Currys plc (CURY) Earnings Call Transcript & Summary

Good morning, everybody. I'm going to give a quick intro with Bruce, and then we can dive straight into your questions. So FY '23 was a better-than-expected performance in what was a tough environment with a poor Nordics performance being offset by solid Greece and a strong and strengthening U.K. performance. We've been quite attentive to mitigating downside risk. And as we'll talk about, we're pretty prudent on the outlook. Let me start with the Nordics, which was a bad year in a very tough market with demand down, inflation up, ambitious competition. And I think it's true to say, however, we would have responded, profits would have been sharply down last year. Still, we believe we could and should have responded better. We've got have spotted those market trends a little faster. Our costs could have come out sooner, and we could have got the balance of our trading response with the benefit of hindsight a bit better. Now it's still tough in the Nordics, but we're responding better now with decisive action. I'm pleased with the clarity, the grip and the energy of the new leadership team. We've got a better balance of our trading response between volume and margin and some good margin boosting initiatives are underway, alongside some decisive action on costs, both the in-year tactical cost out as well as some more structural cost reduction, which will benefit in future years. So a poor year in the Nordics, but a much stronger year in the U.K., a strong and strengthening performance, in fact, with profits up over 40% year-on-year and trading better than expected, especially in the last couple of months of the year. That's despite sales being down 7% like-for-like in the year and market share for the full year, did slip more than we would have liked. It was 120 basis points down in the first half. We made some adjustments. It was better in the second half, and we did still manage to protect our #1 slot. But the big story has been on gross margin and on costs. Gross margin have improved again. I think we said 160 basis points up in the first half, it will be similar for the full year. That's after 110 basis points improvement last year. And we can talk to what we've been doing there, doing a better job of selling margin accretive services, especially online monetizing an improved customer experience, not chasing less profitable sales and good progress on supply chain and service operations costs. And that's part of a broader story on costs, where we're nicely in line with our GBP 300 million cost out target and good progress right across, as I say, supply chain and service operations but also store costs, GNFR and IT and Central. So really good performance on costs and on gross margins, a performance that we intend to keep improving. Greece had another strong year and which is a nicely profitable and cash-generative business.

Thanks, Alex. Good morning, everyone. I'd like to spend just a moment to focus on the balance sheet, which remains healthy. In terms of working capital, group stock finished in a good position, down 10% year-on-year despite high single-digit cost of goods inflation. In terms of net debt, last time we guided to between GBP 100 million and GBP 150 million of net debt. I'm pleased to say we expect to come in at the positive end of that range at around GBP 100 million. The number was helped by the stronger U.K. trading that Alex described which impacted positively both free cash flow and conversion stock into cash. Our average net debt for the year is similar to the year-end balance, and we expect that to be the case going forward. And it is worth reflecting on the strength of our balance sheet compared to pre-pandemic. Our net debt of GBP 100 million compared to GBP 204 million, 3 years ago. Today, we have no working capital facilities, our pension deficit has more than halved, and our lease liabilities have reduced as we have fewer stores and lower rents. A recent topic of the discussion with both shareholders and investors has been our banking covenant fixed charge cover ratio. We expect to finish the year with a fixed charge cover of about 1.9x for FY '23. That gives us a headroom of GBP 40 million compared to the covenant of 1.75x. However, to avoid any concern over future headroom, particularly whilst we get our Nordic business back on track, we've had productive conversations with our very supportive lenders, and they've agreed a covenant relaxation for the next 3 measurement periods. So for October 2023, April '24 and October '24, our fixed charge cover ratio will be 1.5x. And will then revert to 1.75x in April 2025, and that increases our headroom by a further GBP 75 million. So our balance sheet is in a healthy place. We want to strengthen it further. And in July, we'll talk about our cost and CapEx plans for the year ahead.

