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Boots Group PLC Interim Results 2005/06 27th October 2005.

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Presentation on theme: "Boots Group PLC Interim Results 2005/06 27th October 2005."— Presentation transcript:

1 Boots Group PLC Interim Results 2005/06 27th October 2005

2 Sir Nigel Rudd Chairman Good morning. I am Nigel Rudd.
Can I start off by welcoming you to our interim results meeting. I have with me Richard Baker our Chief Executive and Jim Smart our Chief Finance Officer and they will be presenting to you in just a moment. Since our last results meeting we have announced two major transactions that help transform the Group. First, the proposed sale of BHI to Reckitt Benckiser. The board are very pleased with the way that management ran the process, very pleased with the price achieved and delighted with the ongoing commitment to manufacturing in Nottingham which reflects well on the efficiency of these operations. Second, our proposed merger with Alliance UniChem. Since the announcement, we have been busy explaining our plans for the new company and the benefits of the merger to both sets of shareholders. Today, we are even more encouraged about the prospect of creating a major new international force in healthcare provision. But this morning is all about our interim results. Everyone here knows how tough it is out there on the high street. Against that background, to deliver a flat underlying like for like sales performance in the first six months is, I believe, good performance especially as we have controlled costs, managed our gross margin effectively and improved our working capital position.  On that note let me hand you over to Richard to take you through today’s agenda.

3 Richard Baker Chief Executive

4 Agenda Overview Richard Baker Financial Review Jim Smart
Operational Review Richard Baker Thank you Sir Nigel and good morning everyone. First, let me give you run through today’s agenda. I will start with an overview, then Jim will cover the detailed financial review; then I will update on progress against the business drivers we shared with you in May. Finally, we will be happy to take any questions you may have. Let me start by saying that this last six months has been a period of further significant progress as we have strengthened our position as THE UK’s health and beauty expert. And three weeks ago we showed our determination to accelerate the pace of our transformation with news of two significant transactions – the proposed sale of Boots Healthcare International to Reckitt Benckiser and the proposed merger with Alliance Unichem. We will touch on these later. But today is really about our results and the main focus will be what we have achieved in the first half.

5 Performance headlines
Continued sales growth in a tough retail market BTC sales +1.1% Continued progress in key health and beauty markets Dispensing volumes +5% Beauty sales +7% Delivered against targets for margin, cost and working capital Group trading profit £163m, down 9.6% reflecting the cost of continued investment Interim dividend agreed at 9.1p Our performance is encouraging. In a difficult consumer environment, we achieved a 1 per cent increase in overall sales. Our underlying sales, excluding the effect of regulatory price changes, are flat year-on-year – a good performance against the wider retail market where overall like for like sales fell by around 2 per cent. When we met in May I told you about our intention to focus on the health and beauty market. These figures reflect that – with volume growth of 5 per cent in pharmacy and 7 per cent in beauty. We also delivered our plans for margin, cost growth and working capital. Of course, profits are lower reflecting our continued programme of making Boots a modern, efficient, competitive retailer, with continued investment in price and the infrastructure. We are maintaining the interim dividend at 9.1p. Jim will comment further in a moment.

6 2 years of progress Building a Better Boots The Health & Beauty Expert
Strong retail brand operating in growth markets Significant progress towards a modern, competitive and efficient business Prices re-positioned 40 more stores EoT Extended opening hours New tills in all stores Store friendly supply chain One third less jobs in head office I think it is worth taking a minute here to look at what has been achieved in the last two years – particularly for those who are new to following Boots. Two years ago, when I joined Boots, I said that there was plenty to do but few quick fixes. I knew I was taking charge of a great retail brand, operating in growth markets; but one where the retail operations had been underinvested. Since then we have made significant progress in our ambition to make Boots more modern, competitive and efficient. First what our customers have seen. We have cut our prices to ensure that we are offering value for money; we have invested in our stores by opening more space on the edge of town, extending our opening hours, modernising some stores and introducing new tills. Behind the scenes we have re-engineered our supply chain, closed and moved manufacturing plants, introduced better-buying and revolutionised IT systems throughout the business. All this while removing a third of the jobs in our head office. LINK: But that kind of change alone was not enough. We knew that there were some major decisions that had to be taken to allow us to reposition the Group for long term growth. The Health & Beauty Expert Building a Better Boots

