EMBARGOED UNTIL 0700 HOURS

Wednesday 4 June 2008

Kingfisher plc

Q1 trading update for the 13 weeks ended 3 May 2008

Group Financial Summary 

• Joint Venture (JV) and Associate sales are not consolidated. 

• Retail profit is stated before central costs, exceptional items, acquisition intangibles amortisation and share of joint venture and associate interest and tax.

• B&Q, Screwfix and Trade Depot.

• Castorama and Brico Dépôt.

• Poland, China, Italy, Spain, Ireland, Russia, Turkey JV and Hornbach. South Korea and Taiwan JV included in comparatives only.

All trading commentary below is in constant currencies.

• Outdoor seasonal product sales were sharply down on last year across most of Europe due to an early Easter and poor weather, contrasting with last year's boost from a warm spring; 

• In the UK, B&Q's revamped stores and new products performed well and a further six large stores were revamped. Although sales were weak, gross margin was up nearly 300 basis points, around half of which reflected lower mark downs with the remainder being timing benefits which are expected to reverse across the year. The successful Screwfix trade counter roll-out continued; 

• In France, Kingfisher grew sales and improved gross margin although retail profit was marginally down reflecting slower seasonal sales;

• In Eastern Europe, our businesses in Poland and Russia continued to grow strongly;

• B&Q China's management team has been strengthened and a turnaround plan instigated to return the business to profitability next year;

• As at 3 May 2008 net debt was £1.5 billion (2 February 2008: £1.6 billion) and net assets were £4.9 billion (2 February 2008: £4.7 billion);

• Under the new Group Chief Executive new targets and incentives are in place and new operational priorities established to unlock the Group's full potential value for shareholders.  

Ian Cheshire, Group Chief Executive, said:

"As anticipated, trading remained very tough, especially in the UK, and the poor weather was unhelpful for sales of outdoor products. Sales of indoor products, including higher ticket, project related categories, held up well despite the unfavourable consumer backdrop. Against this backdrop, we have taken vigorous action to improve margins and control costs.

"In a busy first quarter, we have reworked our 2008 budgets to reduce our reliance on sales growth in what could be a challenging year, and put in place an overall plan with a clear target for the next three years. Some elements, notably at B&Q and on working capital, are already underway. We will have a full team and completed all plans in detail in time for the interim results in September, but today we can share the key seven steps, as well as some specific targets and actions which are already underway. Our focus will remain on delivering a step-change in shareholder value."

Future Direction - update on progress in Q1 

Following the appointment of Ian Cheshire as Group Chief Executive at the end of the last financial year, the new management team has been taking the necessary actions to unlock the true potential for shareholders from the Group's assets. The pace of change under the new leadership team has been fast and good progress has been made with the three themes announced at the preliminary results as follows:

Management

The historical decentralised management structure has been replaced with a new Retail Board with collective responsibility for overall Group success. This board, which comprises the Group CEO, CFO, the three retail divisional heads and key functional heads (eg Group Commercial), meets monthly to monitor business performance and agree actions to achieve delivery of financial and operational objectives.

Leaders have now been appointed for two of the three newly created retail divisions (Philippe Tible for France and Euan Sutherland for the UK) with the third position (Other International) expected to be announced shortly. Within France, Guy Colleau and Philippe Blanc have been appointed to lead Castorama France and Brico Dépôt France respectively.

New elements to the share-based long-term incentive plan have been introduced consistent with the aim of delivering a step-change in shareholder value. The plan awards shares for achievement of exceptional Total Shareholder Returns (TSR) and earnings growth for the Group over the next three and four years respectively.

Capital 

New spending limits and a more rigorous approval process have been introduced. This year's gross level of capital investment will be around £400 million (on a constant currency basis), 20% lower than last year. Investment return hurdle rates needed to secure new capital have been increased and a new requirement to achieve +20% return on new investment by year three is now in place to prioritise higher and faster returning projects. The Group Chief Executive chairs the Capital Investment Committee. A full review is underway of existing capital, including opportunities for improving returns on the £3.6 billion property portfolio.