Thanks, Chris. So in a volatile and challenging environment. As Bruce said, we are taking plenty of action to minimize downside risk, which we think is prudent given a still uncertain outlook. And we might be surprised on the upside, but we're preparing for another tough environment in FY '24. We're not planning on any tailwinds. We're prudently assuming a market that declines for the year ahead. And so our focus in the year ahead is to protect against that downside risk to continue the very encouraging U.K. trajectory and to get the Nordics back on track. And longer term, if we do all of this, we'll be in good shape. We're standing by our over 3% EBIT margin target by FY '25 as the Nordics has achieved only last year. And the U.K. is getting close to achieving on an underlying basis now. So if we do what we say, we do get that EBIT margin over 3%, keep the balance sheet strong, and that will leave us in a position to give healthy shareholder returns. But [indiscernible] say, for the year ahead, we're not counting on any favors from our environment. Laura, with that, we're going to pass back to the group for some questions.

[Operator Instructions] We'll take our first question from Michael Benedict at Berenberg.

Just a couple for me. Firstly, on the U.K., you mentioned that the performance there has been better than expected, particularly in the last couple of months. I wondered if that's a function of the environment or you're stabilizing your market share here, please? And then the second one in the Nordics, looks like top line momentum has slowed further. Is that a sign of the environment getting increasingly difficult? Or is that the local team there focusing on stabilizing profit?

Thanks, Michael. Let me start, and then Bruce may have a couple of bills. The short answer on the U.K. is it's not attributable to the environment. It's got everything to do with the actions that we've taken. We have stabilized market share since the 120 basis point decline that we flagged in the first half. But the big story has been on gross margin improvement and cost reduction. We've done a better job of selling margin-accretive services like credit and care and repair especially online. We've been able to monetize and improving customer experience, especially in areas like delivery charging and NPS has been up again in the year just past. We're not chasing less profitable sales. And so things like digital marketing efficiency has significantly improved, and we're much more selective on our promotions. And we've taken cost out and supply chain and service operations. That's in addition to the other cost efficiency measures that I talked about. So I think it's been a story of self-help in a tough environment in the U.K., which is encouraging because it leaves us in good shape to benefit from any recovery in the macro, not that we're counting on one. I mean on the Nordics, I think, again, we're not -- I wouldn't say that we're counting on any improvement in our environment. The market still remains very tough. We're still seeing depressed demand. Cost inflation is still high, and the competition is still vicious. And so we're not waiting for any improvement. And we've made the changes that we've talked about in leadership and getting the balance right and our trading response between volume and margin and taking decisive action on cost.

The only thing I would add to your question regarding Nordic top line performance, I would say that has been caused by some softening within the macroeconomic environment. Clearly, it's not 1 country, it's all, and we're seeing particular softness within Sweden and Denmark which is impacting the group top line and therefore, dropping through to profitability. But that is, however, being offset by some great work that we're doing, self-help on cost base within the Nordic business and some slight improvements that we started to see within our gross margin, but the overall trends at the bottom line are consistent with what we saw in the first half because of a slower top line sales.

We will now take our next question from Nicolas at BNP Paribas.

I'm standing in for Warwick Okines at BNP Paribas Exane . I just have a couple of questions. I'll start with in Nordics, you flagged restructuring costs there in FY '23. Is there anything to flag for FY '24 that might feed into there? And maybe if you -- because of cash and PBT impact that you could give us, that would be great. And then just on your OpEx base. How are you seeing the inflationary trends impact your OpEx for the full year ahead? Are you seeing any of that? Are you seeing any disinflation basically or anything to call out there?

Thank you, Nicolas. So in terms of the restructuring, the number that we're talking about when we're talking about restructuring in the Nordic, well, from a cash flow perspective, will impact both years. So there will be roughly 1/3 will impact the current financial year, 2/3 will flow into next year when it comes to redundancy payments, et cetera. In relation to inflationary trends, there has been some reduction within inflation, particularly around shipping costs, for example, that were particularly high last year, we've started to see them normalize, but they're still at a high base. We clearly continue to see high levels of inflation within, for example, energy, although we do hedge forward between 6 to 12 months on our energy costs, the flow-through of increased wage costs continue to impact us. And as we described, cost of goods sold, inflation has been a particular challenge in particular within our Nordic markets who continue to see weakness within the NOK and the SEK against the euro and the dollar. So I'd say those are the key inflationary impacts.

