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Dixons Carphone plc

A strong half year with Headline profit before tax up 19%*

Highlights: Interim results for the 26 weeks ended 29 October 2016*

• Group H1 like-for-like revenue(3) up 4%; Q2 like-for-like up 4%; statutory revenue for H1 up 11%

• Market share gains across all markets

• Group Headline PBT(1) of £144 million (2015/16: £121 million), up 19%

• Group Headline EBIT(1) of £153 million (2015/16: £135 million)

• Group Headline basic EPS(1) from continuing operations 10.9p (2015/16: 7.5p)

• Statutory profit before tax of £104 million (2015/16: £78 million) after non-Headline charges of £40 million (2015/16: £43 million), statutory basic EPS of 8.1p (2015/16: 4.8p)

• Interim dividend of 3.5p, payable in January 2017, an increase of 8%

• Free cash flow(8) of £65 million (2015/16: £64 million) and net debt of £285 million (2015/16: £378 million)

• CWS: Announcement of connected home partnership with SSE

Notes:

- In the UK & Ireland both like-for-like and total revenue were negatively affected by approximately 1% from refurbishment disruption.

- In the UK & Ireland, like-for-like revenue improved by approximately 3% as a result of sales transferred from closed stores.

* See notes on page 3 for an explanation of the basis of preparation and defined terms. This document also uses definitions that are set out in the Group's Annual Report and Accounts for the year ended 30 April 2016 on pages 154 to 156.

Q2 results

Notes:

- In the UK & Ireland both like-for-like and total revenue were negatively affected by approximately 1% from refurbishment disruption.

- In the UK & Ireland, like-for-like revenue improved by approximately 4% as a result of sales transferred from closed stores.

Seb James, Group Chief Executive, said:

"Two years ago when we combined the businesses of Dixons Retail and Carphone Warehouse, we set out a strategy to create a powerful engine to help our customers navigate an increasingly complex and interconnected world. It is therefore, very encouraging again to be able to report good growth in both sales and profits across all of our businesses.

Overall, it has been a strong start to the year with like-for-like growth of 4% and Headline PBT growth of 19%. The teams across the business have achieved this through the successful execution of a wide array of initiatives. These have varied from an extremely ambitious property programme in the UK and Ireland that is delivering exactly as expected, the commissioning of the most modern small products warehouse in Europe for our Nordic business, the near completion of our merger activities across the Group, the integration of two ancillary businesses including the UK's largest independent reseller of multiplay products, a totally new services proposition in Leeds, and a great many more. Together, these continue to improve the proposition that we put before our customers every single day, and are responsible for the continued growth in both customer satisfaction and market share that we have been enjoying. We are far from being satisfied, however. As we go into our most critical trading period, the teams are drawing up a programme for next year that is every bit as ambitious, innovative and customer-focused. 

Looking forward, we remain optimistic about our ability to continue to gain market share in all our key markets, and, while we have still not seen any effect on consumer demand as a consequence of Brexit, we have been planning for the possibility of more uncertain times ahead. In particular, we have been focusing on reducing our fixed cost base, identifying areas of potential market share growth if the world becomes a tougher place for our competitors, and generally preparing for all eventualities - just in case. We are also planning our offer so that potential currency impacts are minimised for the customer, and are ensuring that next year, as always, everybody can be absolutely sure that they won't get a better deal anywhere.

We continue to make great progress within CWS and I am delighted to be announcing today a new strategic partnership with SSE who will be using our honeyBee software to enable, in time, their 5 million customers to monitor, control and maintain their homes and appliances at the touch of a button. Our leading services brand, Knowhow, will support the partnership with its comprehensive repair and maintenance infrastructure.

Finally, I would like to thank my 42,000 colleagues who make up the great shared enterprise that is Dixons Carphone for their impressive work this year and wish them all - from Miami to Malmö to Manchester - a very happy Christmas and New Year."

