monitored on a continuous basis. An annual risk assessment with recovery plans is prepared for the major suppliers across the Group. The Group is not significantly exposed to one supplier or product type with no supplier accounting for more than 7% of total goods purchased in 2009. An established QA process is in place throughout the business.
However, the ability to pass on price increases to customers is affected by competitor activity and the economic climate. An inability to raise selling prices could reduce margins.
The market price of products distributed by the Group, particularly commodity products, can vary significantly and affect operating results. The Group's businesses actively take steps to protect themselves from anticipated price rises.
Any restrictions on third party credit insurance available to suppliers could result in them reducing their own credit exposure to the Group. If this were to occur, it could adversely impact the Group's working capital and therefore it's debt levels.
Acquisitions and Other Expansion
Growth by acquisition continues to be an important part of the long-term strategy of the Group. Significant risk can arise from acquisitions in terms of the initial valuation, the integration programme and the ongoing management of the acquisition. Detailed internal analysis of the market position of major acquisition targets is undertaken and valuations are completed using discounted cash flow financial models. Independent advisors are used to comment on the strategic implications and the assumptions in valuation models for larger acquisitions. A rolling programme of post acquisition audits is completed and reviewed by the Board each year.
Human Resources
The ability to recruit and retain staff at all levels of the Group is an important driver of our overall performance. Salaries and other benefits are benchmarked annually to ensure that the Group remains competitive. A recruitment toolkit is available for both trade and retail outlets. A wide-range of training programmes are in place to encourage staff development and management development programmes are used to assist those identified for more senior positions. The Group Human Resources Director monitors staff turnover by job type and reports to the Board annually. Succession plans are established for the most senior positions within the Group and these are reviewed annually.
Information Technology and Business Continuity
The operations of the Group depend on a wide range of IT systems to operate efficiently. An IT strategy committee reviews performance levels of the key systems and prioritises development work. Maintenance is undertaken on an ongoing basis to ensure the resilience of group systems and escalation procedures are in place to resolve any performance issues at an early stage. Our two new data centres mirror each other with data processing switched from one to the other on a regular basis. An IT disaster recovery plan exists and is tested regularly together with the business continuity plan with arrangements in place for alternative data sites for both trade and retail businesses. Off-site back-up routines are in place.
The Group distributes products from seven major warehouses in Great Britain. The loss of any single warehouse through fire or other major incident could have a material effect on the availability of product in the trade and retail outlets. Each warehouse has fire detection and alarm systems and a business continuity plan.
Legislation
The Group is affected, both positively and negatively, by the legislative environment within which it operates. Planning and building legislation impacts its customers, and consequently the Group, whilst health and safety, employment, environmental and competition laws together with the rules of the Financial Services Authority and the Listing Rules influence its day to day operations.
The Group has an in-house legal team headed by the Group Company Secretary, health and safety and environmental experts that monitor changes in legislation that affect the Group and enable it to take timely action to ensure any impacts are reduced.
Environmental
Failure to operate within the highest environmental standards may reduce the Group's profitability if such action causes it to come into conflict with legislative requirements. Furthermore, with heightened environmental awareness, companies that fail to meet environmental standards may find their ability to trade or gain access to capital markets reduced.
The Group has accreditation for its environmental management system to the ISO 14001 standard. Further details of the Group's environmental policies and performance are given in the Chief Executive's review of the year. However, to mitigate the potential environmental risks, the Group undertakes comprehensive reviews across all its businesses involving independent external advisers. External verification of environmental performance is undertaken and repeated on an annual basis.
Pensions
The risks in this area relate to the potential for contributions required to meet the benefits promised in the final salary scheme rising to a level that restricts other corporate activity. The Scheme Trustees and the Group obtain independent actuarial advice and formal valuations are carried out at least every three years. The Trustees receive reports on the investment performance quarterly. The Travis Perkins' final salary scheme was closed to all new members in April 2006 and in 2009 pensionable salary inflation was capped at 3% per annum.
The accounting deficit at 31 December 2009 is £43m. The Group currently has arrangements in place to eliminate the deficit over a period of 8 years. Any deterioration in the scheme's funding position could impact the Group's liquidity.
