Currys H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
December 12, 2024

There are 10 speakers on the call.

Operator

Good morning, and welcome to Kura's 2024, 'twenty five Interim Results Webcast. I will now hand over to CEO, Alex Baldeck.

Speaker 1

Thanks, Sergei. Good morning, everybody. In a moment, Bruce will take you through some encouraging results, which see our performance continue to strengthen, which see us getting the Nordics back on track and continuing our strong multiyear UK and I momentum, all underpinned by strong balance sheet and liquidity and promising further strengthening of free cash flow. I'll then say a few words about how we've done it with a fuller update to come in January before

Speaker 2

we take your questions. Bruce? Thank you, Alex. Good morning, everyone. As Alex says, the first half has delivered strong performance.

Speaker 2

So let me kick off with some headlines. From a revenue perspective, total group sales up by 1% year on year to £3,900,000,000 Adjusted EBITS has increased by 52 percent to £41,000,000 Our adjusted EPS has stepped forward from minus 1.1p up to plus 0.6p. Our free cash flow has been very successful, increasing £4,000,000 last year, up to £50,000,000 and our closing cash position has gone from net debt of £129,000,000 up to a closing cash of £107,000,000 Finally, our pension deficit has fallen by £47,000,000 year on year to £143,000,000 So stepping through each market. 1st of all, the UK and Ireland, very strong performance across the board. Revenue up by 5% on a like for like basis, gaining market share.

Speaker 2

Our online share of business has stepped up a touch to 45% and our adjusted EBIT has increased by 53% from £15,000,000 to £23,000,000 and our EBIT margin has increased by 0.3%. Similarly, our operating cash flow has stepped forward by £6,000,000 and particularly pleasing has been the movement in segmental free cash flow. We moved from an outflow last year of £15,000,000 to an inflow of 64,000,000 and that is coming not just from increase in profits and lower exceptionals, but we've also achieved over £50,000,000 of working capital inflow and that's despite a £25,000,000 working capital investment in IB Mobile. So in total, we've seen a gross improvement in working capital of €75,000,000 in the UK, some coming from growing top line growth, but also tight management of trade working capital. In terms of the UK profit bridge, EBIT, as I've said, steps forward by 30 basis points, coming from both gross margin and operating expenses.

Speaker 2

Gross margin has increased by 10 basis points, so that's increased for the 4th consecutive year through a continued focus on service adoption, not chasing less profitable sales and supply chain cost savings. Our operating expense ratio has increased by 20 basis points, although our costs have increased in absolute terms. From inflation, particularly national living wage, we've spent more on marketing and increased our investment spending. But that's been offset by cost savings and clearly, we're seeing the benefits of operational leverage. A contributor to higher operating costs is project investment spending.

Speaker 2

This year, we've returned to a more normal level of spend, relative to the austerity that we imposed last year in order to protect the balance sheet. You can see this year, we're expecting project spend to return to roughly the same level as FY 'twenty two and FY 'twenty three, although significantly lower than the GBP 100,000,000 that we were spending pre pandemic. However, important to point out that rather than circa 25 percent of this project spend hitting the P and L, it's now closer to 50% as we've invested more in software as a service and the cloud. I think it's important to recognize and celebrate that the profit progression we're showing in the UK is after absorbing this extra cost. Moving on to the Nordics.

Speaker 2

We clearly continue to face a challenging environment with the market declining by more than 3%. But we're really pleased to see an increase in market share. So in terms of our results, revenue like for like is down by 2%. Online share of business has stepped up a touch to 25.5 percent. Despite the drop in sales, we're really pleased that adjusted EBIT has moved forward by £6,000,000 to £18,000,000 moving adjusted EBIT margin up by 0.4%.

Speaker 2

Operating cash flow is flat and our segmental free cash flow is an outflow of €4,000,000 and that's predominantly been impacted by €23,000,000 of negative working capital driven by falling sales. In terms of the Nordic profit bridge, we've successfully offset lower sales with great progress both in margin and cost. Our gross margin has stepped forward by 80 basis points in the Nordic, so that's the 2nd year of growth and gross margins are now above where they were 3 years ago, really a focus on our strategic initiatives of services sold with and particularly important, not chasing sales in a tough market. From an operating expense to sales ratio perspective, you can see the number is negative, but costs are actually down in absolute terms with savings exceeding inflation. The adverse movements in the ratio is due to operational deleverage.

Speaker 2

In terms of cash generation, pretty much good news across the board with free cash flow increasing from £4,000,000 last year to £50,000,000 this year. Obviously, operational cash flow has been helped by growth within our profitability. Capital expenditure is broadly flat. Adjusting items have stepped back as we reduced restructuring. Cash tax is lower.

