Edited Transcript of DC.L earnings conference call or presentation 15-Jul-20 8:00am GMT

Christel Deskins

London Jul 16, 2020 (Thomson StreetEvents) — Edited Transcript of Dixons Carphone PLC earnings conference call or presentation Wednesday, July 15, 2020 at 8:00:00am GMT * Jonathan P. Mason * Richard B. Chamberlain Hello, and welcome to the Dixons Carphone 2020 Full Year Results Conference Call. My name is Molly, […]

London Jul 16, 2020 (Thomson StreetEvents) — Edited Transcript of Dixons Carphone PLC earnings conference call or presentation Wednesday, July 15, 2020 at 8:00:00am GMT

* Jonathan P. Mason

* Richard B. Chamberlain

Hello, and welcome to the Dixons Carphone 2020 Full Year Results Conference Call. My name is Molly, and I’ll be your coordinator for today’s event. Please note that this call is being recorded. (Operator Instructions) I will now hand you over to your host, Alex Baldock, CEO, to begin today’s conference. Thank you.

Thanks, Molly. Good morning, everybody. What you’re going to hear from Jonny and I this morning before we take your questions, is a story of a business that was on track pre crisis. On track both with the 5 major legs of the transformation, with which you’re familiar, but also on track to meet financial expectations for performance in the year. Then the crisis hit, and we pivoted abruptly to a new set of priorities to keep everyone safe, to help millions of customers through the crisis and to secure the businesses future. And it fills me with pride the work that thousands of colleagues did and the success with which we fulfill those 3 imperatives.

Nevertheless, COVID has impacted the business, and you see that reflected in the financial performance that Jonny will take you through later. It also — even though we have traded strongly wherever we’ve been open through the crisis and even though we have started the new financial year trading strongly as well, we do expect a weakening of consumer demand later this year, and we are being cautious in all of our planning.

Nonetheless, that we look forward now to raising our gaze beyond this crisis and to resuming a transformation that was visibly working. So let’s get into that. Let’s get into the fact that we did what we said we were doing — did what we said we would do pre-crisis and that was visibily working online and stores first together omnichannel. And we were making good progress online. We were gaining market share online before the crisis, 240 basis points of market share gains. We were growing 25% up year-on-year in our online business. We did that by doing what we said we’d do by making it easier for customers to find and buy and get stuff online; by increasing the size of the range by 2,000 SKUs, for example; by making significant improvements to the online customer experience in areas like search, recommendations, checkout and site speed; by improving the experience after customers bought in areas like delivery, we saw a 9-point jump in customer satisfaction. But it’s not all about online, it was about stores as well. And we’ve got behind, as we said we would, the 300 big 3-in-1 stores in the U.K. We’ve invested tens of millions of pounds in those stores, remodeling 121 of them before the crisis hit. And it’s online and stores together that we see our future still. And we’re starting to do some quite interesting things in bringing the 2 together. We saw, for example, a 64% year-on-year increase in online stock sold in the store, and we’ve done some quite interesting innovation in areas like ShopLive, as you all see. So good progress online and good progress in the stores, and that’s reflected in online growing. That’s reflected in the online growing as a share of business, and growing in market share as well. Not just online, our credit is another big profitable growth driver as you will recall. Credit is important because with it, customers buy more, they come back more often and they’re more satisfied, 16 points happier. And we made good progress there as well, whether it’s credit sales up by 27% in the year and whether it’s credit customer numbers up by 30-something percent, that good important progress on credit.

Likewise, progress on services. Another important means of getting the stickier and more valuable customer relationships that we want. And we said we would focus on the most important of those services, protection, which is warranty and insurance. And so we did, where we improved customer adoption of our protection products during the year, and we launched a new market-leading and regulator-friendly new warranty and insurance product during the course of the year. So we did what we said we do there as well. So good progress on services, but much more to come, for example, in Customer Club, which we launched first in the Nordics. It’s grown quite nicely from 1 million to over 3 million members in 18 months. The benefits to customers are clear. They get exclusive content and deals and the benefits to us clear as well and much better data, higher sales and improved margins for club customers. So a good start on a — a good start on the club as well as we hedge towards stickier and more valuable customers. And to achieve that, it’s also important not to give customers reasons to go anywhere else to make their end-to-end experience easier. And we said we do that as well. The hard unglamorous yards of eking out marginal gains in the end-to-end customer experience has been reflected in significant, for the most part, double-digits year-on-year improvements in customer satisfaction as well.

And finally, mobile, which as we know, was challenging, but it was on track pre-crisis. We know the issue in mobile that the business has been geared to a declining postpay segment, but we were on track in doing what we said we would do about it, whether it was in network renegotiations and widening the range of networks. We weren’t able to reach an acceptable deal with O2, but we were with the likes of Virgin and VOXI and a much improved iD, our own proposition as well. Meanwhile, we managed to lower the volume commitments without completely getting rid of them. So we did what we said we’d do on the network renegotiations.

Likewise, on improving the offer, that the future mobile offered our own credit-based bundle was on track for delivery as planned in FY ’21, and the cost reductions totaling GBP 200 million of central and IT cost reduction is so important. For the mobile economics, we’re also on track for FY ’21. So we were well on track for a mobile business that once we were free of the legacy constraints of contracts and of costs, we are on track for a mobile business that would be smaller, but would be profitable, cash-generative and an integrated category. Then the crisis hit. And in mobile, it hit us in 2 ways. First of all, on the sales line because with the enforced closure of the large 3-in-1 stores, we weren’t as successful in mobile as we have been in U.K. and electrical. That’s transferring those lost store sales online. The investment online, you will recall, was deliberately focused on U.K. electrical. So that did hit us. And also, as a response to the crisis, we’ve paused large chunks of our transmission of the CapEx spend. And that in 2 areas has set us back in mobile on the development of the future mobile offer and on aspects of the systems integration, the 2 into 1. And that will make us around 6 to 12 months late on the transformation here.