Investor and analyst call

There will be a conference call for investors and analysts at 9:00 am today:

Dial-in details - UK/International: +44(0) 20 3059 8125; passcode: 9524 (to be quoted to the operator)

Seven-day replay - UK/International: +44(0) 121 260 4861; passcode: 4868557 #

Accompanying slides will be available on the company website, www.dixonscarphone.com, at 7:00am

Next announcement

The Group will publish a trading update on 24 January 2017 and will host a management presentation that morning at the Deutsche Bank offices in London

For further information

Notes

(1) Headline results exclude amortisation of acquisition intangibles, Merger integration and transformation costs, property rationalisation costs, acquisition related costs, net interest on defined benefit pension schemes and discontinued operations (comprising Phone House operations in Germany, Netherlands and Portugal). Such excluded items are described as 'Non-Headline'. The directors consider 'Headline' performance measures to be a more accurate reflection of the ongoing trading performance of the Group and believe that these measures provide additional useful information for shareholders on the Group's performance and are consistent with how business performance is measured internally. For further details see notes 1 and 3 to the financial information.

(2) Change in local currency revenue reflects total revenues on a constant currency and period basis.

(3) Like-for-like revenue is calculated based on Headline store and internet revenue using constant exchange rates. New stores are included where they have been open for a full financial year both at the beginning and end of the financial period. Revenue from franchise stores are excluded and closed stores are excluded for any period of closure during either period. Customer support agreement, insurance and wholesale revenues along with revenue from Connected World Services and other non-retail businesses are excluded from like-for-like calculations. Revenue from Carphone Warehouse SWAS are included in like-for-like. We consider that like-for-like provides useful additional information to reported revenue as this enables performance of the Group to be measured on a consistent year-on-year basis.

(4) UK & Ireland comprises operations in the UK and Ireland and the Dixons Travel business.

(5) Nordics comprises operations in Norway, Sweden, Finland, Denmark and Iceland.

(6) Southern Europe comprises operations in Spain and Greece.

(7) Connected World Services ("CWS") comprises the Group's B2B operation which leverages the specialist skills, operating processes and technology of the Group to provide managed services to third parties looking to develop their own connected world solutions and the Group's share of results of its joint venture.

(8) Free Cash Flow comprises cash generated from / (utilised by) continuing operations before special pension contributions, less net finance expense, less income tax paid and net capital expenditure. We consider this useful as it shows cash resources generated for the Group to invest in its future growth and to create shareholder value.

Certain statements made in this announcement are forward-looking. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from any expected future events or results referred to in these forward-looking statements. Unless otherwise required by applicable laws, regulations or accounting standards, we do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. Information contained on the Dixons Carphone plc website or the Twitter feed does not form part of this announcement and should not be relied on as such.

Performance review

The performance review below refers, unless otherwise stated, to Headline information for continuing businesses. The basis for the preparation of this information is described on page 3.

Group

The Group has seen strong growth in the first half, on a local currency basis revenue has increased 5%. Like-for-like revenue increased 4%, with growth across all divisions. Total reported revenue has increased 11% to £4,869 million benefiting from the weakening of the Pound against the Euro and Norwegian Krone following the announcement of the UK's EU Referendum results.

Headline EBIT has increased 13% to £153 million (2015/16: £135 million), ahead of revenue growth, driven by solid trading results and the continued delivery of synergies related to the Merger.

In the first half the Group has successfully integrated the Simplifydigital and InfoCare businesses acquired in the prior year with these businesses contributing revenues of £20 million and £24 million respectively.

UK & Ireland

Revenue in the first half in the UK & Ireland increased by 3% on a local currency basis to £2,988 million (2015/16: £2,872 million). Like-for-like revenue increased 5% with the difference between total revenue and like-for-like revenue growth predominantly due to a reduction in store numbers following the property rationalisation programme, partly offset by revenues related to the Simplifydigital acquisition.

The mobile business continues to see strong performance in the UK postpay market and higher revenues in handset sales, whilst iD Mobile has now surpassed 450,000 customers.

The electricals business has delivered good growth in the first half, driven by white goods, consumer electronics and multiplay partially offset by decreased revenue from computing.

This revenue growth combined with cost savings resulted in Headline EBIT growth of 8% to £109 million (2015/16: £101 million).

The property rationalisation programme, as set out during 2015/16, remains on track.