Paul Hampden Smith
Finance Director
23 February 2010
STATEMENT OF DIRECTORS' RESPONSIBILITIES
For the year ended 31 December 2009
The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and have also chosen to prepare the parent company financial statements under IFRSs as adopted by the EU. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that directors:
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
|
By order of the Board |
||
|
|
|
|
|
|
|
|
|
G. I. Cooper |
|
P. N. Hampden Smith |
|
Chief Executive |
|
Finance Director |
|
23 February 2010 |
|
23 February 2010 |
Consolidated income statement
For the year ended 31 December 2009
|
|
|
|
||||||
|
|
|
2009 |
2009 |
2009 |
|
2008 |
2008 |
2008 |
|
|
|
£m |
£m |
£m |
|
£m |
£m |
£m |
|
|
|
Pre- exceptional items |
Exceptional items (Note 6) |
Total |
|
Pre- exceptional items |
Exceptional items (Note 6) |
Total |
|
Revenue |
|
2,930.9 |
- |
2,930.9 |
|
3,178.6 |
- |
3,178.6 |
|
Operating profit |
6 |
224.6 |
32.7 |
257.3 |
|
271.5 |
(56.2) |
215.3 |
|
Finance income |
7 |
5.6 |
- |
5.6 |
|
7.7 |
- |
7.7 |
|
Finance costs |
7 |
(50.2) |
- |
(50.2) |
|
(76.7) |
- |
(76.7) |
|
Profit / (loss) before tax |
|
180.0 |
32.7 |
212.7 |
|
202.5 |
(56.2) |
146.3 |
|
Tax |
|
(46.1) |
(9.2) |
(55.3) |
|
(58.6) |
14.2 |
(44.4) |
|
Profit / (loss) for the year |
|
133.9 |
23.5 |
157.4 |
|
143.9 |
(42.0) |
101.9 |
|
Earnings per ordinary share |
8 |
|
|
|
|
|
|
|
|
Basic |
|
|
|
88.4p |
|
|
|
68.6p |
|
Diluted |
|
|
|
86.2p |
|
|
|
67.8p |
|
Total dividend declared per ordinary share |
9 |
|
|
- |
|
|
|
14.5p |
All results relate to continuing operations.
Consolidated statement of comprehensive income
For the year ended 31 December 2009
|
|
2009
|
2008
|
|
|
£m
|
£m
|
|
Profit for the year
|
157.4
|
101.9
|
|
Cash flow hedges:
Gains / (losses) arising during the year
|
14.7
|
(17.1)
|
|
Transferred to income statement
|
0.4
|
(3.6)
|
|
|
15.1
|
(20.7)
|
|
Actuarial losses on defined benefit pension scheme
|
(28.3)
|
(70.3)
|
|
|
(13.2)
|
(91.0)
|
|
Unamortised cash flow hedge cancellation payment
|
(14.0)
|
-
|
|
Tax relating to components of other comprehensive income
|
12.5
|
19.6
|
|
Other comprehensive loss for the year
|
(14.7)
|
(71.4)
|
|
Total comprehensive income for the year
|
142.7
|
30.5
|
Consolidated balance sheet
As at 31 December 2009
|
|
2009 £m |
2008 £m |
|
|
|
|
|
ASSETS |
|
|
|
Non-current assets |
|
|
|
Property, plant and equipment |
499.0 |
534.5 |
|
Goodwill |
1,352.8 |
1,351.4 |
|
Other intangible assets |
162.5 |
162.5 |
|
Derivative financial instruments |
44.7 |
80.3 |
|
Investment property |
3.3 |
3.4 |
|
Interest in associates |
31.7 |
19.6 |
|
Available-for-sale investments |
1.5 |
2.0 |
|
Deferred tax asset |
12.0 |
19.5 |
|
Total non-current assets |
2,107.5 |
2,173.2 |
|
Current assets |
|
|
|
Inventories |
312.7 |
321.9 |
|
Trade and other receivables |
375.4 |
386.2 |
|
Derivative financial instruments |
- |
2.4 |
|
Cash and cash equivalents |
347.2 |
7.7 |
|
Total current assets |
1,035.3 |
718.2 |
|
Total assets |
3,142.8 |
2,891.4 |
Consolidated balance sheet (continued)
As at 31 December 2009
|
|
2009 £m |
2008 £m |
|
EQUITY AND LIABILITIES |
|
|
|
Capital and reserves |
|
|
|
Issued capital |
20.9 |
12.3 |
|
Share premium account |