So while we are still on track for breakeven in mobile during the course of FY ’22, it won’t before FY ’22, and Jonny will come back and take you a bit more detail about that later. So on track to do what we said we would do on all 5 legs of the transformation there. And also some important progress on the enablers underneath that, capable and committed colleagues first and some good progress on learning and development with the launch of our new academy in Birmingham, on incentives continuing to make all of our colleagues, shareholders, but perhaps mostly was the development in the leadership team, where we’ve got 5 world-class hires to show for our progress there, whether it’s Erik Sonsterud or Mark Allsop,Paula Coughlan, Ed Connolly or Lindsay Haselhurst, all joining the team.

One Business, as I said, we are on progress. We are making good progress and on track for the GBP 200 million of cost reduction. And likewise, stronger infrastructure, which — stronger IT infrastructure in particular, which remains a constraint for the business, and we have stronger leadership now to take us through it, not just Mark Allsop, we also hired Dyson’s CIO Andy Gamble. And we’ve made some good progress, whether it’s giving colleagues frontline tools, for example, the store modes tablets in the stores, so essential for delivering our omnichannel proposition or better routing technology, that’s been important on some of the supply chain efficiencies that we have seen. We’ve also landed some important new pricing technology, which allows us to be more scientific in our pricing, while being more consistently on the money.

And on the big SAP replatforming, we’ve continued with that in the Nordics through the crisis and happily have landed the first phase of that successfully and on time. We paused it in the U.K., again, as part of our prices response. But we’re now ready, close to being ready, to start resuming that. So progress on all the big 3 enablers of the strategy. And all of this progress is reflected in better customer satisfaction. You’ll see in the U.K., for example, electrical and PS up nicely in the double digits. It’s also reflected in strengthening #1 market leadership positions. We’ve had another year of gaining market share in all of the core electricals businesses in the U.K. and in the Nordics, and we’re now up to close to 27% market share in the U.K. electrical business, which has never been higher.

So progress on all 5 legs of the transformation and progress reflected in happier customers giving us more of their money. But nonetheless, so, as I mentioned at the start, the crisis has hit us. You’ll hear more on this from Jonny a little later and has hit the financial results, we were on track to meet our promises. We were on track not just to meet the expectations of GBP 210 million PBT, but we’re on track to do other important things like growth, not just sales, but profits in U.K. and international electrical. But of course, the crisis has hit us.

So I refer to the crisis. Let’s look for a moment at what we did about it and its impact and some of its longer-term implications for the business. And first of all, when it hit, the first thing we did was to abruptly pivot to a much simpler set of in crisis priorities to keep everyone safe, colleagues and the customers; to continue to help millions of people through the crisis with vital technology; and to secure the business’ future. And it does fill me with pride the work that my tens of thousands of colleagues have done success with which they tackled this crisis and success on all 3 fronts.

First of all, keeping each other safe. And important, not just but we’re human beings, and it’s the right thing to do, but it was also really important to make colleagues engaged and feel like continuing to come to work at an uncertain time. And all of the good work that we did to help set the BRCs, the retail and industry standards on areas like social distancing and hygiene. First of all, in our supply chain, service operations and contact centers, lately in the reopening stores has still us in good step because it’s allowed us to do the second of these things, which is to continue to provide vital help to millions of people through this crisis, and it has been striking how important technology has been to people through this crisis to keep each other connected with loved ones, entertained, healthy and productive as people increasingly work from home and home school the kids. And we’ve been able to do that in the U.K. as an online-only player and pivot to that overnight, which is testament to not just to the fantastic efforts of all of the colleagues, it’s also a testament to the efforts over the past 18 months to improve the online business in the ways that I’ve talked about, without which, there’s just no way we would have been able to sustain 166% year-on-year increase in online sales during April, for example. So really good work there to — in the U.K. to pivot to online. But of course, getting on the heart of the business international, with the exception of Greece, was largely unaffected by the crisis.

And last, but certainly not least, we’re proud of the work that we’ve done to help vulnerable older people through the crisis in partnership with our partner Age UK as well as prioritizing the NHS for scarce stocks, to helping our customers, in turn, played an important role in securing the business’ future. And there, we took radical action quite quickly to spend less, to raise more money at the same time, raising our gaze beyond the crisis, spending less, both on CapEx and OpEx, taking the difficult, but necessary decisions to cancel bonuses to — and pay rises to temporary pay cuts that everybody accept, those colleagues who are leaving their homes through the crisis as well as pausing substantial elements of the transformation program.

At the same time, raising more money. And now with over GBP 1 billion of liquidity headroom and no intention and no need foreseen to raise any more money, that stands us in good stead. But equally, at the same time, we are raising our gaze beyond this crisis. We are raising our gaze to making sure that we are well set to prosper beyond it. So what do we see when we look forward? Well, the first thing in the very short term, what we have seen in the crisis is sales hit wherever our stores have been closed. That much is obvious. And the — but looking forward, what do we see? Looking forward, what we see, first of all is — right now, is continuing strong trading. We’ve traded well wherever we’ve been open throughout this crisis, online-only where necessary, but the stores have traded well when we opened too. And that’s been true at the start of this financial year as well as towards the end — the last one. At the start of this new financial year, U.K. and international electricals total sales have been up year-on-year. The stores have reopened well online, online has continued its strong growth. So we’ve seen that. Equally, we’ve been cautious in our outlook. We expect a weakening of consumer demand, and we’ve done a lot to prepare ourselves for it should it happen. And that’s in a couple of different areas. I mean, first of all, is our category, the space that we’re in. I mentioned before that we’ve seen technology becoming a more important part of consumer’s lives. And that may point to the relative resilience of tax spend as a proportion of disposable income. But whether that’s true or not, whatever the state of our market, we are much better equipped now to be resilient in that market than we were, for example, in the last crisis in 2008, 2009. Our market shares are higher, our market positions are significantly stronger, and that’s reflected in even stronger supplier relationships, which gets us access to scarce stock, our availability has been market leading. It gets us better terms. It also gets us more flexible terms, and we’re doing some quite interesting things now in risk-sharing with suppliers that give us confidence that we can prepare for very different scenarios of how the market pans out, particularly over this peak period.