7 Transforming the Group
Proposed sale of BHI enables full focus on core chemist chain Delivered full proceeds of £1.926bn Stronger balance sheet 200p special dividend for shareholders Proposed merger with Alliance UniChem accelerates our plans Creates Europe’s leading pharmacy-led healthcare group Step change in UK pharmacy presence with 2,600 outlets Pan-European buying scale Enhances international growth opportunities Delivers substantial cost savings To this end, we announced in April our plan to sell BHI, our manufacturer of over-the-counter medicines. We knew BHI was a good business – but recognised that as a relatively small player in a consolidating global market it was more likely to fulfil its potential under separate ownership. We were delighted with the level of interest in the business, the process we have run and the outcome – which is right for Boots, right for BHI and great for shareholders. The proposed sale, to Reckitt Benckiser for £1.926bn means that we can return 200p per share to investors – and retain £400m to help us preserve a strong balance sheet and to give us the ability to continue to invest in building a better Boots. That brings us to the proposed merger with Alliance Unichem which we announced three weeks ago. This transaction will create an international pharmacy-led healthcare group with combined sales of more than £13bn. What it offers Boots is clear. We will achieve a step-change in our presence in the UK pharmacy market, ending up with more than 2,600 outlets. It will also significantly strengthen our pan-European buying position – giving us a platform for successful international growth – and provides significant cost savings which will allow us to compete more effectively. LINK: I will now hand over to Jim who will take you through the financial overview.

8 Chief Financial Officer
Jim Smart Chief Financial Officer

9 Group results 6 months to 30th September 2005 (£m) Sales TradingProfit
Boots The Chemists 2,196 +1.1% 164 -18.6% Boots Opticians 83 -10.5% (5) Boots Retail International 28 +13.3% (2) Boots Healthcare International 265 +8.5% 47 +28.1% Group & other 22 +8.2% (24) Group sales and trading profit 2,594 +0.8% 180 -10.0% Net financing costs (17) Trading profit after financing costs 163 -9.6% Thanks Richard and good morning everybody. I would like to start with a summary of group results for the first half of the year which are presented for the first time in accordance with International Financial Reporting Standards. I recognise that this makes some of the statutory figures a little less familiar. I have, therefore, tried in this presentation to simplify the figures as much as possible to give a clearer view of business performance. I have provided a detailed reconciliation to the statutory figures in the news release. Group sales were £2,594m, up 0.8%. Trading profit after financing costs was £163m, £17m or 9.6% lower than last year. This reduction reflects a £45m increase in operating expenses as a result of the planned investment in Boots The Chemists. Looking at the elements of the Group in turn. Boots The Chemists profit was £37m or 18.6% lower than last year owing to planned investment in the infrastructure of the business. I will review BTC’s performance in more detail in a few moments. Boots Opticians has had a difficult first half with disruption arising from the integration into BTC coming on top of a very tough market which has been particularly hit by the downturn in discretionary spending. This has resulted in sales down 10.5% and a loss of £5m for the first half. Boots Retail International has had a very good first half with sales up 13.3%. The trials with Target and CVS in the states are progressing well and have been extended to 150 stores and we have recently announced plans to open Boots stores in the Middle East. Despite the potential distraction provided by the proposed sale, Boots Healthcare International has had a very strong first half with sales up 8.5% in total or 8.6% in local currency. Each of the three major brands showed good growth in the half year. Group costs were £24m, almost a quarter lower than last year’s number due to the favourable phasing of certain costs. Net financing costs in the half were unchanged at £17m.

10 Group results 6 months to 30th September 2004 2005
Other operating income and expenses £1m £147m Effective tax rate 32% 9% EPS - Underlying 17.1p 16.1p - 5.8% Dividend per share 9.1p Share repurchase £178m £50m Moving on to look at some of the other important metrics for the half year. Other operating income and expenses, the heading under which we report items not included in trading profit, was £147m. This includes £151m of accounting profit on the store disposals under our sale and leaseback transaction, and other asset disposals. The tax rate in the first half was 9%. The rate is lower than usual due to the sale and leaseback attracting no tax charge. We continue to expect a rate of around 32% for the Group post the BHI disposal. Underlying Earnings per Share, which excludes Other Operating Income and Expenses and related taxation, was down 5.8% at 16.1p. We have agreed an interim dividend of 9.1p per share, the same as last year. During Q1 we returned £50m to shareholders to complete the first £350m tranche of the share buyback programme. Given current market conditions and the ongoing process of implementing our proposed merger with Alliance Unichem, we do not expect to buy back any more shares in the current year although shareholders will receive the substantial special dividend from the proposed sale of BHI.

