IFRS 16 Briefing 2 July 2019 Agenda Overview IFRS 16 recap - - PowerPoint PPT Presentation

IFRS 16 Briefing

2 July 2019

• Overview
• IFRS 16 recap
• Impact summary
• Q&A

Agenda

• No change to how we run the business
• Predominantly freehold business, own 86% of stores
• Impacts on financial statements - balance sheet, income statement and cash flow classification
• No impact on balance sheet principles, capital allocation framework or dividend policy
• An accounting change only - no impact on cash flow
• Balance sheet

–

Increase in liabilities

–

Net debt includes lease liabilities

–

Right-of-use assets recognised

• Profit before tax and exceptionals1 and EPS before exceptionals2 impacted, as previously guided

Overview

1 Defined as profit before tax, exceptional items and net pension interest 2 Profit before exceptional items and net pension interest, adjusted for a normalised tax charge

• Effective for the Group for the 52 weeks ending 2 February 2020
• We are adopting the fully retrospective transition approach:

–

As if IFRS 16 has always been applied

–

Comparatives restated

–

Most consistent and comparable approach

• Significant change to balance sheet:

–

Lease liabilities recognised for operating leases

–

Recognition of associated right-of-use assets

–

Adjustment to opening reserves

• Income statement impact:

–

Straight line rental cost replaced by depreciation and interest

–

Shape of income statement changes – profit before tax and EPS decrease, operating profit and

• perating margin increase

–

Different profile of income statement charge over lease life

• Discount rate and lease length assumptions are lease specific

IFRS 16 recap

• The financial impact on the restated 2018/19 balance sheet is:

–

Recognition of right-of-use assets £745m1

–

Recognition of lease liabilities £1,397m

–

De-recognition of onerous provisions £272m2

–

Recognition of deferred tax assets £69m

–

Adjustment to opening retained earnings £306m

• The impact on the restated 2018/19 income statement is :

–

Profit before tax and exceptionals3 lower by £10m, as previously guided

• Dividend policy remains unchanged

Impact summary – 2018/19

1 Net of amounts reclassified from Property, plant and equipment and impairment of right-of-use assets 2 Provisions for onerous contracts and amounts provided for onerous commitments 3 Defined as profit before tax, exceptional items and net pension interest

4,631 4,325 (1,397) 272 1,206 (461) 69 5

FY19 Net assets (reported) Recognition of lease liabilities De-recognition of

• nerous lease

and amounts provided for

• nerous contracts

Recognition of right-of-use assets Impairment of right-of-use assets Recognition of deferred tax balances Other FY19 Net assets (restated)

Restated balance sheet – as at 3 February 2019

£745m recognition of right-

• f-use assets net of

impairment

£m

£m Reported 2019 IFRS 16 impact Restated 2019 Non-current assets Property, plant and equipment 7,312 (218)* 7,094 Right-of-use assets

• 929*

929 Investment property 26 34* 60 Other non-current assets 1,196 8 1,204 8,534 753 9,287 Current assets and assets held-for-sale 1,382 (3) 1,379 Current liabilities Creditors (3,085) 15 (3,070) Lease liabilities

• (69)

(69) Other current liabilities (210)

• (210)

(3,295) (54) (3,349) Non-current liabilities Lease liabilities

• (1,328)

(1,328) Other non-current liabilities (1,154)

• (1,154)

Deferred tax liabilities (483) 69 (414) Provisions (353) 257 (96) (1,990) (1,002) (2,992) Net assets 4,631 (306) 4,325 Net Debt (997) (1,397) (2,394)

Summary balance sheet – as at 3 February 2019

Sum of marked items (*) equivalent to £745m right-of-use assets net of impairment

Restated income statement – 3 February 2019

406 396 103 (58) (55) Profit before tax and exceptionals (reported) Rent Depreciation on right-of- use assets Finance costs Profit before tax and exceptionals (restated)

£m

1 Defined as profit before tax, exceptional items and net pension interest

1 1

IFRS 16 Impact £m Reported 2019 Rent Depreciation Finance costs Restated 2019 Notes Revenue 17,735 17,735 Operating costs (16,713) (16,713) Operating lease rental (114) 103 (11) Rent costs removed, other than short-term and/or low value leases Depreciation and amortisation (443) (58) (501) Depreciation on right-of-use assets Operating profit before exceptionals 465 103 (58)

• 510

Operating margin % 2.6% 2.9% Up 25 bps Profit from JV 1 1 Net finance costs before exceptionals (60) (55) (115) Increase due to interest on lease liabilities Profit before tax and exceptionals1 406 103 (58) (55) 396 Down £10m as previously guided Basic EPS before exceptionals2 13.17p 12.85p Down in line with profit before exceptionals

Income statement (pre exeptionals)

1 Defined as profit before tax, exceptional items and net pension interest 2 Profit before exceptional items and net pension interest, adjusted for a normalised tax charge

Summary cash flow statement

£m Reported 2019 IFRS 16 Impact Restated 2019 Cash flows from operating activities Profit for the period 244 (11) 233 Net finance costs 75 55 130 Taxation charge 76 (6) 70 Share of profit of joint venture (net of tax) (1)

• (1)

Operating profit 394 38 432 Adjustments for:

• Depreciation and amortisation

443 58 501

• Net impairment

(55) 53 (2)

• Profit/loss arising on disposal and exit of properties

(2) 2

• Other adjustments

55

• 55
• Working capital

7 (16) (9) Cash generated from operations 842 135 977 Interest paid (54) (66) (120) Taxation paid (76)

• (76)

Net cash inflow from operating activities 712 69 781 Net cash outflow from investing activities (431)

• (431)

Net cash outflow from financing activities (344) (69) (413) Net decrease in cash and cash equivalents (63)

• (63)

Cash and cash equivalents at start of period 327

• 327

Cash and cash equivalents at end of period 264

• 264

No impact on cash flow

• Significant change to balance sheet and income statement

means a different definition and calculation of ROCE

• Prior calculation, based on 10 times lease multiplier,

replaced by IFRS 16 lease liability

• Same trend under new and old measures

ROCE

7.3% 7.7% 7.9%

7.0% 7.2% 7.4% 7.6% 7.8% 8.0% 2016/17 2017/18 2018/19

6.3% 6.7% 6.9%

6.0% 6.2% 6.4% 6.6% 6.8% 7.0% 2016/17 2017/18 2018/19

Pre IFRS 16 Basis Post IFRS 16 Basis

2018/19 Pre IFRS 16 Post IFRS 16 Net debt (£m) 997 2,394 Lease adjusted net debt1 : EBITDAR 2.1x

• Net debt : EBITDA
• 2.4x

Debt metrics

Prior calculation, based on 10 times lease multiplier, replaced by IFRS 16 lease liability

Q&A