Another difference between this crisis and the last one is on price. Last time, we couldn’t say that we’re on the money on price, and we were vulnerable. As a result, we’re not vulnerable now. We’ve taken the difficult but necessary steps to be on the money on price. We won’t be beaten by anybody, and the competitors are starting to realize that. And the customers are certainly realizing that shown in the greater trust that we see to be on the money on price and other [inequity] measures.

And finally, this is a more diversified business than it was 12 years ago. Diversified more geographically as international is a more important of the business than it was by channel as online is a more important part, but also in the increasing importance of credit and services as well as product sales. So a resilient business and certainly a more resilient business than during the last crisis. But we also get asked about online. And obviously, the consumers have a force digital-first immersion during the course of this crisis. And many people discovered digital tech for the first time, whether it’s video conferencing or telemedicine and of course, online shopping. And we’re asked, do we expect that to endure? What are the implications for our stores? What are the implications for our sales and for our profits?

Well, the first thing to say is that we do expect this trend to be an enduring one. We are seeing a shift online, and we expect that a big chunk of that to stick, but that’s not bad news for us because we are big and we are gaining online. You can see that our growth rates online are accelerating more than twice the growth rate in the past year versus the previous one at 25% and our market share is growing. We’ve gained 240 basis points of market share online. But we’re well equipped to serve those customers who shop online only. Thing is, in our category in electricals, whether it’s leaning towards big ticket, considered purchases, the online-only customer is a minority still at 20% of the market consider themselves to be online-only customers, and 80% use both online and stores. And what that means is that we, with being big and gaining online, and we, with our large, well invested, increasingly exciting destinations in the stores that we’re getting behind, we are well placed to benefit from that. And we — and we’ve seen that, for example, in the Nordics, as the crisis has developed, footfall has recovered.

So to the extent if the market has more customers buying stuff online, we’re well equipped to deal with that. But those customers remain a minority and the omnichannel is in our game. There is a question, though, about what that means for profitability. And undoubtedly, if we are to look for a moment to the channels separately, if we look at online and stores separately, a shift to online, everything else being equal is gross margin dilutive. Online has a lower product margin than stores with the mix skewing towards lower value products and categories. That services adoption has been lower in stores, credit and services like trade-in and protection and setup have all been lower online than in stores in the past. And likewise, some variable costs are higher in online, notably digital marketing and also distribution and installation costs, although the gap in the latter is probably less than some might think. The infrastructure is increasingly shared across the channels. A quarter of online sales reflected in stores, a quarter of store sales are delivered to home. And so the gap is only circa 3 to 4 percentage points. And the total gross margin gap between the channels, while notable, is less than some might think at less than 10 percentage points.

And importantly, that gap is narrowing because of the steps that we’re taking. We’ve already almost eliminated the GAAP in credit penetration between online and stores, and we’re narrowing the gap on services penetration to customer adoption of our protection products online, for example, has improved by 150 basis points, and that’s just the start. But possibly the most exciting development here is the omnichannel colleague and to say what I mean about that. I’m going to use the example of ShopLive, which has been an innovation landed during the course of this crisis with some quite exciting longer-term implications for us. And ShopLive is simply bringing the best of our stores’ face-to-face advice from expert colleagues to customers online. And what that means is a customer in Glasgow wanting to buy a washing machine online can be helped by a colleague with the right expertise and capacity at that moment in Gilford.

And what I like about this is a few things. Firstly, it’s that rare thing, a scalable and defensible innovation, which the customer clearly values. Very early days, but we’re seeing significant upticks in both conversion and average order value for ShopLive customers versus unassisted online sales, significant upticks. And it’s also is defensible because we are the ones with the tens of thousands of expert colleagues, the millions of customers and therefore, the scale to benefit from the network effects there. And we also, by the way, have the proprietary technology, which is the in-app or in websites integrated video link. So this is properly exciting. It’s still relatively small. We’ve got — getting on to 300 colleagues, 280, I think it is up and running full live on ShopLive at the moment. We’ve served about 130,000 customers, but the longer-term potential here for sales or product margin for service margin as well as the cost leverage is significant. I mentioned cost leverage. And that, of course, is one of the things that sharing assets across the channels, like store colleagues, will give us. But it’s not just that. We’re also getting flexibility in our costs from other sources, whether it’s the still relatively low even after the regearing of some leases, the relatively low average remaining lease length in the U.K., 5 years and less than that in the Nordics. But it’s also the flexibility that we have from how we structured our colleagues. In store, for example, we have a high and increasing proportion of variable compensation, and we also have a lot of flexibility on the colleague hours.

The more flexible costs, also lower costs, were achieving circa 30% on the rent reductions at lease renewal, for example. And as I mentioned before, we remain on track for that GBP 200 million of central and IT cost benefits, cost benefits that come from supply chain efficiencies, from some head office restructuring from some outsourcing of the contact centers which — all of which we’ve made good progress with in the year just passed.

So to summarize, before I hand over to Jonny, what have we seen in the — over the past year? What we’ve seen is a business that was on track for pre-crisis. It was on track to — on track with the big 5 legs of our transformation, and it was on track to meet financial expectations of performance in the year. And for the longer term, we can draw comfort from the double-digit improvements in customer satisfaction that we’ve seen as well as continuing to strengthen our market leadership. The crisis, of course, came and we abruptly pivoted to keeping everyone safe, to helping customers through the crisis and to securing the business’ future. And it does, as I say, fill me with immense pride, the work that my colleague have done to see us through this crisis and see us out strong on the other side.

Coming out the other side, we are trading strongly. We have traded strongly wherever we’ve been open through the crisis, and we’ve started the new financial year well. Nevertheless, we are cautious about this outlook. But our caution is in the context of a business that’s much more resilient than it was previously in the previous process to any external weakening of demand and a business that believes in the omnichannel model that we are better equipped to give customers than anyone else. The customer demonstrably prefers online and stores together in our space. We’re demonstrably best equipped to give it to them. And we can do so not only while continuing to make top line gains, but we’re also working hard to make sure that works for us economically as well.

So with that, I’m going to pass over to Jonny Mason before we then go on to take your questions. Thank you.

