Gusbourne Regulatory News (GUS)

25 May 2005 07:02

GUS PLC25 May 2005 25 May 2005 GUS plc Preliminary Results For Year Ended 31 March 2005 Strong financial performance €10% increase in profit before amortisation of goodwill, exceptional items and taxation* to £910m (2004: £827m) •Profit before tax increased to £693m (2004: £692m) €5% increase in basic earnings per share before amortisation of goodwill and exceptional items* to 63.8p (2004: 60.7p) •Basic earnings per share 42.3p (2004: 47.4p) €9% increase in full year dividend to 29.5p (2004: 27.0p) €10.3% post-tax return on capital (2004: 10.2%) Record profits again at Argos Retail Group, Experian and Burberry •ARG: sales up 7% and profit up 10% before one-off charges* •Experian: sales up 18% and profit up 16% for continuing activities at constant exchange rates •Burberry: sales up 10% and profit up 21% at constant exchange rates Further initiatives to enhance shareholder value •Lewis: sold remaining stake •Burberry: demerger later in year •ARG and Experian: - driving sustainable growth is key - future separation * One-off charges have been made covering the Argos OFT fine (£16.2m) andHomebase reorganisation costs (£18.3m). Excluding these one-off charges, GroupPBT was £945m (up 14%) and basic EPS before amortisation of goodwill andexceptional items was 66.2p (up 9%). Sir Victor Blank, Chairman of GUS, commented: "The Board has drawn its conclusions from the strategic review about futuregroup structure and has started to take actions accordingly. It recognises thatthere is no strategic logic in maintaining ARG, Experian and Burberry within thesame group in the long term. While the separation of ARG and Experian will beundertaken at the right time in the future, the Board has decided that it isappropriate to demerge Burberry later this year to give our investors a directinterest in Burberry's exciting future." John Peace, Chief Executive of GUS, commented: "We are delighted with the progress made again at GUS during the year,especially as this is the fourth year of double-digit growth. Once again allthree of our main businesses have achieved record profits in 2005. Lookingforward, the UK retail environment remains very challenging but we are confidentthat our businesses have clear strategies to deliver long-term sustainablegrowth, supported by continuing investment." Enquiries GUSJohn Peace Group Chief Executive 020 7495 0070David Tyler Finance DirectorFay Dodds Director of Investor Relations FinsburyRupert Younger 020 7251 3801Rollo Head There will be a presentation today at 9.30am to analysts and investors at theMerrill Lynch Financial Centre, 2 King Edward Street, London EC1A 1HQ. Thepresentation can be viewed live on the GUS website at www.gusplc.com. Thesupporting slides and an indexed replay will also be available there later inthe day. There will be a conference call to discuss the results at 3.00pm today (UKtime), with a recording available later on the website. All relevant GUS,Burberry and Lewis Group announcements are also available on www.gusplc.com. The restatement of these preliminary results under International FinancialReporting Standards will be published on 14 June 2005. GUS will hold its AGM andissue its First Quarter Trading Update on 20 July 2005. Certain statements made in this announcement are forward looking statements.Such statements are based on current expectations and are subject to a number ofrisks and uncertainties that could cause actual events or results to differmaterially from any expected future events or results referred to in theseforward looking statements. Any shares to be distributed in the proposed demerger have not been and will notbe registered under the US Securities Act of 1933 (the "Securities Act") and maynot be offered or sold within the United States absent registration under theSecurities Act or an exemption from registration. No public offering of suchshares will be made in the United States. GROUP STRATEGY Introduction In May 2004, the Board of GUS stated that it believed that there was furtherscope to increase shareholder value significantly, building on its track recordof success in the previous four years. It stated it would: • continue to invest in its three main businesses and drive profitgrowth; • initiate a share buyback programme of about £200m over the next twelvemonths; and • actively review all strategic options over the next two years, inorder to create further value for our shareholders. Progress in 2005 During the last financial year, GUS has continued to deliver against theseinitiatives: • Group profit before amortisation of goodwill, exceptional items andtaxation increased by 10%, with each of our three main businesses generatingrecord profits; • we have invested over £650m in these businesses, through a combinationof capital expenditure of £390m, an increase of £89m in the ARG FinancialServices loan book and 27 acquisitions for Experian at a total cost of £181m; • we have completed the £200m share buyback, purchasing 22m shares at anaverage price of 897p. This is in addition to the proposed full year dividend of£293m (29.5p per share); and • we have undertaken a detailed analysis of the Group and its mainbusinesses in a number of areas: - the likely future developments in each of the markets in which weoperate; - the future growth plans and investment requirements of our businesses; - the equity market's valuation of the Group; - the advantages and disadvantages of various ownership structures; and - the views of our investors and senior management. Update on Strategic Review This review has reinforced our belief that GUS has businesses with above averagegrowth potential, which are capable of leadership positions in their respectivemarkets. As discussed later, each business has a clear strategy to deliversustainable growth. The Board has also drawn its conclusions about future Group structure from thereview and has started to take actions accordingly. These include: Sale of Lewis Group stake A placing of GUS' remaining 50% stake in Lewis took place successfully lastweek, raising about £140m. This brings the total net proceeds from selling 100%of Lewis to £245m. Burberry Group plc The Board has decided to demerge the remaining 66% stake in Burberry to GUSshareholders by way of a dividend in specie