REG - Sainsbury(J) PLC - Interim Results <Origin Href="QuoteRef">SBRY.L</Origin> - Part 2
12/11/2014 08:01
- Part 2: For the preceding part double click ID:nRSL7745Wa
sales excluding VAT.
3 Retail underlying operating profit before rent, depreciation and amortisation.
4 Retail underlying EBITDAR divided by retail sales excluding VAT.
In 2014/15, Sainsbury's expects cost inflation towards the lower end of the two to three per cent range and efficiency
savings of around £140 million.
We have announced today an investment of £150 million in price, of which approximately half will fall in the second half of
2014/15 and the remainder in the first half of 2015/16. When combined with the outperformance of both the Bank and cost
savings in the first half that we do not expect to be repeated in the second half, Sainsbury's expects profitability to be
lower in the second half than the first half.
Financial services - Sainsbury's Bank
Sainsbury's completed its purchase of the remaining 50 per cent of Sainsbury's Bank on 31 January 2014 and the Bank has
been 100 per cent consolidated for the six months to 31 August 2014. The Bank contributed £35 million to Group underlying
profit before tax (2013/14: £12 million).
Sainsbury's Bank results
6 months to31 August 2014 6 months to31 August 2013 Change% 50 weeks to28 February 2014
Total income (£m)1 131 122 7.4 229
Underlying operating profit (£m) 35 27 29.6 53
Recognised as a joint venture (£m) - 12 (100.0) 18
Consolidated as a subsidiary (£m) 35 - n/a 6
Impact on Group underlying profit before tax (£m) 35 12 191.7 24
Net interest margin (%)2 4.0 2.7 126bps 3.1
Bad debt as a percentage of lending (%)3 0.8 1.3 53bps 1.1
Tier one capital ratio (%)4 13.5 12.5 103bps 13.6
1 Net interest and net commission income.
2 Net interest receivable divided by average interest-bearing assets.
3 Bad debt expense divided by gross lending.
4 Tier one capital divided by risk-weighted assets.
Sainsbury's Bank total income increased by 7.4 per cent to £131 million (2013/14: £122 million), mainly due to lower market
savings rates which resulted in a reduction in interest payable.
Sainsbury's Bank delivered an underlying operating profit of £35 million, a 29.6 per cent increase year-on-year. This
increase was driven by the higher total income and favourable bad debt levels, partly offset by incremental running costs
associated with the move to a new, more flexible banking platform.
Bad debt levels as a percentage of lending improved to 0.8 per cent (2013/14: 1.3 per cent) as a result of improved
recovery processes, low market interest rates and improving economic conditions. Net interest margin increased by 126 basis
points year-on-year to 4.0 per cent (2013/14: 2.7 per cent) mainly driven by changes to the funding structure. The tier one
capital ratio increased by 103 basis points year-on-year to 13.5 per cent (31 August 2013: 12.5 per cent).
In 2014/15, Sainsbury's Bank is expected to deliver around ten to 15 per cent year-on-year growth in underlying operating
profit.
Property and other joint ventures ('JV')
Sainsbury's underlying share of post-tax profit from its JV with British Land was £6 million (2013/14: £7 million). Its
underlying share of post-tax profit from the JV with Land Securities was £2 million (2013/14: £1 million).
An investment property fair value movement of £18 million was recognised within the share of post-tax profit from the JVs
in the income statement (2013/14: £1 million surplus), with average property yields of the JVs decreasing to 5.0 per cent,
0.1 percentage points lower than the prior half-year (2013/14: 5.1 per cent), partly offset by rental increases.
The two start-up JVs, Mobile by Sainsbury's and I2C, recognised a net loss of £2 million driven by start-up costs (2013/14:
£2 million loss).
In 2014/15, Sainsbury's expects the share of profit from the property JVs to be around £14 million. Sainsbury's share of
loss from the start-up JVs, now including Netto, is expected to be around £10 million.
Underlying net finance costs
Underlying net finance costs decreased by £4 million year-on-year to £54 million (2013/14: £58 million). This was driven by
a change in the mix of debt and a decrease in the inflation rate on Sainsbury's inflation-linked debt1, partly offset by a
reduction in capitalised interest.