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Jonathan P. Mason, Dixons Carphone plc – Group CFO & Director [3]

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Hello, everybody, and welcome to this first remote working results announcement. I’m going to spend the next 15 minutes talking about our financial results for FY ’20 and the impact that COVID-19 had on those. There’s not going to be much today about forward-looking guidance given the high levels of uncertainty there are out there in the market. But what I will describe is how we are well placed the year ahead. Alex has already talked about how our colleagues have responded brilliantly to the crisis that’s hit us. And we also have lots of liquidity to deal with whatever and however the market develops.

So here are the summary highlights of our financial results. Revenue was down 3% overall to GBP 10.2 billion, and that was because of the reducing sales in mobile. The electricals businesses together, like-for-like growth was about 2% in the year, and it would have been higher than the previous year if it hadn’t been for the impact of COVID.

Adjusted EBIT declined from GBP 363 million to GBP 194 million, and that was because of a combination of the increasing losses in mobile and the impact of COVID-19 on the U.K. electricals results, which I will describe next.

PBT declined slightly more than EBIT, and that was because of increasing finance costs on the new facility we put in place to deal with the crisis. And there was a statutory loss of GBP 140 million, and that was after adjustments to PBT of GBP 306 million in total, which I will describe shortly. These were mostly noncash, that included restructuring costs in the mobile division and IFRS 16 adjustments.

Free cash flow declined to GBP 109 million because of the impact of the enforced store closures in the U.K., Ireland and Greece right at the end of the year. And this led to a small increase in net debt to GBP 384 million, and we’ll take a look at the cash movements shortly.

So this slide shows the impact on profits of COVID-19 on U.K. electricals on the left and on U.K. mobile on the right. Alex has already said, we were on track to achieve market expectations before we had to close our shops. And as you will recall, we guided to GBP 210 million of group PBT and for net debt to decline slightly year-on-year. But the shop closures had a big impact in the U.K. and Ireland.

In U K. electricals first, we lost margin on the reduced sales and then we also lost further margin on the accelerated shift online and on missing some year-end volume targets because this was a very important time of year. And we also made some provisions for the impact on stock. And this was partially offset by government support on rates and on colleague costs in furlough.

And then in U.K. mobile, similarly, we lost some sales — some margin, excuse me, on lower sales. We lost further margin on missing those important year-end targets and on some provisions for the impact on future consumer spending of the COVID situation. And this, too, was offset by rates and furlough subsidy from the government, but to a much lesser extent in the smaller business. So we estimate that in total, the impact on profit last year was about GBP 50 million, which seems a lot in only 6 weeks, but it did have those year-end impacts in there, including missing the year-end targets and the provisions.

And important to say, we’re not expecting any further inventory write-off as we go forward. And then we also estimate that the impact on cash was about GBP 40 million. And that’s as the lost sales, including VAT, were mostly offset by deferrals of tax payments, rent payments and a bit lower CapEx.

So now I’ll talk about each of the divisions in turn before moving on to cash, and we’ll do U.K. electricals first. So there was good sales growth in the year, like-for-like was 1%. That would have been about 3% if it hadn’t been for the force closure of the shops. The 53rd week added a percentage to total sales growth, but that had an immaterial impact on profit, and therefore, we don’t split that out separately for any of the divisions. This sales growth was based on market share gain of 0.7 points, and that was higher than the previous year, with gains in both online and shops.

Over the first 10 months, the market share gain was 1 point, but that fell back towards the end of the year when our shops were forced to close, but some of our competitors were able to remain open. Strongest categories in the year, Alex has mentioned computing, large screen TVs, gaming and smart tech with imaging, the main category to reduce. Our online revenue grew 10%, but online in-store grew 64%, and that demonstrates how our business is becoming more omnichannel.

In period 12, when we traded online only, online sales grew 166%, and the IT infrastructure and the supply chain coped admirably with this unplanned peak everyday situation, which was very reassuring. Now adjusted EBIT declined despite that sales growth, and that’s because of the margin impacts that I described from the COVID situation earlier.

So let’s look at how did the margin develop in U.K. electricals in the second half of the year. So on the left of this graph, the red and the green bars are the impact of COVID, which I described earlier, on both margin and operating cost. If we look at the underlying movements, excluding that COVID impact, in the second half, gross margin in U.K. electricals went down about 80 basis points. And a bit less than half of this was because of the accelerating shift online. And the remainder was continuing investments in our customer offer, improved delivery and repair promises and our unambiguous price promise. And this investment was more than it was in the first half of the year, but as expected, it was more than covered by operating cost efficiencies. It was at 120 basis points of operating cost efficiencies in the second half. And this came mainly from head office team restructuring, from contact center, outsourcing and from renegotiated rent deals. And so for the full year, the EBIT margin was close to flat. And that’s why we are confident that our profits would have increased in line with the sales increase, had it not been for the COVID impact at the end of the year.

So now let’s switch to international, where there was very good sales growth, up 4% like-for-like and 5% in total in local currency. Market share increased in both the Nordics and Greece by 0.5 points and 0.3 points, respectively. In the Nordics, the best-performing categories were kitchens, headphones, wearables and cordless vacuum cleaners. And online sales grew by 14% in the first 11 months, and that accelerated to nearly 100% in April, even though the shops stayed open. And that’s because, of course, customers were more at home. And so online represented 19% share of business last year.

Like in the U.K., online in-store grew 64% for the year, demonstrating there too, how the business is becoming more omnichannel. And then in Greece, the best-performing categories were TV, laundry and cooling equipment. Online sales grew there 19% in the first 11 months. That accelerated to an amazing 597% in April, albeit from a much smaller start point. And so online became 8% share of business in Greece for that year.

Now in international, the profit margin was not much impacted by COVID. Gross margin was flat year-on-year with the impact of channel shift and a weaker currency being offset by commercial initiatives, including growth in services, subscriptions and accessories. And the operating cost ratio was also flat with cost efficiencies from — and a slightly weaker currency offsetting higher branch costs. So all in all, it was another very good year of solid growth from the international division.

