Currys plc (CURY) Earnings Call Transcript & Summary

Good morning, and welcome to Currys' 2024-25 Interim Results Webcast. I will now hand over to CEO, Alex Baldock.

Thanks, Sergey. Good morning, everybody. In a moment, Bruce will take you through some encouraging results, which see our performance continues to strengthen. We see us getting the Nordics back on track and continuing our strong multiyear UK&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 we take your questions. Bruce?

Thank you, Alex. Good morning, everyone. As Alex said, the first half has delivered strong performance. So let me kick off with some headlines. From a revenue perspective, total group sales up by 1% year-on-year to GBP 3.9 billion. Adjusted EBIT has increased by 52% to GBP 41 million. Our adjusted EPS is set forward from minus 1.1p up to plus 0.6p. Our free cash flow has been very successful, increasing GBP 4 million from last year, up to GBP 50 million. And our closing cash position has gone from net debt of GBP 129 million, up to a posting cash of GBP 107 million. Finally, our pension deficit has fallen by GBP 47 million year-on-year to GBP 143 million. So stepping through each market. First of all, the U.K. and Ireland, very strong performance across the board. Revenue up by 5% on a like-for-like basis, gaining market share. Our online share of business has stepped up and touched to 45% and our adjusted EBIT has increased by 53% from GBP 15 million to GBP 23 million, and our EBIT margin has increased by 0.3%. Similarly, our operating cash flow stepped forward by GBP 6 million and particularly beating has been the movement in segmental free cash flow. We've moved from an outflow of asset of GBP 15 million to an inflow of GBP 64 million, and that is coming not just from increase in profits and lower exceptionals, but we've also achieved over GBP 50 million of working capital inflow, and that's despite a GBP 25 million working capital investment in iD Mobile. So in total, we've seen a gross improvement in working capital of GBP 75 million in the U.K., some coming from growing top line growth, but also tight management of trade working capital. In terms of the U.K. profit range, EBIT, as I've said, steps forward by 30 basis points, coming from both gross margin and operating expenses. Gross margin has increased by 10 basis points, so that's increased for the fourth 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 returns from inflation, particularly national living wage, we spent more on marketing and in our investment spending. But that was being offset by cost savings, and clearly, we're seeing the benefits both operational leverage. A contributor to higher operating costs is project investment spending. This year, we've returned to a more normal level of spend to the [indiscernible] 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 '22, FY '23. Although significantly lower than the GBP 100 million that we were spending pre-pandemic. However, important to point out that rather than certain 25% of this project and fixing the P&L, it's now closer to 50%, and we've invested more work in Software as a Service and the cloud. And I think it's important to recognize and celebrate that the profit progression we're showing in the U.K. is after absorbing this extra cost. Moving on to the Nordics. We clearly continue to face any 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 will be down by 2%. Online share of business has stepped up a touch to 25.5%. Despite the drop in sales, we're really pleased that adjusted EBIT has moved forward by GBP 6 million to GBP 18 million, moving adjusted EBIT margin up by 0.4%. Operating cash flow is flat and our segmental free cash flow is an outflow of GBP 4 million, and that's predominantly been impacted by GBP 23 million 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 second year of growth and gross margins are now above where they were 3 years ago, really focus on our strategic initiatives of services is solved 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. In terms of cash generation, pretty much good news across the board with free cash flow increasing from GBP 4 million last year to GBP 50 million this year. Obviously, the operational cash flow has been helped by growth within our profitability. Capital expenditure is broadly flat. Adjusting items have stepped back as we've reduced restructuring. Cash tax is lower, 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 U.K., 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 increased to GBP 107 million and the pension deficit to GBP 143 million, which gives us a net indebtedness position of just GBP 36 million, and that compares to over GBP 800 million just 5 years ago. Also, to give us good financial security, we refreshed our revolving credit facility. Our GBP 525 million facility is now in place towards September 2028, would be an opportunity to extend that by a 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. In terms of current year outlook and guidance, obviously, we will say a lot more about this in January post peak. But today, with slightly no change to our profit and our cash guidance. Trading since the end of the period has been consistent with our expectations, and the group still expects to grow both profits and cash in the year. We are updating two pieces of guidance. Number one, capital expenditure to attacking that it will be around GBP 80 million as opposed to the GBP 90 million that we flagged previously and a new piece of guidance relates to total interest expense going through the P&L, which we're flagging will be around GBP 70 million. That compares to GBP 85 million last year. And in terms of shareholder returns, just to reiterate what we've said before, it's the Board's intention to announce the 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 U.K. 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 GBP 30 million 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 certain GBP 15 million of the costs which are new, which we need to seek mitigation for the impact on next year's profits. 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 GBP 3 million of cost out. There were no low-hanging fruit, 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 improvements in cash available to equity. 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 as I showed in our previous slide, a greater proportion of CapEx is now going through the P&L. Therefore, we remain -- expect CapEx to remain below GBP 100 million a year. Adjusting items, as we've exited nontrading stores and other locations, we're expecting the level of adjusting items to 4 and will be below GBP 10 million by the time we get to FY '27. Cash tax payment obviously will rise a profit increase, but I'd like to remind you that we've got significant benefits from forward losses in the U.K. 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 Mobile. And finally, pension contributions. We do expect the contributions to decrease over time as our deficit reduces. So we're going into the pension trend 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 described, we've seen the deficit for -- 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 GBP 277 million that have been scheduled. But obviously, we look forward to sharing more about that once the triennial is finished. Let me hand back to Alex.