later this year. This will besubject to shareholder approval and will be accompanied by a GUS shareconsolidation exercise. ARG and Experian The Board has also concluded that, at the right time, shareholder value islikely to be further enhanced by a separation of ARG and Experian. But it believes that at this stage both businesses will benefit from further investment and support as part of GUS. We will continue to focus on driving sustainable growth in ARG and Experian as we have in recent years. The Board firmlybelieves that this is the key driver of long-term value creation for shareholders. The restructuring will be undertaken at a time and in a manner that benefits ourbusinesses, minimises disruption and is in the long-term interests of ourshareholders. GROUP FINANCIAL HIGHLIGHTS Sales from continuing operations up 7% to £7.6bn An increase of 10% to £910m of profit before amortisation of goodwill,exceptional items and taxation. Profit rose 14% to £945m before the one-offcharges for the Argos OFT fine and Homebase reorganisation costs. Foreignexchange movements reduced profit by £18m during the year. An increase of 5% to 63.8p in earnings per share before amortisation of goodwilland exceptional items. It rose 9% to 66.2p before the ARG one-off charges.Minority interests were £49m (2004: £27m), reflecting the partial IPO of Lewisin September 2004 (£10m), the sale of a further stake in Burberry in November2003 (£5m) and strong profit growth in both businesses. An effective tax rate of 24.3%, based on profit before amortisation of goodwilland before profits and losses on sale of businesses (2004: 23.4%). For 2006, weexpect the tax rate to increase by about 2% under UK GAAP. Net debt increased to £1.4bn at 31 March 2005, up from £1.2bn a year ago,reflecting strong operating cash flow, the £200m GUS share buyback and a £76mspecial pension contribution. An analysis of cash flow by division is given inAppendix 1. Final dividend of 20.5p proposed, making 29.5p for the full year (2004: 27.0p).Dividend cover is 2.16 times on EPS of 63.8p. 12 months to 31 March Sales Profit -------------- ---------------- 2005 2004 2005 2004 £m £m £m £m -------- --------- --------- ---------Argos Retail Group (1) 5,535 5,162 421.5 415.5Experian 1,362 1,286 318.3 282.2Burberry 715 676 165.7 141.2Central activities (12) (5) (24.1) (19.9)Continuing operations 7,600 7,119 881.4 819.0 -------- --------- --------- ---------Discontinued operations (2) 187 429 55.4 61.5Total 7,787 7,548 936.8 880.5 -------- --------- --------- ---------Net interest (26.4) (53.9) --------- ---------Profit before amortisation of goodwill, exceptional itemsand taxation 910.4 826.6Amortisation of goodwill (207.3) (192.6)Exceptional items (10.0) 58.3Profit before taxation 693.1 692.3 --------- ---------EPS before amortisation of goodwill and exceptional items 63.8p 60.7p --------- ---------Reported basic EPS 42.3p 47.4p --------- ---------The profit figure shown against each business above is operating profit, definedas profit before interest, taxation, exceptional items and goodwillamortisation. The same definition of operating profit is used in each table inthis preliminary announcement. (1) 2005 operating profit at ARG is after the one-off charges of £16.2m for theArgos OFT fine and £18.3m for Homebase reorganisation costs.(2) Discontinued operations include sales from Lewis and Home shopping and Realityand operating profit from Lewis and Property. ARGOS RETAIL GROUP (ARG) Sales up 7% to £5.5bn and profit up 10% to £456m, with operating margin up atboth Argos and Homebase Argos continued to outperform its market, with like-for-like sales growth of 3%and an improved gross margin Homebase gained market share, with like-for-like sales growth of 3% and animproved gross margin Moving forward there will be continued investment in ARG despite challengingtrading conditions: •increase in planned size of chain at both Argos and Homebase; •national roll out of Argos Extra in July 2005; •Furniture Direct into all Homebase stores by November 2005. Sales Operating profit --------------- ---------------- 12 months to 31 March 2005 2004 2005 2004 £m £m £m £m-------------------- -------- --------- --------- ---------Argos 3,652 3,384 325.8 297.4Homebase (1) 1,580 1,483 110.1 102.2Financial Services 81 60 0.2 (5.5)Wehkamp 222 235 19.9 21.4 -------- --------- --------- ---------Sub-total 5,535 5,162 456.0 415.5-------------------- -------- --------- --------- ---------Argos - charge for OFT fine - - (16.2) - Homebase - charge for -reorganisation costs - - (18.3)-------------------- -------- --------- --------- ---------Total reported 5,535 5,162 421.5 415.5-------------------- -------- --------- --------- ---------Operating margin (2) 8.2% 8.0% Operating cash flow 54 44-------------------- -------- --------- --------- --------- (1) Homebase sales and profit for 12 months to 28 February(2) Excluding one-off charges for Argos OFT fine and Homebase reorganisation costs ARG is focused principally on selling general merchandise in the UK. It has amulti-brand, multi-channel offer, supported where appropriate by a centralinfrastructure in areas such as sourcing and supplier management, multi-channelordering, home delivery and financial services. Consumer spending in the UK has slowed sharply in recent months. ARG believesthat this has resulted in a decline on a like-for-like basis in the non-food,non-clothing market. It is planning on the assumption that this trend in themarket continues. At the same time, retailers are facing higher cost inflationin areas such as rates, wages and energy costs. Clearly Argos and Homebase arenot immune from this downturn in demand or these cost pressures. In the current environment, ARG will continue to control costs robustly anddrive productivity to help offset underlying cost inflation. It will alsocontinue to invest in its key initiatives, outlined below, which support thedelivery of sustainable growth over the longer term. ARG •delivering supply chain gains across ARG, with total benefits from the integration of Homebase expected to double to £40m by March 2006; and •continuing to invest in the infrastructure required to support future growth. Argos •rolling out Argos Extra to all stores with the launch of the Autumn/ Winter catalogue in July 2005; •converting