So let’s move on to mobile. Now revenue in mobile dropped significantly in the year, and that’s because of the continuing challenge of competing in the traditional 24-month postpay market against competitors who have more flexible customer-friendly offers. This sales decline accelerated, of course, in the second half when all of our small stand-alone shops were closed. And that was exacerbated by the COVID impact, which impeded our planned transfer of some of those sales to the big 3-in-1 shops, which also had to close. The sales transfer online post COVID was not as strong as any electricals. And that was because the mobile business has a smaller share of revenue online anyway. And it’s running on a platform that has deliberately not been invested in over the last 2 years as it is planned for that to be integrated into the new One Business platform. So this declining sales trend on a large legacy fixed cost base is what led to the large losses for the year. These would have been in line with expectations of no worse than GBP 90 million for the year, if it hadn’t been for that COVID impact at the end that I’ve already described.

So let me now move on to the adjusting items to profit, which were GBP 222 million at the EBIT level. First, there was a negative revaluation on network debtors. This was to reflect 3 new factors. The first was the estimated impact on future spend of COVID-19. The second was the impact of the closure of the small stand-alone shops and the third was impact of new regulation. GBP 26 million was the amortization of acquisition intangibles. It’s in line with previous years, GBP 121 million strategic change costs and that’s mostly property and payroll provisions for the closure of the mobile shops and it is as was previously announced. GBP 30 million of regulatory claims is also, as was announced at the half year. And then there were GBP 18 million of impairment — store impairments, offset by the negative GBP 20 million or the GBP 20 million credit from IFRS at the EBIT level. That GBP 222 million becomes GBP 306 million at the group PBT level because of a large IFRS 16 adjustment and also the pension fund interest.

Let’s now look onto free cash flow. Same chart as we’ve seen in previous years, GBP 109 million of free cash flow in total was GBP 44 million below the previous year, and we estimate that GBP 40 million of that was caused by COVID-19. We’ve talked about why the EBIT is lower. Depreciation and amortization was lower than the prior year because of previously fully impaired assets. And in working capital, the network debtor reduced by over GBP 100 million, excluding any revaluation. So cash effect. We had lower stock at the end of the year, but that was offset by some year-end payment timings. So other working capital netted off to a small number.

CapEx of GBP 119 million, slightly lower than the GBP 200 million we’ve guided to, and that’s because we paused our transformation projects close to the end of the year. I’ll talk about future — about CapEx future in a minute. Tax was lower on lower profits. And we also spent less cash on restructuring items in the year just past. And so all of that, now what did we do? Let’s move on to the use of funds, the free cash flow was applied to pay the dividend and pension contributions. This dividend, of course, reflects the final dividend of the prior year and the interim dividend of FY ’20.

As you know, the Board has decided not to pay a final dividend for FY ’20, and it will consider going forward, both the level and the timing of future dividend payments. And then the pension contribution, GBP 46 million. In the year ahead, that has been changed to be paid in monthly amounts to help our liquidity. And from FY ’22, that’s going to increase to GBP 78 million, which is designed to repay the actuarial deficit over 8 years.

Now this is a new slide to give a bit of context about our net debt. As you can see from the top left, GBP 324 million of — sorry, GBP 384 million of net debt, comprises of GBP 120 million of cash, GBP 324 drawn facilities and then GBP 18 million of finance leases, old style, IAS 17 as it were.

The facilities are shown on the bottom left, including the new one for GBP 266 million, which we put in place for the crisis. And then most importantly, I think, on the top right, this is a profile of our net debt through the year, the blue line at the top. And you can see 2 peaks in debt. It’s a very similar pattern every year. Most importantly, there’s a lot of headroom between our net debt and the committed facilities that we have. And without getting into any forecasts, what I can say is that net debt now is comfortably lower than it was at the same time last year.

So as we look forward, we don’t want to provide profit guidance at this stage, and that’s because of the high level of uncertainty in the market. We will update the market appropriately as we did in March and April when the outlook becomes clearer. But what we will say now is, we’ve got lots of liquidity, as we’ve just seen. I’ve already talked about the pension contribution. We do expect large restructuring costs this year but these are the restructuring of the mobile division relating to the closure of the shops, and they are as was previously announced.

And then on CapEx, we’d expect CapEx in the year ahead to be a bit lower, more in line with our normal run rate of about GBP 175 million for a year, rather than the GBP 240 million we had previously guided to and that’s because of the pausing of our transformation projects. But it’s important to say that this CapEx is within our control. And we can reduce or increase the quantum depending on the development of the market.

And then a few words on mobile. As we look into the year ahead, our transformation has been delayed. We’re 6 to 12 months slower. And what that means is that we now expect mobile losses in the year ahead to be slightly higher than they were last year rather than what we previously said of a reduction. And we expect the breakeven point on mobile to be during FY ’22 rather than for FY ’22. So 6 to 12 months later than we previously said.

Restructuring costs and working capital unwind are in line with what we’ve previously said. But the increase in operating losses, both this year and next, mean that the net cash receipts for the period of unwind of the old traditional postpay business we now expect to be in the range of positive GBP 125 million to GBP 175 million, rather than the GBP 200 million that we’ve said previously.

And then I’ll finish with the same slide that Alex finished with, which summarizes our key messages for this year. We’ve seen great delivery on our strategy through last year. And through the crisis, we have become even more convinced that it is the right strategy. We saw continuing gains in all of our territories, wherever our businesses were open.

Our colleagues reacted brilliantly to the COVID crisis, and the business is performing strongly at the moment. But there’s a lot of uncertainty out there in the market. Whatever happens, we have a lot of liquidity available to deal with it and we are determined to emerge from this crisis as a stronger business in the future.

Thanks very much for your attention, and we will now — I’ll hand back to the operator, and we’ll now be happy to take any questions that you’ve got.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Simon Bowler calling from Numis.

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Simon Bowler, Numis Securities Limited, Research Division – Analyst [2]

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Just a couple of questions, if it’s okay. First one would be, you kind of mentioned that revenues are up across your regions. Would the same color be true for profit or some of the impacts you’ve spoken about regarding margins? I mean, that wouldn’t be the case. And then the second one is around the cost saving piece. I was just wondering how far through that kind of GBP 200 million cost save program are you, i.e., how much further is there to go? And how can we square that with the kind of 120 basis points of underlying cost savings you’ve spoken about in the electrical parts of the business?