Nordics

Whilst the Nordic business continues to experience a highly competitive environment, the first half has seen 5% local currency revenue growth and 2% on a like-for-like basis. Reported revenue in the first half was up 23% to £1,474 million (2015/16: £1,198 million) benefiting from the weakening in the Pound.

At the end of November 2015, as part of our services strategy, we acquired InfoCare Workshop, a service and repair business. This business has now been fully integrated delivering revenues of £24 million in the period. 

Nordics Headline EBIT was £34 million (2015/16: £30 million) with the increase reflecting the weakening in the Pound, where in local currency the increase in revenues in the first half and cost saving initiatives was offset by a continued determination to offer competitive prices in the market.

Southern Europe

The strong Southern Europe results in the first half were driven by growth across all major categories in Greece reflecting a more stable economic environment, and in particular air conditioning was boosted by the hot summer temperatures.

Our Spanish business continues to face changes in market trends with post-pay volumes down year on year offset by increases in multiplay and handset only volumes. The business model continues to adapt to these market changes to retain market share and profitability by moving towards a franchise model. Total franchisees increased from 224 to 263 between October 2015 and October 2016.

Southern Europe Headline EBIT has increased to £5 million (2015/16: £1 million) primarily reflecting the strong performance in Greece and the weakening of the Pound against the Euro.

Connected World Services 

CWS performed strongly in the first half, with revenue up 46% to £98 million (2015/16: £67 million) benefiting from the consultancy agreements with Sprint, licensing of the honeyBee platform and the new distribution agreement with Talk Talk announced in the prior year.

Headline EBIT has increased to £5 million in the period (2015/16: £3 million) reflecting the increased revenue noted above. Headline EBIT of £5 million includes £8 million share of losses from the Sprint joint venture reflecting the continued investment by both partners in the roll out of Sprint branded stores. The Sprint joint venture store rollout remains on track, with a total of 42 stores operational across 7 states as at the end of October 2016.

Today we have also announced a new strategic partnership with SSE. This is an excellent example of how adaptive our honeyBee software is. With SSE we are developing an interactive platform that will enable customers to monitor, control and maintain their homes and appliances at the touch of a button. This will be backed up by Knowhow, who will be providing the repair and support infrastructure necessary to meet all customers' maintenance needs.

Finance costs

Headline net finance costs have decreased from £14 million to £9 million largely as a result of charges relating to the renewed RCF recognised in the prior year. The Non-Headline costs of £8 million (2015/16: £8 million) relate to the interest on the UK defined benefit pension scheme. The total statutory net finance costs have decreased from £22 million to £17 million.

Tax

The Group's Headline effective rate of taxation before one off tax charges / credits for the full year has been estimated at 23% (2015/16: 25%) with this rate being applied to the half year results. The rate is higher than the UK statutory rate of 20% due mainly to higher statutory rates in the Nordics, and certain non-deductible items mainly in the UK. In calculating the total tax charge for the half year, a one-off tax credit of £16 million has been recognised following successful resolution of a prior year tax issue, which results in a total effective rate of taxation on Headline earnings of 13%, with an effective rate of taxation on Non-Headline earnings of 20% The total statutory effective rate of taxation is 11%.

Cash and movement on net debt

Free cash flow

Free cash flow before restructuring in the first half was an inflow of £109 million (2015/16: £76 million). The Group had a working capital inflow of £16 million, comparable to the prior period.

Capital expenditure in the first half was £112 million comparable to the £110 million in the prior period. Capital expenditure in the current period reflects the continued spend on the integrated retail offering and the capital element of the property rationalisation programme announced in the prior year, investment in IT platforms and continued development in both our retail and Connected World Services businesses.

Taxation paid has increased from £12 million to £16 million largely due to the timing of tax payments and increased taxable profits, offset by a successful resolution of a prior year tax issue resulting in a cash receipt in the period.

The reduction in interest paid is as a result of facility fees that were paid in H1 2015/16 and the Group's new revolving credit facility incurring a lower interest rate. Restructuring costs primarily comprise the cash costs associated with the Merger and transformation activities and property rationalisation programme noted below within Non-Headline items.

A reconciliation of free cash flow to cash flow from operations is presented in note 9 to the financial information. 