Thanks, Bruce. Some encouraging results reflecting progress on several fronts, including getting the [ Nordics ] back on track. Now obviously, we can't control the macro environment or consumer spending and the market has gone backwards by 1.4% but on what we can control, [indiscernible] shop management has been improving well. I mean market share is 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 handing 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 current sales growth and market share gain in what is still a tough market. So sales up 5% in a market down 1.4%. Behind that, 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. We talked about AI being a trend that was going to start with early adopters in 2024 before we open to it in 2025. We're pleased with what we've seen both in laptops and mobile established an over 75% market 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 also good for our top line, our margins and for the stickiness and value of customer relationships. We've stepped forward, for example, solutions selling by 13 points to nearly 38% adoption, good progress, plenty more headroom to go. Credit is one example of a service that's been going well. Adoption is up again by 140 basis points and nearly 22% of sales, active accounts up to over GBP 2.4 million now and that's partly a result of a successful relaunch as Currys' flex pay and prepared to grow strongly as well, up another 7%. Connectivity, our own MVNO iD is now over 2 million customers in 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 2031, 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 and top 10% of companies worldwide. And as you've heard from Bruce, all this progress rests on strong financial foundations of balance sheet and liquidity. So in summary, we are encouraged by our progress and the strengthening performance. I mean the Nordics, we're delivering on everything in our control growing profits in a weak market and the U.K. is returning to sales growth and profit growth continued several years of an improving trajectory there. 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 assets in iD 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? Well, air fryers, you can join the 58% of the population who own one double stack is going particularly well. Any game has in your families, I'd recommend the current monitors on the accessories front, or the excellent bundle with the PS5 both of those are going well, as is the Shark only been 1 hair style if hair care is your thing. Over the head headphones are going very well with the noise canceling capability, which could come in handy. If you're a family Christmas, is anything like mine, a supersized TV, 98 inch and plus is at 400%, which is very gratifying. And we need three people to deliver, but it's worth it and worth it to the customer, too, with a high sense of 100-inch at 1999, including delivery installation. Drones, if you'll forgive the pun are flying, particularly the [ DGI ], version and AI laptops and mobile I 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. A really important point on AI. We've established and believe that we do not intend to relinquish and this has got a lot further to run. And finally, coffee machines continues to go great [ garner ]. So there's still time [indiscernible] and join the 80% of U.K. households who are [indiscernible] customers. But with that, I'll pause, and we can take your questions.

[Operator Instructions] We'll now take our first question from Monique Pollard from Citi.

The first question I had was just on your U.K. market shares, obviously, back in growth now after a period of decline, and that's also on top of significant profitability increasing in the region. 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% market share in AI laptops, and I'm imagining it may have helped?

It certainly did, Monique and we have been able to offer the market, as you've talked about, with 5% sales growth in the market going back by 1.4%. And that's driven by the three-dimensions. We've grown through what we sell, who do and how we sell it. So you mentioned AI laptops and mobile phones. That's been well out there. But not just that, I mean, our mobile business, which isn't in to call market share numbers as far as 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. I mean we've made big improvements in both channels. We've invested in our stores, 80 stores have been regime in the U.K. with more to come post peak 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 are up better than ever as well. So order online and collect in-store were still the fastest way to get 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 want to cover more words about that.