and integrating the 33 acquired Index stores; and •extending the store chain to in excess of 750 stores over the next four years. Homebase •extending the store chain to around 350 stores over the next four years; •nationally launching Furniture Direct during 2006, leveraging the ARG infrastructure; and •adding at least 20 more mezzanines into existing stores in 2006. One-off chargesAs previously announced, the Competition Appeal Tribunal has recently ruled onthe fine imposed on Argos by the Office of Fair Trading two years ago. Argos isdisappointed with the judgment and continues to maintain vigorously itsinnocence. It is seeking leave to appeal what it believes to be an unfairdecision. A charge of £16.2m to cover the fine and the associated interest costshas been made against Argos' operating profit in 2005. As previously announced, ARG is planning to move a number of Homebase functionscurrently based in Wallington, Surrey to its head office in Milton Keynes. Thisrelates to about 500 Homebase employees, including the merchandising and buyingfunctions. The costs of this move have been estimated at £18.3m and have beencharged against Homebase's operating profit in 2005. Argos 12 months to 31 March 2005 2004 Growth £m £m-------------------- -------- --------- --------- ---------Sales 3,652 3,384 8%Total growth 8% 12%Like-for-like growth 3% 5% Operating profit 325.8 297.4 10%Charge for OFT fine (16.2) - -------- --------- --------- Total reported 309.6 297.4 Operating margin (1) 8.9% 8.8%-------------------- -------- --------- ---------At 31 March Number of stores 592 556Of which: Argos Extra stores 179 75-------------------- -------- --------- ---------(1) Excluding one-off charge for the OFT fine In an increasingly competitive general merchandise market, Argos continues togrow share by winning a higher proportion of customers' spend by offering themthe most compelling combination of choice, value and convenience. Operational review Following a successful trial, customers will be offered improved choice throughthe roll out of Argos Extra to all stores and channels with the launch of theAutumn/Winter catalogue in July 2005. Argos Extra has over 4,000 more lines thanthe main catalogue's 13,300 and was available in 179 stores at the year end. Ofthese, 128 stocked-in the additional lines and 51 offered customers the optionto order-in the extended range for later collection. The extended leisure,storage and lighting ranges sold well during the year. In July 2005, Argos Extra will be made available in all stores. Approximately160 stores will stock-in the additional lines, with the remaining storesoffering the order-in facility. Argos Extra will also be available over theInternet and for home delivery anywhere in the UK. New system developments, suchas text message notification that products are available in store forcollection, will also provide customers with greater convenience. To date, the Argos Extra stocked-in stores have delivered high single-digitpercentage sales uplifts, with lower increases at ordered-in stores. Thenational roll out of Argos Extra is expected to add 2-3% to sales in its firstfull year, as consumers become more aware of the extended ranges. Thisinitiative is a clear example of how Argos can generate returns on investmentwell above its hurdle rate. Argos continues to offer customers lower prices. Prices on re-included lines inthe current Spring/Summer catalogue are 6% lower than last year supported bysupply chain benefits and the movement in the US dollar. Direct importing nowaccounts for about 25% of sales compared to 16% two years ago. During the year,Argos also launched a "non stop price drop" campaign, reinforcing to consumersits commitment to reduce prices during the life of the catalogue. Argos expects to add around 35 stores per annum over the next four years,bringing the total to over 750 stores by March 2009. It has already successfullyexpanded the chain into more out-of-town locations (with 152 stores currentlybeing on retail parks). This allows it to move into more catchments that cansupport a second or third Argos store. Argos has also enhanced its ability toopen stores in smaller market towns, as range expansion enables it to take ahigher share of spend in these catchments. Argos also plans nearly to double itspresence in Ireland over the next four years from the current 22 stores. At the year-end, Argos had 592 stores. It plans to open around 35 stores in2006. This is in addition to 33 Index stores, which will be purchased for £44min July 2005. Argos expects these stores to start trading by October 2005 afterwhich they should add 2-3% to total Argos sales in their first full year ofoperation. Argos continues to invest in improving the convenience of its offer forcustomers. It enables customers to order or reserve goods in stores, by phone oron the Internet, for delivery to store or to home. Argos Direct, the delivery tohome operation, grew sales by 18% and accounted for 22% of revenue in 2005.Internet orders for direct delivery to home grew by 37% during the year,accounting for 5% of Argos' sales. A further 8% of total sales were reserved bycustomers, either by phone, Internet or text message, for later collectionin-store. Work is almost complete on the new delivery to home warehouse in Faverdale,Darlington due to open in July 2005. This is Argos' third dedicated warehousesupporting the home delivery of large items which are not available in store,such as furniture and white goods. Financial review In the year to 31 March 2005, Argos again outperformed its market. It grew itstotal sales by 8% and increased its gross margin, leading to a 10% increase inoperating profit (before the one-off charge for the OFT fine). Against anenvironment of weakening retail demand, sales and profit growth slowed in thesecond half. Sales growth was 13% in H1 slowing to 5% in H2, while profit growthdeclined from 16% in H1 to 7% in H2. New stores continue to trade well and contributed 5% to sales growth in theyear. Like-for-like sales growth was 3%. There were strong performances fromconsumer electronics, digital products and leisure throughout the year. However,the rate of growth in sales of furniture and white goods slowed in the fourthquarter. Operating profit in the year grew by 10%, reflecting the