Funding

At 29 October 2016 the Group had net debt of £285 million (2015/16: £378 million). A reconciliation of net debt is presented in note 9 to the financial information. Free cash flow was an inflow of £65 million (2015/16: inflow of £64 million) for the reasons described on the previous page.

Of the free cash flow, £75 million was returned to shareholders in the form of dividends for the 2015/16 financial year.

Net outflows associated with acquisitions and disposals in the current period largely relates to deferred consideration payments for Simplifydigital of £10 million, the 'Epoq' kitchen business of £2 million and the acquisition of 10 FONA stores in Denmark of £6 million (2015/16: CPW Europe Acquisition final payment of £26 million).This is offset by cash inflows relating to discontinued operations of £16 million (2015/16: £65 million outflow).

The investment in joint venture of £16 million relates to additional contributions to the Sprint joint venture during the period.

Statutory results

Income statement - continuing operations

EBIT increased from £100 million to £121 million predominantly reflecting the increased Headline EBIT as discussed above, which has been offset by the non-Headline costs recognised of £32 million (2015/16: £35 million).

Net finance costs have decreased by £5 million to £17 million largely as a result of charges relating to the renewed RCF recognised in the prior year.

The tax charge has been calculated based on the full year forecast effective tax rate of 23%, before the one-off tax charges / credits and has decreased from £23 million to £11 million largely as a result of the recognition of a one-off tax credit of £16 million during H1 2016/17 following the successful resolution of a prior year tax issue.

The increase in statutory basic EPS reflects the improved performance in the period, with no significant changes in the number of shares in issue.

Non-Headline items

Headline profit before tax is reported before Non-Headline charges. These charges are analysed below:

Costs incurred in relation to the Merger in the first half of 2016/17 relate to integration costs of £9 million (2015/16: £15 million) and functional transformation costs of £6 million (2015/16: £nil). Integration costs primarily reflect professional fees, employee severance and incentive costs associated with the initial integration of the two merged businesses. During the current period functional transformation projects have commenced across the finance, procurement and human resources functions to rationalise shared service centre activities and harmonise policies and procedures across key support functions of the business.

The charge for the amortisation of acquisition intangibles was £17 million (2015/16: £20 million) with the decrease due to some of the acquisition intangibles arising on the CPW Europe Acquisition being fully amortised during the prior period.

Net pension interest was £8 million (2015/16: £8 million) reflecting the charge incurred in relation to the Dixons Retail UK pension scheme. Further details on the pension scheme can be found in the Pensions section later in this performance review.

For further details of Non-Headline items see note 3 to the interim financial information.

Discontinued operations

As previously reported, the Group's retail operations in Germany, the Netherlands and Portugal were treated as discontinued operations following the decision to exit these businesses. The sale of operations in Germany was completed on 5 May 2015, the Netherlands on 30 June 2015 and Portugal on 31 August 2015. A net loss of £9 million was recognised in relation to these businesses in H1 2015/16 (year ended 30 April 2016: £18m loss). No profit or loss relating to discontinued operations has been recognised in the 26 weeks to 29 October 2016.

Balance sheet

Goodwill has increased by £135 million to £3,189 million largely as a result of foreign exchange movements for goodwill held relating to the Nordics and Spain, and additions of £3 million relating to the acquisition of 10 FONA stores in Denmark.

The net working capital liability has decreased by £22 million to £339 million, largely as a result of the increase in the carrying value of ongoing network commission receivables. Overall net debt has increased by £18 million as described in the cashflow section above.

Tax, pension and other liabilities have increased by £167 million largely as a result of the increase in the UK defined benefit pension scheme of £174 million, offset by a decrease in deferred consideration of £10 million as a result of payments made during the year.

Cash flow statement

The statutory EBIT for the Group has increased for the reasons discussed in the performance section above. The statutory EBIT includes the charges of £32 million relating to the 'Non-Headline' items. Depreciation and amortisation charges remained relatively consistent in the period. Working capital movements are largely as a result of timing variances. Acquisitions outflows in the current period of £18 million relate to £10 million deferred consideration payment for the acquisition of Simplifydigital, £2 million in the Nordics in relation to the 'Epoq' kitchen business acquired in 2011/12 and £6 million for the acquisition of 10 FONA stores in Denmark. Investment in joint venture of £16 million relates to further contributions into the Sprint joint venture.