Speaker 2

That predominantly relates to a rebate received in the Nordics. And cash interest paid has fallen significantly to reflect the improved balance sheet. And finally, working capital, as I've said, is a really healthy inflow driven by the initiatives within the UK, offset by the sales effect within the Nordics. As a result of that strong cash flow, we're seeing our balance sheet continue to strengthen. We've seen net cash increase to 107,000,000 and the pension deficit fall to 143,000,000, which gives us a net indebtedness position of just 36,000,000 and that compares to over 800,000,000 just 5 years ago.

Speaker 2

Also, to give us good financial security, we refreshed our revolving credit facility. Our €525,000,000 facility is now in place until September 2028 with the opportunity to extend that by year. And I would like to say a big thank you to all of our banks who have supported us through this process. In addition, our fixed charge cover has been permanently reduced to a minimum of 1.5x and our leverage ratio is unchanged at 2.5x and important to say that we are constantly within both of those metrics. So in terms of current year outlook and guidance, obviously, we'll say a lot more about this in January post peak, but today, we're flagging no change to our profit and our cash guidance.

Speaker 2

Trading since the end of the period has been consistent with our expectations and the group still expects to grow both profit and cash in the year. We are updating on 2 pieces of guidance. Number 1, capital expenditure. We're now flagging that it will be around €80,000,000 as opposed to the €90,000,000 that we flagged previously. And a new piece of guidance relates to total interest expense going through the P and L, which we're flagging will be around £70,000,000 that compares to £85,000,000 last year.

Speaker 2

And in terms of shareholder returns, just to reiterate what we've said before, it's the Board's intention to announce a recommencement of shareholder returns no later than the full year results in July. Looking ahead to next financial year, we wanted to provide some guidance on the impact of the UK government budget. As you can see set out here, we're estimating the full year impact of the national living wage, the national insurance and also a small impact on rates, impacting us by over £30,000,000 year on year. Now circa half of these costs were anticipated. Clearly, we expected to see national living wage come through, but it does leave circa £15,000,000 of costs which are new, which we need to seek mitigation for to limit the impact on next year's profit.

Speaker 2

You can see on the right hand side of the slide some of the areas that we're going to be focusing on. But based on the work we've been doing over the last 3 years to take over £300,000,000 of cost out, there are no low hanging fruits, but we will be doing our best. Finally, I wanted to provide some longer term guidance. From a profit perspective, we remain committed to delivering at least 3% EBIT, but this slide predominantly focuses on cash. We want to reiterate the comments we made in June that we see a path to a significant improvement of cash available to equity.

Speaker 2

So stepping through each element of this, and I'll focus you on the words on the right hand side. First of all, capital expenditure. We're far more efficient with our use of capital and I show as I showed in a previous slide, a greater proportion of CapEx is now going through the P and L. Therefore, we remain expect CapEx to remain below £100,000,000 a year. Adjusting items, as we've exited non trading stores and other locations, we're expecting the level of adjusting items to fall and will be below £10,000,000 by the time we get to FY 'twenty seven.

Speaker 2

Cash tax paid obviously will rise as profit increase, but I would like to remind you that we've got significant benefits from brought forward losses in the UK. And cash interest paid will continue to benefit from our improved balance sheet and hopefully lower interest rates. And working capital, we expect it to be flat as we offset the working capital impact of ID. Movil. And finally, pension contributions.

Speaker 2

We do expect the contributions to decrease over time as our deficit reduces. So we're going into the pension triannual review in March and we'll be working with the pension trustees to find an appropriate level of contributions to ensure the scheme is well funded. However, as Erf described, we've seen the deficit fall and it will fall further before the end of the year based on our contributions and I'd remind you that our contributions can cease when the actuarial deficit reaches 0. Therefore, we want to flag that contributions will be significantly less than the GBP277,000,000 that have been scheduled, but obviously, we look forward to sharing more about that once the triannual is finished. Let me hand

Speaker 1

back to Alex. Thanks, Bruce. Some encouraging results reflecting progress on several fronts, including getting the Nordwelix back on track. Now obviously, we can't control the macro environment or consumer spending, and the market's gone backwards by 1.4%. On what we can control, Elk shop management has been improving well.

Speaker 1

In market, share's up by 40 basis points, gross margins up again, as you've heard, and the cost discipline is very strong, which leads to a 50% profit growth even with sales heading backwards in the Nordics. In the U. K, it's been a story of keeping up multiyear and encouraging momentum. Importantly, we're pleased that we've returned the

Speaker 2

Currys to sales growth and market share gain

Speaker 1

in what is still a tough market. So sales up 5% and a market down 1.4%. Behind that, a really strong performance in B2B. We said 6 months ago that we had everything it took to be successful with SME customers. That's panning out well.