Yes, sure. So there are two components, which have resulted in us putting more marketing spend into the first half. The first is there was a bit of a pull forward. Obviously, the euros were in quarter 1. So we put extra money there in order to support demand. The other was investments in PPC. So you might remember that over the last 12, 18 months, we've talked quite a bit about how we pull 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 PBCs that we're now putting back on is generating a really healthy return. So our sales are being driven by some phasing of marketing spend but also some net new.

But the final thing I'd say because 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 margin and on costs, importantly, we have been able to buck the market.

The second question I had was just on the change in the mix of projects, GBP 10 million more this year and now being expensed, that has been in CapEx. So should I think of that as versus where we were at the start of the year, you maintaining your expectations for profit growth, but with an additional GBP 10 million of OpEx now in the base versus what you had expected?

So that isn't quite right. And there's two things that are going on. The first is on a full year basis, we're expecting our total CapEx to reduce by GBP 10 million. Now a component of that will relate to the switch from CapEx into OpEx. Some of it is pacing 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&L both in the first half and full year. So the mid-single digits of millions in the first half of incremental project and that has gone into OpEx that we've been able to absorb with our outperformance.

And then the final question I just had is on the implications from the budget that you've outlined very clearly the GBP 72 million cost impact of the recent budget, that's pretty useful detail. Obviously, you're saying you're planning to mitigate much of that or as much as you can by cost-saving initiatives. But do you think a rule this is going to be inflationary for the market?

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 future now mature collaboration with Emphasis and increased automation, for example, what we've been able to do with electronic shelf labeling. So these are all established programs that we will aim to build on and mitigate as much of the cost headwinds as we can. When you ask about inflation. I mean we do think that across the sector, as across retail overall, some price rises are inevitable. Now we will still give the customer our call [ sign ] promise that if they find a cheaper anywhere else, we will match the difference. So -- but across the market, as across retailers, you're hearing in other categories. We simply think that the scale and the speed of these new headwinds make some price rises at least inevitable.

Our next question comes from [ Neri Barca ] from BNP Paribas Exane.

The first one, just I wanted to touch base, following the kind of court appeal ruling in relation to motor finance and castings and the kind of implications this has for the relationship between customers, brokers and owners across industries. I appreciate at this stage that 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 a result of the ruling?

So it's a good question. So, we believe and are probably advised that the role of vendors and brokers in motor finance is very different to that, our own financial services business. I mean, Will, for example, we're a broker of a single provider of credit but finance brokers role, as you know, is to provide options and recommendations. It's much more extensive role. And secondly, the judgment does not affect our ability to earn extra sales commission. Now clearly, as you say, that the case flows in products on this, and we'll keep a close eye on where it settles. And as you heard this morning, is now subject to appeal the Supreme Court anyway. But as it stands, we believe our situation is very different.

And my second question was just in relation to electronic shelf edge label. What efficiencies as this created? Can you quantify these? And sort of how much other is there to go on this?

In terms of the number of stores that we've put it out to us since so far, we 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 this 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 allowed us both save colleague time and efforts within stores. There's obviously time of materials, et cetera, but it also increases our flexibility to be able to move prices. 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 that changing it. We're able to do it pretty much instantaneously. So those are some of the benefits.

It's worth adding, Nick, but this is one of the areas where we get a benefit from being a group because electronic shop venture labeling was first rolled out in our Nordics business. We got to see how it worked out. 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. and we're happy enough with what we're seeing to continue to roll out.

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

So we'll get into that, Nick, in January in [indiscernible] and I think -- I mean, the overall picture is that the market just one of the things across the Nordics, that is in common continuing persistently high interest rates, relative high penetration of variable rate mortgages, which passes those costs on to consumers pretty quickly and accordingly low consumer confidence in spending. And our market is down 340 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. We're in a share gain across the piece. The gross margins, as Bruce mentioned before, are now back above the level of 3 years ago, 80 basis points improvement over the 190 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 serving. Look, we're pleased with the trajectory. We're not yet pleased with where we are, and we're going to keep going.

Our next question is from Richard Chamberlain from RBC.

Asked about the -- how you're seeing the outlook, Alex, for the appliances market in the U.K. I just wondered if you think sort of past the worst now whether improvements in housing activity with the lags and so on might help that category a little bit over the next year? That's the first one. And then the second one, I guess, more for Bruce, you talk about sort of phasing of the adjusting items going forward? What sort of adjusting items that you expect still in the medium term? I guess that's the question. I appreciate the numbers going to be hopefully quite small now.