Other financing cash flows of £29 million primarily relate to the repayment and drawdown of cash under the revolving credit facilities.

Comprehensive income / changes in equity

Total equity for the Group has increased from £2,860 million to £2,904 million primarily reflecting the total statutory profit of £93 million in the period, the gain on retranslation of overseas operations of £180 million, the payment of dividends of £75 million and the increase in the IAS19 defined benefit pensions deficit for the UK pension scheme, reflecting the change in discount and inflation rates in the period, resulting in an actuarial loss of £184 million.

Pensions

The IAS 19 accounting deficit of the defined benefit section of the UK pension scheme amounted to £646 million at 29 October 2016 (31 October 2015: £423 million, 30 April 2016: £472 million). Contributions during the period under the terms of the deficit reduction plan amounted to £18 million (2015/16: £18 million).

The deficit has increased during the first half largely as a result of changes in financial assumptions, primarily the discount and inflation rates, which determine liabilities, partially offset by an increase in asset values.

Dividends

The Board has declared an interim dividend of 3.5p per share, up from 3.25p per share last year. The ex-dividend date is 29 December 2016, with a record date of 30 December 2016 and an intended payment date of 27 January 2017.

* Headline results exclude amortisation of acquisition intangibles, Merger integration and transformation costs, property rationalisation costs, acquisition related costs, net interest on defined benefit pension schemes and discontinued operations (comprising Phone House operations in Germany, Netherlands and Portugal). Such excluded items are described as 'Non-Headline'. For further details see notes 3 and 10.

* Headline results exclude amortisation of acquisition intangibles, Merger integration and transformation costs, property rationalisation costs, acquisition related costs, net interest on defined benefit pension schemes and discontinued operations (comprising Phone House operations in Germany, Netherlands and Portugal). Such excluded items are described as 'Non-Headline'. For further details see notes 3 and 10.

1 Basis of preparation

The interim financial information for the 26 weeks ended 29 October 2016 was approved by the directors on 13 December 2016. The interim financial information, which is a condensed set of financial statements, has been prepared in accordance with the Listing Rules of the Financial Conduct Authority and International Accounting Standard 34 'Interim Financial Reporting' (IAS 34) as adopted by the European Union and has been prepared on the going concern basis as described further in the section on risks to achieving the Group's objectives.

The accounting policies adopted are those set out in the Group's Annual Report and Accounts for the year ended 30 April 2016 which were prepared in accordance with IFRS as adopted by the European Union. New accounting standards, amendments to standards and IFRIC interpretations which became applicable during the period were either not relevant or had no impact on the Group's net results or net assets.

The interim financial information uses definitions that are set out on pages 154 to 156 of the same document.

The interim financial information is unaudited and does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006, but has been reviewed by the auditor. The financial information for the year ended 30 April 2016 does not constitute the Company's statutory accounts for that period but has been extracted from those accounts which have been filed with the Registrar of Companies and are also available on the Group's corporate website www.dixonscarphone.com. The auditor has reported on those accounts, their report was unqualified, did not draw attention to any matters by way of emphasis, and did not contain statements under Sections 498 (2) or (3) of the Companies Act 2006.

The Group's income statement and segmental analysis identify separately Headline performance and Non-Headline items. Headline performance measures reflect adjustments to total performance measures. The directors consider 'Headline' performance measures to be a more accurate reflection of the ongoing trading performance of the Group and believe that these measures provide additional useful information for shareholders on the Group's performance and are consistent with how business performance is measured internally.

Headline results are stated before the results of discontinued operations or exited / to be exited businesses, amortisation of acquisition intangibles, acquisition related costs, any exceptional items considered so one-off and material that they distort underlying performance (such as reorganisation costs, impairment charges, property rationalisation costs and other non-recurring charges) and net pension interest costs. Businesses exited or to be exited are those which the Group has exited or committed to or commenced to exit through disposal or closure but do not meet the definition of discontinued operations as stipulated by IFRS and are material to the results and operations of the Group. 