Speaker 1

We talked about AI being a trend that was going to start with early adopters in 2024 before really starting to grow it in 2025. We're pleased with what we've seen both in laptops and mobile. In laptops, Curry has established an over 75% market share in AI powered, which bodes well for the future. And we're doing well at selling the solutions and the services that customers value and are also good for our top line, our margins and for the stickiness and value of customer relationships. We've stepped forward, for example, solution selling by 13 points to nearly 38 percent adoption.

Speaker 1

Good progress, plenty more headroom to go. Credit, one example of a service that's been going well. Adoption's up again by 140 basis points to nearly 22 percent of sales. Active accounts up to over 2,400,000 now, and that's partly a result of a successful relaunch as Currys Flex Pay. And repair has grown strongly as well, up another 7%.

Speaker 1

Connectivity, our own MVNO ID, is now over 2,000,000 customers and counting, 32% growth in the period. We think we are continuing to build a valuable asset here in ID, and we're more confident now that we can sustain ID's trajectory, having secured an extension of terms with 3 to 2,031, which we're pleased about. So all this in the U. K. As in the Nordics is underpinned by strong customer satisfaction, up again and colleague engagement now firmly established in the top 10% of companies worldwide.

Speaker 1

And as you've heard from Bruce, all of this progress rests on strong financial foundations of balance sheet and liquidity. So in summary, we are encouraged by our progress and this strengthening performance. I mean, the Nordics were delivering on everything in our control, growing profits in a weak market, and the U. K. Is returning to sales growth, and profit growth continues several years of an improving trajectory there.

Speaker 1

We're doing what we said we'd do to achieve all of this: selling more solutions and services, growing the business serving SMEs and continuing to build a valuable asset in ID and mobile. Yet, we faced some unwelcome new headwinds, but we're confident of mitigating about half of those, and we're working on the rest. And we are confident of continuing our momentum and keeping profits and free cash flow going forward as promised. Finally, you wouldn't expect me to let this group of high net worth individuals pass without acting as a personal shopping service for last minute Christmas gifts. What's hot?

Speaker 1

Well, air fryers, you can join the 58% of the population who own 1. Double Stack is going particularly well. Any gamers in your families, I'd recommend the curved monitors on the accessories front or the excellent bundle with the PS5. Both of those are going well, as is the Shark 5 in 1 hairstyler, if hair care is your thing. Over the headphones are going very well with their noise canceling capability, which could come in handy if your family Christmas is anything like mine.

Speaker 1

A supersized TV, 98 inches and plus, is up 400%, which is very gratifying. We need 3 people to deliver them, but it's worth it and worth it to the customer, too, as with the Hisense 100 inches at $1999 including delivery installation. Drones, if you'll forgive the pun, are flying, particularly the DJI version and AI laptops and mobiles, I've touched on. And on mobile, I mean, the iPhone Pro Max has been going well, and we expect that to kick on further with the launch now of Apple Intelligence in the U. K.

Speaker 1

Really an important point on AI. We've established a lead that we do not intend to relinquish, and this trend has got a lot further to run. And finally, beans, coffee machines continue to go great gum. So there's still time to get to Currys and join the 80% of U. K.

Speaker 1

Households who are Currys customers. But with that, I'll pause, and we can take your questions.

Operator

We'll now take our first question from Monique Pollard from Citi.

Speaker 3

Thanks for the Christmas gift ideas. I still haven't done my shopping. It's very helpful. The first question I had was just on your UK market shares. Obviously, back in growth now after a period of decline, and that's also on top of significant profitability increases in the region.

Speaker 3

Just wondered if you could give us a bit more color as to what led to that. Obviously, you mentioned that you've got over 75% UK market share in AI Luck and I'm imagining that, that may have helped?

Speaker 1

It certainly did, Monique. I mean, and we have been able to buck the market, as you talked about, with 5% sales growth in the market going back by 1.4%. And that's driven by, I suppose, three dimensions. We've grown through what we sell, who to and how we sell it. So you mentioned AI laptops and mobile phones.

Speaker 1

That's been well up there. But not just that, I mean, our mobile business, which isn't in the core market share numbers, has grown faster still. And our business serving SME customers, also not in the core market share numbers, has enjoyed very strong growth. So that's been important on what we sell and who we sell it to. How we sell?

Speaker 1

I mean, we've made big improvements in both channels. I mean, we've invested in our stores. 80 stores have been rejigged in the U. K. With more to come post peak.

Speaker 1

Online, we've made 60 improvements to the online customer experience, whether it's in navigation, search, filtering or checkout. And we've joined the channels a lot better than ever as well. And so order online and collect in store is still the fastest way to get a hold of your tech within 30 minutes, and that's up 15% to 27% of our online sales. And then finally, there's marketing, which Bruce touched on as well. Bruce, do you

Operator

want to say a couple more words about that?

