Interim results for the 31 weeks ended 1 November 2014

A strong half year for our new company with pro forma Headline profit before tax up 30%

Highlights

•       Group H1 like-for-like revenue up 5%; Q2 like-for-like up 9%, with stable gross margins in H1

•     Market share gains across electrical and mobile businesses in the UK & Ireland, Nordics and Greece

•     Netherlands and Germany remain challenging but action underway to review and restructure

•       Group pro forma Headline PBT of £78m (2013: £60m), up 30%

•     Group pro forma Headline EBIT of £100m (2013: £85m)

•     Headline basic EPS from continuing operations 7.1p (2013: 3.2p)

•       Statutory loss before tax from continuing operations £20m (2013: loss of £27m) after non-Headline charges of £100m, statutory basic EPS from continuing operations loss of 4.7p (2013: loss of 5.4p)

•       Interim dividend of 2.5p, payable in January 2015

•       Integration progressing well and now expected to deliver a minimum £80m of synergies by 2016-17, one year ahead of plan

•       Disposal of Virgin Mobile France completed on 4 December 2014 with net cash proceeds of £104m

Pro forma and Headline results are defined in the performance review on page 3 (Basis of preparation) and a reconciliation of Headline results to statutory results is provided in note 2 to the condensed financial statements.

Like-for-like revenue is defined in the performance review on page 3.

H1 13/14 contains 26 weeks of the Carphone Warehouse business compared with 31 weeks in H1 14/15.

Q2 results reflect the 13 weeks ended 1 November 2014 for Carphone Warehouse and the 3 months ended 31 October 2014 for Dixons Retail.

Sebastian James, Group Chief Executive, said:

"It is clearly a symbolic moment in the history of our great new shared enterprise to be reporting our first half year results. And they are, I am pleased to say, encouraging. Overall sales in the period have grown by 5% on a like-for-like basis and profit before tax has grown by 30%. Best of all, customer satisfaction continues to show good year-on-year progress across the business.

We have seen a barnstorming performance from our UK & Ireland division with like-for-like sales growth of 6% in the first half and 11% in Q2. This has been driven by continued improvements in price and service, competitive changes, technology launches and some recovery in the economy. We have also seen a good performance from our Nordic business where the competitive environment seems - possibly temporarily - to have calmed just a shade. Our Greek business has also had a good half and seems to be benefiting from some market recovery. Life has been tougher for our smaller European phone businesses who are strategically less able to be robust in the face of market changes and we are in the midst of restructuring and reviewing these operations. We remain excited about the long-term potential of our Connected World Services business on which we report separately today. This business continues to show promise with third party deployment of honeyBee and a new contract recently signed with BT.

The integration of our business seems to be going better than I dared hope, and our integrated stores are trading very well which augurs well for the future. There is still much, much more to do, but I have been struck by the willingness of people at all levels and from all parts of the business to roll up their sleeves and get on with it. I also feel, every day, how lucky we are to have such a smart and committed team. I would like to use this opportunity to thank them for their hard work.

All in all, then, this has been a very good half year but there is a lot more of the year to go and a crucial Christmas to come, against a backdrop of big changes in how and when customers do their Christmas shopping. Black Friday was an extraordinary - and fun - day but we are all acutely aware that there is no room for complacency. Ahead of this all-important peak period we remain comfortable with market expectations for this year; at the same time we know that we will need to keep our foot on the gas if we are to achieve our ambitious longer-term goals."

Investor and analyst webcast

There will be a conference call for investors and analysts at 9:00 am today. The presentation slides will be available via webcast (listen only) on our corporate website, www.dixonscarphonegroup.com

Dial-in details: UK/International +44(0) 20 3427 1909; USA +1646 254 3360; Passcode 9606976

Next announcement

The Group will publish its next trading statement on 21 January 2015.

For further information

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

Performance review

Headline⁽¹⁾ revenue and profit analysis - pro forma basis

Basis of preparation - pro forma information

On 26 June 2013 Carphone Warehouse Group plc (Carphone Warehouse) acquired the 50% of CPW Europe which it did not already own from Best Buy Co., Inc. (the CPW Europe Acquisition) and on 6 August 2014 an all-share merger of Carphone Warehouse and Dixons Retail plc (Dixons Retail) (the Merger) took place. The information in this performance review refers, unless otherwise stated, to pro forma information, reflecting the results of both Carphone Warehouse (including CPW Europe) and Dixons Retail throughout both the current and comparative periods. 