A new target for flat net debt in 2008/09 (at last year end's exchange rates) has also been introduced as the lead financial target for senior management bonuses this year.

  Returns

Starting with 2008/09, the Retail Board has reviewed and reworked the Group's internal annual budget. Whilst targets for earnings, ROCE and net debt remain unchanged, anticipated sales growth has been reduced and targets for improved gross margin percentage and cost savings introduced. 

Simplified weekly and monthly management information has been developed to enable the Retail Board to monitor and challenge business performance across the Group and a standard financial and operational KPI scorecard is under development.

A similar review process has been completed for the 2009 to 2012 period to ensure significant earnings and ROCE growth targets are underpinned by actual operational 'bottom up' plans.

'Delivering Value' 

This review has enabled the leadership team to define the seven major steps which we have internally branded 'Delivering Value', which will drive the step-change in shareholder value. These are:

1. Driving up B&Q's profit 

2. Exploiting our UK Trade opportunity

3. Expanding our total French business

4. Rolling out in Eastern Europe 

5. Turning around B&Q China

6. Growing Group sourcing

7. Reducing working capital

1. Driving up B&Q's profit 

Profit recovery in the UK will be the largest single driver of improving shareholder value. In 2007/08 B&Q's operating margin was 3.3% on sales and management plan to grow this to 7% through a combination of sales density improvements, improved gross margins and lower operating cost ratios.

The renewal of B&Q is already well underway and the roll out of new products, better service and an improved store environment are working. Around 20 large store revamps are currently planned in 2008/09, two new large stores, one new medium store, 18 medium store revamps and relocations and one large store downsize. Overall space growth is expected to be around 1%. Around 30% of the Group's annual capital investment will be allocated to B&Q in the UK in 2008/09. 

In addition to the continuing renewal programme, which will primarily drive the sales line, detailed category plans are in place to improve gross margins and targets established to minimise cost growth.

  2. Exploiting our UK Trade opportunity

Kingfisher currently operates three brands in the UK trade market - B&Q, Screwfix and Trade Depot. Our trade business is growing and makes healthy profits and returns but our share of this fragmented market remains low. One of Euan Sutherland's first priorities on joining later this month will be to develop a co-ordinated approach to accelerate our profitable growth in this market segment.  

3. Expanding our total French business

In France Kingfisher has two strong businesses that in aggregate have consistently been taking market share for the last five years. Philippe Tible, previously CEO of Castorama France, has taken up his new role as CEO Kingfisher France and we have also appointed two strong operational retailers to run the individual brands. Phillippe is currently examining the potential benefits from more co-ordination of the two brands, including greater joint French sourcing and tactical store expansion. 

In 2008/09 a further four Castorama store revamps, two store relocations and one new store are planned. Nine new Brico Dépôts will also open. In total, space in France will increase by 5% in 2008/09 and around 30% of the Group's annual capital investment will be allocated to France.

4. Rolling out in Eastern Europe

Kingfisher currently has three key market positions in Eastern Europe, a large and profitable business in Poland and two smaller but fast-developing businesses in Russia and Turkey (50% JV with Koç Group in Turkey). Each are capitalising on faster growing markets than Western Europe and store expansion in these markets will continue at pace. Kingfisher currently operates 65 stores across Eastern Europe delivering £84 million Group profit in 2007/08. Kingfisher is now targeting to open around 80 stores in these three countries over the next four years, more than doubling current store space, starting with nine in Poland, three in Russia and eight in Turkey in 2008/09. Around 20% of annual capital investment will be allocated to Eastern Europe. Entry into other markets in Eastern Europe will be kept under review.  

5. Turning around B&Q China  

China remains an important market opportunity for Kingfisher and we have built a leading position, but without delivering the consistent returns we need. The disappointing performance last year was largely due to short-term market factors, principally new supplier and property transaction regulations.