Speaker 2

Yes, sure. So there are 2 components which have resulted in us putting more marketing spend into the first half. The first is there was a bit of pull forward. Obviously, the euros were in quarter 1, so we put extra money there in order to support demand. The other was investment in PPC.

Speaker 2

So you might remember that over the last 12, 18 months, we've talked quite a bit about how we pulled back from PBC to make sure that our online advertising is generating maximum returns. So if you like, we've drawn back from that. We've rebased and we've dramatically improved the level of intelligence we bring to the investments we make. So every pound of PPPC that we're now putting back on is generating a really healthy return. So our sales are being driven both by some phasing of marketing spend, but also some menu.

Speaker 1

I mean, the final thing I'd say, Monique, is all of this is happening without any particular help from the market. I mean, we maybe come on and talk about the U. K. Consumer, but I mean, our market went backwards by 1.4% in the period. So we've been able to, whilst maintaining our discipline on gross margins and on costs, importantly, we have been able to buck the market.

Speaker 3

Excellent. The second question I had was just on the change in the mix of project spending, €10,000,000 more this year now being expensed versus being in CapEx. So should I think of that as being versus where we were at the start of the year, you sort of maintaining your expectations for profit growth but with an additional £10,000,000 of OpEx now in the base versus what you had expected?

Speaker 2

Yes. Thank you, Manik. So that isn't quite right. There's 2 things that are going on. The first is on a full year basis, we're expecting our total CapEx to reduce by £10,000,000 Now a component of that will relate to the switch from CapEx into OpEx.

Speaker 2

Some of it is phasing and some of it are really that we're far more efficient in terms of managing the level of spend. So that's the key point. Although you are right, we are absorbing within our P and L, both in the first half and full year. So mid single digits of 1,000,000 in the first half of incremental project spend that has gone into OpEx that we've been able to absorb with our outperformance.

Speaker 3

Very helpful. And then the final question I just had was on the implications from the budget. So you've outlined very clearly the €32,000,000 cost impact in the recent budget, so that's pretty useful detail. Obviously, you're saying you're planning to mitigate much of that or as much as you can via cost saving initiatives. But do you think, overall, this is going to be inflationary for the market?

Speaker 1

So a couple of things there, Monique. I mean, yes, we've already got plans in place to mitigate about half of the anticipated impact, and we're working hard on the other half to mitigate as much of that as we can. And by building on the successes that we've had in greater process efficiency through things like Right First Time, through greater offshoring as we've got with our mature now mature collaboration with Infosys and increased automation, for example, what we've been able to do with electronic shelf edge labeling. So these are all established programs that we will aim to build on and mitigate as much of the further cost headwinds as we can. When you asked about inflation, I mean, we do think that across the sector, as across retail overall, some price rises are inevitable.

Speaker 1

Now we will still give the customer our cast iron promise that if they find it cheaper anywhere else, we will match the difference. So but across the market, as across retail, as you're hearing in other categories, we simply think that the scale and the speed of these new headwinds makes some price rises at least inevitable.

Operator

Our next question comes from Nirik Bharkar from BNP Paribas Exane.

Speaker 4

Hi there. Thank you very much for taking my questions this morning. The first one, just I want to touch base, following the kind of quarter of field's ruling in relation to motor financing cases and the kind of implications this has for the relationship between customers, brokers and vendors across industries. I appreciate at this stage, there's a lot of uncertainty. I was wondering if you could share any initial comments about this case and discuss anything about how you're doing things differently as

Speaker 5

a result of the ruling.

Speaker 1

Yes. So it's a good question. So we believe and are probably advised that the role of lenders and brokers in Motor Finance is very different to that of our own Financial Services business. I mean we, for broker or a single provider of credit, whereas Commercial Finance, brokers' role, as you know, is to provide options and recommendations. It's a much more extensive role.

Speaker 1

And secondly, the judgment does not affect our ability to earn extra sales commission. Now clearly, as you say, the case law is in flux on this, and we'll keep a close eye on where it settles. And as you've heard this morning, it's now subject to appeal to the Supreme Court anyway. But as it stands, we believe our situation is very different.

Speaker 4

Thank you very much. That's incredibly useful. And my second question would just be in relation to electronic shelf edge labeling. What efficiencies has this created? Can you quantify these?

Speaker 4

And sort of how much further is there to go on this?