11 Boots The Chemists 6 months to 30th September 2004 £m 2005 £m Sales
Like for Like Sales 2,171 2,196 +1.1% -1.3% PPRS deflation reduces reported BTC sales growth by 1.3% Gross margin movement -180bp -30bp Turning now to look at BTC performance in more detail. Sales at £2,196m are up 1.1% in total, which is down 1.3% like for like. The contribution from new space is 2.4%. Within this result there is considerable regulatory price deflation under the Pharmaceutical Price Regulation Scheme or PPRS. This reduced reported sales growth in Dispensing by 4.7% which is equivalent to 1.3% off LFL sales growth at BTC level. Gross margin percentage was down 30bps in the first half due to the annualisation of price reductions under our lower prices you’ll love campaign in the first half last year. This performance is in line with our expectations for this point of the year and with our guidance of broadly stable margin for the year. Operating costs were 6% higher in the first half. We have made good progress on our efficiency programmes and these have again contributed savings sufficient to offset underlying inflation. The increase in costs is thus entirely accounted for by the increases resulting from our planned investment programme. Our guidance for the year of broadly stable gross margin and 6% operating cost growth is unchanged. LINK: Turning now to look in more detail at the drivers of sales. Operating costs +12% +6% Trading profit 202 164 -18.6%

12 BTC transaction numbers
6 months to 30th September 2005 Footfall -2.9% Counter Transactions growth Total +0.5% The consumer slowdown can clearly be seen in our same store footfall which is down 2.9% on last year. Footfall remains subdued and is volatile from week to week. Our transactions numbers have suffered less than footfall. Like for like store transactions are 1.8% down on last year. Advantage Card remains an important driver of transactions. The number of active card holders is up 12% year on year with these customers continuing to spend more than non card holders. Given the higher propensity of these loyal customers to purchase from us, the Advantage Card scheme is an important contributor to the resilience of the business. Average transaction value in the half year was up 3.1% as a the result of the increasing proportion of higher spending Advantage Card holders amongst our customers. LINK: I should now like to look at sales performance by category. . Like for like stores -1.8% Average Transaction Value £8.83 Growth +3.1%

13 Continued progress in Health
Sales up 0.6% to £936m Dispensing volume +5.1%, in line with the market Dispensing sales value +0.3% Price deflation PPRS reduces sales by 4.7%, annualises in Feb ’06 Generics reduces sales by 1.2%, annualised in Sept ’05 New contract neutral in H1 OTC healthcare sales +1.0% Good growth in vitamins offset by lower hayfever sales We continue to make good progress in Health with sales up 0.6% to £936m. Within our dispensing business we saw volume growth of 5.1% which continues the strong performance we have seen in recent results. Reported sales growth was however much lower at 0.3% reflecting significant price deflation. Firstly PPRS has reduced the price of branded medicines by 7%. This has reduced our sales income and, given the mix of medicines dispensed, it deflated dispensing sales by 4.7% in the half year. PPRS is the means by which government controls the cost of branded drugs and it impacts both the reimbursement we receive and the cost of drugs we buy. The impact on profit is therefore small. PPRS is designed to operate for 5 years and will become comparable from 1st February Dispensing sales growth was also deflated by 1.2% in the first half as a result of price reductions to generic medicines which annualised on 1st September this year. H1 also saw the first impact of the new pharmacy contract which moves some funding from the reimbursement of generic medicines to fees for services. The impact of this change was neutral in the half in line with our expectations for the year. Within the over the counter business, healthcare sales were up 1% with good growth in vitamins and supplements offset by weaker hayfever sales. LINK: We also made good progress in Beauty, our second key business.