level of sales growth,a slightly improved gross margin and continued investment in future growthinitiatives, such as Argos Extra and the infrastructure. As outlined above, thisinvestment will continue in the current financial year in areas such asinfrastructure and the transitional costs relating to the acquired Index stores.The latter will reduce profits by about £8m in the first half. Homebase 12 months to 28 February 2005 2004 Growth £m £m-------------------- --------- --------- ---------Sales 1,580 1,483 7%Total growth(1) 6% 5%Like-for-like growth (1) 3% 3% Operating profit 110.1 102.2 8%Charge for reorganisation costs (18.3) -Total reported 91.8 102.2 Operating margin (2) 7.0% 6.9%-------------------- --------- --------- ---------At 28 FebruaryNumber of stores 287 278Of which: number with mezzanine floor 111 67-------------------- --------- --------- --------- (1) Total and like-for-like growth for 2005 excludes 29 February 2004(2) Excluding one-off charge for reorganisation costs Within a competitive market, Homebase is being repositioned as the UK's leadinghome enhancement retailer. The key strategic priorities remain unchanged, beingto: • improve the existing core business; • enhance and extend its home furnishings offer; and • deliver synergies by leveraging the scale and expertise of ARG. Operational review Homebase continues to improve the in-store experience for its customers, drivingmarket share gains. Actions to improve customer service, stock availability andretailing basics have continued during the year with positive feedback fromcustomers. Stock availability has been improved through close monitoring of keylines and out of stocks. Range reviews have been undertaken in areas such aspaint, tiling and lighting, driving encouraging sales gains. A new advertisingcampaign was launched in early March, supporting the Homebase differentiatedproposition and value position. It also forms the basis for a consistent styleacross all marketing activity. Homebase expects to add around 15 stores per annum over the next four years,bringing the total to about 350 stores by March 2009. New stores continue toperform well, giving a payback on investment well above the hurdle rate.Homebase sees longer-term potential for around 450 stores given this strongfinancial performance and its greater confidence in the improved format andservice offer. Homebase had 287 stores at the year-end, having opened a net nine stores duringthe year. It plans to open a net 13 stores in 2006, being a mix of traditionaland smaller stores. The most recent mezzanine formats are delivering improved sales uplifts, wellabove the 15% generated by earlier trials. They offer improved store layout,better lit mezzanines, enhanced fixtures and improved internal and externalsignage. Examples can be seen at Telford, Finchley Road (London) and Banbury. A total of 111 stores had mezzanine floors at February 2005, an increase of 44in the year. In 2006, Homebase plans to add at least another 20 mezzanine floorsto existing stores and open most of its 13 net new stores with mezzanines. Thisis in addition to all the work involved with the national roll-out of FurnitureDirect in the same period. Homebase will continue to benefit from leveraging the scale and expertise ofARG, in both sourcing and infrastructure. During the year, Homebase has seenbenefits from value engineering and terms harmonisation in areas such as gardenpower, garden furniture, power tools, bathrooms, lighting and flooring. Homebasehas also been able to use the established ARG infrastructure to increase rapidlythe proportion of goods directly imported. This now stands at 21% of sales,compared to 8% at the time of acquisition in late 2002. The trial of the Furniture Direct catalogue, which uses the ARG infrastructureto home deliver furniture and home furnishings sourced from both the Homebaseand Argos ranges, has been successful in improving sales densities. Productdisplays are in 20 Homebase stores currently, with nine further stores offeringthe catalogue only. By November 2005, an additional 115 stores will displayproducts, with catalogues available in all remaining stores. Homebase has alsorecently launched a transactional website, selling products from the Argosrange, and is testing Appliances Direct, a catalogue offering white goods againfrom the Argos range, in 29 stores. Financial review In the year to 28 February 2005, against a weakening retail environment,Homebase gained share in the DIY market, increased total sales by 6% andimproved its gross margin slightly. In the year, new stores contributed 3% to total sales growth. Like-for-likesales growth of 3% was aided by the performance of mezzanines and big ticketitems. Operating profit, before reorganisation costs, increased by 8%, reflecting thesales increase and gross margin improvement, partially offset by continuedinvestment in mezzanines. ARG Financial Services (ARG FS) 12 months to 31 March 2005 2004 £m £m-------------------- --------- ---------Sales 81 60 Profit before funding costs 18.6 6.8Funding costs (18.4) (12.3)Operating profit/(loss) 0.2 (5.5)-------------------- --------- --------- At 31 MarchGross loan book 463 374Number of active store card holders (000s) 887 765 ARG FS works in conjunction with Argos and Homebase to provide their customerswith the most appropriate credit offers to drive product sales, while retainingthe maximum possible profit from the transaction within ARG. It offers storecards (providing both revolving and promotional credit) and a range of insuranceproducts. ARG FS loan book grew by 24% or £89m in the year, reflecting mainly store cardgrowth. The Argos store card funded 9% of Argos' sales in 2005, with continuedgrowth in the active card base. The Homebase store card, which was launched inOctober 2003, funded 3% of Homebase's sales. Credit sales helped to drive bigticket purchases in particular, with customers taking advantage of strongpromotional credit offers, such as "buy now pay later". Due to the competitivenature of the market, ARG FS has currently stopped offering new personal loans.Despite this, continued momentum in store cards is expected to drive the grossloan book to around £500m by March 2006. ARG FS achieved a break even position for the first time in 2005, as interestincome from growth in