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Finance Director's Report |
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| Finance Director's Report |
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The results for the year are produced under International Financial Reporting Standards (IFRS) and to aid understanding we show in tables on page 17 the reconciliation of profit under IFRS to the Adjusted Profit numbers used by management and most of the analyst community.
Earnings per Share and Dividend
Basic earnings per share was 0.5 pence per share compared to 0.9 pence per share in the previous year. Adjusted basic earnings per share (which removes the effect of fixed rental uplifts, amortisation of certain intangible assets and exceptional items) was 1.4 pence per share against 1.2 pence per share last year.
A final dividend of 0.17 pence per share has been recommended by the Board. This will be paid, subject to shareholders’ consent, on 25 June 2008 to shareholders on the register at close of business on 11 April 2008. This proposed dividend, together with the interim dividend of 0.43 pence per share paid on 12 December 2007, brings the total dividend for the year to 0.6 pence per share, compared with a total of 1.77 pence per share in the prior year. This level of full year dividend is covered 2.4 times by Adjusted Profit after tax and at this level forms a base from which to grow with further improvement in profitability.
The results reflect a highly challenging retail environment and a year of change for our Entertainment Wholesale business. They include a number of one-off costs and the full year benefit of a number of accounting changes made during the prior year.
Profit before tax
Adjusted Retail Profit was £3.4 million, an improvement of £16.3 million on the prior year loss of £12.9 million. Whilst the retail environment remained challenging, the business benefitted from the investment and accounting changes put in place during the prior year and the absence of one-off costs. The full year benefit of asset relifing was £10.9 million, compared to £5.8 million in the prior year.
Further details of the various retail initiatives are included in the Chief Executive’s Report on pages 10 to 15.
Adjusted Profits from Entertainment Wholesale and Publishing amounted to £54.8 million compared to £53.1 million in the previous year. This reflects a highly successful year from 2 entertain, our joint venture with BBC Worldwide, offset by a substantial reduction in the level of releases of historic accruals no longer required. The adjusted profits of EUK together with THE and Bertram were down £0.4 million on the previous year having benefitted by £3.8 million from asset relifing. This reflects a year of substantial change. Further details of the developments in the businesses are again included in the Chief Executive’s Report.
Balance Sheet
Overall Group stock increased by £13.9 million to £391.0 million. This reflects the growth of the Entertainment Wholesale and Publishing business, more than offsetting the £1.9 million reduction in Woolworths retail stock. The decrease in retail stock, achieved by tight control of purchasing, has been somewhat masked at year-end by setting the business up for the much earlier Easter in 2008.
During the year, four store freeholds were purchased at a cost of £5.1 million and £11.6 million was received from the sale of the freeholds of the Guernsey and Jersey stores. The £8.6 million profit from the sale of the Channel Island freeholds is treated as an exceptional item. Profits of £11.4 million were earned on the assignment of store leases during the year against £6.4 million in the prior year.
Cash Flow and Net Debt
The Group’s average net debt increased from £113.0 million to £246.3 million, reflecting the full year effect of the THE and Bertram acquisitions and the increased working capital requirements of the enlarged Entertainment Wholesale business. Capital expenditure in the Retail business reduced from £62.4 million to £33.3 million, reflecting the completion in the prior year of the 10/10 store refit programme.
The year-end net debt of £123.7 million was up from £103.3 million in the prior year. This reflects the substantial increase in working capital required by the growth in the Entertainment Wholesale business, more than offsetting cash generated in the other parts of the Group.
Exceptional Items
As described above, the disposal of the Guernsey and Jersey store freeholds resulted in an exceptional profit of £8.6 million. This was more than offset by (i) exceptional costs in the Entertainment Wholesale business of £8.4 million relating to the operational integration of the EUK, THE and Bertram businesses and the costs of the Competition Commission inquiry into the acquisition of Bertram and (ii) a provision of £3.4 million in relation to payments made under the terms establishing the 2 entertain joint venture which could not be ascertained at that time.
Taxation
The effective tax rate was 36 per cent compared to 15 per cent in the prior year. The prior year rate was lower than usual due to the effect of a £5.6 million prior year tax credit which primarily arose as a number of historic tax provisions were identified as no longer required following agreement of a number of historic queries. Under existing tax legislation it is anticipated that the effective Group tax rate will be marginally above the main UK Corporation Tax rate.