Underlying net finance costs 28 weeks to27 September 2014£m 28 weeks to28 September 2013£m 52 weeks to15 March2014£m
Underlying finance income2 10 10 20
Interest costs (76) (83) (157)
Capitalised interest 12 15 26
Underlying finance costs2 (64) (68) (131)
Underlying net finance costs2 (54) (58) (111)
1 The interest rate on the inflation-linked debt resets annually in April, by reference to the RPI rate (capped at
five per cent) prevailing in January.
2 Finance income/costs before financing fair value movements and the IAS 19 Revised pension financing charge.
Sainsbury's expects underlying net finance costs in 2014/15 to be around £105 million, including capitalised interest of
around £20 million.
Items excluded from underlying results
Items excluded from underlying results totalled a charge of £665 million (2013/14: £33 million credit), mainly due to
one-off items.
Items excluded from underlying results
28 weeks to27 September 2014£m 28 weeks to28 September 2013£m 52 weeks to15 March 2014£m
Profit on disposal of properties 4 18 52
Investment property fair value movements 18 1 -
Retail financing fair value movements (12) (3) (8)
IAS 19 Revised pension financing charge (16) (14) (23)
Defined benefit pension scheme expenses (2) (5) (7)
Acquisition adjustments 6 - 18
One-off items (663) 36 68
Total items excluded from underlying results (665) 33 100
One-off items
The charge to one-off items of £663 million (2013/14: £36 million credit) includes: a non-cash impairment and onerous
contract charge of £628 million; costs of £23 million in relation to transitioning Sainsbury's Bank to a new, more flexible
banking platform; and £12 million of pension compensation payments made to employees as a result of the closure of
Sainsbury's defined benefit pension scheme to future accrual.
As part of adapting to our changing customer needs, we have reassessed our store pipeline and the potential to achieve an
appropriate return on capital, which resulted in a decision that some sites will no longer be developed, for which a charge
of £287 million has been recognised. A charge of £341 million has also been recognised in relation to unprofitable and
marginally profitable trading stores.
One-off items 28 weeks to27 September 2014£m 28 weeks to28 September 2013£m 52 weeks to15 March 2014£m
Impairment and onerous contract charge (628) (92) (92)
Sainsbury's Bank costs (23) (17) (45)
Pension compensation payments (12) - (10)
Pension past service credit - 158 158
Nectar VAT - - 76
Other - (13) (19)
Total one-off items (663) 36 68
In 2014/15, Sainsbury's Bank costs for transitioning to a new, more flexible banking platform are expected to be around £50
million (capital costs relating to the transition are expected to be around £70 million). Pension compensation payments are
expected to be £17 million.
Taxation
The income tax charge was £54 million (2013/14: £93 million), with an underlying tax rate of 26.4 per cent (2013/14: 21.5
per cent) and an effective tax rate of (18.6) per cent (2013/14: 21.5 per cent). The underlying rate is higher than last
year, mainly due to the revaluation of deferred tax balances reducing the rate in the prior year, but not repeated in the
current year. The effective tax rate was negative, mainly as a result of the impairment costs not being deductible for tax
purposes.
Underlying tax rate
28 weeks to 27 September 2014 Profit Tax Rate%
£m £m
Profit before tax, and tax thereon (290) (54) (18.6)
Adjustments (and tax thereon) for:
Profit on disposal of properties (4) -
Investment property fair value movements (18) -
Retail financing fair value movements 12 (1)
IAS 19 Revised pension financing 16 (5)
Defined benefit pension scheme expenses 2 (1)
Acquisition adjustments (6) 2
One-off items 663 (41)
Revaluation of deferred tax balances - 1
Underlying profit before tax, and tax thereon 375 (99) 26.4
In 2014/15, Sainsbury's expects the underlying tax rate for the full year to be broadly in line with the rate for the
half-year.
Earnings per share
Underlying basic earnings per share decreased by 12.7 per cent to 14.5 pence in the first half of 2014/15 (2013/14: 16.6
pence) reflecting the fall in underlying profits, a higher underlying tax rate year-on-year and additional shares issued
during the year.
The weighted average number of shares in issue was 1,909.4 million (2013/14: 1,894.4 million), an increase of 15.0 million
shares or 0.8 per cent. Basic loss per share was 18.0 pence (2013/14: 17.9 pence earnings). The basic loss per share was
lower than the underlying basic earnings per share due to the items excluded from underlying results.