14 Continued progress in Beauty
Beauty and Toiletries sales up 3.3% to £923m Beauty sales up 7.3% Successful investment in own brands and new beauty halls Premium brands +9% No7 +12% Toiletries sales up 2.9% Successful investment in own brands and strong promotional support Suncare +16%, Skincare and Dental strong Electrical products down 5.9% Sales in Beauty and Toiletries were up 3.3% to £923m. Within Beauty, our investment in our own brands and in new beauty halls has helped us to grow sales by 7.3% within which we saw Premium cosmetics up 9% and No7 up 12%. Growth in Toiletries was 2.9% in the half with particularly good growth in Suncare, up 16% with Soltan now established as the biggest brand in the market. Skincare and Dental also performed strongly. Growth in the Beauty and Toiletries category was depressed by beauty-related electrical products, such as hair straighteners and shavers, sales of which have been particularly affected by the consumer slowdown and were down 5.9%. In total, sales growth has been in line with the health and beauty market. LINK: Moving on to BTC’s Lifestyle category.

15 Difficult H1 for Lifestyle
Sales down 2.8% to £337m Baby sales +5.3% More space Extended ranges Food sales -3.9% Atkins launch in the comparative Q2 London disruption Photo sales -10.2% Gaining share in declining market Continued growth in digital Sales in the Lifestyle categories have been difficult in the first half. Sales were £337m, down 2.8% on last year. The Baby category has continued to show good growth, up 5.3% and benefited from the additional space and ranges added last year. Food sales were down 3.9%. The launch of exclusive Atkins diet products helped the Food business to a strong performance last year. The combination of lower sales of Atkins ranges this year together with the disruption to the key London market in Q2 has left sales down in the first half. We continue to gain market share in photo and to see good growth in digital although the overall market remains in decline and sales were down 10.2%. LINK: I would now like to look at the performance of the Boots Opticians business.

16 Major changes in Boots Opticians
Sales down 10.5% to £83m Driving efficiency through integration into BTC Short term disruption Difficult market conditions Affected by slower consumer spending Market expected to remain tough in H2 Contact lens deregulation Sales in Boots Opticians were down 10.5% to £83m. The first half has seen some major changes in Boots Opticians as the programme to integrate the business into BTC has gained pace. A key part of the process is to integrate the management with that of Boots The Chemists. The integration process will reduce the cost base and drive efficiency but inevitably causes a level of disruption that affects sales in the short term. This disruption, together with a downturn in the market as consumers have delayed the purchase of glasses, has led to sales being down in the half. The integration process is making good progress and we therefore expect disruption to begin to ease. However the market is expected to remain tough in H2 with the additional impact of price deflation following the deregulation of contact lenses.

17 Group cash flow 6 months to 30th September 2004 £m 2005
BTC stock cover (wks) 2005 Trading profit (before financing costs) 197 180 Working capital (280) 14.7 (29) 12.6 Capital expenditure (140) (100) Depreciation 79 92 Taxation and other items (59) (203) 84 Disposal of fixed assets - 296 Net cash flow after investing activities 380 The Group’s cash flow has been well controlled in the first half. Working capital growth in the half year is only £29m despite the seasonal increase in BTC stock in preparation for the Christmas quarter. Working capital benefited from the early receipt of £85m for dispensing which was received on the last day of September rather than in October. Nevertheless even adjusting for this, the outflow is much lower than last year and is in line with our guidance of flat working capital for the full year. BTC stock cover has been reduced by 2 weeks since September last year. You may recall last year we added an additional 1 week’s stock cover to provide a buffer against potential disruption during the implementation of the Supply Chain changes. This week’s cover was taken out in the second half of last year. The remaining reduction of one week can broadly be divided into equal parts. Around half a week’s cover reflects later buying of Christmas products. The other half a week’s cover is a genuine reduction largely from stock in the back shop of stores. This is good progress towards our goal of reducing stock cover by 2 weeks over the next 2 years. Capital expenditure is £100m. This is in line with our guidance of £190m for the full year with the reduction on last year reflecting the trading conditions. Spend has been directed towards new stores, IT, particularly to support the healthcare business, and in fixtures for beauty halls and the relaunch of own brand cosmetics. The depreciation charge is up on last year as the effect of the investment programme feeds through to the income statement. As a result, depreciation in the half was only £8m lower than capital spend. Finally, asset disposals, including sale and leaseback receipts, added £296m to cash flow bringing net cash inflow after investing activities to £380m for the half year. I believe the Group’s cash position is healthy and is the result not only of the cash generative nature of the business but also careful management of its cash resources.

