Dixons Carphone Interims 18/19 & Strategy Update

Dixons Carphone plc

 

 

Interim Results for the 26 weeks ended 27th October 2018

 

H1 headline results as expected, strategy set, transformation underway

 

We Help Everyone Enjoy Amazing Technology

 

New vision and strategy launched

•     Transformation plan underway to deliver a more valuable business

•     Focusing on the core; two big growth opportunities in online and credit; revitalising our mobile business; and giving customers an easy experience

•     Over 30,000 colleagues to become shareholders through new share awards, aligning business behind strategy

Results Summary

•     Gained market share in electricals in all territories

•     Group H1 like-for-like revenue⁽³⁾ up 2%; Q2 like-for-like up 4%

•     Group headline PBT⁽¹⁾ of £50 million (2017/18: £73 million)

•     Statutory loss before tax of £440 million (2017/18: profit before tax of £54 million), including non-headline charges of £490 million (2017/18: £19 million), primarily relating to non-cash impairments, mainly goodwill⁽⁴⁾

•     Free cash flow⁽⁵⁾ of £116 million (2017/18: £174 million), with different working capital phasing year-on-year

•     Net debt⁽⁶⁾ of £274 million (2017/18: £206 million)

Financial Guidance⁽⁷⁾

•     2018/19 headline PBT guidance of around £300 million unchanged

•     Transformation plan targeting:

o  Market share gains and LFL sales growth

o  Group EBIT margin improvement to at least 3.5%⁽⁸⁾ over 5 years

o  £200 million of identified gross cost savings available for reinvestment and margin progression

o  Additional £200 million of capex over 3 years, to accelerate transformation, funded by working capital improvement

•     Board committed to maintaining a strong balance sheet and investing in the colleague and customer experience to deliver long term shareholder value

o  For 2018/19, dividend rebased to 3 times earnings cover; expected to grow dividends from this level

o  Interim dividend 2.25p (2017/18: 3.5p)

•     Expect to generate more than £1bn of free cash flow over 5 years

Alex Baldock, Group Chief Executive, said:

"We believe that Dixons Carphone is now on the path to sustainable success. We have set a clear long-term direction that will deliver more engaged colleagues, more satisfied customers and a more valuable business for shareholders.

 

We have powerful strengths, as a growing market leader with amazing people and capabilities no competitor can match. Our plan builds on those strengths. We're focusing on our core, and on four things that matter most: two big profitable growth opportunities in online and credit; revitalising our mobile business; and giving customers an easy experience. We'll deliver these through capable and committed colleagues, working in one joined-up business, with strong infrastructure.

 

We're underway and investing in all of these, including giving our colleagues at least £1,000 of shares, making every colleague a shareholder. We strongly believe aligning and energising the business behind our strategy in this way will benefit customers and shareholders.

 

There are headwinds and uncertainty facing any business serving the UK consumer, we've had our own challenges, and our plan will take time. But, with this plan, we can now see the way to unleashing the true potential of this business. We believe in our plan, are underway making early progress and determined to make it a lasting success."

 

 

H1 results summary

				Headline revenue (1)				Headline profit / (loss) (1)
		H1 18/19	H1 17/18		Reported	Local currency(2)	Like-for- like (3)		H1 18/19	H1 17/18
	Notes	£m	£m		% change	% change	% change		£m	£m
UK & Ireland electricals*	(4)	1,997	1,953		2%	2%	2%		42	70
UK & Ireland mobile*	(4)	1,009	1,056		(4)%	(4)%	-%		(31)	(36)
Nordics	(4)	1,675	1,666		1%	4%	3%		44	42
Greece	(4)	212	191		11%	11%	11%		6	6
Group		4,893	4,866		1%	2%	2%		61	82
Net finance costs									(11)	(9)
Profit before tax									50	73
Tax									(12)	(17)
Profit after tax									38	56
Headline basic EPS(1)									3.3p	4.8p

* - previously reported as combined UK & Ireland - see footnote 4

 