the loan books increased. This has been offset to someextent by higher borrowing costs, which have not been passed on to customers,together with additional bad debt costs. Wehkamp 12 months to 31 March 2005 2004 Change at £m £m constant FX-------------------- --------- --------- --------- Sales 222 235 (4%) Operating profit 19.9 21.4 (6%) Operating margin 9.0% 9.1%-------------------- --------- --------- --------- Sales at Wehkamp, the leading home shopping brand in Holland, declined by 4% atconstant exchange rates. This reflects the weakening retail environment inHolland throughout the year. Operating profit was 6% lower in euros, drivenprimarily by the sales reduction. EXPERIAN Sales up 18% and profit up 16% for continuing activities at constant exchangerates Third consecutive year of double-digit sales and profit growth Third consecutive year of excellent cash generation, with 97% of operatingprofit converted into operating cash flow Benefiting from balance in the business portfolio - breadth of product offer andglobal reach Successful integration of acquisitions yielding expected synergies andaccelerating growth across the portfolio; LowerMyBills.com is a step-change fordirect-to-consumer activities---------------------- --------------- -------------------12 months to 31 March Sales Operating profit---------------------- --------------- ------------------- -------- -------- -------- -------- 2005 2004 2005 2004 £m £m £m £m---------------------- -------- -------- -------- -------- Experian North America 724 665 188.2 181.2Experian International 620 532 128.6 107.3 -------- -------- -------- --------Total continuing activities 1,344 1,197 316.8 288.5% growth at constant FX 18% 14% 16% 20% Discontinued activities 18 89 1.5 1.5Closure costs - - - (7.8) -------- -------- -------- --------Total reported 1,362 1,286 318.3 282.2---------------------- -------- -------- -------- -------- Operating margin - excluding FARES 21.0% 21.0%- including FARES 23.6% 24.1% Operating cash flow 309 298----------------------------------- -------- -------- Notes (relevant to all Experian tables): Additional information on Experian is given in Appendix 2. Experian is nowreporting the sales of its Interactive operations separately. This includesConsumer Direct, MetaReward, Affiliate Fuel and LowerMyBills.com. Full details of discontinued activities are given in Appendix 3. Operating margin is for continuing activities only. For FARES, the 20%-ownedreal estate information associate, Experian reports its share of FARES profitsbut not sales. Experian is a global leader in providing information solutions to organisationsand consumers. It helps organisations find, develop and manage profitablecustomer relationships by providing information, decision-making solutions andprocessing services. It has over 50,000 clients in more than 60 countries. Experian is the clear global leader in its sector and is uniquely positioned tobenefit from the key drivers of long-term growth, including expansion in: • credit and card usage; • emerging markets such as Eastern Europe and Asia Pacific; • fraud prevention; • multi-channel marketing; • vertical markets such as automotive and government; and • the direct-to-consumer market. Experian's newly formed Interactive operation offers a wide range of products that assist consumers in managing the financial aspects of key life events, such as buying a home. Following the acquisition in May 2005 of LowerMyBills.com, a leading online generator of mortgage and other loan application leads in the United States, Experian Interactive now accounts for about 30% of Experian North America sales on a pro forma basis. Experian has a clear strategy to capitalise on these opportunities by: Building on its core businesses. Experian has continued to win contracts acrossits businesses and around the world. These include application processing for anumber of financial institutions in the US, a multi-year deal in support of a UKgovernment agency to provide authentication services and customer managementsolutions for Brazil's largest state-owned bank. It has also been successful inmoving into emerging markets. In the last twelve months, Experian has preparedto open the first credit bureau in Russia as a joint venture, worked with theleading Korean credit bureau to introduce value-added solutions to the marketand extended its consumer classification system (MOSAIC) to countries includingJapan and China. Selling new value-added solutions. Experian continues to invest heavily in newproducts. For example, its new application fraud prevention system, Hunter II,has been successfully implemented in its first customer and has won numerousother contracts globally in countries such as Korea, Russia and the UK. Growing by targeted acquisitions. The ability of Experian to identify, acquireand integrate businesses is a core competency. Experian can often accelerate thegrowth of the acquired company by creating product synergies and cross-sellingto the combined client base. In the year to 31 March 2005, 16 acquisitions and11 affiliate credit bureaux purchases were completed for a combined investmentof £181m. Together, these are performing ahead of plan and are expected togenerate post-tax double-digit returns over time. During the year, Experian made significant investments in infrastructure,including the opening of a new UK data centre and new technology platforms forimproved access to US credit, consumer marketing and business-to-businessmarketing data. The new global management structure announced in February 2005is also enabling Experian to reinforce its position as the leading global playerin its markets. It is now better able to support multi-national clients anddevelop global products and solutions, while focusing on the needs of each localmarket. Experian North America 12 months to 31 March 2005 2004 Growth at £m £m constant FX----------------------- -------- --------- --------------Sales- Continuing activities 724 665 19%- Discontinued activities - 38 na -------- --------- --------------- Total reported 724 703 12% Operating profit- Direct business 153.7 143.9 16%- FARES 34.5 37.3 1% -------- --------- --------------- Continuing activities 188.2 181.2 13%- Discontinued activities - (1.6) na- Total reported 188.2 179.6 