Richard, let me take the appliances question before I hand over to Bruce. And so, the first thing to say is appliances are both big and small maintenance appliances and what we're seeing on the small domestic appliances, it 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 that's seen 30% of the population who owned one grow 58% now, and it's still climbing. And so that's one area that's going particularly well. I mean, even 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, then 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. And I think that's the most definite promising feature 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 have a tailwind effect for appliances.

So exceptionals really fall into three 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 property. So these are old Currys stores, old carton warehouse stores, all the buildings that we have in our estate that are no longer used. And what we're seeing is either to [indiscernible] properties, some of the cash costs associated with this starts to fall away. Obviously, transformation is somewhat contingent on whatever activity is underway. But as I've described in the first half, that was [ both ] see nothing. And legal points, I guess, we pick up as they come along, which is why we're confident to be flatting single-digit millions.

Our next question is from Ben Hunt from Panera [indiscernible] .

Just a sort of general question really on -- obviously, you're doing a lot of work on service adoption throughout the sort of this period of volume coming down. You've increased the penetration. But as the sort of green shoot starts 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 iness? 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 years. But the gross margin sort of hasn't really gone up as much, the improvement there has been a bit more modest. Just sort of -- what's your sort of view of the shape of that to come as you started regain market share? Any thoughts really around those points?

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

So in terms of gross margin, I guess we're happy with a step forward of 10 basis points. And when you consider that's not the back of 3 years in a row of progression. So our gross margin today is dramatically better than it was to say [ 3 to 4 ] years ago. Do we continue to focus on driving it? Are there tens of activities that are supporting it? Yes, they are. I guess, always mix flows into it as well, which would cause some level of dilution. But overall, we're pleased, we're pleased with the ongoing trajectory, and we expect gross margins to continue to grow going forward.

And it's one of the reasons for that is we see further pan in solutions and services adoption. As you know, but 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 products 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 boost when they do. Now we're really pleased with the salt with solution selling, as we call it, progress. So 37.8% of eligible sales up 12.6 percentage points year-on-year. 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 410 basis point year-on-year progress in installation adoption, but that still leaves us only 32% of eligible sales. We think we can do better. 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 having yet with 2 million customers. So I mean you can make your own thoughts on where you see the ceiling on these things. We don't think we're approaching it yet.

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

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 to grow, I think, 150 basis points of share is very significant off the back of the 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, this is a very significant number of changes and developments that we've made on our website. We're happy with both of those components, and we need to continue to focus through both channels.

Yes, that's right. I mean I think the other thing to say about online. But first let's remember how big we are online. I think of GBP 2.3 billion sales. The 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 I talked about the improvements in navigation and search and filtering and checkout that you've seen. 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 PBC, so we can get behind that channel in particular more. So we're not satisfied with where we are, if that's what you're driving at.

Our next question is from Alison Lygo from Deutsche Numis.

I just wondering if you could talk a little bit more about that CapEx as we look out the GBP 100 million and how we should maybe think about that split? Should we be expecting record towards stores? Are we thinking about warehouse automation there? Is there kind of any in cash? Or is it largely now really being expensed? And then the second one is just on the national insurance minimum wage costs. Obviously, you've really helped with your expectations for that in the coming year. Just wondering how far the kind of logistics supply chain that goes like how much of the kind of warehouse drivers, those sorts of things? Do you think there's potential for more indirect cost? You might have to absorb as that gets passed down or do you feel like it stops there in terms of the you've helped us this morning?

Well, don't you 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 invest in, in the first half, will continue in the second half, and that investment will continue going forward. What is important to say about our store state is that it is very well invested, and that's true in both the U.K. 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. So supply chain is 1 of the key components of being able to continue to take cost out of our business is through automation. So that will definitely be spending that space. And yes, some of our IT spend will still be capital but as I've described as more and more of our states 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 50-50 split. In terms of national living wage, the national insurance, how far that goes up. And then clearly, the national insurance such as colleagues. 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 pain of some of the more junior roles so you have to reflect that up through the organization.

I think the only thing I would add to that, Alison, is you asked about how far it goes. I mean we've disclosed that there's a GBP 12 million year-on-year headwind on the national insurance contributions from our own colleagues and from our outsource partners and many of those outsourced partners sit in the supply chain and the logistics as well as the service operations.