Quarterly revenue summary

						Q2 2018/19				Q1 2018/19(4)
	Notes					Reported % change	Local currency(2) % change	Like-for- like (3) % change		Reported % change	Local currency(2) % change	Like-for- like (3) % change
UK & Ireland electricals	(4)					4%	4%	3%		-%	-%	-%
UK & Ireland mobile	(4)					(2)%	(2)%	1%		(7)%	(7)%	(1)%
Nordics	(4)					3%	7%	7%		(2)%	1%	-%
Greece	(4)					12%	12%	12%		11%	11%	9%
Group						3%	4%	4%		(2)%	(1)%	-%

 

Notes

(1)   Headline results exclude amortisation of acquisition intangibles, significant reorganisation costs, significant impairments, businesses to be exited, property rationalisation costs, acquisition-related costs and other one-off, non-recurring items, net interest on defined benefit pension schemes and discontinued operations. Such excluded items are described as 'non-headline'. For further details see note 3 to the financial information. Comparatives have been restated following the classification of the honeybee operations as discontinued operations and are therefore included in non-headline results. For further details see note 13 of the financial information.

(2)   ‌Change in local currency revenue reflects total revenues on a constant currency and period basis.

(3)   ‌Like-for-like revenue is defined in the glossary on page 44

(4)   During the period, the reportable segments of the Group have been changed and comparatives restated accordingly. The full year and half year restatements are detailed in note 2 to the financial information. As part of the strategic review, the Group has separated the previous UK & Ireland operating segment into the separate electricals and mobile operating segments. Given the challenges in the mobile market, and the corresponding change in the UK&I mobile performance in the period, the Group has changed the information presented to the Board to provide greater clarity over the relative performance of the two UK&I businesses and to support decisions related to the allocation of the Group's resources. This change has included the provision of separate financial information being provided in respect of the UK&I mobile and electricals segments. As a result of the change, the goodwill previously allocated to the UK & Ireland has been separated into UK & Ireland electricals and UK & Ireland mobile and an impairment review was then performed over the new segments. This identified a material non-cash impairment charge of £225 million  recorded over the goodwill of the UK & Ireland mobile segment, together with impairment of related assets £113 million and additional onerous lease charges of £6 million to be recorded against individual stores.

(5)   Free cash flow is defined in the glossary on page 46

(6)   Net debt is defined in the glossary on page 46

(7)   Dixons Carphone has in place substantial contingency plans to mitigate the expected operational disruption that could arise in the event of a 'hard Brexit'. However, all financial guidance is provided on the basis that there is no significant change in macroeconomic outlook.

(8)   Excludes any changes in the revaluation of network receivables, the impact of which will continue to be separately disclosed.

 

Certain statements made in this announcement are forward-looking. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from any expected future events or results referred to in these forward-looking statements. Unless otherwise required by applicable laws, regulations or accounting standards, we do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. Information contained on the Dixons Carphone plc website or the Twitter feed does not form part of this announcement and should not be relied on as such.

 

 

 

Strategy update and medium term targets

 

 

Our strategy starts with the customer

 

We have developed a clear vision underpinned by strategic initiatives. We are building a sustainable business for the long term which will offer significant financial upside versus where we are today; with reinforced scale benefits; One Business with a simpler and lower cost infrastructure; and a profitable more cash generative mobile business.

 

This is a business with a significant opportunity. This opportunity starts with the customer and with what they think of technology. Customers find technology exciting, but also confusing and expensive. We know they value help to discover, choose, afford and enjoy technology throughout the life of their products. Using strengths that derive from our scale there is no one better placed than us to help them do this.

 

Our strategy starts around a clear vision:

 

"We Help Everyone Enjoy Amazing Technology"

 

The strategy to deliver our vision focuses on our core, and on four things that matter most: two big profitable growth opportunities in online and credit; revitalising our mobile business; and giving customers an easy experience. This will be delivered through three core enablers: capable and committed colleagues; working in one joined-up business and strong infrastructure.