14%---------------------- --------- --------- --------------Operating margin- excluding FARES 21.2% 21.6%- including FARES 26.0% 27.2% Two small businesses (NuEdge and Real Estate Solutions) were sold during thesecond half of the year. These will be treated as discontinued activities from 1April 2005. Full details are given in Appendix 3. In the year to 31 March 2005, Experian North America delivered another goodfinancial performance across all businesses, demonstrating the strength of itsbroad product mix and its distribution capabilities. Operational review Sales from continuing activities increased by 19% in dollars. Corporateacquisitions generated 8% of this growth, with 11% organic growth. This wasachieved despite a 3% impact from lower sales to the mortgage sector. Credit Information and Solutions together grew sales by 5% excludingacquisitions. Growth was driven by new products such as triggers (automaticalerts to changes in consumers' credit behaviour), which gained strong marketadoption. Sales also benefited from improved delivery platforms and by sharegains in Credit Information in under-penetrated sectors such as credit unions,telecommunications and collections. A further 11 small affiliate bureaux werepurchased during the year, bringing the total to 32 at a combined cost of $191m. Marketing Information and Solutions together grew sales by 6% excludingacquisitions. There has been a general recovery in direct marketing, aidingsales of consumer marketing lists as well as automotive and business marketinginformation. In line with market trends, Marketing Solutions has seen acontinued switch of clients from traditional list processing to databasemanagement and e-mail marketing. Experian continues to gain new data managementbusiness from major multi-channel retailers and is now a key supplier to four ofthe top five retailers in the US. Experian Interactive increased its sales by 37% during the year excludingacquisitions. In Consumer Direct, which sells credit reports, scores andmonitoring services to consumers, the number of subscribers was nearly 2.4m atthe year-end, up by over 650,000 during the year. Sales were driven by the moveto monthly rather than annual billing, the successful launch in the fourthquarter of Triple Advantage (daily notification of any changes in consumers'reports from all three credit bureaux) and increased consumer credit awareness.MetaReward, the Internet lead-generation business, which was acquired inNovember 2003, had an exceptional year with sales doubling on a pro forma basis.This reflects some large, but lower margin, client contracts. FARES, the 20%-owned real estate information associate, had another strong year,with profits of $63.8m broadly equivalent to last year's $63.2m, despite risinginterest rates. FARES benefited from the synergies resulting from itsacquisition of Transamerica's tax and flood businesses in October 2003. Itcontinues to make complementary acquisitions and focus efforts on cost reductionto mitigate the expected decline in the mortgage market. Financial review Sales from continuing activities in the year were $1,337m, up 19% compared tolast year. Corporate acquisitions contributed 8% of this growth, a level thatshould at least be repeated in 2006 following the acquisition ofLowerMyBills.com. Operating profit from direct businesses was $284.0m, up by 16%. The operatingmargin declined slightly reflecting the growth of MetaReward (a lower marginbusiness) in the second half and FACTA-related costs not yet fully recouped bythe cost recovery charge to clients. With the free credit report required underthe FACT Act now available to half of the US population, activity levels andcosts are in line with expectations. The £/$ exchange rate moved substantially during the year from an average of$1.70 in the year to March 2004 to $1.85 in 2005. This reduced reported sales by£65m and operating profit by £17.0m. Experian International 12 months to 31 March 2005 2004 Growth at £m £m constant FX----------------------- ----------- ----------- -----------Sales- Continuing activities 620 532 17%- Discontinued activities 18 51 na- Total reported 638 583 10% Operating profit- Continuing activities 128.6 107.3 20%- Discontinued activities 1.5 3.1 na- Closure costs - (7.8) na- Total reported 130.1 102.6 27%----------------------- ----------- ----------- -----------Operating margin 20.7% 20.2%----------------------- ----------- ----------- ----------- Experian International, which accounts for about 45% of total Experian sales,had another excellent year, continuing its long record of double-digit sales andprofit growth. Operational review Sales grew by 17% at constant exchange rates, of which 10% came fromacquisitions. There was consistently good growth in the UK and Rest of World. Credit Information and Solutions increased sales by 8% excluding acquisitions.In the UK, there was continued good growth in business information, withsignificant gains in market share due to the strength of value-added products.In consumer information, Experian's position in financial services has beenenhanced by wins in other sectors including government and telecommunications.In Rest of World, there was excellent growth in business information services inFrance and in the credit bureaux in Southern Europe. The contract with CCI, theconsortium of Spanish banks, has been extended to 2010. Experian-Scorex, the credit solutions business, saw double-digit growth withparticularly strong performances in the UK, Latin America, Spain and emergingmarkets. It continues to develop and sell new solutions. For example, it isworking in the UK with Barclays to optimise targeting of customercommunications. In Russia, it has introduced a new collections and debt recoverysolution for its clients. Marketing Information and Solutions grew sales by 9% excluding acquisitions.This was driven by strong growth in many areas including: UKbusiness-to-business marketing; insurance; online data cleansing; e-mailmarketing; Business Strategies (micromarketing and economic forecasting) andfrom operations in Southern Europe. Following its acquisition in October 2004,QAS, the leading supplier of address management software in the UK, hasdelivered to the acquisition plan. QAS has won significant private and publicsector contracts in the past six months and