Non-Headline items in the current and prior periods comprise amortisation of acquisition intangibles, Merger integration and transformation costs, property rationalisation costs, acquisition related costs, net interest on defined benefit pension schemes and discontinued operations. A reconciliation of Headline profit and losses to total profits and losses is shown in note 2. Items excluded from Headline results can evolve from one financial year to the next depending on the nature of exceptional items or one off type activities described above. Headline performance measures and Non-Headline performance measures may not be directly comparable with other similarly titled measures or "adjusted" revenue or profit measures used by other companies.

2 Segmental analysis

The Group's operating segments reflect the segments routinely reviewed by the Board and which are used to manage performance and allocate resources. This information is predominantly based on geographical areas which are either managed separately or have similar trading characteristics such that they can be aggregated together into one segment.

The Group operates four operating segments as described below. Discontinued operations are excluded from this segmental analysis.

The Group's reportable segments have been identified as follows:

• UK & Ireland comprises operations in the UK and Ireland and the Dixons Travel business.

• Nordics operates in Norway, Sweden, Finland, Denmark and Iceland.

• Southern Europe comprises operations in Spain and Greece.

• Connected World Services is the Group's B2B operation which leverages the specialist skills, operating processes and technology of the Group to provide managed services to third parties looking to develop their own connected world solutions, and the Group's share of results of the Sprint Connect joint venture.

UK & Ireland, Nordics and Southern Europe are involved in the sale of consumer electronics and mobile technology products and services, primarily through stores or online channels.

Transactions between segments are on an arm's length basis.

2 Segmental analysis (continued)

(a) Segmental results

Reconciliation of Headline profit to total profit

2 Segmental analysis (continued)

(a) Segmental results

Reconciliation of Headline profit to total profit

2 Segmental analysis (continued)

(a) Segmental results (continued)

Reconciliation of Headline profit to total profit

(b) Seasonality

The Group's business is highly seasonal, with a substantial proportion of its revenue and EBIT generated during its third quarter, which includes the Christmas and New Year season.

3 Non-Headline items

Non-Headline items also include discontinued operations, which comprise the results of the Phone House operations in Germany, the Netherlands and Portugal. The post-tax results of these businesses have been reported separately and are further described in note 10.

(i) Amortisation of acquisition intangibles:

This relates to acquisition intangibles arising on the CPW Europe Acquisition, the Dixons Retail Merger and Simplifydigital acquisition.

(ii) Merger and transformation related costs:

The Merger has given rise to the following costs which have been treated as non-Headline:

· Merger integration costs of £9 million (2015/16: £15 million, year ended 30 April 2016: £48 million) relate to the reorganisation of the Group following the Merger and primarily comprise professional fees, employee severance and incentive costs associated with the integration process.

· During the current period, functional transformation projects have commenced across the finance, procurement and human resources functions to rationalise shared service centre activities and harmonise policies and procedures across key support functions of the business. In H1 2015/16, the cost recognised of £6 million primarily relates to consultancy fees.

· In the year ended 30 April 2016 the Revolving Credit Facility fee write off recognised in finance costs relates to the deferred facility fees written off. The fees incurred were a result of the Merger and the financing required to facilitate the Merger at short notice. No related amounts were recognised in the current half year.

(iii) Property rationalisation costs:

Following the Merger it was announced that the Group would launch a major roll out of its fully refurbished 3-in1 store concept in the UK & Ireland. This involves merging the remaining PC World and Currys stores and inserting a Carphone Warehouse, reducing the overall store portfolio by 134. The costs associated with this initiative, being early lease termination premiums, onerous lease provisions, dilapidations and fixed asset impairments, were treated as exceptional items in the year ended 30 April 2016.

(iv) Acquisition related:

Acquisition related comprised an increase in the deferred consideration payable on a business acquired by Dixons in the Nordics in 2011/12 (£5 million), which was recorded in the second half of 2015/16, and costs incurred in the acquisition of Simplifydigital and InfoCare incurred in the same period.