 

Big four levers of value

 

 

Online

This is a big profitable growth opportunity, where we have strong foundations and headroom for growth. Improving our Online proposition is important because:

 

•     Online accounts for more than 100% of the growth in the market (electricals and mobile)

•     We are underweight versus the market online despite strong foundations to build on

We currently have an Online business that is taking share in the overall online market with revenue of over £1.5 billion per annum in the UK & Ireland. This makes us the largest retailer in the category delivering multi-channel technology at scale. With our online market share below that of our store share we see opportunities to narrow this gap over time.

 

We will use what we uniquely have to accelerate online. We intend to achieve this by:

 

•     Giving customers access to a much larger range accessible through all channels

•     Making it easier to find, buy, and get hold of amazing technology online

•     Focus on smartphone first, the growth channel within online

•     Drive crossover benefits across electricals and mobile via credit and services

Online performed strongly in the first half, with revenues up 12% year-on-year in the UK and Ireland. We are making good early progress on our initiatives, including a 30% increase in site speed, a faster and simpler checkout process and improvement in the delivery and contact centre customer experience.

 

 

Credit

Credit is another big profitable growth opportunity and the largest and fastest growing segment of services with strong demand in both electricals and mobile. Technology is expensive, particularly at the big-ticket end of the market where we are strongest; our credit makes it affordable, as well as giving customers reason to shop with us.

 

 

 

 

 

•     Credit is valuable to us because it:

o  Attracts a greater number of new customers

o  Allows customers to buy at a higher average transaction value (ATV) and with greater frequency

o  Increases customer retention

o  Drives the adoption of other services

o  Is profitable in its own right

o  Is important for both electricals and mobile

 

We have strong foundations with customer-focused colleagues who are trained experts in credit. We understand responsible lending. This gives us an opportunity to build profitably on our existing proposition. Our current credit proposition, Your Plan, has grown since 2016 to over 700k active accounts with more than £440 million of credit revenues expected this year and over £2 billion of approved credit.

We are building on these strong foundations and have signed a new agreement with our established strategic partner, BNP Paribas, which gives us better economics and better breadth of offer, still without taking on credit or fraud risk. We see significant headroom for growth and expect to at least double credit adoption from the 8% of our sales today.

 

Easy Customer Experience

We are obsessed with making the customer end to end experience of shopping with us easier through purchase, set up, to delivery and installations, and to resolving queries and issues. We will build a reputation for consistency and reliability and give customers fewer reasons to shop elsewhere.

 

We will make it easier for customers to:

•     Find and buy the right products, whether in store or online

•     Get products how they want them - through improved delivery and collection

o  We are underway with e.g. smarter routing and improvements to our Supply Chain

•     Resolve queries through improved contact centre performance

o  We are underway with improvements to answer rates and more joined up contact centres

 

We have a clear plan focusing on the services that matter most to customers and that make the most of our strengths and scale. We will help the customer to get the most out of their tech, throughout the life of the product through our services, from connect, protect, set-up, maintain and repair, to trade-in and upgrade. Work is underway strengthening what we already have. Services for us are a means of making our customer relationships stickier and more valuable.

 

Today our customer satisfaction scores (NPS) are not where we want them to be. We see significant opportunity to improve.

 

 

UK&I Mobile

 

Mobile is central to our vision. It is the most important category for us, it is our largest, and the most important product to customers and where we are still number one in the market. But it is loss making and we need to change that. Our challenges are well understood in the market, i.e. reduced handset volumes and mix changes, have resulted in declining share for us. And our profitability has been impacted by mix, contractual pressure and an inflexible cost base.

 

 

 

 

 

 

 

 

 

 

 

 

We are responding, with a clear plan to restore mobile to profitability and cash generation:

 

·      Reset our relationships with network partners onto a more sustainable footing with increased choice, improved access to best tariffs and improved terms:

o  We are making good progress here and secured all the connectivity we need to achieve our plan

o  We have a new deal with 3 which will see our own network be more competitive and new deals with other network partners.

o  We have secured connectivity, improved choice and access, with improved economics and significantly eased the burden of hard volume commitments

 

·      Radically improved our offer to the customer with the widest choice of handsets, connectivity, ways to pay, accessories and services.