Underlying earnings per share
28 weeks to27 September 2014pence per share 28 weeks to28 September 2013pence per share
Basic (loss)/earnings per share (18.0) 17.9
Adjustments (net of tax) for:
Profit on disposal of properties (0.2) (1.0)
Investment property fair value movements (0.9) (0.1)
Retail financing fair value movements 0.5 0.2
IAS 19 Revised pension financing charge 0.5 0.5
Defined benefit pension scheme expenses 0.1 0.2
Acquisition adjustments (0.2) -
One-off items 32.6 (0.6)
Revaluation of deferred tax balances 0.1 (0.5)
Underlying basic earnings per share 14.5 16.6
Dividends
The Board has recommended an interim dividend of 5.0 pence per share (2013/14: 5.0 pence). This will be paid on 2 January
2015 to shareholders on the Register of Members at the close of business on 21 November 2014. The interim dividend was
approved by the Board on 11 November 2014 and, as such, has not been included as a liability as at 27 September 2014.
Sainsbury's will maintain the interim dividend at 5.0 pence per share for this year and dividend cover at two times our
underlying earnings for 2014/15. Given expected profitability1, the dividend is expected to reduce year-on-year.
1 2014/15 UPBT consensus estimate of £677 million as published on
www.j-sainsbury.co.uk/investor-centre/analyst-consensusat 17.00 on 11 November 2014.
Financing
The Group's key financing objectives are to diversify funding sources, to minimise refinancing risk and to maintain
appropriate standby liquidity. As at 27 September 2014, the Group had drawn borrowing facilities of £2.9 billion and
undrawn but committed borrowing facilities of £650 million at its disposal.
The principal elements of the Group's core borrowings comprise of two long-term loans of £891 million due 2018 and £821
million due 2031, both secured over property assets. In addition, the Group has unsecured borrowings totalling £339 million
with maturities ranging from 2015 to 2019, unsecured private placement loans totalling £184 million with maturities ranging
from 2015 to 2017 and £140 million of hire purchase facilities.
In February 2014, the Group entered into a new syndicated committed revolving credit facility for £1,150 million, replacing
the £690 million facility which was due to mature in October 2015. The £1,150 million facility is split into two tranches,
a £500 million Facility (A) maturing in March 2017 and a £650 million Facility (B) maturing in March 2019. As at 27
September 2014, £500 million had been drawn under Facility (A) (28 September 2013: £nil). The £1,150 million facility, bank
loans and private placement loans contain only one financial covenant, being the ratio of EBITDAR to consolidated net
interest plus net rental expenditure, the 'Fixed Charge Cover' ratio. As at the half-year, Sainsbury's comfortably passed
this covenant test.
Net debt and cash flows
Sainsbury's net debt includes the cost of acquiring Sainsbury's Bank, but excludes Sainsbury's Bank's own net debt
balances. As at 27 September 2014, net debt was £2,382 million (28 September 2013: £2,187 million), an increase of £195
million year-on-year and a decrease of £2 million since 15 March 2014. The year-on-year increase was driven primarily by
the additional funding used to acquire Sainsbury's Bank at the end of 2013/14 and an increase in capital expenditure,
partly offset by improvements in retail working capital.
Operating cash flows before changes in working capital decreased by 11.0 per cent to £620 million (2013/14: £697 million)
and cash generated from operations decreased by 24.6 per cent to £524 million (2013/14: £695 million, 9.1 per cent
increase), mainly due to an adverse movement in Sainsbury's Bank working capital. Retail operating cash flow after changes
in working capital increased by 29.1 per cent to £897 million (2013/14: £695 million).
Total working capital increased by £96 million from 15 March 2014, driven by an increase in Sainsbury's Bank working
capital of £408 million, partly offset by a £312m improvement in retail working capital. The £312 million improvement in
retail working capital was mainly due to an increase in trade payables of £383 million.
The net cash used in investing activities of £554 million was £231 million higher year-on-year (2013/14: £323 million)
driven by higher capital expenditure and lower proceeds from property transactions. Receipt of new debt of £530 million
during the year relates to a £200 million bank loan maturing in August 2019, a £30 million hire purchase facility maturing
in May 2019 and an additional £300 million drawing under the new £1,150 million syndicated committed revolving credit
facility maturing in 2017 and 2019. The new debt offsets £322 million of borrowings repaid during the year.