Speaker 2

So in terms of the number of stores that we've put it out to, as you said in the statement that so far, we've put it into 60 stores in the first half. We'll put it into a further 40 stores in the second half, and we will then carry on with the rollout across the rest of the states probably in the course of next year. In terms of payback, I mean, obviously, we don't share specific details, but it's got a very healthy payback. It allows us to both save colleague time and efforts within stores. There's obviously time of materials, etcetera, but it also increases our flexibility to be able to move prices.

Speaker 2

And when you're facing into online competitors who are changing their prices all the time rather than only being able to do it maybe 48 hours delayed and having to go through the rigmarole of changing it, we're able to do it pretty much instantaneously. So those are some

Speaker 1

of the benefits. It's worth adding, Nick, that this is one of the areas where we get a benefit from being a group because electronic shop edge labeling was first rolled out in our Nordics business. We got to see how it worked there. It worked really well on both the efficiency and the nimbleness of pricing fronts that Bruce referred to and gives us confidence to roll it out in the U. K.

Speaker 1

And we're happy enough with what we're seeing to continue the rollout.

Speaker 4

Perhaps the final one, if you don't mind, is just on the Nordics itself then. Is there any more color on the kind of different regions and then how they're performing against each other?

Speaker 1

So we'll get into that, Nick, in January in Borden Hotel. And I think, I mean, the overall picture is that the market still starts. One of the things across the Nordics Nordics that is incumbent is continuing persistently high interest rates, relatively high penetration of variable rate mortgages, which passes those cutoffs on to consumers pretty quickly and accordingly low consumer confidence and Stephanie. And our market's down 3.40 basis points year on year. I think, again, across all of our Nordics markets, what we have in common is that we're dealing with it well.

Speaker 1

We're in share gain across the piece. The gross margins, as Bruce mentioned before, are now back above level of 3 years ago, 80 basis points improvement over the 190 basis points that we saw for the last full financial year, and we're really pleased by the cost discipline that our colleagues across the North Sea are exerting. Look, we're pleased with the trajectory. We're not yet pleased with where we are, and we're going to keep going.

Speaker 6

Thank you very much.

Speaker 4

Thank you.

Operator

Our next question is from Richard Chamberlain from RBC. Please go ahead.

Speaker 6

Ask about the how you're seeing the outlook, Alex, for the appliances market in the UK. Wondered if you think you're sort of past the worst now whether improvements in housing activity with the lag and so on might help that category a little bit over the next year. That's the first one. And the second one, I guess, more for Bruce. As you talk about sort of phasing of the adjusting items going forward, what sort of adjusting items might you expect still in the medium term?

Speaker 6

I guess that's the question. I appreciate the numbers going to be hopefully quite small now.

Speaker 1

Richard, let me take the appliances question before I hand over to Bruce. And I suppose the first thing to say is appliances are both big and small, major and small appliances. And what we're seeing on the small domestic appliances is quite a lot of innovation and quite a lot of room for us to get to our normalized market share in areas where previously we're underweight. I mean, air fryers is an obvious example where we're very strong and where we're benefiting from this trend. We've seen 30% of the population who own 1 in 2022 grow to 58% now, and it's still climbing.

Speaker 1

So that's one area that's going particularly well. I mean equally, I mean, if you include health and beauty in appliances, the hair care is going particularly strongly. And so there are a couple of examples of where in small domestic and kitchen appliances, we're going quite well. On the major side, though, you're right, that this is primarily still a replacement and distress market. It's largely driven by the replacement cycle and, to an extent, by the housing market.

Speaker 1

And I think that's the most promising future indicator here is that the government is committed and has recommitted this week to accelerating its program of house building in the U. K. And everything else being equal, that will have a tailwind effect for appliances.

Speaker 2

Richard, yes. So exceptional really fall into 3 broad categories: property, transformation and legal. In terms of how we expect it to play out going forward, by far, the biggest individual components is properties. So these are old Curry stores, old Carton warehouse stores, old buildings that we have in our estate that are no longer used. And what we're seeing is either through the lease runoff or our ability to offload those properties, so the cash cost associated with them starts to fall away.

Speaker 2

Obviously, transformation is somewhat contingent on whatever activity is underway, but as I've described in the first half, that was virtually nothing. And legal points, I guess, we pick as they come along, which is why we're confident to be flagging single digit millions.

Operator

Our next question is from Ben Hunt from Panjermir Leverem. Please go ahead.

Speaker 5

Good morning there.

Speaker 4

Hi there.

Speaker 5

Just a sort of general question really on, obviously, you've done a lot of work on service adoption throughout the sort of this period of volumes coming down and you've increased the penetration there. But As the sort of green shoots start to come through and perhaps volumes return, where you sort of see what the sort of the tailwind could be in terms of margins for the business? And sort of related to that, there was a chart earlier on in the U. K. Part of the presentation showing your market share is down, I think, 300 basis points since over the last 2 years.