We'll now move on to our next question from Simon Bowler at Numis.

Thank you. I'll tone at a time, I think. Firstly, can you just add a little bit of color on the mobile debtor revaluation. What drove the kind of the best and expected performance there? And how are you thinking about that for next year?

Yes, sure. So the overall debtor revaluation is roughly GBP 10 million up year-on-year. So when you look at our profit progression year-on-year, roughly GBP 10 million upside in the U.K. is coming from the debtor revaluation. The key thing that we're calling out is that of the value, there's GBP 35 million that won't repeat into next year. And there are 2 reasons for that, Simon. The first is that there's a chunk of it that relates to RPI. So this is where the networks have put up their prices and that creates incremental value downstream for Currys, and we expect RPI to normalize going into next year. So that is one of the reasons we expect to step back. But there's also a set of the legacy contracts that we have that came through the Carphone estate when it was opened. Those customers are now reaching 2, 3, 4 years of tenure, and they're starting to fall off. So that will mean that there is less value to come from revaluations going forward. In relation to the delta between maybe our expectations if you assume that there was roughly mid-single digit of incremental value that came through network debtor that has caused some of the beat that we're talking about, that would be roughly right.

Okay. Great. And then secondly, just noting on kind of the progress on inventory. Can you just kind of add some color around where that inventory is located? I'm assuming kind of U.K. is in a very good shape and in kind of Nordic, would remain kind of overstocked? Is that kind of a fair assumption? Or is it more balanced across the estate?

No, it's definitely more balanced, Simon. So you'll remember that we talked at last year-end about some significant investment that the Nordic business have made. And we -- I think we called out GBP 100 million of extra stock year-on-year. Now that is more than fully reversed. And therefore, when we're talking about a 10% reduction overall, actually, there's a significantly larger reduction within the Nordic compared to that. U.K. stockholding at last year-end was relatively normal. But nevertheless, we've seen that stock continue to fall. And within our Greek business, as you've seen, our like-for-like within Greece have been very healthy. Actually, we've built stock year-on-year.

Great. And then that means to be too greedy. Just one final one. You kind of have explicitly kind of repeated your CapEx guidance for fiscal '23. But by invitation, I mean you've come in somewhere around about the GBP 120 million you have been guiding to.

Yes. It's broadly there. Maybe a fraction less, but it's broadly there.

We'll now move on to our next question from Adam Tomlinson at Liberum.

Just 3 questions from me, please. I'll give you them all at once. Just first question is on the U.K. I'm noting the improving trends you talked about, particularly in March and April there. Just the consistency of those trends, the exit rate, any comment around that? And your overall confidence that the underlying profitability improvement in the U.K. can be sustained, please? That's the first question. Second question, just on the Nordics. You previously talked about the situation there being in terms of the challenging market being temporary, albeit visibility low on when that recovery comes through. So has anything changed in terms of your view that this should prove temporary over time? And the final question, just on the balance sheet, the fixed charge covenant renegotiation there. It sounds like that's happened in pretty short order. So just any comment you can give around how smooth those discussions with the banks were. And a reminder of how many banks are in the RCF that have agreed to that renegotiation?