 

·      We are completing the Dixons Carphone merger to become truly one business and realise the top and bottom line benefits of doing so:

o  We will deliver a better joined up experience for colleagues, driving significant cost opportunities

o  We will deliver a better joined up experience for customers between mobile and other categories and drive opportunities to cross sell via bundles and credit

o  We have made good progress with operating model changes as we move closer to a single retail leadership, supported by combined online and commercial teams

o  We will have a large, optimised and profitable store estate. We are well underway towards that having nearly completed the previously announced store programme

o  As we implement our strong infrastructure programme we will integrate and move to a single modern IT stack, our single biggest cost prize

 

All this will take time but make sure we reinforce our leading position in the category and deliver a sustainable, profitable and cash generative business underpinned by working capital improvements.

 

 

Core enablers

 

 

Capable and Committed Colleagues

Capable and committed colleagues are our number one advantage. The best assisted selling to customers requires super-helpful colleagues. To deliver this we've increased investment in learning and development, creating customer-first training and will relaunch our Dixons Carphone Academy, equipping colleagues with the right tools for the job. To date there has already been a 25% increase in front line customer training hours.

Today, we are announcing the launch of a share ownership scheme which will see every permanent colleague with 12 months service granted at least £1,000 of shares each at over the next 3 years. By making every colleague a future shareholder we are energising our colleagues behind the vision and strategy in a way that will benefit customers and shareholders. The scheme is expected to cost c.£10 million per annum over the period with the shares vesting after 3 years.

 

 

One Business

As we move towards being one truly joined up business, this means:

•     A joined up customer experience, so the customers get the full benefit of everything we have to offer

•     A joined up business behind the scenes, realising the cost benefits of moving to One Business. We have firm plans across 10 areas, including IT, Supply Chain and central costs, to deliver £200 million of cost savings available for reinvestment, margin progression and to combat headwinds

 

 

Stronger Infrastructure

There is plenty of work ahead to upgrade our infrastructure to enable our transformation. In our Supply Chain we are focusing on building consistency and reliability to enable us to keep the promises we make to our customers. For example, we are investing in new Warehouse and Order Management systems and routing capabilities to improve right first-time delivery. As a result of this, we have already seen a 2% improvement in right first-time deliveries in the last six months, equating to a 30% reduction in missed deliveries year-on-year.

 

In IT we have plenty of work ahead to upgrade to an IT infrastructure that will enable our Transformation. We are:

•     Focusing our spend in the areas that matter most across the big four levers of value; credit, online, easy, customer experience and mobile

•     Infosec, to deliver a more secure experience for our customers

Most importantly, we are building in a way that will de-risk execution, led by a new IT leadership team, supported by new and improved partnerships. We are using vanilla, lower risk, proven solutions, minimising time, cost and risk.

 

We are underway with some early deliveries:

•     Better kit and connectivity to frontline colleagues

•     Stockless technology to extend the range

•     Revionics tool - more trust in pricing

•     Planning and forecasting systems for better product availability

 

 

International

We have a strong international business today, generating around 40% of the Group's profits this year and continuing to grow its market leading positions. First half results show good top and bottom line trajectory with strong management teams in place. The focus of our transformation today is on the UK & Ireland but we have a clear plan that is consistent with the UK but locally tailored. This includes growth opportunities in B2B, online, credit, an easy customer experience and focused on two growth categories, smart home and kitchen.

 

 

Financial Guidance

Our transformation is reshaping the business to be one which responds to how customers shop across all categories and to one which, over time, will deliver sustainable earnings growth with higher cash flows.

 

 

2018/19:

•     No change to headline PBT guidance of around £300 million, despite an expected modest loss in mobile.