Speaker 5

But the gross margin sort of hasn't really gone up as much that the improvement there has been a bit more modest. But just sort of what's your sort of view of the shape of that to come as you start to really gain market share? And any thoughts really around those points?

Speaker 1

Perhaps Bruce can touch on the specific gross margin point first and then I'll get to your broader question about services adoption and its effect.

Speaker 2

Yes, okay. So in terms of gross margin, I guess, we're happy with a step forward of 10 basis points in the UK when you consider that's off the back of 3 years in a row of progression. So our gross margin today is dramatically better than it was, say, 3 or 4 years ago. Do we continue to focus on driving it? Are there tens of activity that are supporting it?

Speaker 2

Yes, they are. I guess, always mix flows into it as well, which would cause some level of dilution. But overall, we're pleased with the ongoing trajectory, and we expect gross margins to continue to grow going forward.

Speaker 1

And I mean, one of the reasons for that is we see further Heather and Ben in Solutions and Services Adoption. I mean, as you know, we don't get into specifics on the numbers, but one way to think about it is, I mean, to take solutions first, selling the laptop, not just with the laptop on its own, but with the monitor, the keyboard, the cable, the mouse, the antivirus software, the Microsoft 365, the protection product and so on. And as you know, the customer needs all that stuff, and they might as well get it from us because it's a significant margin booster when they do. Now, we're really pleased with the solution selling, as we call it, progress. So, 37.8 percent of eligible sales, up 12.6 percentage points year on year.

Speaker 1

So, that's showing that we're getting somewhere, but it's still less than 38%. So there's still significant headroom for growth, particularly, but not only in our online channel, and that's an area of focus for us there. I mean, likewise, on our services. I mean, for example, our installation services on Big Box, yes, we're pleased by the 4 10 basis point year on year progress in installation adoption, but that still leaves us at only 32% of eligible sales. We think we can do better.

Speaker 1

We think we can do better on credit adoptions. Yes, again, another strong growth of 140 basis points to just shy of 22% adoption, but we don't see that as a ceiling. And I could go on and talk about the repair and the connectivity, particularly now we're more confident of sustaining the profitable growth trajectory of ID. We think that has further to run. We're not happy yet with 2,000,000 customers.

Speaker 1

So I mean you can make your own call on what where you see the ceiling on these things. We don't think we're approaching it yet.

Speaker 5

Okay. Fine. And just a small technical question. There was quite a disparity in your market share between stores and online. Are we to assume that's the disparities can be explained by the legacy of rationalizing the ranges or any of these there really?

Speaker 5

Just

Speaker 2

So I think we called out specifically that we've seen some good growth in market share within our stores and we've held market share online. And I think we're happy with both of those components. Certainly, clearly, we are a very successful bricks and mortar retailer and the bricks and mortar components of our omnichannel operation and to grow, I think, 150 basis points of share is very significant off the back of a share that is already very healthy. Online, clearly, a super competitive market. It's a growing part of our market for us to be maintaining share with, as Alex described earlier, the very significant number of changes and developments that we've made on our website.

Speaker 2

We're happy with both of those components, and we need to continue focus through both channels. Yes, that's right. I mean,

Speaker 1

I think the other thing to say about online, but first of all, let's remember how big we are online. I think at $2,300,000,000 of sales, our U. K. Online business is more than twice the size of AO, just pick an example, and we're investing heavily behind that channel. I mean, and we've talked about the improvements in navigation and search and filtering and checkout that you've seen.

Speaker 1

We've seen a big step forward in the slickness of our order and collect process that sees that at 27%. And I mean, the other angle online is that, as we talked about before, as we get more sophisticated in assessing the profitability of different marketing investments like PPC, so we can get behind that channel in particular more. So we're not satisfied with where we are, Ben, if that's what you're driving at.

Speaker 5

No, no, no. It's just I was just interested to hear the explanation. That's very useful.

Operator

Our next question is from Alison Liggo from Deutsche Nomis. Please go ahead.

Speaker 7

Good morning, Alison. Good morning. Thank you for taking my questions. So first, just wondering if you could talk a little bit more about that CapEx as we look out the $100,000,000 and how we should maybe think about that split? Should we be expecting that it is mostly directed towards stores?

Speaker 7

Are we thinking about warehouse automation there? Is there kind of any tech being capitalized? Or is it largely now really being expensed? And then the second one is just on the National Insurance minimum wage cost. Obviously, you've really helped with your expectations for that in the coming year.

Speaker 7

Just wondering how far up the kind of logistics supply chain that goes? Does like how much of the kind of warehouse drivers, those sorts of things, do you think there's potential for more indirect costs you might have to absorb as that gets passed down? Or do you feel like it stops there in terms of the number of fees you've helped us with this morning?