Let me lead off with the first 2 and then Bruce can take the third. We are quite pleased with the recent months trading in the U.K. and that's evidenced in a market share decline that improved during the second half. So we're happy with the market share trends. But again, the big story in the second half as for the full year has been on the gross margin improvement and the cost outside. Are we confident we can keep the underlying improvements going? We are. We see a lot more mileage both in the big picture, which we can come back to in July, the continuing improvements in colleague engagement and customer satisfaction and retail fundamentals and in the big differentiators of our omnichannel and services. But then in the specifics, we see a lot more mileage in doing better at selling services, especially online, and we've got the platform to do that now. We intend to continue the improvements in the customer experience and give us further scope to charge for them as we get a better understanding of end-to-end profitability, so we'll be less and less tolerant of chasing any unprofitable sales. And we've got significantly further mileage to go on supply chain and service operation cost efficiency. So that's -- we're confident of that. We're also confident that we're in line, at least in line with the GBP 300 million overall cost target. We expect to beat the GBP 170 million cumulative cost out for FY '23. And whether you look at supply chain service operations costs, on continuing store cost efficiency, on better improvements in our procurement for GNFR or an IT and central cost efficiency, we see further scope with all of those. So we are confident we can keep that progress going in the U.K. even without any help from what's been a pretty challenging environment. On the Nordics, with the benefit of hindsight, I probably wouldn't use that word temporary again. I think we've seen a really tough market right the way through the year, and we're not calling an improvement right now. I think what equally, do we see anything structural and permanent in these market challenges? We don't. These are fundamentally healthy and wealthy markets. I mean the fact that consumer confidence is currently at a 40-year low across these markets. Do we expect that to continue? We don't. The excess stock from some competitor buys is selling through. And at some point, economic gravity will reassert itself and these competitors will need to make some money, which none of them are at the moment. Are we calling up time on that? We're not, and we're being more prudent in our expectations there. What I am pleased with is the energy and clarity and the grip that the new leadership team has shown. I'm pleased we were getting the trading balance better between margin and volume. And I'm pleased that the cost out in particular, the structural cost savings, which will flow through into FY '24 have been well delivered. So but we're not giving a particular time on a Nordic recovery, no, Adam.

So in terms of the banks, we have 8 banks within our banking syndicate who provide our revolving credit facility and I'm sure you can imagine, we provided them with comprehensive information about current performance and outlook. There was a robust set of questions as they went to their investment committees for approval, but we got unanimous support. So there was no challenge to that.

We'll now move on to our next question from Ben Hunt of Investec.

Sorry, most of my questions have been answered. But I just wanted to retouch back on Andy's last question regarding the exit rate and the gross margin in March and April. I don't know if I've got my math wrong here, but I think you alluded to sort of 160 basis points after the second half. If I remember rightly, at peak, it was up 240, I think. So it feels like you've lost a bit of momentum there in the final few months. Is that correct? And if so, why or anything you can sort of give any color there?

Yes. I think the short answer, Ben, is we flagged for the whole of the first half, 160 basis points up, and we're flagging the similar for the second half. So no, we're not, we're not concerned about a loss of momentum. In fact, we're pleased with the progress that we're making on services, on the customer experience, we're not chasing less profitable sales and on supply chain and service operations costs. And we're confident that we can maintain that into FY '24.

We'll take our next question from Richard Chamberlain of RBC.

Just a couple from me, please. I just wondered what your thoughts are on the Nordic competitive environment right now. So any sense we're past the worst, I guess, we've had some belated or from the government coming through for consumers and so on, for energy and so on. But how do you see the competitive environment there? And then back on the U.K., I appreciate this is only a sort of pre-close update. But can you give a bit of color on mix effects on U.K. margins, so either sort of store recovery versus online or indeed product mix. So either of those 2 things had a significant effect on the U.K. margin.

Bruce, do you want to -- if you have anything to say on the second of those questions today.

No, we're not going to talk about channel mix today or overall. We'll come back and talk about that more in July, Richard.

