Currys Plc FY24 Investor Presentation

Thank you, Dan, and good afternoon everybody. You will see that I'm going to walk through a subset of the slides that we shared in our year-end results. The full deck along with the video of Alex Baldock, our Chief Executive, and myself presenting these results are on our website. I would encourage, if you want more information, to dig into those, but of course as Dan said, very happy to answer your questions today also. So if we go on to the first slide, which is our financial highlights for last financial year. Obviously, we come off the back of two very challenging years from a cost-of-living perspective, and selling high-price discretionary products meant that the overall market in both of our key core markets, UK and Nordics, stepped backwards. Off the back of that, we saw our sales decrease by 2% year on year. But despite the drop in our sales, we saw our profitability increase by 10% to 118 million. We gave a lot of focus to our key metric, the generation of free cash flow, and we saw a big step forward in our free cash flow to 82 million. Through this increase in free cash flow, our focus on our balance sheet, and the sale of our Greek business, we moved from a year-end net debt position 12 months previously of 97 million to a net cash position of 96 million. So we're in a really, really strong balance sheet place. Earnings per share stepped forward by 7% to 7.9 pence, and we didn't pay a dividend last year, again with the context of managing our balance sheet.

So I'm not going to share the year-on-year results. Instead, we thought it would be helpful for you to see year on two years because this encapsulates that period of tough economic environment. So starting off with the UK, over that two-year period, our profitability has moved forward from 117 million up to 142 million. So as a percentage of sales, from 2.1% to 2.9%. Now that step forward has happened despite the fact that we have seen a significant impact on our sales as a result of the shrinking market. That would be over half a billion pounds worth of sales that have been lost over that two-year period, which would have been based on a marginal contribution of around 20%, circa a 100 million negative impact on our profitability. Now the great news is that we've been able to offset that. We'll come into more detail on the steps we've taken to improve our gross margin. We've increased our gross margin percentage for three years in a row, and over the last two years by 120 basis points. We've also enjoyed significant cost savings. Across the UK business over the last three years, circa 470 million pounds worth of cost savings, significantly more than offsetting inflationary headwinds. So as I say, despite the big drop in revenue during this cost-of-living position, we've been able to improve our profitability. That is critical because as we look forward, our ambition, indeed our strategy, is to hold on to those gross margin upsides and continue to drive them further. We will continue to manage our cost base, but as the market comes back, both the overall market, the macroeconomic environment, and some of the self-help activities I'll talk about later, we believe that we can significantly move our EBIT margins forward.

Looking at the same slide for the Nordics. Our financial year 22 in the Nordics was definitely the peak profit that we've had ever, coming off the back of the pandemic. We achieved an EBIT margin of 142 million, 3.5% of sales. Last year we generated 61 million. So why the big step back? Well, there are two key factors. First of all, like the UK, a drop in our Nordic revenue of around 350 million. That would equate to a 70 million drop back in EBIT. There was also a 10 million headwind caused by movements in FX. You may be aware that there's been circa 12% devaluation of the krona, so as we translate our Nordic business profitability into sterling, that impacted us by around 10 million pounds, and that equates to the whole of the step back. Now again, like the UK, we're very optimistic about moving that EBIT margin and profitability forward back towards where it has been in the past. Now some of that will come through plans we have to grow gross margin and reduce cost similar to the UK, but again, a step forward in the market and self-help in terms of growing sales will move that profitability back to where it has been historically.