•     As we commence the transformation we expect capex of c.£190 million. Given regulatory and data incident costs we now expect exceptional cash costs of £100 million (previous guidance of c.£30 million)

•     Net debt, broadly flat year-on year

•     All other guidance is unchanged

 

Medium term targets:

•     We will continue to grow market share in the categories of technology retailing where we operate in the UK & Ireland, Nordics and Greece. This will lead to like-for-like sales growth

•     UK mobile will go through a period of transition for 3 years, whilst we build new propositions, infrastructure, capability and combine mobile with other categories into One Business

•     Group EBIT margin will grow to at least 3.5%⁽¹⁾ as we complete the transformation to One Business. Savings in operating costs of £200 million will be sufficient to more than offset the headwinds and to support investments in our customers' experience

•     We believe that a steady state capex run rate of c.£175 million per annum is sufficient to maintain a well-invested business. Over the next 3 years we plan to invest an additional £200 million, weighted to the early years, to complete the merger and to create one modernised business with unified IT infrastructure  

•     The additional capex will be funded by a significant reduction in working capital

•     With this plan, we expect to deliver more than £1 billion of cumulative free-cash flow⁽²⁾ over the next 5 years

 

 

 

Capital Structure and allocation

 

We intend to maintain a strong balance sheet throughout this business transformation.  We believe that net debt is at about the right level now.

We expect next year, FY20, to be the low point of cash flow generation, because the additional capex for transformation of £200m will be front-end loaded, whilst working capital reduction will take time to build. 

We plan to increase pension fund contributions next year, following the next triennial valuation, in agreement with the trustees, to reduce the recovery period to less than the current 12 years.

We will revert to the previous policy of 3 times cover for dividend, which will lead to a reduction of approximately 40% in the dividend this year. This is intended to allow the dividend and the pension fund contributions to be at least covered by free cash flow, which we consider to be prudent.

Going forward, our cash flow will build and we will apply it according to the following priorities, to maximise long-term shareholder returns:

1.   Invest to grow the core business

2.   Pay and grow the ordinary dividend and fund the pension deficit recovery plan agreed with the trustees

3.   Any appropriate strategic investment to enhance the core business

4.   Any surplus available for distribution to shareholders

 

(1)    Excludes any changes the revaluation of network receivables, the impact of which will continue to be separately disclosed.

(2)    Free cash flow: see glossary for definition.

 

 

 

 

Investor and analyst presentation and webcast

 

There will be a management presentation for investors and analysts at the London Stock Exchange at 8:30 am (GMT) this morning. There will be a video webcast of the presentation, details of which can be found on our corporate website, www.dixonscarphone.com and there will be an accompanying conference call:

Dial-in details: +44(0) 20 3936 2999; passcode: 310100

Seven-day replay: +44(0) 20 3936 3001; passcode: 793333

Next announcement

The Group will publish its Christmas 2018/19 trading update on 22^nd January 2019.

For further information

Assad Malic	Group Corporate Affairs Director	+44 (0) 7414 191 044
Mark Reynolds	Head of Investor Relations	+44 (0) 7979 696 498
Amy Shields	Head of External Communications	+44 (0) 7588 201 442
Tim Danaher, Helen Smith	Brunswick Group	+44 (0) 207 4040 5959

 

About Dixons Carphone: Dixons Carphone plc is a leading multinational consumer electrical and mobile retailer and services company, employing over 42,000 people in nine countries. We Help Everyone Enjoy Amazing Technology, however they choose to shop with us. We are the market leader in the UK & Ireland, throughout the Nordics and in Greece. With a full range of services and support, we make it easy for our customers to discover, choose and enjoy the right technology for them, throughout the life of the product. Our core multichannel operations are supported by an impressive distribution network and sourcing office in Hong Kong and a state-of-the-art repair facility in Newark, UK. Our brands include Currys PC World and Carphone Warehouse in the UK & Ireland and iD Mobile in the UK; Elkjøp, Elgiganten and Gigantti in the Nordics; and Kotsovolos in Greece. Our Dixons Travel brand has a presence across several UK airports as well as in Dublin and Oslo, and our services are provided through Team Knowhow in the UK, Ireland and the Nordics.