Following the Merger the Group changed its year end to be the Saturday closest to 30 April.  As a result, its half year now ends on the Saturday closest to 31 October. The current interim period therefore comprises the 31 weeks to 1 November 2014 for the Carphone Warehouse business with a comparative period of the 26 weeks ended 28 September 2013 in line with previously reported results. The current year therefore benefits from an additional five weeks of trading from the Carphone Warehouse business. The prior year comparatives include an adjustment to Carphone Warehouse's results reflecting the impact of opening balance sheet adjustments required under IFRS following the CPW Europe Acquisition.  Under IFRS the opening balance sheet remains open for a period of twelve months from the date of acquisition with any new information about circumstances that existed at the acquisition date being recognised in the opening balance sheet with a corresponding entry in goodwill. The net impact of these adjustments on pro forma Headline EBIT was an increase of £14m in the prior period. There is a corresponding reduction in second half pro forma Headline EBIT with the result for the full year remaining unchanged.

Prior year comparatives for Carphone Warehouse have also been restated to reclassify the unwind of discounts for the time value of money on network commissions receivable from pro forma Headline EBIT to interest, in line with the treatment in the current period. This item had a value of £4m for the 26 weeks to 28 September 2013 and the reclassification had the impact of reducing pro forma Headline EBIT.

Current period pro forma results for the Dixons Retail business comprise the 6 months ended 31 October 2014 with a comparative period of the 6 months ended 31 October 2013. The prior period results of Dixons Retail have been restated to exclude the results of its Central European business which are treated as discontinued following the disposal of this business.

 Notes

(1)   Headline results exclude amortisation of acquisition intangibles, exceptional items (which comprise net restructuring charges, business impairment charges and other one-off, non-recurring items), net interest on defined benefit pension schemes, the results of businesses exited (which comprise the Group's retail operations in France) and, where applicable, discontinued operations. Such excluded items are described as 'Non-Headline'. For further details see note 3 to the condensed financial statements.

(2)   Like-for-like sales are calculated based on Headline store and internet sales using constant exchange rates. New stores are included where they have been open for a full financial year both at the beginning and end of the financial period. Closed stores are excluded for any period of closure during either period. Customer support agreement sales and income earned from insurance policies are excluded from like-for-like calculations, along with revenues from wholesale operations, Connected World Services and other non-retail businesses. Like-for-like revenue reflects performance for the Carphone Warehouse business for the 31 weeks to 1 November 2014 compared to the 31 weeks to 2 November 2013 and for the Dixons Retail business for the 6 months ended 31 October 2014 compared to the 6 months ended 31 October 2013.

(3)   UK & Ireland comprises operations in the UK and Ireland and the Dixons Travel business.

(4)   Northern Europe comprises operations in Norway, Sweden, Finland, Denmark, Iceland, the Netherlands and Germany.

(5)   Southern Europe comprises operations in Spain, Portugal and Greece.

(6)   Connected World Services comprises the Group's B2B operation which leverages the specialist skills, operating processes and technology of the Group to provide managed services to third parties looking to develop their own connected world solutions.

(7)   Segmental profit / (loss) reflects Headline earnings before interest and tax (Headline EBIT).

Group

Group pro forma Headline revenue in the first half was up 1% to £5,022m (2013: £4,970m) and up 5% on a local currency basis, including a 6% benefit of an extra five weeks of trading from the Carphone Warehouse business. Like-for-like revenue growth was 5% reflecting growth in our UK & Ireland and Nordic businesses, partially offset by Southern Europe, most notably Spain. The difference between the total revenue growth (as adjusted for the additional five weeks of trading from the Carphone Warehouse business) and like-for-like is predominantly due to a reduction in lower margin wholesale revenues and a reduction in store space.

Pro forma Headline EBIT was £100m (2013: £85m).

Gross margin has been impacted by changes in the revenue mix but on an underlying basis gross margin was stable.