Looking at cash. So this is the cash performance last financial year, and as I said in the headlines, we achieved free cash flow of 82 million, up from an outflow the year before of 92 million. So a major step forward. As you can see, our operating cash generation was broadly flat, but we did take a decision to dramatically reduce the level of capital expenditure in the year. We more than halved it as we focused on the balance sheet and getting our liquidity in a really strong place. We have very strict criteria for spending capex within the business in terms of payback period and tight cost control when a project is being approved. We did increase the value of adjusting items in the year to 48 million. That was an increase in our Nordic business offset by a reduction within our UK business. Within the Nordic business, a large component of those exceptionals, indeed all of it, was relating to restructuring, as we reduce the size of our head office, our regional offices, and also made some changes to our store to save cost going forward. Our cash tax paid reduced, partly as a result of lower Nordic profits, but the number there for FY23 included almost a double count because there was some timing of previous tax payments. Our cash interest paid was broadly flat as a result of higher average interest rates offset by a reduction in our average net debt. From a working capital perspective, you can see last year we had a cash outflow from working capital of 34 million. That's really good news, because all of that relates to the growth of our iD Mobile proposition. As you saw from Dan's slides, we've significantly grown the size of our iD proposition, and as we increase the size of that base, it actually causes a cash outflow in the month that we make the sale of a mobile phone because we've got all the cost of goods sold but only receive the revenue over the course of the life of the contract. Outside of that, our working capital is been extremely tightly managed. With our falling sales, you would have expected a cash outflow because we've got negative payday stock, but we managed to offset that through a focus on stock and payables. So also Dan mentioned the disposal of our Greek business, Kotsovolos. We achieved a very good price for that business, 56 million. That's great news. It's allowed us to strengthen our balance sheets as I've described. It simplifies the group, allowing us to focus on our UK and Nordic core business. But as I reflected, we achieved a wonderful valuation for the business. Roughly, we sold 7% of our turnover for 25% of our market capitalization. Now that obviously was the capitalization at the point that we did the transaction. I think it also shone a light on the undervaluation of the business, in our opinion. So a very, very good transaction. And the next slide shows how that has helped us really improve our balance sheet. So as I've already described, we enjoyed significantly higher free cash flow at 82 million. As part of our balance sheet management, we declared zero dividend last year, so no shareholder returns. We also had support from our pension scheme. Cash out was only 36 million compared to 78 million in the previous year. Together with the 159 million that we got from the disposal of our Greek business, it meant that we had a movement in cash in the year of 193 million, and hence moving ourselves to a net cash position. As I say, that's super important from a liquidity perspective, but in particular making sure that we are taking off the table any risk of business failure, which unfortunately in many retail businesses has been a challenge. We want to make sure that during any downturn we are protected from that by removing the level of debt within the business.

And moving on to the next slide, you can see this hasn't just been a one-year thing. We've been focusing on improving the balance sheet over the course of the last four years. If you look at the number there for FY20, if you look at the combination of net debt and pension deficit, we had a negative position of over 800 million just four years ago. Through the focus we've given to the balance sheet, that number for last year was less than 100 million across the pension deficit and the net debt. That pension deficit reduction is particularly important, reducing it from around 550 million down to 171 million, mainly as a result of the contributions we've made. Our focus is to get that deficit clearly as low as possible, and that will mean a reduction in contributions to the scheme.

So moving on. In terms of outlook for the year, starting with our medium-term ambition. Our medium-term ambition is to achieve at least 3% EBIT margins. Now as you can see on this graph, and you've heard me say already, the UK business has been at or around 3% EBIT margins for the last two years, and that isn't the extent of our ambition. As I've described, as the market comes back, as we have our self-help growth opportunities, and continue to focus on margin and cost, we expect that to step forward further. Similarly, the Nordics, if you were to look back at the last decade, the majority of those years, probably eight out of the last ten, have achieved an EBIT margin of over 3%. It's only the last two years as we've seen sales fall away and some one-off impacts caused in the Nordic market by, for example, the war in Ukraine and some excess stock that was sloshing around in FY23. Getting back to 3% should be eminently achievable. With that step forward in EBIT margin, we'll be able to do our number one objective, which is improving our free cash flow. So in terms of where that will come from, we've got a number of initiatives that we've been working on for the last three years and had success over the last three years in driving our gross margin forward. If I was to just cover these really quickly: solution selling, selling accessories with the hardware, so selling a case with a laptop or selling a soundbar with a TV. We've got really effective at driving that adoption rates and that improves our margin. As you heard from Dan, driving the sales of services, increasing the adoption of credit also helps our margin. We have started to charge for delivery and installation after many years in the market of that being free, and that has substantially improved our gross margin percentage. As has a set of conscious decisions to stop chasing less profitable sales. We have put in place over the last three years a forensic view on end-to-end profitability, and that's allowed us to choose the products we want to sell, choose the brands we want to sell, stop loss-making promotions, stop giving so much money to Google for pay-per-click advertising, and make better pricing decisions. And then finally within our gross margin, we've reduced our supply chain and our service costs.

Moving on. As I said already, we have had great success at taking cost out of our business, and we have line of sight to further cost savings. We've worked hard with outsourced partners for many years: GXO and Concentrix have run our supply chain, service operations, and our contact center. We've also outsourced our back office to Infosys over the last 18 months. We've moved circa 900 heads from our UK and Nordic business to Infosys, and the majority of those are sitting in India, so we are getting significant wage arbitrage savings. We're also working on a group synergy basis. So for example, we only have one CIO now looking after technology for both the UK and Nordic business, and we've done the same thing for procurement. We focus on getting things right first time, which significantly reduces our cost base, particularly within our delivery network and our service network. And then finally, AI. This is AI within our business, and we're working with Microsoft and Accenture to dramatically reduce our after-sales cost base by supporting our contact center and our service infrastructure with generative AI technology.