471.2 |
179.5 |
|
Other reserve |
21.3 |
23.8 |
|
Hedging reserve |
(12.1) |
(17.8) |
|
Own shares |
(83.7) |
(83.7) |
|
Accumulated profits |
1,042.8 |
904.1 |
|
Total equity |
1,460.4 |
1,018.2 |
|
Non-current liabilities |
|
|
|
Interest bearing loans and borrowings |
739.1 |
1,007.3 |
|
Derivative financial instruments |
6.1 |
25.8 |
|
Retirement benefit obligation |
43.0 |
69.9 |
|
Long-term provisions |
43.7 |
47.8 |
|
Deferred tax liabilities |
62.8 |
74.7 |
|
Total non-current liabilities |
894.7 |
1,225.5 |
|
Current liabilities |
|
|
|
Interest bearing loans and borrowings |
71.5 |
13.9 |
|
Unsecured loan notes |
3.8 |
3.9 |
|
Trade and other payables |
638.7 |
582.2 |
|
Tax liabilities |
28.1 |
9.1 |
|
Short-term provisions |
45.6 |
38.6 |
|
Total current liabilities |
787.7 |
647.7 |
|
Total liabilities |
1,682.4 |
1,873.2 |
|
Total equity and liabilities |
3,142.8 |
2,891.4 |
The financial statements of Travis Perkins plc, registered number 824821, were approved by the Board of Directors on 23 February 2010 and signed on its behalf by:
|
G. I. Cooper |
|
|
|
P. N. Hampden Smith |
Directors |
Consolidated statement of changes in equity
|
|
Issued share capital |
Share premium account |
Revaluation reserve |
Hedging reserve |
Own shares |
Retained earnings |
Total equity |
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
At 1 January 2008 |
12.3 |
178.9 |
24.2 |
2.9 |
(83.9) |
902.5 |
1,036.9 |
Profit for the year |
- |
- |
- |
- |
- |
101.9 |
101.9 |
Cash flow hedge losses |
- |
- |
- |
(20.7) |
- |
- |
(20.7) |
Actuarial losses on defined benefit pension schemes |
- |
- |
- |
- |
- |
(70.3) |
(70.3) |
Tax relating to comprehensive income |
- |
- |
- |
- |
- |
19.6 |
19.6 |
Total comprehensive income for the year |
- |
- |
- |
(20.7) |
- |
51.2 |
30.5 |
Dividends paid |
- |
- |
- |
- |
- |
(52.5) |
(52.5) |
Issue of share capital |
- |
0.6 |
- |
- |
- |
- |
0.6 |
Difference between depreciation of assets on a historical basis and on a revaluation basis |
- |
- |
(0.4) |
- |
- |
0.4 |
- |
Own shares |
- |
- |
- |
- |
0.2 |
(0.2) |
- |
Credit to equity for equity-settled share based payments |
- |
- |
- |
- |
- |
2.7 |
2.7 |
At 31 December 2008 |
12.3 |
179.5 |
23.8 |
(17.8) |
(83.7) |
904.1 |
1,018.2 |
Profit for the year |
- |
- |
- |
- |
- |
157.4 |
157.4 |
Cash flow hedge gains |
- |
- |
- |
15.1 |
- |
- |
15.1 |
Actuarial losses on defined benefit pension schemes |
- |
- |
- |
- |
- |
(28.3) |
(28.3) |
Unamortised cash flow hedge cancellation payment |
- |
- |
- |
(14.0) |
- |
- |
(14.0) |
Tax relating to comprehensive income |
- |
- |
- |
4.6 |
- |
7.9 |
12.5 |
Total comprehensive income for the year |
- |
- |
- |
5.7 |
- |
137.0 |
142.7 |
Issue of share capital |
8.6 |
304.9 |
- |
- |
- |
- |
313.5 |
Costs of issuing shares |
- |
(13.2) |
- |
- |
- |
- |
(13.2) |
Realisation of revaluation reserve in respect of property disposals |
- |
- |
(2.1) |
- |
- |
2.1 |
- |
Difference between depreciation of assets on a historical basis and on a revaluation basis |
- |
- |
(0.4) |
- |
- |
0.4 |
- |
Debit to equity for equity-settled share based payments |
- |
- |
- |
- |
- |
(0.8) |
(0.8) |
At 31 December 2009 |
20.9 |
471.2 |
21.3 |
(12.1) |
(83.7) |
1,042.8 |
1,460.4 |
Consolidated cash flow statement