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Alex Baldock, Dixons Carphone plc – Group Chief Executive & Director [3]

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Jonny, do you want to take this?

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Jonathan P. Mason, Dixons Carphone plc – Group CFO & Director [4]

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Yes, I’ll take that. So we don’t want to talk about profits for this year at this stage, Simon. There’s lots of moving parts. As an ongoing trend, we are planning for our operating cost efficiencies to cover any investment required in gross margin to maintain our customer offer. But in this unusual time, we’ve also got furlough subsidies and rates. So I think we’d rather come back and comment on profit development later in the year, there are pluses and minuses. Was there another part, excuse me? Oh, yes, how are we getting on through our central costs? Yes, we’re making good progress. We’re still sure that we’ll exclude (inaudible) of cost save. A chunk of that, remember, is related transforming the mobile business into 1 business. And we are for now still requiring a duplicate overhead structure and duplicate IT system costs. The reason that our breakeven point in mobile has been delayed is that we’re now anticipating we’re going to have to run those duplicate systems for a bit longer until the transformation is complete and they all go on to One Business business platform.

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Simon Bowler, Numis Securities Limited, Research Division – Analyst [5]

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Okay. That’s great. And actually, if I may just ask kind of one quick follow-up on the mobile side of things. It seems like there’s some kind of very big moving parts with regards to getting to the GBP 125 million to GBP 175 million number. What’s the risk, I guess, in the east direction? How strong is your visibility on that when we think about tension of customers and so on and so forth, given the current environment?

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Jonathan P. Mason, Dixons Carphone plc – Group CFO & Director [6]

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No. I think that range gives us plenty of scope. Remember, there are some big parts in the cash flow, but the other parts are not moving. So the restructuring costs, we’re pretty sure of, and they are on track. The working capital unwind, we’re also pretty sure of, and that’s on track. So what’s changed since we said GBP 200 million is that we’re going to run losses for a bit longer because of the delay in the transformation. But sitting here today, we wouldn’t anticipate a delay longer than 6 to 12 months. So that range is pretty safe.

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Operator [7]

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(Operator Instructions) The next question comes from the line of Richard Chamberlain calling from RBC.

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Richard B. Chamberlain, RBC Capital Markets, Research Division – MD of Consumer Retail [8]

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I’ve got 3 questions, if that’s all right. I just wondered, Alex, first of all, we can just talk about the size and shape of the store footprint now we’ve got the COVID crisis. I mean I guess we could see some sort of combination of sort of superstores, more sort of showroom-type stores carrying less inventory and maybe more sort of pickup-type locations. So I wondered how you see the store footprint evolving for Currys from what we have now, that’s the first one. And second, I wonder if you’ve got any comments about sort of 5G and potential delays there. And I presume none of that was in any of your mobile guidance to start with. But I just wondered what impact you think that might have on the market? And then the final one is on ShopLive, how many products has that been rolled out? Or how many areas is that applicable to? And what’s the scope to expand that further in the business?

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Alex Baldock, Dixons Carphone plc – Group Chief Executive & Director [9]

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Okay, Richard, 3 big questions there. So let’s start with the store footprint. As you know, we took the decision to close the small stand-alone stores to get behind the big ones, and we’re up to 121 remodelings of the 308 so far on the big ones. And we’re not flagging any change to that footprint. And we believe that the stores that we have, the larger stores are equipped…

(technical difficulty) the experts and enough of the tech all in one place to allow the face-to-face, but also the demo of the product that the customer values. So that’s the first. I think the second thing touches on your third question, which is where the sharing of the store assets, where the leverage of the store assets, how far that could go. And we envisage a future where the store’s economics, if you like, are not solely dependent on the footfall that happens to walk in off the street. We envisage a future where our store houses a bunch of experts. And those experts, of course, will continue to serve customers who walk in off the street. And let’s remember that, that footfall is relatively stable in the large retail park stores where our state is now concentrated. But more than just the footfall that’s coming in off the street, we can — we’re building a future now where the — where the colleague in Gilford can serve the customer in (inaudible) and we can fit the 2 together at scale in a way that others cannot with tens of thousands of colleagues on the one hand and the millions of customers on the other. And the proprietary digital technology to match a specific need at a given time for a customer with the colleague with the right expertise and capacity at that time. Longer term, this has the potential to go beyond selling to customers, they could also go to serving customers, and we intended to. And so for example, spare — a colleague with some spare time who’s an expert in washing machines could answer an inbound service query relating to washing machines that currently is dealt with by the contact center but could be dealt with by the colleagues. We trialed this, too, and we quite like the early results. And obviously, that…

(technical difficulty)

(technical difficulty)

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Jonathan P. Mason, Dixons Carphone plc – Group CFO & Director [10]

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Oh, (inaudible), Alex seems to have frozen.

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Richard B. Chamberlain, RBC Capital Markets, Research Division – MD of Consumer Retail [11]

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Do you want to pick up on the other points, Jonny, or this one (inaudible).

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Jonathan P. Mason, Dixons Carphone plc – Group CFO & Director [12]

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Richard, remind me…

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Alex Baldock, Dixons Carphone plc – Group Chief Executive & Director [13]

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Can you still hear me?

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Jonathan P. Mason, Dixons Carphone plc – Group CFO & Director [14]

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(inaudible)

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Richard B. Chamberlain, RBC Capital Markets, Research Division – MD of Consumer Retail [15]

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I was just (inaudible) known you haven’t got any benefit from 5G or anything in the moderate side and (inaudible)

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Alex Baldock, Dixons Carphone plc – Group Chief Executive & Director [16]

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Sorry. Richard, did you — did I cut off for a moment there, because I was…

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Richard B. Chamberlain, RBC Capital Markets, Research Division – MD of Consumer Retail [17]

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You did. Sorry, you were just talking about extending the offer to — so colleagues could help with service inquiries (inaudible) as well as selling stuff, yes.