18 Disposal of BHI Proposed sale to Reckitt Benckiser plc for £1.926bn, to be completed during early 2006 £1.43bn (200p per share) to be returned to shareholders by special dividend Consolidation of shares to maintain comparability of share price and EPS EPS enhanced by the disposal £400m to be retained to strengthen the balance sheet and for future investment Long-term commitment to manufacturing in Nottingham No adverse impact on Group costs Earlier this month we announced the proposed sale of BHI to Reckitt Benckiser for £1.926bn and the return of over £1.43bn to shareholders by way of a special dividend of 200p per share. Special dividend is, in our judgement, the most appropriate way to return money to shareholders. The sale is expected to complete in early 2006 and the dividend will be paid as soon as practical thereafter. The special dividend will be accompanied by a share consolidation which will reduce the number of shares by approximately the same percentage as the special dividend bears to the market capitalisation of the business. The consolidation ratio will be set out in the circular expected to be sent out early next month and is intended to maintain the comparability of share price and earnings per share. The price achieved for BHI and the size of the cash will, once the cash return is complete, enhance earnings per share since percentage of shares consolidated is greater than the proportion of group earnings being lost. We will retain £400m to strengthen the balance sheet and provide flexibility for future investment. We also intend to make a special contribution to strengthen further the pension fund. We are very pleased to have secured a long term commitment to manufacturing on the Nottingham site which ensures there is no adverse impact on Group costs.

19 Balance Sheet Financial objectives Position at 30th September 2005
Strong investment grade debt rating Adequate cash and earnings cover to dividend Position at 30th September 2005 713m shares ranking for dividend Net debt £500m, a decrease of £143m Position post BHI disposal Zero year end net debt on balance sheet Ongoing financing charge still expected Capitalised operating leases of £1.5bn Property position post sale & leaseback Remaining freeholds prime retail sites plus non retail property NBV £400m, estimated market value at 31st March 2005 £650m Given the number of changes to our financial position in the half I thought it might be helpful to explain our current balance sheet structure. Our financial objectives are twofold: Firstly we aim to retain a strong investment grade debt rating. Secondly, we recognise the importance of dividend and we aim to provide adequate cash and earnings cover to dividend. Both of these aims are assisted by the BHI disposal and the related return of capital and retention of cash. At 30 September we have 713m shares in issue ranking for dividend. Net debt at the half year was £500m; a reduction of £143m on the year end. Following the sale of BHI we expect to have no on-balance sheet debt at the end of this financial year. We will still expect to have a financing charge next year as we will need to service our bonds in issue, and to fund the seasonal stock build in BTC. We will also have interest charges for leases and pensions. In assessing the Group’s financial position it is important to take into account the operational gearing from the Group’s operating leases, primarily for property. Following the sale and leaseback transaction, annual operating lease payments are a little over £200m and the capitalised value is £1.5bn. We still retain the freehold of around 100 stores. These, together with head office and warehouses, have a book value of around £400m and the estimated market value of these properties in the March 2005 accounts was around £650m. We are confident that our balance sheet remains strong and are comfortable with its current structure. In summary then we have made progress in H1, we have traded well in our key businesses of Health and Beauty, we have delivered against our targets for gross margin and cost growth, we have managed working capital well. We have achieved a disposal price for BHI which allows us to pay a special dividend of 200p per share at the same time as enhancing earnings per share. I should now like to hand back to Richard.

20 Richard Baker Chief Executive
Thank you Jim. Let’s take a look now at the progress we have made over the past six months.

21 Clear priorities for BTC
Healthcare First Expert Customer Care Only at Boots Back in April we set out our five key business drivers as we moved to the next phase of our plan to build a better Boots. I would now like to give you an update on where we are. LINK: First we will look at our core healthcare market. Right Stores, Right Places Boots for Value