For the year ended 31 December 2009
|
|
2009 £m |
2008 £m |
|
Operating profit before exceptional items |
224.6 |
271.5 |
|
Adjustments for: |
|
|
|
Depreciation and impairment of property, plant and equipment |
58.7 |
63.0 |
|
Other non cash movements |
(1.5) |
4.6 |
|
Impairment of investment |
0.5 |
- |
|
Losses of associate |
3.2 |
1.4 |
|
Gain on disposal of property, plant and equipment and investment |
(12.0) |
(6.0) |
|
Operating cash flows before movements in working capital |
273.5 |
334.5 |
|
Decrease in inventories |
9.2 |
13.3 |
|
Decrease in receivables |
12.4 |
32.3 |
|
Increase / (decrease) in payables |
52.3 |
(22.5) |
|
Payments on 2008 exceptional items |
(2.5) |
(8.5) |
|
Payments to the pension scheme in excess of the charge to profits |
(25.1) |
(11.5) |
|
Cash generated from operations |
319.8 |
337.6 |
|
Interest paid |
(30.5) |
(63.0) |
|
Swap cancellation payment |
(28.7) |
- |
|
Income taxes paid |
(27.3) |
(66.0) |
|
Net cash from operating activities |
233.3 |
208.6 |
|
Cash flows from investing activities |
|
|
|
Interest received |
1.5 |
0.3 |
|
Acquisition of shares in unit trust and subsidiaries |
- |
(0.3) |
|
Proceeds on disposal of property, plant and equipment and investment |
20.8 |
14.9 |
|
Purchases of property, plant and equipment |
(28.6) |
(97.3) |
|
Interest in associate |
(12.9) |
(20.7) |
|
Acquisition of businesses net of cash acquired |
(1.0) |
(22.5) |
|
Net cash used in investing activities |
(20.2) |
(125.6) |
|
Financing activities |
|
|
|
Net proceeds from the issue of share capital |
300.3 |
0.6 |
|
Bank facility finance charges |
- |
(14.7) |
|
Payment of finance lease liabilities |
(1.5) |
(2.1) |
|
Repayment of unsecured loan notes |
(0.1) |
(11.5) |
|
Decrease in bank loans |
(160.0) |
(33.7) |
|
Dividends paid |
- |
(52.5) |
|
Net cash from financing activities |
138.7 |
(113.9) |
|
Net increase / (decrease) in cash and cash equivalents |
351.8 |
(30.9) |
|
Cash and cash equivalents at beginning of year |
(4.6) |
26.3 |
|
Cash and cash equivalents at end of year |
347.2 |
(4.6) |
Notes
1. The Group's principal accounting policies, as set out in the 2008 annual report, which is available on the Company's website www.travisperkinsplc.com, have been applied consistently other than the following changes to accounting standards, which have been adopted by the Group during 2009:
a. IFRS 8 "Operating Segments" increased segmental disclosures (see note 10);
b. IAS 1 "Presentation of Financial Statements (revised 2007)". Inclusion of a statement of changes in equity as a primary statement separate from the income statement and inclusion of a statement of comprehensive income;
c. IFRS 7 "Improving Disclosures about Financial Instruments".
2. The proposed final dividend is nil pence (2008: nil pence).
3. The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2009 or 31 December 2008, but is derived from those accounts. Statutory accounts for 2008 have been delivered to the Registrar of Companies and those for 2009 will be delivered in due course. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006. Whilst the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards ("IFRS") this announcement does not itself contain sufficient information to comply with IFRS.