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Alex Baldock, Dixons Carphone plc – Group Chief Executive & Director [18]

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Yes. That’s right. So basically, what we’re talking about, both on the sales line and on the cost line, leveraging store assets more broadly. And that’s on top of the more obvious ways of doing it, and we’re already doing by, for example, serving a quarter of online sales through in-store pickup as well as the other way around of having home stores — having stores deliver a 1/4 of their sales to home. So that’s the first one. Second is a very quick answer on 5G. The answer is no. It doesn’t make any difference because even — because we weren’t counting on it in the first place. I think we said back in December that there were certain upsides that potentially could materialize, whether it’s a 5G-driven upgrade to handsets for others, but we weren’t counting on those. So no, it doesn’t make any difference. And then your third question is on ShopLive. And I think I’ve (inaudible) sort of touched on that. Where we see this potential going is at quite significant scale. Because it’s, say, bringing the best of our stores to customers online in a way that customers demonstrably value as we’re seeing from the uptick to — significant uptick to conversion and average order value. And it — so customers value it, and it’s an innovation that’s defensible at scale to us with the assets that we have.

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Operator [19]

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The next question comes from the line of Adam Tomlinson calling from Liberum.

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Adam Stuart Tomlinson, Liberum Capital Limited, Research Division – Analyst [20]

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Two questions for me. I appreciate you’re not giving explicit guidance for this year, and there’s a number of moving parts. But you have obviously talked about in the past, the medium-term free cash flow target cumulative of GBP 1 billion and also the 3.5% EBIT margin at the group. Are you able to just give any comments around those, whether we should be thinking differently about those? But obviously, COGS, and you’re not giving explicit guidance, but useful to get some color on that, please. And then the second question is around mobile. And again, I know you’ve talked in the past about getting to breakeven is not dependent on the new proposition being overly successful. But anything that you’re seeing in terms of support from the network operators, new contracts you’re entering into? And the overall product offer there would be helpful as well.

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Alex Baldock, Dixons Carphone plc – Group Chief Executive & Director [21]

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Jonny, do you want to take the first part on that?

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Jonathan P. Mason, Dixons Carphone plc – Group CFO & Director [22]

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I’d say the first one, yes. I mean, we’re still planning to do exactly what we said we were going to do. It’s just that it will be 6 to 12 months later. And therefore, those targets aren’t changing. We’re not signaling any change to targets today.

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Alex Baldock, Dixons Carphone plc – Group Chief Executive & Director [23]

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And the second part, Adam, is — I mean, you’re right that we’re not counting in what we’ve talked about on any great success from the future mobile offer. Such connectivity as it depends on, we can now provide ourselves in any case. So through iD, we now have security of supply and a much more competitive offer. We still believe that we will be able to offer a broader range of connectivity than that, but we’re not leaning on it. And in any case, getting to where we need to get to on mobile can be achieved substantially through the cost savings alone, which as Jonny said before, we’re confident on.

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Operator [24]

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The next question comes from the line of Szilvia Bor calling from Crédit Suisse.

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Szilvia Bor, Crédit Suisse AG, Research Division – Research Analyst [25]

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It’s a question on product categories and development. Can you give us some color on how the consumer preference has changed as (inaudible) in parts of Europe and the U.K., what are the latest consumer trends that the consumer perhaps moves away from those initial purchases of Visa technology? And does this have any meaningful impact on your gross margins?

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Alex Baldock, Dixons Carphone plc – Group Chief Executive & Director [26]

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Szilvia, Jonny touched on a little bit of this in his intro. But what you asked is specifically during lockdown. Well, one of the things we’ve seen is that consumers are obviously working from home more as we’re demonstrating on this call right now. And everything connected with homeworking has seen a big jump, whether that’s laptops, home networking or printers all have been substantially up, and that’s a trend that we expect to see enduring. And obviously, we’re working with closely with key partners, such as HP and Intel and Microsoft and others to take full advantage of that. So that’s one big trend. Home schooling is another, and that may or may not endure, but it’s certainly been another boost to sales of laptops and the like. We’ve also seen people discover their inner chef during the lockdown, whether it’s small domestic and kitchen appliances like coffee makers or bread makers or popper makers, we’ve seen them fly off-the-shelf in gratifying style. I think people have clearly been looking for ways to entertain the kids during lockdown on gaming sales, which are the star of the show, and that’s even before the anticipated uptick from the new console launches. PC gaming in particular has been exceptionally strong. More recently, we’ve seen large screen TV performed strongly, especially as the stores come on lives. And right at the start of the crisis, we saw things like American-style refrigeration go very well and chest freezers. So we’ve — if I’m covering a big part of the product offer, that’s because we’ve seen quite a broad-based uptick, which underline what we believe that technology matters more now to customers in their lives than it ever has before and may give you some comfort on the relative resilience of technology spend going forward. Now the one thing that’s missing from that list was washing machines. So some of the white goods, which are more dependent on the housing markets haven’t been as strong as the housing market, especially in the U.K., but also to an extent in Ireland has been relatively more [among].

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Operator [27]

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The next question comes from the line of Adam Cochrane calling from Citi.

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Adam Gareth Cochrane, Citigroup Inc., Research Division – Director [28]

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Question on the cost base. How flexible — I think right now, agility and flexibility are the key watchwords given the uncertainty. How would you describe the flexibility in your cost base as you look over the next 12 months given the potential range of outcomes? And what have you been doing to maximize the flexibility, please?

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Alex Baldock, Dixons Carphone plc – Group Chief Executive & Director [29]

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Let me kick off on this one. And I’ll use a word that Jonny loathes, which is variabilizing the cost base, I mean angling the English language, so apologies for that. But that’s one of the things that we’ve sought consciously to do to bring greater — to up the variable element base as well as provide greater flexibility. So on colleagues, for example, we’re leaning more towards variable compensation than we were. We’re also leaning more towards more flexible colleague hours in the stores. That’s on top of the leases, which we’ve managed to reduce about sort of circa 30% on renegotiation. So there’s that sort of element of flexibility being brought into the store cost. But I’d come back to what I said before, Adam, is that as our omnichannel model develops, we are able to leverage the costs in, for example, a store over a greater number of customers. And whether they’re customers purchasing online via ShopLive or in the future. Whether they’re customers today calling the contact center, tomorrow, they could be speaking to the relevant expert colleague in-store has capacity at that moment. Jonny, what have I missed from that?