22 Healthcare First Healthcare First Our biggest business
40% of sales, 50% of profits 100m scripts p.a. The biggest category all year round A strong and growing market A key focus for investment Smartscript in all stores Additional capacity to serve care homes Dispensing sales volume +5% Health is the key to the success of Boots. It is central to customer perceptions of our stores and as our biggest business it is also the key to the economics of the company – contributing 40 per cent of our sales and 50 per cent of our profits. It covers not only pharmacy but also consumer healthcare – everything from over-the-counter medicines to the growing market for positive personal healthcare such as vitamins and minerals as well as alternatives remedies. Healthcare is the one category that is present in every store, regardless of its size and location. It is also one of the fastest growing retail markets. That is why we have focused on it over the past couple of years and will continue to do so. We have often summed it up by saying that our mission is to “Put the Chemist Back in Boots”. Healthcare has been a primary focus for investment. Over the past six months we have completed the roll-out of Smartscript, our IT-based system for pharmacists which allows them to check all medicines to ensure they are right for each customer – not aggravating any existing conditions or adversely reacting with anything else they might be taking. We have installed additional capacity for our care home business in 28 stores and advertised the prescription collection services more widely. These businesses are up 12% and 20% respectively helping grow overall dispensing volumes by 5 per cent. LINK: Let me just say a few words on this market.

23 A strong and growing market
Healthcare First Demographic trends Greater life expectancy, people older for longer 135 130 125 120 115 Population 1976 =100 110 There are three main reasons why this market grows at around 5% per year. First, people are living longer – that means that they are older for longer and need more medication. This chart shows how the number of people over retirement age has grown well ahead of the wider population and is forecast to continue to do so. 105 100 95 90 1976 1986 1996 2006 2016 Total population Over retirement age Forecast Forecast Source: ONS

24 A strong and growing market
Healthcare First Demographic trends Greater life expectancy, people older for longer Continual advances in treatment Significant area of investment A priority for government Healthcare spending as % of GDP 1997/98 4.2% 2006/07 6.5% (Plan) New contract Source: ONS 90 95 100 105 110 115 120 125 130 135 1976 1986 1996 2006 2016 Population 1976 =100 Total population Over retirement age Forecast Second the constant flow of innovation in pharmaceuticals has brought and will continue to bring big advances in treatment. And third is the government’s clear signal that health spending is a priority area – but that within that it wants the NHS to work in partnership with the pharmacy industry. At the heart of the reforms is the desire for pharmacists to play a greater role in the provision of community healthcare.

25 Growing our pharmacy business
Healthcare First Improving convenience 31 new pharmacy contracts Improving service PCS Care homes service New contract services Improving efficiency New pharmacy operating model Professional time freed up for patients So how will we grow our pharmacy business? The first push is to improve convenience. We are opening new pharmacies, with 31 new contracts granted so far this year, of which 20 are already trading, and we have an internet based offer. We have worked to improve the in-store experience so people are served faster and better, with more expert advice available. Secondly, we have moved to improve our service. We have continued to grow our business under the Prescription Collection Service where we collect scripts straight from GP surgeries and have the medication waiting for customers when they come into stores. We have also been pushing further and faster with the Monitored Dosage System, under which we provide pre-packaged drugs for safe and easy use by care homes. Thirdly, wherever possible we have tried to make the best use of our people in stores, with a new pharmacy operating model rolled out to over 300 stores. This speeds up the dispensing process and frees up more time to spend with customers. This is a new initiative but early indications are encouraging with an uptick in volume growth and lower operating costs in the pharmacy.

26 A changing role… Healthcare First New pharmacy contract
Funding shift to fees and services Enhanced services Incremental funding from new sources E.g Chlamydia testing Patient Group Directions Private dispensing unique to Boots E.g. Boots Weight Loss Programme Electronic Transfer of Prescriptions Significant change…significant opportunity At the same time, the new contractual framework, launched in April, aims to give patients faster and easier access to primary healthcare by increasing the services offered in pharmacies. For example, community pharmacists can now provide medicines reviews for those with long-term conditions, offer advice to improve public health on issues such as obesity and dispose of unwanted medicines. Funding is shifting from medicine reimbursement to fees and services. These services offer an opportunity for Boots. Let me give you some examples. One of the most interesting new services is for chlamydia testing. This is a completely new move for the NHS and Boots won the only contract to provide the service on the high street. Such work was previously only carried out by GPs. This initial contract is for 200 London stores and is worth £2m a year. We are also able to offer new services under Patient Group Directions. This is a private dispensing service unique to Boots. For example we have recently introduced weight loss programmes in 66 of our stores which combine healthy eating advice with the ability to prescribe weight-loss drugs and we are signing customers up at the rate of 200 a week. As you would expect we are also working closely with the NHS in the development of Electronic Transfer of Prescriptions which will, in time, change the way scripts are passed from GP to pharmacist. So. There is significant change. But it offers us significant opportunities. Our trusted brand and network of pharmacies means we are well placed to capitalise on the changes. LINK: Our second driver is “Only at Boots”.