4. This announcement was approved by the Board of Directors on 23 February 2010.
5. It is intended to post the annual report to shareholders on 14 April 2010 and to hold the Annual General Meeting on 17 May 2010. Copies of the annual report prepared in accordance with IFRS will be available from the Company Secretary, Travis Perkins plc, Lodge Way House, Harlestone Road, Northampton NN5 7UG from 14 April 2010 or will be available through the internet on our website at www.travisperkinsplc.com
6. Profit
(a) Operating profit
|
|
2009 |
2008 |
|
|
£m |
£m |
|
Revenue |
2,930.9 |
3,178.6 |
|
Cost of sales |
(1,944.4) |
(2,080.3) |
|
Gross profit |
986.5 |
1,098.3 |
|
Selling and distribution costs |
(649.8) |
(728.1) |
|
Administrative expenses |
(125.0) |
(164.7) |
|
Other operating income |
48.8 |
11.2 |
|
Share of results of associate |
(3.2) |
(1.4) |
|
Operating profit |
257.3 |
215.3 |
|
Exceptional items |
(32.7) |
56.2 |
|
Adjusted operating profit |
224.6 |
271.5 |
6. Profit (continued)
With effect from the 1 December 2009 the Company and the Trustees of the Pension Scheme agreed to amend the terms of the Travis Perkins' defined benefits pension scheme to include a cap on future pensionable salary increases of 3% per annum. This has been treated as a curtailment event and the resulting exceptional reduction of £32.7m in the benefit obligation has been included in other operating income.
In 2008 the Group incurred an exceptional charge of £56.2m associated with the severe downturn in the construction market. The total charge of £56.2m included a cost of redundancy and re-organisation (£10.5m), onerous property lease provisions (£39.5m) and asset write offs (£6.2m). £40.4m and £15.8m were included in selling and distribution costs and administration expenses respectively.
To enable readers of the financial statements to obtain a clear understanding of underlying trading, the Directors have shown separately the exceptional items in the group income statement.
(b) Adjusted profit before and after tax
|
|
2009 |
2008 |
|
|
£m |
£m |
|
Profit before tax |
212.7 |
146.3 |
|
Exceptional items |
(32.7) |
56.2 |
|
Adjusted profit before tax |
180.0 |
202.5 |
|
|
2009 |
2008 |
|
|
£m |
£m |
|
Profit after tax |
157.4 |
101.9 |
|
Exceptional items |
(32.7) |
56.2 |
|
Tax effect of exceptional items |
9.2 |
(14.2) |
|
Adjusted profit after tax |
133.9 |
143.9 |
6. Profit (continued)
(c) Operating margin
|
|
Merchanting |
Retail |
Group |
|||
|
|
£m |
£m |
£m |
£m |
£m |
£m |
|
|
2009 |
2008 |
2009 |
2008 |
2009 |
2008 |
|
Revenue |
1,950.2 |
2,237.9 |
980.7 |
940.7 |
2,930.9 |
3,178.6 |
|
|
|
|
|
|
|
|
|
Operating profit |
203.5 |
206.5 |
57.0 |
10.2 |
260.5 |
216.7 |
|
Share of associate losses |
- |
- |
- |
- |
(3.2) |
(1.4) |
|
Exceptional items
|
(32.7) |
18.3 |
- |
37.9 |
(32.7) |
56.2 |
|
Adjusted segment result |
170.8 |
224.8 |
57.0 |
48.1 |
224.6 |
271.5 |
|
|
|
|
|
|
|
|
|
Adjusted operating margin |
8.76% |
10.05% |
5.81% |
5.11% |
7.66% |
8.54% |
The segmental results for merchanting and retail are shown in note 10.