Our next question is from Adam Tomlinson from Berenberg.

Three questions, if I can. Just the first one was on B2B. So I think you mentioned in the past that being a sort of GBP 25 billion, GBP 26 billion market Nordics in the U.K. and strong growth highlighted in the statement. So any color you can give around that would be very helpful, please. Sorry, second question was just on stock levels coming down about GBP 100 million. 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 Microsoft and Accenture, I think, a few months back. I was just wondering how that is going some of the learnings there and potentially how that feeds into the cost savings program going forward.

Do you want to take the stock question first?

Yes, very happy to. So thank you, Adam. I guess the easy answer is that, firstly, all of the stock reduction is within the Nordics business and it's all a reflection of the lower sales to the management team at the same time of doing a great job on margin and cost, also keeping stock under tight control. So we've seen that fall away. But as you can imagine, there is also an equal and opposite forward in creditors, which is why it doesn't necessarily impact cash.

I mean on B2B, and you ask for a bit of color. I mean the way to think about the B2B market is that we're not going to all things. So we're not trying to compete head-to-head with the like computer center, asking and spoke this typically and fellow SMEs. And the topic is on that is that what we have is by virtue of our core B2C business is very well suited with minimal extra costs to serve those smaller SMEs because we have the supplier relationships, the products, by and large, are the same. The channels that an online are very well suited to the SME customer. And many of the solutions we've developed, whether it's the credit, the repair protection, the installation, the recycling. All of these things are in demand by B2B customers as well. Disciplined about sticking to the adjacent smaller end of the SME market, is the foirst thing, so to say. Second, again, another advantage of having a group that we were more advanced in our Nordics business on B2B, as a part of their growth plans, that's up the North Sea for some time. It's the single biggest business in our plans across both the U.K. and the Nordics. And we have a reasonable job, I think, of learning and the teams working together to accelerate our progress and to level it up across the different geographies of the business. So we're quietly -- quite pleased how it's going. It's important to emphasize that our progress in B2B is not reflected in the market share numbers that we talked about today, 80 basis points market share improvement in the Nordics or the 20 basis points improvement in the U.K. That's on top of that. 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 mobile, 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 as it is, Accenture and Microsoft. We've got good partnerships with both of those organizations, and we've extended it into AI. We've not been talking 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 a narrow bit, very narrow because what we want focused initially on use cases where we can be absolutely sure that they're making money. And 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 shop, [ edge ] labeling. We talked about small box automation in our logistics and supply chain. 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.

Our next question is from Wayne Brown from Panmure.

I'm clearly very slow on the phones 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 '25, 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 upside that you think the consumer has to spend on electronics next year? And what's that kind of consumer sentiment view would be? 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.

The 1 way to think about this way is that, look, we haven't needed in the U.K., for example, a rising market and growing top line in order to improve the profit to the business. And then we've been able to do that without any top line growth. Clearly, given the choice, we prefer top line growth and one of the reasons that we are as pleased as we are to return the U.K. business to topline [ 45% ] 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 we touched on before. So can we do a good job without it? 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 -- at the moment, I mean, the one way to think about it is that U.K. consumer is in a better place than it was a year ago, but not as it was 6 months ago. And you can see that reflected, if you want to quantify the GfK consumer confidence, it was minus 24% a year ago. It has improved to minus 13%, and now it's dipped back to minus 18%. So back to what we were in January. The reasons for that is fairly well troubles ground. I mean we expected in the summer inflation to keep falling to interest rates to carry on going down or to go down and consumer confidence to keep rising, and we've seen that progress solved. 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 have more to say about that come in 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 look, we're ready for any consumer environment. Clearly, we'd prefer benign one.

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

But my final one is on your long-term EBIT margin. I appreciate you said 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 probably back into process.

Our position is really straightforward here, Charlie. Clearly, our ambitions 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 a strong EBIT and cash flow as we can. But right now, that's our [ analysis ].

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

Thanks, Sage. 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 seen us #1 in our markets growing share, however tough the markets are with world-class colleague engagement, improving customer satisfaction and strategic initiatives visibly working. We aim to continue. And yes, there are some unscheduled and unwelcomed headwinds, but we've dealt with those in the past. We aim to deal with them now, and we're underway doing so. We're confident in the long-term sustainable free cash flow generation that's going to be level one's benefit. So on we go. Thank you all, and have a great day.