launched Intact from QAS, a jointlydeveloped solution with Experian, that makes available online data cleansingservices to its 7,500 UK clients. Focused now entirely in France, Outsourcing sales grew by 7% excludingacquisitions. This was fuelled by increased volumes and contract wins, such asCegetel, in back office processing and card processing. Acquisitions continue to be a key driver of growth in Experian International,leveraging its existing assets and skills. During the year it has acquiredseveral companies, often small, that have brought it new products (such as ISL,providing analytics and models to the insurance sector), or strengthened itspresence in more countries (such as Business Strategies micromarketing inScandinavia, China and Hong Kong). Acquisitions completed in 2005 are expectedto contribute over 10% to sales in the first half of 2006. Financial review Excluding discontinued activities, sales at Experian International increased by17% at constant exchange rates. This is despite one large card issuer moving itsUK account processing in-house from Experian from the second quarter of thefinancial year 2005. Operating profit from continuing activities at £128.6m increased by 20% atconstant rates. This resulted in a 50 basis point improvement in the operatingmargin, reflecting the high level of sales growth and resulting operatingleverage. BURBERRY GUS has a 66% stake in Burberry Group plc. The following summarises the latter'spreliminary announcement released on 24 May 2005. 12 months to 31 March 2005 2004 Growth at £m £m constant FX---------------------- --------- --------- -------------Sales 715 676 10% Operating profit 165.7 141.2 21% Operating margin 23.2% 20.9% Operating cash flow 144 155 At 31 MarchNumber of retail locations 157 145 Burberry delivered a strong performance for the year to 31 March 2005, growingsales by 10% and operating profit by 21% at constant exchange rates. Burberrymade good progress on its strategic and operational priorities. The performancereflects the balance and diversity of Burberry's operations across products,channels and regions. Burberry saw good growth across retail, wholesale and licensing. At constantexchange rates, retail sales increased by 8%, driven by the opening of five newstores and seven concessions during the year, as well as the refurbishment ofseveral key stores including San Francisco, Boston and Paris. Burberry plans toincrease its net selling space by approximately 8% in 2006. Wholesale revenue in the year increased by 9% at constant exchange rates. Basedupon orders received to date for the Autumn/Winter 2005 season, Burberry expectsbroadly flat wholesale revenue in the first half of this financial year. Licensing revenue increased by 19% in the year at constant exchange rates,driven by strong gains from global product licensees, including watches andfragrance. During the year, Burberry finalised plans with respect to itsnon-apparel licences in Japan, which should enable it better to take advantageof the long-term opportunity in Japan's substantial luxury market. Operating margin increased by over 200 basis points, as gross margin grew from57.9% to 59.3% (due to pricing and sourcing gains and a higher proportion ofrevenue from licensing) and expense efficiency gains. Exchange rate movementsreduced reported sales by £24m and operating profit by £4.9m in the year. Burberry is launching a major programme to redesign its business processes andsystems, creating a substantially stronger platform to support its long-termoperation and growth. Over the next three years, Burberry expects to investapproximately £50m in capital expenditures and associated expenses, withapproximately £18m invested in 2006. In its third year, the programme isexpected to generate over £20m annually in savings. LEWIS GROUP Following the sale of its remaining 50% stake on 19 May 2005, GUS no longer hasa holding in Lewis. It is now treated as a discontinued operation. The followingsummarises Lewis' preliminary announcement released on 16 May 2005. 12 months to 31 March 2005 2004 Growth at £m £m constant FX---------------------- -------- -------- -------------Sales 187 160 11% Operating profit 55.4 43.5 21% Operating margin 29.6% 27.2%---------------------- -------- -------- -------------At 31 MarchNumber of stores - Lewis 400 400 - Best Electric 58 47 - Lifestyle Living 17 18---------------------- -------- -------- ------------- The above figures are prepared under UK GAAP, while the Lewis Group announcementhas been prepared under South African GAAP. Lewis Group, a leading retailer in southern Africa, sells furniture, householdand electrical goods mainly on credit. There was further significant successduring the year in its focus on the key strategic business initiatives of: • increasing sales from existing stores and expanding the store base; • driving operational efficiencies; and • delivering on its customer-focused business model, which is based on convenience, choice, credit and loyalty. Sales increased by 11% in rand, reflecting a positive retail environment andLewis' own initiatives. The trading environment in South Africa is one of themost positive experienced in the past three decades. Consumer confidence andexpenditure have been stimulated by a decline in interest rates, in income taxand in above-inflation wage increases. Lewis is also benefiting from the rapidgrowth of the emerging middle class and the related increase in spending powerof this group, Lewis' main target market. Merchandise sales were up 14% (10% on a like-for-like basis), with strong growthin furniture, electronic and white goods. Lewis had success in both thecompetitively priced branded merchandise as well as in its upgraded own-brandranges now available in 130 stores. Insurance premiums and finance chargesearned grew only marginally due to the higher proportion of cash sales (25%compared to 18%) and lower interest rates. Operating profit increased by 21% in rand, with operating margin expanding by afurther 240 basis points. This reflects strong sales growth, operatingefficiencies, a further improvement in the quality of the debtors' book (drivenby efficient collection procedures and advanced credit risk systems) and tightcontrol on costs throughout the business. The rand strengthened from an average rate of £1=R12.05 