7. Net finance costs
|
|
2009 £m |
2008 £m |
|
Interest on bank loans and overdrafts* |
(29.1) |
(64.6) |
|
Interest on unsecured loans |
(0.2) |
(0.2) |
|
Interest on obligations under finance leases |
(1.3) |
(1.6) |
|
Other finance charges - pension scheme |
(2.6) |
- |
|
Unwinding of discounts in provisions |
(3.8) |
(1.6) |
|
Amortisation of cancellation payment for swaps accounted for as cash flow hedges |
(8.7) |
- |
|
Cancellation of swaps measured at fair value |
(0.8) |
- |
|
Net loss on re-measurement of derivatives at fair value |
(3.7) |
(8.7) |
|
Finance costs |
(50.2) |
(76.7) |
|
Net gain on re-measurement of derivatives at fair value |
- |
2.4 |
|
Other finance income - pension scheme |
- |
4.8 |
|
Interest receivable |
5.6 |
0.5 |
|
Finance income |
5.6 |
7.7 |
|
Net finance costs |
(44.6) |
(69.0) |
|
Adjusted interest cover |
10.7x |
4.3x |
*Includes £2.9m (2008 £2.2m) of amortised bank finance charges.
Adjusted interest cover is calculated by dividing adjusted operating profit of £223.3m (2008: £268.7m) (operating profit of £224.6m (2008: £271.5m) less £1.3m (2008: £2.8m) of IFRS adjustments) by the combined value of interest on bank loans and overdrafts (excluding amortised bank finance charges), unsecured loans, and interest on bank deposits, which total £20.8m (2008: £62.1m).
The unwinding of discounts charge arises principally from the exceptional property provisions created in 2008.
8. Earnings per share
(a) Basic and diluted earnings per share
|
|
2009 £m |
|
2008 £m |
|
Earnings |
|
|
|
|
Earnings for the purposes of basic and diluted earnings per share being net profit attributable to equity holders of the Parent Company |
157.4 |
|
101.9 |
|
Number of shares |
No. |
|
No. |
|
Weighted average number of shares for the purposes of basic earnings per share pre-rights issue adjustment |
117,034,434 |
|
117,004,114 |
|
Rights issue adjustment |
61,001,501 |
|
31,474,107 |
|
Weighted average number of shares for the purposes of basic earnings per share revised |
178,035,935 |
|
148,478,221 |
|
Dilutive effect of share options on potential ordinary shares |
4,427,564 |
|
1,715,810 |
|
Weighted average number of ordinary shares for the purposes of diluted earnings per share |
182,463,499 |
|
150,194,031 |
At 31 December 2009, 3,913,130 (2008: 4,680,005) share options had an exercise price in excess of the market value of the shares on that day. As a result, for 2009 these share options were excluded from the calculation of diluted earnings per share.
(b) Adjusted earnings per share
Adjusted earnings per share are calculated by excluding the effect of the exceptional items, as shown below.
|
|
2009 £m |
|
2008 £m |
|
|
|
|
|
|
Earnings for the purposes of basic and diluted earnings per share being net profit attributable to equity holders of the Parent Company |
157.4 |
|
101.9 |
|
Exceptional items |
(32.7) |
|
56.2 |
|
Tax on exceptional items |
9.2 |
|
(14.2) |
|
Earnings for adjusted earnings per share |
133.9 |
|
143.9 |
|
|
|
|
|
|
Adjusted basic earnings per share |
75.2p |
|
96.9p |
|
|
|
|
|
|
Adjusted diluted earnings per share |
73.4p |
|
95.8p |
9. Dividend
Amounts were recognised in the financial statements as distributions to equity shareholders as follows:
|
|
2009 |
|
2008 |
|
|
£m |
|
£m |
|
Final dividend for the year ended 31 December 2008 of nil p (2007: 30.4p) per ordinary share |
- |
|
35.5 |
|
Interim dividend for the year ended 31 December 2009 of nil p (2008: 14.5p) per ordinary share |
- |
|
17.0 |
|
Total dividend recognised during the year |
- |
|
52.5 |
The dividend declared for 2009 at 31 December 2009 and for 2008 at 31 December 2008 were as follows:
|
|
2009 |
2008 |
|
|
Pence |
Pence |
|
Interim paid |
- |
14.5 |
|
Final proposed |
- |
- |
|
Total dividend for the year |
- |
14.5 |
The proposed final dividend of nil p per ordinary share in respect of the year ending 31 December 2009 was approved by the board on 23 February 2010.
Adjusted dividend cover for 2008 of 8.5x was calculated by dividing adjusted basic earnings per share (note 8) of 96.9p by the restated for the rights issue total dividend for the year of 11.43p.