Pro forma Headline profit before tax in the first half was £78m (2013: £60m) reflecting the improved pro forma Headline EBIT and a lower interest charge year-on-year following the redemption of the bonds previously held by Dixons Retail in August of this year.

Integration continues to progress well and our stated target of a minimum £80m of synergies by 2017-18 has now been brought forward by one year to 2016-17. As part of the integration of the two businesses, we have reviewed the consistency of existing operating and financial processes, including the integration of our interactions with suppliers.

Excellent progress has been made in the UK & Ireland with a number of departments now fully integrated. In September we announced our plans for one UK head office. We now have a total of 190 Carphone Warehouse stores-within-a-store (SWAS) operating within Currys and PC World stores (32 new SWAS and 158 converted Phones 4U stores). The SWAS are continuing to outperform expectations and we will re-commence the SWAS roll-out after the all-important peak trading season.

In Sweden we are making good progress and have now opened the first co-branded trial stores and co-marketing is also driving business performance.  In addition the head office integration has been communicated.

UK & Ireland

The UK & Ireland had a very strong first half across both electricals and mobile, particularly in the second quarter, and we continued to gain market share across all our brands with strong sales driving increased profits, with pro forma Headline EBIT up 31% versus last year. This excellent performance puts us in a good position ahead of the peak trading period.

The electricals business continued to build on a strong first quarter with white goods and TVs selling well across the half, with a particularly good performance in high-end TVs, aided by a number of initiatives including free warranties. In computing, the laptop market appears to be stabilising, whilst tablets were down year-on-year due to limited product innovation.

Our mobile business in the UK & Ireland also performed well. Postpay volumes and market share continued to grow year-on-year, particularly towards the end of the period as the business benefited from the closure of Phones 4U and some particularly successful product launches. We are also encouraged by the positive impact on ARPU from higher levels of data usage. This was partly offset by continued prepay volume declines, consistent with recent quarters.

Whilst the Phones 4U closure created new market opportunities it also presented a short-term requirement for increased investment including an accelerated SWAS roll-out and the recruitment and integration of many former Phones 4U employees. The Group took on twelve former Phones 4U standalone stores and a further 158 Phones 4U SWAS from which Dixons Retail previously received a profit share, converting them into Carphone Warehouse outlets.

Pro forma revenue in the first half in the UK & Ireland increased by 8% to £2,954m (2013: £2,741m) including a 6% benefit of the additional five weeks of trading of the Carphone Warehouse business. Like-for-like revenue for the first half was up 6% reflecting strong performances in both our electricals and mobile businesses. The difference between the total revenue growth (as adjusted for the additional five weeks of trading from the Carphone Warehouse business) and like-for-like predominantly reflects a reduction in store space.

UK & Ireland pro forma Headline EBIT increased to £80m (2013: £61m) reflecting the factors explained above.

Northern Europe

Northern Europe reflected a very solid first half from our Nordic business with continued sales momentum across the region and good trading across all major categories. 'Happy or Not' scores continue to rise and customer service remains strong. In contrast, conditions are tough in Germany and the Netherlands and we have taken decisions to accelerate a review and restructuring of these businesses.

In the Netherlands the market proved to be much more challenging than anticipated and we have expedited its restructuring. To better position ourselves in this market we are closing 50 stores and reducing head office costs. As previously announced we are also closing our retail and wholesale hardware operations in Germany. This resulted in a reduction in revenue but an immaterial impact on Headline profitability. We continue to operate the Mobile World Distribution business, providing connections and services to other businesses. A non-Headline charge of £67m, of which £58m is non-cash, has been recognised in relation to these reorganisations. Further details are provided in the non-Headline section later in this performance review.

Pro forma Headline revenue in Northern Europe in the first half was down 8% to £1,632m (2013: £1,767m). Northern Europe revenue was affected by a significant negative movement on foreign exchange and pro forma revenue on a local currency basis was up 2% including a 4% benefit from an additional five weeks of trading from the Carphone Warehouse business. Like-for-like revenue was up 5% with the variation between the total revenue growth (as adjusted for the additional five weeks of trading from the Carphone Warehouse business) and like-for-like reflecting a reduction in low margin wholesale revenues in the German business.