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Jonathan P. Mason, Dixons Carphone plc – Group CFO & Director [30]

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No, I would just add, remember how we define gross margin, and that is after distribution costs and after marketing. Now those costs are clearly entirely variable, or predominantly variable with the level of sales. Of the remainder of the cost, it’s an unusual year with rate subsidies in furlough and all that sort of thing. But with the increasing, and I’m going to use it too, variabilization of our costs, a rule of thumb is that as regards to the rest of the cost, about half of them, we can keep variable and the other half is more fixed.

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Adam Gareth Cochrane, Citigroup Inc., Research Division – Director [31]

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In terms of what you managed to do in April with the short notice on the cost base, with a bit more time you would have had into May and June and July, have you been able to make it even more efficient? Is your business model in-store constantly evolving? And I presume efficiency is the key watchword when you’re deploying the number of staff back into store as an example?

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Jonathan P. Mason, Dixons Carphone plc – Group CFO & Director [32]

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Yes, very much so. And Alex referred in his description to the innovations, which have accelerated through this short time since the crisis began. Our colleagues are becoming more omnichanneled as we work our way through this crisis, it’s accelerating trends that were already there. And that makes those costs more variable than they used to be.

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Alex Baldock, Dixons Carphone plc – Group Chief Executive & Director [33]

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We’re also being judicious in bringing colleagues back from furlough, for example, into the stores. I mean, we’ve got 98% it is now of the big stores reopened. But we haven’t brought back proportion of store colleagues back from furlough yet. We brought more than half back. But we’re being — as I say, we’ve been cautious about the rate at which we bring colleagues back, and we’re making sure that we lean on the government’s support to do what it was designed to do, which is to support the employment, the tens of thousands of jobs that we account for and the millions more broadly in the retail sector.

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Adam Gareth Cochrane, Citigroup Inc., Research Division – Director [34]

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If I took — make an — a small assumption that sales and electricals are up, but more only, let’s call it, more than half of the employees have come back. The dynamic should look okay in profit terms?

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Jonathan P. Mason, Dixons Carphone plc – Group CFO & Director [35]

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Well, it could, but it’s very early days, Adam. And as Alex has already said, the year, we’re trading well. Online sales are still growing despite the shops reopening. But the future is uncertain, and therefore, we’re being cautious.

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Operator [36]

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We have no further questions coming through on the phone lines. So I’ll hand back to your host for any questions on the webcast. Thank you.

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Dan F Homan, Citigroup Inc., Research Division – VP [37]

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It’s Dan Homan here. One question from the webcast, which is what do you expect the shift to online to be over the Black Friday period? And how are we preparing for that Black Friday period given the shift to the online channel?

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Alex Baldock, Dixons Carphone plc – Group Chief Executive & Director [38]

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Let me answer the second part of that question first because, obviously, and I said at the start that Jonny’s got the same, that there’s never been as much uncertainty of outlook as there is currently. And clearly, that has implications for how we plan for a peak period. I think another dimension of flexibility that we’re able to bring into our operations, though, is flexibility in terms of our arrangements with our suppliers. This is where we do benefit from our scale. And this is where our commercial teams have done some excellent work with our — and with the full-throated collaboration with our suppliers, so that we’re ready for very different scenarios of how this peak could pan out and how this year could pan out. And I touched on this before, but we’re able to do quite imaginative risk-sharing with suppliers in a way that we haven’t previously. We’re able to get much more flexible terms on things like the time at which we need to forward order on inventory as well as securing better terms and access to scarce stock that boosts our market-leading availability. So all of those things enable us to unprecedented degree, not a complete degree, but to an unprecedented degree to get ready for very different scenarios of demand. Now you specifically asked about online. And I mean, we — as I’ve mentioned before, we do expect customers to buy more staff online. And we expect that the jump that we’ve seen in the proportion of sales transacted online, the jump that we’ve seen during lockdown to endure for all the reasons that we set, customers that have that immersion, and some of it will stick. Nonetheless, though, we’ll come back to what we said before, which is the typical customer in our space remains a longer channel one. And they still want to use stores for some purchases at some times. They still value there face-to-face advice. They still value seeing the technology for themselves and experiencing it for themselves, they value the excitement that good stores can produce and the — to a discovery of tech as well as the choice of it. So all of those things are reasons that we continue to bet on the big stores that we’ve invested tens of millions of pounds in previously. And so almost irrespective of where that precisely lands that those customers might buy some more stuff online, but they are still omnichannel customers. Our challenge is, first, to make sure that we’ve got the winning online, the winning stores and knitting the teams together in ways that we’ve described in order to cement that top line growth that we’ve seen, to cement the market share improvements that we continue to enjoy. At the same time, as addressing the economics of that shift in the way that we’ve talked about.

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Dan F Homan, Citigroup Inc., Research Division – VP [39]

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Thank you. There’s no more questions over the webcast. Operator, are there any more over the phone?

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Operator [40]

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We have no further questions coming through these phone lines.

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Alex Baldock, Dixons Carphone plc – Group Chief Executive & Director [41]

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In that case, well, thank you very much, everybody, for your attention this morning on what is an unusual way to deliver these results, but one in keeping with the times and one that reinforces some of the messages on homeworking, that we’ve been giving today. So I won’t repeat everything you’ve heard already, except to say that this is a business that was on track pre-crisis, both in terms of its transformation and its in-year performance, that crisis has hit that performance. But we’ve dealt with it in a way that I think that many tens of thousands of colleagues can take great pride in. And this is a business that remains set up for success. We intend to resume this transformation of ours as we raise our gaze now beyond the crisis, to continue with the transformation that was visibly working before it and remains as relevant now as ever. So thank you very much, and have a great day.

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Jonathan P. Mason, Dixons Carphone plc – Group CFO & Director [42]

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Thank you.

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