Summary cash flow statement
28 weeks to27 September 2014 28 weeks to 28 September 2013 52 weeks to 15 March 2014
£m £m £m
Operating cash flow before changes in working capital 620 697 1,366
Decrease/(increase) in retail working capital 312 (2) (128)
Increase in Sainsbury's Bank working capital (408) - (11)
Cash generated from operations 524 695 1,227
Interest paid (76) (74) (148)
Corporation tax paid (50) (55) (140)
Net cash from operating activities 398 566 939
Net cash used in investing activities (554) (323) (590)
Acquisition of subsidiaries net of cash acquired (1) - 1,016
Proceeds from issue of shares 8 5 19
Receipt of new debt 530 150 450
Repayment of borrowings (322) (80) (439)
Purchase of own shares (3) - -
Dividends paid (234) (225) (320)
(Decrease)/Increase in cash and cash equivalents (178) 93 1,075
Elimination of net increase in Sainsbury's Bank cash and cash equivalents 385 - (1,225)
Increase in debt (213) (77) (27)
Fair value and other non-cash movements 8 (41) (45)
Movement in net debt 2 (25) (222)
Sainsbury's expects 2014/15 year-end net debt to be around £2.4 billion.
Retail capital expenditure
Core retail capital expenditure increased by £108 million in the first half of 2014/15 to £557 million (2013/14: £449
million), due to higher land purchases year-on-year and the phasing of Digital and Technology ('D&T') expenditure. Core
retail capital expenditure as a percentage of retail sales (including fuel, including VAT) was 4.0 per cent (2013/14: 3.2
per cent).
Three supermarkets were opened in the first half (2013/14: six supermarkets) along with 50 new convenience stores (2013/14:
50 convenience stores).
Expenditure on extensions and refurbishments decreased year-on-year following a reduction to 27 refurbishments (2013/14: 30
refurbishments), comprising five supermarkets (2013/14: eight supermarkets) and 22 convenience stores (2013/14: 22
convenience stores). This was partly offset by a year-on-year increase in the number of supermarket extensions to four
(2013/14: two extensions).
There were no sale and leaseback proceeds in the first half (2013/14: £122 million), resulting in net retail capital
expenditure of £562 million (2013/14: £332 million).
Retail capital expenditure
28 weeks to 27September 2014 28 weeks to 28 September 2013 52 weeks to 15 March 2014
£m £m £m
New store development (£m) 300 234 418
Extensions and refurbishments (£m) 134 140 274
Other - including supply chain and D&T (£m) 123 75 196
Core retail capital expenditure (£m) 557 449 888
Acquisition of freehold and trading properties (£m) (2) 5 41
Proceeds from property transactions (£m)1 7 (122) (301)
Net retail capital expenditure 562 332 628
Capex/sales ratio (%)2 4.0 3.2 3.4
1 Includes movement in timing of capital debtors and creditors.
2 Core retail capital expenditure divided by retail sales (including fuel, including VAT).
In 2014/15, Sainsbury's expects core retail capital expenditure (excluding Sainsbury's Bank) to be similar to 2013/14 and
core retail capital expenditure as a percentage of retail sales (including fuel, including VAT) to also be similar to
2013/14.
Return on capital employed
The return on capital employed ('ROCE') over the 52 weeks to 27 September 2014 was 11.1 per cent (2013/14: 11.4 per cent),
a decrease of 26 basis points year-on-year. ROCE is enhanced by the net pension deficit, which reduces capital employed.
ROCE excluding the net pension deficit and over the 52 weeks to 27 September 2014 was 10.3 per cent (2013/14: 10.5 per
cent), a year-on-year decrease of 26 basis points. ROCE decline was due to the fall in underlying operating profit driven
by lower LFL sales, partly offset by the non-cash impairment and onerous contract charge of £628 million, reducing closing
capital employed.
Return on capital employed
52 weeks to27 September 2014 52 weeks to 28 September 2013 52 weeks to 15 March 20142
Total underlying operating profit (£m) 862 858 879
Underlying share of post-tax profit from JVs (£m) 18 36 30
Underlying profit before interest and tax (£m) 880 894 909
Average capital employed1 (£m) 7,924 7,865 8,073
Return on capital employed (%) 11.1 11.4 11.3
Return on capital employed (%) (excluding pension fund deficit) 10.3 10.5 10.4
52 week ROCE movement to 27 September 2014 (26)bps
52 week ROCE movement to 27 September 2014 (excluding pension fund deficit) (26)bps
1 Average of opening and closing net assets before net debt.
2 The closing capital employed for the 52 weeks to 15 March 2014 has been reduced by 50 per cent of Sainsbury's Bank
consolidated net assets (£243 million) to reflect the fact that the Bank was only consolidated in the accounts for four
weeks of the 2013/14 financial year.