And on your question on the Nordics competitive environment, I mean the short version is it remains vicious and we're not calling it getting any easier right now. I mean -- which -- the competitors vary a bit market by market. As Bruce pointed out, there are several markets in the Nordics. But whether you're looking at people like [ bilka ] using our whole products as loss leaders. In Denmark, whether you're talking about power apparently not caring if they make any money or not in the Danish market or whether you're looking at net on-net complex and now power again, in Sweden or [indiscernible], in Finland. The short version is that the market profit pool ex Elkjop in the Nordics has gone to 0 and those listed competitors who are reporting, that's what we see in our results. Now at some point, as I say, economic gravity will reassert itself and whether they're private or public owners will presumably want them to make some money at some stage. But we're not -- but we're being pretty cautious about calling a time on that. I think what we're focused on is what's within our control. And what's within our control is making sure that our trading response is well balanced. Bruce talked about some of the margin, some of the very early green shoots that we're seeing on margin. Again, we're not getting carried away with that, but we are doing a better job of selling higher-margin accessories and services in the Nordics just as we are in the U.K., we're monetizing a better customer experience with things like delivery charging. We're not chasing less profitable sales in the Nordics just as in the U.K. with our better understanding of end-to-end profitability. We're not having to, and we're also taking supply chain and service operations costs down in the Nordics. On the cost side, we've taken some tactical initiatives, whether it's on marketing and taking marketing down and promotional intensity down or getting rid of contractors and outside consultants and making circa GBP 25 million a year of structural cost improvements that we would expect to see flow through. So those are the things that are within our control and that's what we're focused on doing. What the competitors do is ultimately up to them, but we're not calling an easier competitive environment no, Richard.

We'll now move on to our next question from Tony Shiret at Panmure Gordon.

It's Just a quick question for Bruce. So just circling back around the question on the mobile revaluation and mobile debtor revaluation. I must admit I am -- the impression of that, that would normally be classified as an adjusting item rather than the headline PBT I just wondered, is it equivalent to the GBP 22 million last year? And if so, is it included in the headline PBT guidance? Or is it going to be an adjusting item this year?

No, this is an underlying item, Tony. So we do have very clear accounting distinction between those network debtor items that go through non-underlying versus those that go through underlying. They are all the items that we're talking about today are part of underlying and they all relate to customers who are live and have live contracts with us, which, by definition, means they're part of our underlying business and does equate to the GBP 22 million we talked about previously.

It does equate to GBP 22 million?

Yes, it's comparable.

GBP 22 million was an adjusting item last year.

No, there was -- if you look back through the waterfall, unfortunately, there were two GBP 22 millions. There was one that was showing us underlying, and there was one that was showing us non-underlying. So apologies, I misunderstood which one you were talking about. But no, this is definitely underlying.

We'll now move on to our next question from Paul Rossington at HSBC.

I just -- sorry to labor the point about the Nordics, but I was just wondering what would actually need to happen or how bad would it need to get in the Nordics for you to consider whether you actually need to be in that market anymore or not? Is there a point or where do you potentially draw a line? Or might you kind of consider drawing a line simply exiting the market because it does otherwise distract from the investment case.

No, we're nowhere near that point, Paul. I mean, I think if we step back, it's important to remember that bad this year has been in the Nordics that this is fundamentally a very strong business in a fundamentally very attractive market. I mean in terms of spend per capita, Norway, Denmark, Finland and Sweden are some of the most attractive have been for decades, some of the most attractive markets in the world. And yes, they're going through -- consumer confidence is going through a particularly torrid time. In the Nordics at the moment, not helped by the fact that you have 2 of those countries share land borders with Russia and the third just joined NATO. So I mean you can see the geopolitics of what's going on. But I don't think any serious commentator expects consumer confidence to stay at a 40-year low. No serious commentator expect the current pressures on consumer spend from inflation and from unprecedented interest rates to stay as high as they are. And we expect these fundamentally healthy and wealthy markets to come back. And when they do, will have a healthy business. I mean deeply disappointing to these results in the Nordics are, we are the only player making any money there at the moment, and we've got over 1/4 of the market. So I think there is an element of nerve holding here that we need to believe that we've got a fundamentally healthy business that's going to come back to make the very material contributions that it has made to the group for over a decade previously. Now that said, it's not that we're not just sitting waiting for that to happen. And that's why the leadership changes, the actions on margin, the actions on costs are so important to take control of our own destiny here. Rather than sit and wait for the markets to improve. So no, to answer your question, Paul, that's not under consideration.

We'll now move on to our follow-up question from Simon Bowler at Numis.