(v) Net non-cash financing costs on defined benefit pension schemes:

The net interest charge on defined benefit pension schemes represents the non-cash remeasurement calculated by applying the corporate bond yield rates applicable on the last day of the previous financial year to the net defined benefit obligation. As a non-cash remeasurement cost which is unrepresentative of the actual investment gains or losses made or the liabilities paid and payable the accounting effects of this is excluded from Headline earnings.

4 Tax

The Group's Headline effective rate of taxation before one off tax charges / credits for the full year has been estimated at 23% (2015/16: 25%) with this rate being applied to the half year results. The rate is higher than the UK statutory rate of 20% due mainly to higher statutory rates in the Nordics, and certain non-deductible items mainly in the UK. In calculating the total tax charge for the half year, a one-off tax credit of £16 million has been recognised following successful resolution of a prior year tax issue, which results in a total effective rate of taxation on Headline earnings of 13%, with an effective rate of taxation on Non-Headline earnings of 20%. The total statutory effective rate of taxation is 11%.

The UK corporation tax rate for the 26 weeks ended 29 October 2016 was 20% (26 weeks ended 31 October 2015: 20%).

5 Earnings / (loss) per share

Basic and diluted earnings per share are based on the profit for the period attributable to equity shareholders. Headline earnings per share is presented in order to show the underlying performance of the Group. Adjustments used to determine Headline earnings are described further in note 3.

6 Dividends

The proposed interim dividend for the year ending 29 April 2017 is 3.50p per share. The expected cost of this dividend is £40 million and incorporates the agreement of the Group's Employee Share Ownership Trust to waive its rights to receive dividends.

7 Retirement benefit obligations

The Group operates a number of defined contribution and defined benefit pension schemes. The principal scheme operates in the UK and includes a funded defined benefit section, the assets of which are held in a separate trustee administered fund. The defined benefit section of the scheme was closed to future accrual on 30 April 2010. The net obligations of this scheme, calculated in accordance with IAS 19, are analysed as follows:

The value of obligations is particularly sensitive to the discount rate applied to liabilities at the assessment date as well as mortality rates. The value of the plan assets is sensitive to market conditions, particularly equity values. The assumptions used in the valuation of obligations are listed below:

Mortality rates are based on historical experience and standard actuarial tables and include an allowance for future improvements in longevity.

8 Financial instruments, loans and other borrowings

The Group holds the following financial instruments at fair value:

The fair value of short-term investments have values determined by 'Level 1' inputs as defined by the fair value hierarchy of IFRS 13 'Fair Value Measurement'. Short-term investments comprised shares held in Drillisch AG, a telecommunications providers and listed stock corporation in Germany, which were received as consideration regarding the disposal of Phone House Germany.

The significant inputs required to fair value the Group's currency contracts and interest rate swaps, are observable and are classified as 'Level 2' in the fair value hierarchy.

Deferred and contingent consideration is categorised as 'Level 3' in the fair value hierarchy as the valuation requires the use of significant unobservable inputs. The fair value of contingent consideration arrangements has been estimated by applying the income approach. A reduction in growth assumptions used in the fair value methodology would result in a reduction in the amount of contingent consideration payable. The movement in deferred and contingent consideration during the period is due to cash payments of the amounts due.

Fair values have been arrived at by discounting future cash flows (where the impact of discounting is material), assuming no early redemption, or by revaluing forward currency contracts and interest rate swaps to period end market rates as appropriate to the instrument.

Network commission receivables are classified as loans and receivables as defined in IAS 39 and are therefore accounted for at amortised cost. The carrying value of such network commission receivables is £961 million (31 October 2015: £716 million, 30 April 2016: £904 million) which is approximately equal to their fair value.

There have been no transfers of assets or liabilities between levels of the fair value hierarchy. For all other financial assets and liabilities, the carrying amount approximates their fair value.

On 8 October 2015 the Group signed a new multi-currency revolving credit facility for £800 million, which matures in October 2020 and replaced the multi-currency term and revolving credit facility which was previously in place. On 7 October 2016 this facility was extended to mature in October 2021.

On 7 October 2016 a further £250 million multi-currency revolving credit facility was signed which matures in 2020. In addition, on 28 October 2016, an additional €50 million term loan facility was also signed, which also matures in 2020.

The main terms and conditions of all these facilities are similar. 

9 Note to the cash flow statement