in 2004 to an average ofR11.47 in 2005. This increased reported sales by £9m and operating profit by£2.7m in the year. INTEREST COSTS At £26m, interest costs were £28m lower than last year, with the reductionoccurring mainly in the first half. This principally reflects the benefits fromselling the Group's share of its property joint venture (£14m benefit), afurther 11.5% stake in Burberry (£7m benefit) and the Home shopping businesses(£5m benefit) during the previous financial year. Interest on the proceeds ofthe sale of Lewis shares in September 2004 contributed a further £4m benefit.Funding costs charged against ARG FS operating profit were also £6m higher. Theimpact of the share buyback was a £3m cost, the majority of which fell into thesecond half of the year. EXCEPTIONAL ITEMS 12 months to 31 March 2005 2004 £m £m---------------------- --------- ---------Net profit on disposal of Lewis shares 20 -Net profit on disposal of Burberry shares 4 159Loss on sale of Home shopping and Reality (27) (43)Loss on sale of other businesses (7) (58) --------- ---------Total (10) 58 -------- --------- The only costs treated as exceptional items are those associated with thedisposal or closure of businesses. All other restructuring costs have beencharged against operating profit in the divisions in which they were incurred. A profit of £20m was recorded on the sale of shares in Lewis via an InitialPublic Offering in September 2004. There was an additional exceptional profit of£4m in respect of Burberry share sales. These profits were partly offset bylosses associated with other businesses sold during the year (£7m), principallyin Experian International. Following the sale of the Home shopping and Reality businesses in May 2003, thecompletion statements have been agreed. Although there is an increased loss ondisposal of £27m, reflecting an adjustment to the estimated £800m of assetssold, this has no net impact on the cash still due to GUS (£140m receivable inMay 2006). TAX RATE The Group's effective tax rate for the year was 24.3%, based on profit beforeamortisation of goodwill and before profits and losses on sale of businesses.This compares to 23.4% last year. For 2006, we expect the tax rate to increaseby about 2% under UK GAAP, mainly affected by our current understanding ofrecent proposed changes in UK tax legislation. SHARE BUYBACK PROGRAMME The £200m share buyback announced in May 2004 has been completed, with GUSbuying 22m shares at an average price of 897p. For the purpose of calculatingbasic EPS, the weighted average number of shares in issue for 2005 was 1,000m.This falls to 985m in 2006, assuming no further change in the number of sharesissued. Following post-balance sheet acquisitions and disposals, there are no currentplans for further share buybacks. However, the Board will continue to review thepossibility of returning surplus funds to shareholders, while at the same timeensuring that the interests of bondholders and lenders are protected bymaintaining a strong balance sheet. CASH FLOW AND NET DEBT The Group's free cash flow for the year was £374m, similar to that of theprevious year (2004: £354m). Within this, capital expenditure increased to £390m(2004: £306m) and there was a further working capital outflow of £167m (2004:£273m). Free cash flow was used to fund acquisitions of £181m, dividends of£281m, GUS and Burberry share repurchases of £222m and special pensioncontributions of £76m. After disposal proceeds of £103m, net cash outflow forthe year was £283m. After the positive impact of exchange rates (£56m), net debt on the GUS balancesheet at 31 March 2005 increased by £227m to £1,427m, up from £1,200m at31 March 2004. PENSIONS As previously disclosed, GUS' two UK defined benefit pension schemes had modestdeficits at 31 March 2004. To improve the funding of these schemes, the Groupagain made voluntary special contributions, which totalled £76m in March 2005(2004: £100m). The contributions should marginally increase earnings per sharein the current financial year and beyond. The Group continues to report pension costs under SSAP 24. Under FRS 17, thedeficit at 31 March 2005 for all retirement benefit schemes is £78m, net of taxrelief. This is after taking into account the special contributions. It shouldbe noted that the deficit is less than 1% of the Group's market capitalisationand can prudently be resolved over a period of time. INTERNATIONAL FINANCIAL REPORTING STANDARDS It is now mandatory for the consolidated financial statements of all EuropeanUnion listed companies to be reported in accordance with International FinancialReporting Standards (IFRS) for periods commencing on or after 1 January 2005. The move to IFRS will not change how the Group is managed and will have noimpact on cash flow. It will, however, be likely to lead to increased volatilityin the profit and loss account and balance sheet, with the presentation of thefinancial statements also affected. The Group is now prepared for the adoption of IFRS. The greatest impact on netassets and profit is likely to come from changes to the accounting treatment ofgoodwill amortisation and impairment, other intangibles, share-basedremuneration, pension costs, financial instruments, tax and deferred tax. GUS intends to issue an unaudited statement covering its results for the year to31 March 2005 under IFRS on 14 June 2005. The financial statements for the yearto 31 March 2006 will be reported under IFRS, as will the interim results forthe six months to 30 September 2005. APPENDIX 1. Divisional cash flow Year to 31 March 2005 £m Operating Depreciation Capital Change in Operating profit spend working cash flow capital ------------------------------------------------------------------------------------ARG 422 132 (237) (263) 54 Experian 318 104 (109) (4) 309 Burberry 166 24 (34) (12) 144 Other 31 14 (10) 112 147 --------- --------- --------- --------- --------Total Group 937 274 (390) (167) 654 --------- --------- --------- --------- -------- Interest (42)Taxation (238) --------Free cash flow 374Acquisitions (181)Divestments 103Dividends (281)Share repurchases - GUS (200)Share repurchases - Burberry (22)Special pension contributions (76) --------Net cash outflow (283) Year to 31 March 2004 (1) £m Operating Depreciation Capital Change in Operating cash