And then finally from a development perspective. As I say, growth will come from the market returning, but we're not relying on the market returning. There's a whole series of benefits. Some of them are new technology, and there's been a dearth of new technology in the electricals market for a number of years, but actually it's starting to really get momentum, and certainly we're very excited by a set of new AI-driven technologies, both mobile phones, laptops, and tablets. You will have seen the new range of Microsoft products that have recently been launched with new chips that dramatically increase battery life and are super fast and give access to a lot of new use cases. I've talked about solution selling with add-on accessories. We see opportunities to continue to grow sales through there. It's also the customers we sell to. So we've got a very good B2C business in the UK and Nordics; we have a smaller B2B business with a much smaller market share. We're really getting behind B2B in both UK and Nordics. There are some categories where we're underweight. If you said our average market share across our two markets is 25%, there are some categories like gaming, health, and beauty where we have single-digit market share, so there's the opportunity to grow significantly. That's a key focus. Again, you heard Dan talk about services, and we're going to drive those forward. Over the course of the next few years, we're starting to invest in our stores. We're refurbishing 115 of our stores this financial year, and we continue to invest in our websites to drive conversion rate and sales. So with all of that activity, we believe that we will significantly improve our free cash flow generation.

So with all of that activity, we believe that we will significantly improve our free cash flow generation. Using last year as a benchmark, last year we generated 82 million of free cash flow. I've added back the 34 million of outflow of working capital because we are committed to flat working capital going forward, and we will continue to manage stock and payables to achieve that. Our interest cash costs will reduce because of the improved net debt position. Our exceptionals will reduce dramatically over the coming years. With 3% EBIT margin, our cash coming from cash profit will also increase. The one-off set is capital expenditure: as you saw on the cash slide, we did dramatically reduce our capex level; we're expecting that to return to more normal levels over the coming years. In terms of our capital allocation priorities, this has been consistent for three years and will continue to be consistent. Our number one objective is to maintain a prudent balance sheet. You've seen the hard yards that we've achieved over the last three years to get our total net debt position down towards zero. We're not going to be giving that up. We of course must continue to support our pension scheme, and we have made great success in reducing the deficit, but as that deficit goes down to zero, the contributions will disappear. We will continue to invest in the business, but of course at the point that we've achieved all of that, we will then reinstate and grow the dividend, and any surplus cash will be available to return to shareholders.

In terms of our short-term outlook and guidance, we've had a reasonable start of the year, good start of the year, it's been in line with our expectations and certainly in line with our year one ambition. We expect to grow profit and to grow free cash flow irrespective of what happens to the market in the year ahead. We're providing some guidance: capital expenditure we expect to be around 90 million in this new financial year; cash exceptionals will drop from 48 down to 30; and our annual pension contributions will increase based on contracted amounts to 50 million this financial year.

Final slide. I guess just to reemphasize some of the things Dan said: we are the market leader in all the markets we operate in; we have our four clear strategic priorities in terms of capable, committed colleagues, easy to shop, customers for life; and all of those are working, which meant that we continue to grow profit and free cash flow. With a robust balance sheet, we believe that leaves us in a really strong position for the future. So that's the end of our formal presentation session. Let me hand back to Alex so that he can serve up your questions. Thank you.

Yeah, let me take that one first and then Dan can add. We're pleased with the progress we've made over the last 12 months. I didn't share that particular slide, but as I've described, the slides are on our website. We more than doubled our profitability in our Nordic business last year from a low base. Certainly during the second half of the year, we saw ourselves taking market share. We successfully grew our gross margins substantially. We continue to take cost out of the business. So we are pleased with the progress that we're making within the Nordic operation. It remains a tough market. I think that's an important point to say. A number of our competitors continue to lose money in that market, but we're not. We're growing our profitability as the market leader. As I said, the new management team: we put a new Chief Executive in, a new Chief Operating Officer, and a new Chief Commercial Officer. Those individuals have got a lot of experience of electrical retailing, a lot of experience of our Elgiganten business, and are in a better place, I think, in a tougher economic environment to run that business. We're delighted with the progress they're making. Anything to add, Dan? No, I think you covered it, Bruce.

Let me start and then I'll let Dan maybe build with some color. So we are very excited about the AI opportunity, as I described in the presentation, both in terms of the computing market but also the mobile market. I'm sure AI will start to touch many of the other products. In fact, I was lucky enough to be with one of our suppliers last week who was showing me an AI-powered fridge, but you can only imagine what that does. We are excited by the opportunity that will come, partly because we think it will drive the repurchase cycle. Certainly since the pandemic, when a lot of people bought TVs and computers, that's now becoming three, four years ago. It is coming to a point where that repurchase cycle will start to kick in again, and we think this AI technology will be a great excuse for people to do that. In terms of why should they do that, there are lots of key use cases, but also the technology that this brings: the speed of the PC, the fact that far more can be done on the computer as opposed to having to bounce backwards and forwards to the web, the ability for example for auto-translation from a foreign language into English, better quality photos being taken, Microsoft Copilot which is quite clunky if you're trying to run it on existing technology but with the latest technology it will run seamlessly on your computer. So lots of reasons to believe. You may have seen that along with Best Buy, we were the first business, the first retailer in the world that got access to this technology, and we have exclusivity on a number of the devices that we sell. In terms of when will this be big, I would say that there will be some upside in the current financial year, but we think it will be even bigger in FY25. Many of the products today, as always with early adopters, are going to be high priced, which is great news because there'll be better margins on them, but it'll also be relatively niche. As we look ahead and the price points start to drop as they inevitably will, it will become more mass market, and as I say that will kick in with a refresh cycle. Dan, could you add to that?

