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Annual Report and Accounts 2010
You are here: Home > Business Review > Financial review:part 1
Financial review:part 1
"Our membership businesses have delivered another strong year of growth with revenue up 21% and operating profit up 13%."
Martin Bennett
Chief Financial Officer
These financial results, which have been prepared in accordance with International Financial Reporting Standards (IFRS ), focus on the performance of our continuing membership operations following the exit from our UK Emergency Services business during the year, which is treated as a discontinued operation within these results.
Partner commission is included within revenue in these results reflecting our membership-only status (see note 2 to the accounts). The results for the year ending 31 March 2009 have been restated on this basis. This has resulted in an increase in both revenue and operating costs of £23.3m in the year ended 31 March 2010 (2009: £20.4m). Aside from this change, the accounting policies used are consistent with the prior year.
GROUP STATUTORY RESULTS
The headline statutory financial results for the Group are presented below.
In accordance with IFRS , statutory operating profit for continuing operations, which has increased by 26% to £106.1m (2009: profit of £84.4m), includes exceptional income of £10.2m, amortisation of acquisition intangibles of £6.5m and our share of the operating result of our joint venture in France of £3.6m.
The amortisation of acquisition intangibles of £6.5m (2009: £3.7m) principally relates to customer and other contracts held by the acquired entities at the date of acquisition. The year on year increase principally reflects the impact of the SFG, SPT and Reactfast acquisitions. Exceptional operating income of £10.2m relates to the recovery of previous years’ Insurance Premium Tax in UK Membership. For our French joint venture, the operating result is defined as profit after tax and hence £2.0m (2009: £1.9m) of taxation is reported within operating profit and profit before tax.
In accordance with IFRS , statutory operating profit for continuing operations, after amortisation of acquisition intangibles, tax on joint ventures and exceptional operating items, were: UK Membership £104.7m (2009: £83.9m); Continental Europe £1.4m (2009: £2.2m); and USA £35k (2009: loss of £1.7m) resulting in a statutory operating profit for continuing operations of £106.1m (2009: £84.4m). The discontinued operations reported a statutory operating loss of £42.0m.
The Group’s net interest charge increased marginally in the year to £3.9m (2009: £3.6m) with a more benign interest rate environment offset by an increase in the deferred consideration interest charge relating to past acquisitions. The interest charge was covered 27 times by operating profit2.
The effective rate of corporation tax is 28.9% (2009: 30.1%). The reduction in the rate is primarily due to the availability of brought forward tax losses in our international businesses which we can start to utilise as those businesses reach profitability.
The earnings of our Doméo joint venture are shown net of tax within pre tax profit. With the increasing profitability (and tax impact of Doméo), it is appropriate to highlight the joint venture adjusted tax rate. Adjusting the tax rate to show the tax relating to joint ventures on a gross basis, the joint venture adjusted tax rate is 30.3% (2009: 31.8%).
The headline statutory financial results for the Group are shown below.
CONTINUING OPERATIONS
| £million | 2010 | Restated 2009 |
||
|---|---|---|---|---|
| Revenue1 | 369.0 | 304.3 | ||
| Exceptional revenue | 10.2 | — | ||
| Total revenue | 379.2 | 304.3 | ||
| Operating profit | 106.1 | 84.4 | ||
| Net interest | (3.9) | (3.6) | ||
| Profit before tax2 | 100.6 | 88.7 | ||
| Amortisation of acquisition intangibles | (6.5) | (3.7) | ||
| Exceptional items | 10.2 | (2.3) | ||
| Tax on joint venture | (2.0) | (1.9) | ||
| Statutory profit before tax | 102.2 | 80.8 | ||
| Tax | (29.5) | (24.4) | ||
| Profit for the period | 72.7 | 56.4 | ||
| Loss for the period from discontinued operations | (42.0) | (91.7) | ||
| Profit/(loss) for the period, being attributable to equity holders of the parent | 30.7 | (35.3) |
Based on current corporation tax rates applicable to our businesses, with the increasing significance of international profits chargeable at higher tax rates than the UK, we anticipate that the joint venture adjusted tax rate will increase marginally over the medium-term.
Earnings per share3 for our continuing operations in the period has increased by 14% from 96.9p to 110.9p.
GROUP REPORTED RESULTS
We continue to consider that profit before the amortisation of acquisition intangibles and tax on our joint venture in France represents an important performance measure for monitoring the business. In addition, in the current year exceptional income of £10.2m (2009: exceptional costs of £2.3m) is excluded in calculating these pro-forma managerial measures. The revenue1 and operating profit2 of our continuing operations is set out opposite.