Summary balance sheet
Shareholders' funds as at 27 September 2014 were £5,517 million (15 March 2014: £6,005 million), a decrease of £488
million, mainly attributable to the non-cash impairment and onerous contract charge of £628 million.
The book value of property, plant and equipment, including land and buildings, decreased by £298 million (excluding
Sainsbury's Bank) since the year-end, driven by the impairment, offset by continued space growth.
Net debt was £2 million lower than at 15 March 2014 (28 September 2013: £25 million higher than at 16 March 2013) driven by
improvements in retail working capital, partly offset by the lower profitability and higher capital expenditure
year-on-year.
Net assets of £532 million as a result of the full consolidation of Sainsbury's Bank have been included and separately
identified.
Group adjusted net debt to EBITDAR was 3.8 times (2013/14: 3.7 times1) and interest cover remained at 7.9 times (2013/14:
7.9 times). Fixed charge cover remained at 3.0 times (2013/14: 3.0 times). Gearing increased year-on-year to 43.2 per cent
(28 September 2014: 38.0 per cent) as a result of the increase in net debt and a reduction in equity shareholder funds.
Excluding the pension deficit, gearing increased to 38.7 per cent (28 September 2014: 34.1 per cent).
Summary balance sheet
As at Movement since 15 March 2014 As at As at
27 September 2014 28 September 2013 15 March 2014
£m £m £m £m
Land and buildings (freehold & long leasehold) 6,916 (211) 7,176 7,127
Land and buildings (short leasehold) 798 47 702 751
Fixtures and fittings 1,850 (134) 1,912 1,984
Property, plant and equipment 9,564 (298) 9,790 9,862
Other non-current assets 869 79 958 790
Inventories 1,055 50 1,051 1,005
Trade and other receivables 328 38 381 290
Sainsbury's Bank assets2 3,993 (120) - 4,113
Cash and cash equivalents 577 210 603 367
Debt (2,959) (208) (2,790) (2,751)
Net debt (2,382) 2 (2,187) (2,384)
Trade and other payables and provisions (3,815) (451) (3,573) (3,364)
Retirement benefit obligations, net of deferred tax (634) 45 (658) (679)
Sainsbury's Bank liabilities2 (3,461) 167 - (3,628)
Net assets 5,517 (488) 5,762 6,005
Key financial ratios
Group adjusted net debt to EBITDAR3 3.8 times 3.7 times 3.9 times
Interest cover4 7.9 times 7.9 times 8.2 times
Fixed charge cover5 3.0 times 3.0 times 3.1 times
Gearing6 43.2% 38.0% 39.7%
Gearing (excluding pension deficit)7 38.7% 34.1% 35.7%
1 2013/14 restated to reflect changes in disclosure of lease lengths beyond five years.
2 As at 31 August 2014.
3 Net debt of £2,382 million plus capitalised lease obligations of £5,090 million (5.5 per cent discount rate),
divided by group underlying EBITDAR of £1,966 million, calculated for a 52 week period to 27 September 2014.
4 Underlying profit before interest and tax divided by underlying net finance costs, calculated for a 28 week period
at half-year, and 52 week period at year-end.
5 Group underlying EBITDAR divided by net rent and underlying net finance costs, calculated for a 28 week period at
half-year, and 52 week period at year-end.
6 Net debt divided by net assets.
7 Net debt divided by net assets, excluding pension deficit.
As at 27 September 2014, Sainsbury's estimated market value of properties, including our 50 per cent share of properties
held within property JVs, was £11.9 billion1 (15 March 2014: £12.0 billion). The £0.1 billion decrease since the
year-end was as a result of the non-Recent news on J Sainsbury
See all newsREG - Sainsbury(J) PLC - Transaction in Own Shares
AnnouncementREG - Sainsbury(J) PLC - Transaction in Own Shares
AnnouncementREG - Sainsbury(J) PLC - Transaction in Own Shares
AnnouncementREG - Sainsbury(J) PLC - Trading Statement
AnnouncementREG - Sainsbury(J) PLC - Transaction in Own Shares
Announcement