Speaker 2

Okay. And well, let me pick up the CapEx point first. I mean, the first thing to say is we don't break out how we spend the CapEx, but you described a number of areas of investments. And of course, we will be investing in all of those areas. We've talked already about the number of stores that we've invested in the first half.

Speaker 2

We'll continue in the second half and that investment will continue going forward. What is important to say about our store estate is that it is very well invested and that's true in both the UK and the Nordics. So it isn't as if we've got lots of incredibly tired stores. We think with a relatively modest level of CapEx, we can keep the estate in really good shape. And of course, we're not right now, who knows, we're not right now talking about opening any new stores.

Speaker 2

Supply Chain Service, one of the key components of being able to continue to take cost out of our business is through automation. So there will definitely be spend in that space. And yes, some of our IT spend will still be capital. But as I've described, as more and more of our estates move to software as a service and technology in the cloud, so the accounting standards are really clear, we have to expense those costs, and that's why we've reached this fifty-fifty split. In terms of national living wage and the national insurance, how far that goes up, I mean, clearly, the national insurance all colleagues.

Speaker 2

So that extra cost, both in terms of the level at which NI starts being paid and the higher rate is impacting all colleagues through the business. The national living wage is an impact in terms of some of the more junior roles within our business, both within stores and supply chain, but one of the components of costs that we have included within our number is maintaining a level of differential. So clearly, as you increase the pay of some of the more junior roles, so you have to reflect that up through the organization.

Speaker 1

I think the only thing I would add to that, Alison, is you asked about how far up it goes. I mean, we've disclosed that there's a £12,000,000 year on year headwind on the National Insurance contributions from our own colleagues and another £9,000,000 from our outsourced partners. And many of those 9 many of those outsourced partners sit in the supply chain and the logistics as well as the service operations.

Operator

Our next question is from Adam Tomlinson from Berenberg. Hi,

Speaker 8

gents. Thanks for taking my questions. Three questions, if I can. Just the first one was on B2B. So I think you've mentioned in the past that being a sort of £25,000,000, £26,000,000,000 market, Nordics and UK and strong growth highlighted in the statement.

Speaker 8

So any color you can give around that will be very helpful, please. The second question was just on stock levels coming down about £100,000,000 so good result there, perhaps just a little bit more color in terms of how you achieve that would be great. And then just a quick third question on AI. I'm thinking more in terms of business processes here. You announced that JV with Microsoft and Accenture, I think, a few months back.

Speaker 8

I'm just wondering how that is going, some of the learnings there and potentially how that feeds into the cost savings program going forward?

Speaker 1

Do you want to take the stock question first?

Speaker 2

Yes, very happy to. So thank you, Adam. I guess the easy answer is that firstly, all of the stock reduction is within the Nordic business and it's all a reflection of the lower sales. So the management team, at the same time, is doing a great job on margin and cost. We're also keeping stock under tight control, so we've seen that fall away.

Speaker 2

But as you can imagine, there is also an equal and opposite fall within trade to creditors, which is why it doesn't necessarily impact cash.

Speaker 1

I mean, on B2B, and you asked for a bit of color. I mean, the way to think about the B2B market is that we're not going after the whole thing. So we're not trying to compete head to head with resellers like Computacenter. Our spot is typically 50 seats and below SMEs. And the benefit of sticking to that and keeping our focus on that is that what we have as by virtue of our core B2C business is very well suited with minimal extra cost to serve those smaller SMEs because we have the supplier relationships.

Speaker 1

The products, by and large, are the same. The channels that we enjoy, the stores and online are very well suited to the SME customer. And many of the solutions that we've developed, whether it's the credit, the repair, the protection, the delivery, the installation, the recycling, all of these things are in demand by B2B customers as well. So we're pretty disciplined about sticking to the adjacent smaller end of the SME market is the first thing to say. 2nd, again, another advantage of having a group here is that we were more advanced in our Nordics business on B2B.

Speaker 1

It's been a big part of their growth plans that's after North Sea for some time. It's the single biggest growth driver for the business in our plans across both the U. K. And the Nordics. And we've done a reasonable job, I think, of learning and the teams working together

Operator

to accelerate our progress and

Speaker 1

to level it up across the different geographies of the business. So we're quietly quite pleased with how it's going. It's important to emphasize again that our progress in B2B is not reflected in the market share numbers that we talked about today, either the 40 basis points market share improvement in the Nordics or the 20 basis points improvement in the U. K. That's on top of that.

Speaker 1

So it's going well. You'd expect to hear more about it in January and beyond. You asked about AI, and you're right, Adam, that AI is both something that we sell, laptops and mobiles, as well as something that we use to improve our own business. And we took the view that this isn't an area of core expertise for us, so let's get in bed with people whose expertise it is, Accenture and Microsoft. We've got good partnerships with both of those organizations and we've extended it into AI.