Revenue1 for continuing operations has increased by 21% to £369.0m (2009: £304.3m). Operating profit2 has increased by 13% to £104.4m (2009: £92.3m). Excluding the impact of acquisitions (SFG which completed in the year, a full year contribution from SPT in Belgium acquired in December 2008 and Reactfast) and foreign currency movements, revenue1 increased by 15% and operating profit2 increased by 13%.
Our UK business has delivered another strong year of growth with operating profit2 up 10% (2009: 14%), policy growth of 7% (2009: 7%), a retention rate of 82.5% (2009: 83.0%) and improved efficiency in handling customer claims and service delivery.
The contribution from our Continental European business increased by 35% with operating profit2 increasing to £7.2m (2009: £5.3m) and revenue growing by 36% to £86.5m (2009: £63.4m). The operating profit2 result for Continental Europe of £7.2m comprises £5.7m contribution from our share in the French joint venture Doméo (2009: £4.8m), a £0.7m contribution from SFG, a £0.4m contribution from Spain (2009: £0.1m) and a £0.4m contribution from Belgium. Excluding acquisitions and the impact of foreign currency translation, operating profit 2 in Europe grew by 28%.
Policy growth of 38% in the US on the back of successful marketing and good take up rates with our gas utility partners and own brand marketing has resulted in a maiden operating profit2 of £1.5m (2009: loss2 of £0.3m).
CASH FLOW AND FINANCING
Cash generated from continuing and discontinued operations amounted to £73.4m (2009: £92.2m), representing a cash conversion (defined as cash generated from operations as a proportion of operating profit2) ratio of 93.2% (2009: 115.7%).
During the year, we incurred net capital expenditure of £25.5m (2009: £16.9m) in respect of information systems to support our growing membership businesses and capital payments made to affinity partners for provision of exclusive database access rights.
Overall, net debt in the year increased by £18.9m to £52.9m (2009: £34.0m), including the impact of acquisitions and disposals of £25.8m (2009: £23.4m). There was a net cash inflow of £3.1m (2009: £29.5m) before acquisitions and disposals, share purchases and financing. We continue to have a low level of financial gearing and our priority remains to use our financial leverage to fund strategic acquisitions which accelerate the development of our UK and international membership businesses.
In the year we had a working capital outflow of £20.8m reflecting growth in our membership businesses, with a greater proportion of customers moving to combined policies and paying for their policies monthly via direct debit.
The revenue1 and operating profit2 of our continuing operations are shown below.
CONTINUING OPERATIONS
| £million | 2010 | Restated 2009 |
Change |
|---|---|---|---|
| Revenue1 | |||
| - UK | 286.7 | 246.6 | 16% |
| - Continental Europe | 86.5 | 63.4 | 36% |
| - USA | 25.7 | 17.9 | 43% |
| - JV | (29.8) | (23.7) | -26% |
| Total revenue | 369.0 | 304.3 | 21% |
| Operating profit2 | |||
| - UK | 95.8 | 87.2 | 10% |
| - Continental Europe | 7.2 | 5.3 | 35% |
| - USA | 1.5 | (0.3) | +£1.8m |
| Total operating profit | 104.4 | 92.3 | 13% |
| Interest | (3.9) | (3.6) | £(0.3)m |
| Profit before tax2 | 100.6 | 88.7 | 13% |
The reconciliation between the statutory and pro-forma measures is set out below.
| £million | 2010 | 2009 |
|---|---|---|
| Operating profit (statutory) | 106.1 | 84.4 |
| Amortisation of acquisition intangibles | 6.5 | 3.7 |
| Exceptional items | (10.2) | 2.3 |
| Tax on joint ventures | 2.0 | 1.9 |
| Operating profit2 | 104.4 | 92.3 |
| Profit before tax (statutory) | 102.2 | 80.8 |
| Amortisation of acquisition intangibles | 6.5 | 3.7 |
| Exceptional items | (10.2) | 2.3 |
| Tax on joint ventures | 2.0 | 1.9 |
| Profit before tax2 | 100.6 | 88.7 |
| Pence per share | ||
| Earnings per share (statutory) | 114.7 | 89.8 |
| Amortisation of acquisition intangibles | 7.8 | 4.4 |
| Exceptional items | (11.6) | 2.8 |
| Earnings per share3 | 110.9 | 96.9 |
1Including gross up of commissions in 2010 and 2009, but excluding exceptional operating items during the year, see Financial review and notes 4, 5 and 13.
2Excluding amortisation of acquisition intangibles, exceptional operating items and joint venture taxation see Financial review and notes 5 and 13.
3Excluding amortisation of acquisition intangibles and exceptional operating items, see Financial review and notes 5 and 13.
4Includes 5.3m households from SoCalGas and 5m households from National Grid USA which were announced after the year end.