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Reconciliation of Adjusted Profit |
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52 weeks to
2 February
2008
£m |
53 weeks to
3 February
2007
£m |
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| Profit before tax and exceptional items |
14.9 |
7.3 |
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| Add back: |
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| – amortisation of certain intangible assets* |
7.6 |
3.9 |
| – fixed rental uplifts |
5.8 |
10.6 |
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| Adjusted profit before tax |
28.3 |
21.8 |
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Adjusted Segmental Analysis
for the 52 weeks to 2 February 2008 |
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Retail
£m |
Entertainment
wholesale and
Publishing
£m |
Unallocated
£m |
Interest
£m |
Total
£m |
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Reported
profit/(loss)
before taxation |
6.2 |
35.4 |
(8.2) |
(21.7) |
11.7 |
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Adjust for:
exceptional
items |
(8.6) |
11.8 |
- |
- |
3.2 |
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(Loss)/profit
before
exceptional
items |
(2.4) |
47.2 |
(8.2) |
(21.7) |
14.9 |
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Add back:
– amortisation
of certain
intangible assets* |
- |
7.6 |
- |
- |
7.6 |
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– fixed rental
uplifts |
5.8 |
- |
- |
- |
5.8 |
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Adjusted
(loss)/profit
before tax |
3.4 |
54.8 |
(8.2) |
(21.7) |
28.3 |
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Adjusted Segmental Analysis
for the 53 weeks to 3 February 2007 |
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Retail
£m |
Entertainment
wholesale and
Publishing
£m |
Unallocated
£m |
Interest
£m |
Total
£m |
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Reported
profit/(loss)
before taxation |
(14.8) |
49.2 |
(7.7) |
(10.7) |
16.0 |
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Adjust for:
exceptional
items |
(8.7) |
- |
- |
- |
(8.7) |
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(Loss)/profit
before
exceptional
items |
(23.5) |
49.2 |
(7.7) |
(10.7) |
7.3 |
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Add back:
– amortisation
of certain
intangible assets* |
- |
3.9 |
- |
- |
3.9 |
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– fixed rental
uplifts |
10.6 |
- |
- |
- |
10.6 |
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Adjusted
(loss)/profit
before tax |
(12.9) |
53.1 |
(7.7) |
(10.7) |
21.8 |
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* Amortisation of certain intangible assets arising on consolidation, namely underlying rights, customer relationships and trade names. |
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Pensions
The Group retains a Final Salary Pension scheme open to all employees who have been with the Group for a minimum period of 12 months.
The Scheme was created at the time of demerger and only comprised active members at that time. It is therefore a much less mature scheme than most. It has 5,112 active members, 3,707 deferred members but only 1,256 current pensioners and therefore the Scheme receives more in contributions from the Group and members than it pays out in pensions. This is likely to continue to be the case for approximately 11 years.
The assets of the Scheme are managed by external Fund Managers and at 2 February 2008 were £316.8 million (2007 £316.0 million). The allocation of Scheme assets is kept under regular review by the Trustees of the Scheme. The liabilities calculated at the current level
of fixed rate bond yields were £383.7 million (2007: £400.0 million), giving an IAS 19 deficit of £48.2 million (2007: £58.8 million) net of tax relief. However, the proportion of current active members and the timescales until pensions are due to be payable does not make the calculation particularly relevant. The full triennial actuarial valuation at 31 March 2005 showed that the Scheme was 89 per cent funded with a deficit of £28.9 million. The contribution rate paid by participating companies remains at 13.5 per cent of pensionable salaries. The next triennial actuarial valuation is due to be carried out at 31 March 2008 and has just commenced.
In January 2008, when the Group moved its bank financing to a secured basis, the Trustee was granted a £63 million 3rd lien security. It was also agreed that the Scheme would receive the first £50 million of proceeds from any future disposal of the Group’s investment in 2 entertain, at which point an equivalent amount of the 3rd lien security would be released.
Treasury Policy
The Group’s Treasury Policy is structured to ensure that adequate financial resources are available for the development of its business whilst managing its currency, interest rate and counterparty credit risks. The Group’s Treasury strategy, policy and controls are developed centrally and approved by the Board. The Group does not engage in speculative transactions.
The main elements of Treasury activity are outlined below:
Funding
The Treasury function arranges sufficient secure financial resources to enable the Group to meet its medium-term business objectives whilst arranging facility maturities appropriate to its projected needs.
During the year, the Group arranged various additional facilities to finance its increased working capital whilst carrying out a full review of how best to finance its ongoing requirements. In particular, this review incorporated the continued growth of the Entertainment Wholesale division, with its associated additional working capital.
The review concluded that the most appropriate structure would be to move to an asset based lending facility, secured primarily against EUK’s debtors and the Group’s stock. In January 2008, facilities comprising a £350 million asset based lending facility and a £35 million 2nd lien loan, were put in place for a period of four years. These, together with an existing £20 million invoice discounting facility available to Bertram, provide the Group with flexible facilities to meet its financing requirements as the businesses continue to develop.
Currency
The Group’s main currency translation exposure is limited to movements in exchange rates to the extent that they affect balances held on its currency bank accounts and certain foreign currency assets and liabilities in the books of its Hong Kong-based product sourcing company, Woolworths Group Asia Limited. Foreign currency bank balances are controlled by the Treasury function and are actively managed to a level that minimises currency translation exposures. The Group’s main currency exposure is its transaction exposure through movements in exchange rates on its purchases overseas that are not denominated in Sterling. These are mainly imports from Asia denominated in US dollars and imports from Europe denominated in Euros.
The Treasury Policy sets out a framework through which the Group’s forecasted foreign currency transactions are hedged.
Interest
The Treasury Policy requires that an interest hedging plan for each year is approved by the Finance Director at the time of the annual budget. The Treasury function is permitted to hedge in accordance with this plan using interest rate products such as swaps, options, forward rate agreements and futures.
The Group will keep under review the opportunity to hedge its interest exposure following the increase in its debt profile during the year.
To date, the interest payable on drawings from the Group’s facilities has been at floating rates driven by the variation in amounts borrowed during the period. Interest receivable on investments has also been at floating rates for short maturities, given the seasonality of the Group’s cash flows.
Counterparty Credit Risk
The Group actively manages its relationships with a panel of high quality financial institutions. Credit risk is controlled by the Treasury function setting counterparty credit limits by reference to published rating agency credit ratings. The Treasury Policy recognises that an exposure to a counterparty arises in relation to investments, derivatives and financial instruments.
Going Concern
The Directors confirm that, after making enquiries, they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing these accounts.
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Stephen East
Finance Director
2 April 2008 |
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