Speaker 1

We're not going to talk in great detail about how we've used it so far. We might come back to that a bit more in January, except to say that we've cast the net very wide on potential use cases and then narrowed it very narrow because what we want to do is focus initially on use cases where we can be absolutely sure they're making money. I mean, we're not after case studies for their own sake. We're after ways to improve the economics of the business. But one broad way to think about this is we flagged automation as an area of focus for cost efficiency improvements, and we've talked about electronic sharp edge labeling, we've talked about small blocks automation in our logistics and supply chain.

Speaker 1

You can think about the application of AI and Gen AI in particular as another dimension of this, which we'll have more to say on in due course. But we think it's pretty interesting.

Operator

Our next question is from Wayne Brown from Panjure of the Bedroom.

Speaker 9

I'm clearly very slow on the phone today because literally all my questions have been asked, which is good news for you guys. But let me just probably just ask one quick one. For FY 'twenty five, I think the narrative was all about you really didn't need market recovery to hit full year numbers. Is it too early? Or do you have a view as to how you think the consumer may actually spend next year or the appetite that you think the consumer has to spend on electronics next year and what that kind of consumer sentiment view would be?

Speaker 9

Or would you rather maybe wait to get through peak until you firm up that view? So just getting an idea of how you're thinking about that for the 12 months ahead?

Speaker 4

The way

Speaker 1

to there's one way to think about this way. So look, we haven't needed, in the U. K, for example, a rising market and growing top line in order to improve the profits of the business. I mean, we've been able to do that for several years without any top line growth. But clearly, given the choice, we prefer top line growth.

Speaker 1

And one of the reasons that we're as pleased as we are to return the U. K. Business to top line growth, 5%, after a number of years of decline. And our aim is to keep the gross margin and cost and cash conversion disciplines, which have served us so well, and add top line growth to mix and benefit from the operating leverage that Bruce touched on before. So can we do a good job without it?

Speaker 1

We've shown that we can, and we're showing it right now in the Nordics where the top line is going backwards and yet we're improving profits by 50%. But clearly, a recovery in the consumer is it will be our strong preference. You asked what are we seeing. At the moment, I mean, one way to think about it is that U. K.

Speaker 1

Consumer is in a better place than she was a year ago, but not a problem than she was 6 months ago. And you can see that reflected, and if you want to quantify it, in the GfK consumer confidence numbers, it was minus 24 a year ago. It improved to minus 13, and now it's dipped back to minus 18, so back to where we were in January. And the reasons for that are fairly well traveled ground. I mean we expected in the summer inflation to keep falling into interest rates to carry on going down to or to go down and consumer confidence to keep rising, and we've seen that progress stall.

Speaker 1

We don't have a crystal ball. What we would say is that, as you've heard, we're trading in line with our expectations this peak, and we'll have more to say about that come January. But we've reiterated our confidence in growing profits and cash flow this year. And as you've heard from Bruce, we're confident in an upward trajectory of free cash flow to equity going forward. So we're ready for any consumer environment.

Speaker 1

Clearly, we'd prefer a benign one.

Operator

We'll now take our next question from Charlie Rothbard from HSBC.

Speaker 6

Answer

Speaker 4

your question, then ask my question. So apologies. My final one is on your long term EBIT margin. I appreciate you say at least 3%. I'm just sort of wondering around what you would consider the point to which you were over earning on EBIT margins and thus would be looking to reinvest into presumably back into price?

Speaker 2

Our position is really straightforward here, Charlie. Clearly, our ambition is to grow our EBIT margin forward. We think at least 3% is a fair way of presenting that right now, but obviously, the goal ultimately is to deliver as strong EBIT and cash flow as we can. But right now, that's where our focus is.

Operator

And with this, I'd like to hand the call back over to Alex Sbaldic for closing remarks. Over to you, sir.

Speaker 1

Thanks, Sergei. And thank you all. I mean, as I say, we're encouraged by our progress. We can see our performance continuing to strengthen, but we're not satisfied with where we are and nor do we need to be. Because we think that by carrying on with a strategy that's working, that's seeing us number 1 in our markets, growing share, however tough the markets are with world class colleague engagement, improving customer satisfaction and strategic initiatives visibly working.

Speaker 1

We aim to continue. And yes, there are some unscheduled and unwelcome headwinds, but we've dealt with those in the past. We aim to deal with them now and we're underway doing so and we're confident in the long term sustainable free cash flow generation that's going to be to everyone's benefit. So on we go. Thank you all, and have a great day.

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Earnings Conference Call
Currys H1 2025
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