10. Business and geographical segments
|
|
2009 |
||||
|
|
Merchanting |
Retail |
Unallocated |
Eliminations |
Consolidated |
|
|
£m |
£m |
£m |
£m |
£m |
|
Revenue |
1,950.2 |
980.7 |
- |
- |
2,930.9 |
|
Result |
|
|
|
|
|
|
Segment result |
203.5 |
57.0 |
- |
- |
260.5 |
|
|
|
|
|
|
|
|
Share of associate losses |
- |
- |
(3.2) |
- |
(3.2) |
|
Finance Income |
- |
- |
5.6 |
- |
5.6 |
|
Finance costs |
- |
- |
(50.2) |
- |
(50.2) |
|
Profit before taxation |
203.5 |
57.0 |
(47.8) |
- |
212.7 |
|
Taxation |
- |
- |
(55.3) |
- |
(55.3) |
|
Profit for the year |
203.5 |
57.0 |
(103.1) |
- |
157.4 |
|
|
|
|
|
|
|
|
Segment assets |
2,234.5 |
1,438.8 |
524.5 |
(1,055.0) |
3,142.8 |
|
Segment liabilities |
(725.7) |
(237.5) |
(1,774.2) |
1,055.0 |
(1,682.4) |
|
Consolidated net assets |
1,508.8 |
1,201.3 |
(1,249.7) |
- |
1,460.4 |
|
Capital expenditure |
16.0 |
16.1 |
- |
- |
32.1 |
|
Depreciation |
44.1 |
14.6 |
- |
- |
58.7 |
The Group has adopted IFRS 8 "Operating Segments" with effect from 1 January 2009. IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Chief Executive to allocate resources to the segments and to assess their performance. In contrast, the predecessor Standard (IAS 14 Segment Reporting) required the Group to identify two sets of segments (business and geographical) using a risk and returns approach. For management purposes, the Group is currently organised into two operating divisions - Builders Merchanting and Retailing, both of which operate entirely in the United Kingdom. These divisions are the basis on which the Group reported its primary segment information under IAS 14 and following a review are the segments that are most appropriate to be reported under IFRS 8. Segment profit represents the profit earned by each segment without allocation of share of losses of associates, finance income and costs and income tax expense.
There are no significant inter-segment sales.
During 2009 and 2008 there were no impairment losses or reversals of impairment losses recognised in profit or loss or in equity in either of the reportable segments.
10. Business and geographical segments (continued)
|
|
2008 |
||||
|
|
Merchanting |
Retail |
Unallocated |
Eliminations |
Consolidated |
|
|
£m |
£m |
£m |
£m |
£m |
|
Revenue |
2,237.9 |
940.7 |
- |
- |
3,178.6 |
|
Result |
|
|
|
|
|
|
Segment result |
206.5 |
10.2 |
- |
- |
216.7 |
|
|
|
|
|
- |
|
|
Share of associate losses |
- |
- |
(1.4) |
- |
(1.4) |
|
Finance income |
- |
- |
7.7 |
- |
7.7 |
|
Finance costs |
- |
- |
(76.7) |
- |
(76.7) |
|
Profit before taxation |
206.5 |
10.2 |
(70.4) |
- |
146.3 |
|
Taxation |
- |
- |
(44.4) |
- |
(44.4) |
|
Profit for the year |
206.5 |
10.2 |
(114.8) |
- |
101.9 |
|
|
|
|
|
|
|
|
Segment assets |
2,081.6 |
1,345.6 |
327.6 |
(863.4) |
2,891.4 |
|
Segment liabilities |
(756.6) |
(185.9) |
(1,794.1) |
863.4 |
(1,873.2) |
|
Consolidated net assets |
1,325.0 |
1,159.7 |
(1,466.5) |
- |
1,018.2 |
|
Capital expenditure |
82.6 |
15.9 |
- |
- |
98.5 |
|
Depreciation |
47.4 |
15.6 |
- |
- |
63.0 |
11. Adjusted return on capital
|
|
2009 £m |
2008 £m |
|
Operating profit |
257.3 |
215.3 |
|
Exceptional items |
(32.7) |
56.2 |
|
Adjusted operating profit |
224.6 |
271.5 |
|
Opening net assets |
1,018.2 |
1,036.9 |
|
Net pension deficit |
50.4 |
11.5 |
|
Goodwill written off |
92.7 |
92.7 |
|
Net borrowings |
1,017.4 |