2 quick ones. I'll again kind of just take them into. First one, Bruce, I'm going around in circles trying to think about this, so I just thought I'd maybe ask the question. Just coming back to that idea of on the rolling office on the Carphone old legacy Carphone contracts. Is there anything from a working capital perspective that we should be thinking about across kind of fiscal '24 as that kind of dynamic works through?

Simon, I mean, there is detail we can get into, but I'd prefer to leave that until July. And at that point, of course, we'll be providing you with a breakdown of our working capital year-on-year, you will see the movements in the network debtor and it will be much more straightforward to describe at that point.

Okay. Cool. That's fine. And then the second one was can you just comment the relaxation of covenants. Does that come with any restrictions around dividends? And I guess, either way, in the context of, as you mentioned, kind of strengthening the balance sheet. Can you just talk about how you feel about shareholder returns as the Nordics works through its challenges?

Yes. So there is no restriction within the change to the covenants, and we will come back and talk again regarding the dividend in July. The Board will make a decision on what our strategy with dividend is at our July Board meeting. So we'll come back to you at that point. And at that point, we'll talk more broadly about returns to stakeholders.

We'll move on to our next question from Nick Coulter at Citi.

One left for me, please. On the U.K. consumer, could you talk about how you see the U.K. consumer and how the behaviors evolved since you last updated any color, I guess, around pricing points and the consumer's acceptance of pricing will be helpful.

A few things in there, Nick. I mean the big picture on the U.K. consumer is that they remain hard pressed by the cost of living crisis, and that's playing through into relatively depressed demand for discretionary and big ticket products. And that's been -- that's placed downward pressure on the technology market and that hasn't changed. And we're still seeing consumers being very careful with their spending. Consumer confidence may be up on where it was a couple of months ago, but it's still at historically pretty low levels. And the consumers are -- remain cautious about dipping into what are for this stage of the cycle still quite high levels of retained savings. So we're not seeing the consumers sort of open their wallets in a care-free way at all. No. which is one of the reasons that we are remaining cautious in our outlook. As I mentioned, we're assuming that the next 12 months see the tech market in the U.K. continue to go backwards. And we might be pleasantly surprised on the upside, but we're not depending on it. So that's the big picture. I mean, specifically, what are we seeing? We're seeing consumers lean more on credit to afford the technology that they need. We'll give some more detail on that in July, but we've had a strong year with our credit offer. It's the first thing. The second, the consumers are certainly chasing a deal and they're looking for help with the affordability of their tech with mechanics like trade-in. Consumers are concerned to see their expensive technology last longer, which is where our big repair business has had another strong year. Again, we'll give more color on that, more detail on that in July. And getting into a bit more detail and to give one example out of the world of TVs, for example, we're seeing a squeezed middle relatively healthy sales of the entry level under GBP 500 TVs, healthy sales of the premium large screen TV over GBP 1,200, both of those have been in good shape. But in between, the GBP 500 to GBP 1,000 mid-market has had a tougher time, both across the market, and we've seen that reflected in our own sales. We've seen consumers buying more of energy-saving devices, whether it's heat pump, tumble drivers, whether it's more efficient, energy-efficient washing machines, whether it's microwaves or air dryers, which we see all of that and air fryers, I should say, we've seen all of that. So those trends have remained constant. So the U.K. consumer is still in a cautious space, and we remain cautious in our outlook.

There are no further questions in queue. I will now hand it back to Alex Baldock for closing remarks. Thank you.

Thanks, Laura, and thanks, everyone. Just in closing, I mean, this is a better-than-expected performance in a tough environment. We're pleased by the progress and the continuing momentum in the U.K. We're determined to get the Nordics back on track after a poor year and to continue the strong momentum in our Greek business. And for the year ahead, we're going to continue that momentum in the U.K. We're going to get the Nordics back on track. We're going to do all the things we've talked about in a volatile and challenging environment to mitigate any downside risk and build financial resilience -- continue to build financial resilience into the business in facing an uncertain year ahead, but we stand by our long-term ambitions and remain confident and deliver them. Thanks, everyone, and have a great day.