27 Building differentiation
Only at Boots Major own brands relaunched No7, No1 cosmetic brand , +12% in H1 17 +13% since relaunch Soltan 5* is the market leader New exclusive brands in store Elle McPherson Ted Baker I have explained in the past that our own-label and exclusive products are a key driver of differentiation and margin. Boots has a level of expertise in product development which none of our rivals can replicate. Cosmetics brands like No7 and 17 and suncare brands like Soltan are great assets. Each of these brands has traded successfully this year following relaunch. No7 has reinforced its position as Britain’s leading cosmetics brand, and in the first half enjoyed sales growth of 12 per cent. More recently we have relaunched 17 and this is ahead by 13 per cent. Soltan, meanwhile, has added 16 per cent and has regained its market leadership in suncare. But own-brands are not the only weapon at our disposal. We have also started to get smarter at using our scale and unique position in the market to secure exclusive deals with other brands. Over the last six months, for example, we have started to sell Elle McPherson’s Body range and new products from Ted Baker. LINK: The “Only at Boots” strategy goes across our business. But nowhere is its impact felt more than in beauty, so I thought it was worth providing some detail in this area.

28 Strong growth in Beauty
Only at Boots Growing and attractive market selected distribution high service element Key area for investment 28 new premium brands in 20 stores 10 new beauty halls new fragrance cabinets in 40 stores Beauty +7% Cosmetics +13% Fragrance +3% Beauty is a strong and attractive market. Even in the difficult consumer market, our sales have continued to grow. Total beauty sales in the first half were up by 7 per cent, with cosmetics increasing by 13 per cent and fragrances by 3 per cent. Like healthcare, beauty plays to our strengths. It is about being a trusted brand in a market with a high level of personal service. Hence it has continued to be a key area for investment. Over the past six months, we have won 28 new accounts to sell premium products – that is brands like Clarins and Estee Lauder - in 20 stores. We have opened 10 new beauty halls and put new fragrance cabinets in 40 stores. In some stores we have converted space previously used for dentistry to the beauty area. LINK: Moving on to look at Boots for Value.

29 Committed to value for money
Boots for Value Continual focus on fair prices 700 lines reduced by 11% 200 new price reductions in Baby Promotions to inspire impulse purchases Xmas Mix’n’match 3for2 Full range of price points Gifts for all More Xmas gifts at lower price points Biggest and most generous loyalty card Baby club Two years ago Boots was significantly disadvantaged both by real price differences with some of its competitors, but also by a customer perception that we were too expensive. That has changed significantly. The Lower Prices You’ll Love campaign has had a big impact – and we will make sure it continues to do so. In the first six months of this year we reduced prices on over 700 lines by an average of 11 per cent – that is £21m further taken off prices. We have held or improved our position in a tough market. We remain as committed to value for money as ever and we continually monitor our prices to ensure they are fair. We also make greater efforts to ensure that we have a full range of price points – ranging from Basics to top-end health and beauty products. Our commitment to value for money will also be to the fore this Christmas, with the successful mix’n’match 3 for 2 offer across many ranges and more gifts at the £5 and £10 opening price points that proved very popular last year. And our value proposition is firmly tied to our Advantage card programme. Our card is the biggest scheme on the high street and the most generous. We know our customers love it. Over the last six months, its value has been enhanced by the launch of the new Baby Club which has helped us as we have added 1.1m new card holders. We believe the increase is because people are finding their income squeezed – and see the Advantage Card as an important way to achieve value for money. As part of this drive to offer greater value to parents we have today announced a further 200 targeted price reductions across our Baby ranges including nappies, food and toiletries. LINK: Our fourth business driver is right stores right places.