941.0 |
|
Exchange adjustment |
(80.2) |
27.9 |
|
Opening capital employed |
2,098.5 |
2,110.0 |
|
Closing net assets |
1,460.4 |
1,018.2 |
|
Net pension deficit |
31.0 |
50.4 |
|
Goodwill written off |
92.7 |
92.7 |
|
Net borrowings |
467.2 |
1,017.4 |
|
Exchange adjustment |
(40.5) |
(80.2) |
|
Closing capital employed |
2,010.8 |
2,098.5 |
|
|
|
|
|
Average capital employed |
2,054.7 |
2,104.2 |
|
Adjusted return on capital |
10.9% |
12.9% |
12. Adjusted earnings before interest, tax and depreciation
|
|
2009 £m |
2008 £m |
|
Profit before tax |
212.7 |
146.3 |
|
Net finance costs |
44.6 |
69.0 |
|
Depreciation and impairments |
58.7 |
63.0 |
|
EBITDA under IFRS |
316.0 |
278.3 |
|
Exceptional items |
(32.7) |
56.2 |
|
Reversal of IFRS effect |
(2.5) |
(4.2) |
|
Adjusted EBITDA under covenant calculations |
280.8 |
330.3 |
|
Net debt under covenant calculations |
413.1 |
925.2 |
|
Adjusted net debt to EBITDA |
1.47x |
2.80x |
13. Net debt
|
|
2009 |
2008 |
|
|
£m |
£m |
|
Net debt at 1 January |
(1,017.4) |
(941.0) |
|
Increase / (decrease) in cash and cash equivalents |
351.8 |
(30.9) |
|
Cash flows from debt |
161.6 |
47.3 |
|
Decrease / (increase) in fair value of debt |
39.7 |
(108.2) |
|
Movement in finance charges netted off bank debt |
(2.9) |
12.5 |
|
Finance lease surrendered |
- |
2.9 |
|
Net debt at 31 December |
(467.2) |
(1,017.4) |
14. Free cash flow
|
|
2009 |
2008 |
|
|
£m |
£m |
|
Net debt at 1 January |
(1,017.4) |
(941.0) |
|
Net debt at 31 December |
(467.2) |
(1,017.4) |
|
Decrease / (increase) in net debt |
550.2 |
(76.4) |
|
Dividends paid |
- |
52.5 |
|
Net cash outflow for expansion capital expenditure |
11.1 |
53.5 |
|
Net cash outflow for acquisitions |
- |
22.5 |
|
Net cash outflow for acquisition of investments |
1.0 |
0.3 |
|
Swap cancellation fee |
28.7 |
- |
|
Cash impact of 2008 exceptional items |
2.5 |
8.5 |
|
Interest in associate |
12.9 |
20.7 |
|
Shares issued |
(300.3) |
(0.6) |
|
(Decrease) / increase fair value of debt |
(39.7) |
108.2 |
|
Movement in finance charges netted off bank debt |
2.9 |
(12.5) |
|
Finance lease surrendered |
- |
(2.9) |
|
Special pension contributions |
25.1 |
11.5 |
|
Free cash flow |
294.4 |
185.3 |
15. Related party transactions
The Group has a related party relationship with its subsidiaries and with its directors. Transactions between group companies, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Company and its subsidiaries are disclosed below. In addition the remuneration, and the details of interests in the share capital of the Company, of the Directors, are provided in the audited part of the remuneration report on pages 58 to 63.
The remuneration of the key management personnel of the Group is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.
|
|
2009 £m |
|
2008 £m |
|
Short term employee benefits |
6.6 |
|
4.8 |
|
Share based payments |
2.3 |
|
2.4 |
|
|
8.9 |
|
7.2 |
The Company undertakes the following transactions with its active subsidiaries:
There have been no material related party transactions with directors.
Details of transactions with the Group's Associate Companies ToolStation and The Mosaic Tile Company Limited are shown in note 18. Operating transactions with both associates during the year were not significant.
This information is provided by RNS
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