However, following a review of the business, we have concluded that after several years of rapid growth B&Q China now needs a period of consolidation to strengthen the business and the customer offer before resuming expansion. Some stores in the smaller, non-core cities are making significant losses and need to be closed or downsized. Furthermore, the economic returns from a number of other stores would benefit from downsizing to increase sales densities and eliminate cost. 

Accordingly, five stores, which in total lost £5 million in 2007/08, will close and three stores will be downsized this year. Further store downsizes are planned over the following years. As previously announced, the total cost of this programme over the next four years is expected to be £33 million in total, (around 10% of the total capital investment in China) with a cash cost this year of £9 million.

The local management has been strengthened to ensure the business achieves its profit turnaround and growth potential. Matt Tyson, 24 years at Kingfisher and most recently Stores Director at B&Q will become CEO of B&Q Asia this autumn. He will work closely with Mariusz Gliwinski who became B&Q China CEO last year after three years as CEO B&Q Taiwan.  

In addition, Joe Riordon, 10 years at Kingfisher including format development at B&Q and Castorama in France, has been appointed to lead the format development programme with immediate effect, supported on a short-term basis by a small team drawn from across the Group. Gavin Keane, 13 years at Kingfisher and most recently General Manager of Kingfisher's Shanghai sourcing office, has been appointed as Commercial Director from July.  A new local CFO, Thurston Tzeng, has also been appointed.

The immediate target for China is to return to annual profit in 2009/10.

6. Growing Group sourcing

Group sourcing currently provides a source of new, exclusive products and purchasing savings. Momentum behind this valuable Group activity will benefit from the new, more collective way of working and new, more stretching targets. Effort will be spread across fewer categories and prioritised where cash margin gains are highest and most achievable in practice. For example, joint sourcing between B&Q UK and Castorama France, where there is the greatest overlap in product range, will be a key priority, as will direct sourcing. This is now targeted to double over the next four years to $1.6 billion at cost, with certain ranges being prioritised including bathrooms and flooring. 

7. Reducing working capital 

A centrally-led project team has started to develop a detailed working capital reduction plan across the Group, with the objective of a £100 million reduction from current 2008 plans. To achieve this we will be looking at all aspects of inventory, debtor and creditor management. Over the three year plan we will be targeting clear improvements across all operating units, especially where growth plans are absorbing significant net working capital. 

  UK 

UK includes B&Q in the UK, Screwfix and Trade Depot.  

B&Q aims to grow its share of home improvement expenditure by strengthening its appeal to both the Do-It-Yourself (DIY) and Do-it-For-Me (DFM) customer. During Q1 B&Q progressed with its renewal programme, which includes updating product ranges and improving its store environment and in-store service.

Total sales declined 5.8% to £997 million (-8.1% LFL) primarily reflecting unfavourable spring weather that impacted sales of outdoor products, down almost 40%. This was in contrast to the first quarter last year (2007/08: +5.9% LFL) which was boosted by warm weather and a later Easter. Sales of indoor products, including higher ticket project areas were up, (+1.7% LFL) despite the weak consumer backdrop.

Last year's updated ranges of wall and window coverings, kitchens and bedrooms performed particularly well, as did more recently updated indoor lighting ranges. A trade discount card, initially trialled successfully in Scotland last year, was rolled out nationwide during April, entitling cardholders to product and volume-based rebates.

Retail profit was £29 million (2007/08: £33 million). Reported gross margins were up nearly 300 basis points. Around half of the increase reflects the lower mark down activity and sales of higher margin products, which started in Q3 last year. The remainder is due to the mix effect of weaker sales of lower margin outdoor seasonal products and the timing of supplier rebates, both of which are expected to reverse across the year.

Results from the new format large stores continued to be encouraging, with 45 now trading. Six large store revamps were completed in Q1 with one new store opening, and the next phase of eight revamps will start at the end of Q2. In addition, five medium stores were revamped. B&Q now has 118 large stores (45 in the modern format) and 205 medium stores (of which 157 have been modernised). Around 60 large stores are expected to be trading in the new format by the year end.

Screwfix total sales grew 23.6% to £127 million, driven by the continu