30 Clear property priorities
Right Stores, Right Places Continue to add space on edge of town 7 new Edge of Town stores New stores +2.4% sales in H1 Drive large store profit intensity Reduce cost of unproductive space Property solutions where possible eg. Brent Cross Long term planning Bring small stores up to standard We have continued to work on the property front as well. As we have said before, increasing our edge-of-town presence is important and in the first six months we added 7 new stores. At the same time, we are reviewing the space we have in some of our larger stores. This is a long-term process. Where property solutions present themselves, we will take them. This is about making the stores more efficient and driving up the sales and profits per sq ft. For example, in Brent Cross, we vacated the second floor after discussions with the landlord. The result was that we removed over £300,000 from our annual property costs and now, two years on, take more sales from the one floor than we took from the two storeys with sales intensity increasing by over 50 per cent. Finally, we know we have work to do to bring some of our smaller stores up to scratch. Many of these stores have not been invested in for some time. These smaller stores and community pharmacies are the heart of this business and we must invest in them to give the service that our customers expect. We will do this over time as part of our ongoing programme to build a better Boots.

31 Expert customer care Expert Customer Care
New uniforms for all Boots people in store Professional care and advice 2,000 pharmacists in training for Medicine Usage Review 150 Accuracy Checking Technicians 300 more trained Healthcare Assistants “Trust” based advertising Our people are key to everything we do – no where more so than in stores. Very early on I decided that while making stores look dramatically different would be a long and slow process, we could achieve a big impression on customers by changing the way all our people were dressed. This was one of the key issues raised by our store people when I joined the business and we have now completed the roll out of new uniforms to all stores. The feedback from customers and our people is great. We know our key role is providing great professional care and advice. Our pharmacists and healthcare specialists are at the heart of this. 2,000 of our pharmacists are currently undertaking training to carry out Medicine Usage Reviews. We have trained 150 colleagues as Accuracy Checking Technicians with 250 more in training. ACTs free up pharmacist time for customer care. We have also retrained over 300 general assistants to provide more specialist healthcare advice. We also continued to recruit more pharmacists than anyone else and over the last year retained three quarter of those who joined us. This is a significant improvement on previous years and reflects our commitment to clinical excellence. During the half year we also launched our new advertising, based on the expertise we have in the organisation and building on the trust that it creates in our customers.

32 Driving efficiency Delivering against £70m productivity target
Store friendly supply chain Continued benefit of Head Office reductions Better in store operations New till based management information Further buying gains supporting margin More Far East sourcing for Xmas eAuctions for own brand products Advanced negotiation training At the heart of our five key drivers is our continued determination to push for efficiencies. This has been an on-going programme of IT changes, supply chain reforms, head office efficiencies and better buying programmes and over the past six months we have delivered productivity savings amounting to around half of our £70m target for the full year. Our stores are now more efficient and we continue to see lower costs for head office. Over the last six months we have managed to drive efficiencies in stores through our work on the supply chain which is largely complete. Stock holdings are lower and the stock that is in store is more readily accessible so our people can put it on shelves quickly and easily. Stock availability has remained good throughout this period. All our stores now have the new tills, which provide better management information. Let me give you an example. Two years ago, Boots store managers only got a real idea of what they sold at the end of each week when they received paper-based records of stock movements. The new systems mean that is now very different. Each store manager can now get sales updates – divided by category and measured against targets – at the touch of a button whenever they want on the new till systems. If a category is under-performing, they can dive straight in and actively manage the situation. We have continued to push for better buying through Far East sourcing, e-auctions and better negotiation with suppliers. But whatever our achievements, in retail you cannot afford to stand still and we will continue to look for further improvements.

33 Summary Two major transactions to transform the business
Health and Beauty focus continues to deliver strong results Delivery against gross margin, productivity and working capital targets Good progress against clear priorities to build a better Boots Commitment, discipline and focus …so in summary. It has been a very busy six months. We have negotiated two major transactions that will help transform the long term growth prospects for the Group. Whilst conducting these major activities and in a challenging environment our key health and beauty businesses have continued to grow strongly. In addition we have managed our gross margin, delivered significant productivity savings and controlled our working capital. All this has been done while maintaining a high rate of momentum and progress against the clear plans we set out to build a better Boots. We have been disciplined so that no single activity has diverted attention away from our overall day-to-day running of the business and that commitment and focus will remain in the second half. Thank you for your time and we now look forward to answering your questions.

34 Boots Group PLC Interim Results 2005/06

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