Yeah, let me pick that one up. So I think just by way of background, coming out of the pandemic, we reinstated our dividend. But as I've described, we obviously went into the cost of living, we were seeing a drop-off in sales, and there was a degree of uncertainty in terms of the marketplace. So we took a series of decisions. We decided to stop the dividend, we decided to stop capex within the business, we also got support from our pension scheme to reduce the level of contributions, and we sold our Greek business. You've seen the benefits that we've achieved from that, both over the last four years but in particular over the last 12 months. We have said that we don't intend to pay a dividend for the year that's just finished, but our expectation is that we would restart dividend within the next 12 months. What does that mean? Our expectation is that we would restart a dividend for the end of the financial year we're in. We're not promising that, but that's our expectations based on our current forecasts coming to pass. What would that mean? Obviously that's up to the board to define exactly what the dividend would be, but we would expect to start a dividend and to grow a dividend. At the point that we have excess cash, as I've already described, we would then deliver that back to shareholders by way of buyback. So that's all I can say, predominantly because that's all that's at the moment being discussed and approved by the board.

I don't know about overly cautious, but we are being cautious. I think as we've demonstrated, getting to 3% EBIT margin based on recent history looks very achievable. We've already got the UK business pretty much to that level, and we have plans through sales, margin, and cost to move beyond that. Our Nordic business, it's a bigger build clearly from the lower base we've seen in the last two years, but again we've made good progress in the last 12 months, and assuming our plans come through in the medium term, we should be getting back to 3%. So our position is at least 3%, and I would emphasize the words 'at least'. If we got to 3%, we would not be satisfied or resting on our laurels. Our goal is to get beyond that.

So I think the first thing to say is why has that lease liability reduced? Well, obviously we've sold our Greek business, so there were a chunk of leases associated with that organization. We've seen the underlying lease liability within both our Nordic and our UK business also fall. The majority of that reduction has been as a result of rent reductions and shorter lease periods. We focus on maintaining as short a lease period as we possibly can to give ourselves optionality, and we've been negotiating hard with our landlords to reduce our lease costs. Over the last few years, we've seen around a 30% reduction in lease costs each time we renew. So we've made good progress, and that's reduced our liability. Now in terms of linking that to a forward-looking view, as you heard from Dan, our strategy is omni-channel, and stores are a critical component of that. Therefore, we're investing in our stores as I've described. We're investing in 115 of our stores, and our ambition is to see the top line grow and for those stores to go from strength to strength. Any assumption that our position is that the future is online and that stores are yesterday is definitely wrong. We believe that stores are going to be a critical component of our proposition. Now if I was getting into the nuts and bolts of this, we do review the profitability of every one of our stores twice a year. Off the back of that, we make a decision as to whether to maintain the lease or not at the end as we come to lease renewal, and as I say, that's a very short period. The good news is that we've closed very few stores over that period, a handful every year, and we're very satisfied with the profitability of the stores we've got. This is not just a black or white 'is the store making a profit or not?' We look at it in a far more comprehensive way than that. We appraise what sales we think would transfer to other stores if we closed the store; we also think about what might transfer online. Even taking that more prudent view, we're still satisfied that all of our stores, maybe with the exception of literally one or two, are profitable. When I say one or two, those happen to be stores with quite long leases that are very old within our group. Other than that, of our 296 stores in the UK, for example, they are, apart from one or two, all of them meet the hurdles that we require. So we're not intending to close at this stage. Anything to add, Dan? No, I think that covers it.

Well, I mean I can give you what I know. I'm clearly not an IT expert, I'm Chief Financial Officer, but let me give it a go. A key component of our capital expenditure is on information security. It's something that we take extremely seriously both as a board and an executive committee, both within the UK and the Nordic organization. We have teams that constantly appraise our level of security, constantly upgrading and protecting our data and dealing with our legacy infrastructure. We have experts in this field. We, touch wood, have not suffered issues certainly in my time with Currys over the course of the last three years. In terms of the Infosys question, frankly I don't know the answer to that, so I'm not going to even attempt to answer it. Dan, anything to add?