Northern Europe pro forma Headline EBIT was £20m (2013: £24m) reflecting a negative impact of foreign exchange of £4m, investment in our Nordic business, and the challenges in the mobile business described above.

Southern Europe

We are experiencing good growth in Greece with strong like-for-like sales growth throughout the first half in most categories but in particular large screen TVs. We are hopeful that this business will return to profitability in the short-term.

Our Spanish business was negatively impacted by market pressure in the first half, however we are pleased to announce that we have recently started a relationship with Telefonica to distribute the products and services of Movistar in our stores for the first time. Whilst it is early days, this could be a significant step in terms of the addressable market for us. We continue to evolve the business model, focusing on franchise operations coupled with our own store optimisation. We closed a net 26 stores during the period. This resulted in restructuring and redundancies and the disposal of non-core assets. Whilst there was a positive effect of these activities in the first half, over the full year the impact will be small.

Our Portuguese business is relatively small, but it has been impressive to see how this business has developed a quad play offering from a standing start, taking good market share in recent weeks. The role of the independent retailer in quad play has proved significant in this market and we will be applying what we have learnt to other markets.

Pro forma Headline revenue in Southern Europe in the first half was down 15% to £357m (2013: £421m). Southern Europe revenue was affected by a negative movement on foreign exchange and pro forma revenue on a local currency basis was down 9% including an 8% benefit of the additional five weeks of trading from the Carphone Warehouse business. Like-for-like revenue was down 11% predominantly reflecting the continued challenging market and weak consumer sentiment in Spain. However, improvements in the Greek business continue with double digit like-for-like revenue growth.

Southern Europe pro forma Headline EBIT was a loss of £4m (2013: loss of £1m).

Connected World Services 

Today, Connected World Services (CWS), our business services division is reported separately for the first time. This business leverages our core expertise and systems to provide solutions for other companies.

We have made substantial progress in H1, the main new initiative being the deployment of our contract with a major global brand in the UK for the use of our honeyBee platform within its stores. This platform enables activations of connections to network operators on which CWS receives a fee for each connection made. We are now deploying honeyBee in further markets.

We are also pleased to announce that CWS has contracted with BT to be the technical support provider for the migration of their corporate MVNO customer base. Delivery will commence in early 2015 using our technical support capabilities.

We are pleased with the progress of our existing relationships with other blue chip brands, Samsung, Aviva, Talk Talk, RBS to name a few.

CWS pro forma revenue was £79m (2013: £41m) with the increase predominantly reflecting the revenue from our Samsung Experience Stores which launched in the second half of last year in addition to the benefit of the additional five weeks of trading from the legacy Carphone Warehouse business. Pro forma Headline EBIT was £4m (2013: £1m) predominantly reflecting the benefit of CWS contracts as they evolve from initial investment phases.

Tax

The expected pro forma rate of tax for the full year is 25% with this rate being applied to the half year results. This rate is higher than the UK statutory rate of 21% due mainly to higher statutory rates in the Nordics and non-deductible depreciation, mainly in the legacy Dixons Retail UK business. The effective rate for the first half of the year is higher than the full year rate owing to certain items falling discretely into the first half of the year and forming a higher proportion of half year profits.  

Statutory results

The explanation of the Group's results presented above is on a pro forma basis as if the group structure following the CPW Europe Acquisition and the Merger had been in place throughout the current and comparative periods. Group results as reported in the condensed financial statements are prepared on a statutory basis, consolidating the results of CPW Europe and Dixons Retail from 26 June 2013 and 6 August 2014 respectively. These results are summarised below:

Headline income statement - continuing operations - statutory basis

(1)    Results for the 26 weeks ended 28 September 2013 have been restated to reflect the finalisation of the opening balance sheet following the CPW Europe Acquisition and also to reclassify the results of Virgin Mobile France as discontinued operations. For further details see note 1 to the condensed financial statements.

Headline EBIT increased from £24m to £92m predominantly reflecting the inclusion of a full period of earnings from CPW Europe and the inclusion of Dixons Retail results from 6 August. The tax charge increased from £5m to £23m reflecting the higher pre-tax earnings described above.

This in turn resulted in an increase in basic Headline EPS from 3.2p to 7.1p for the period. The EPS calculation reflects the fact that the number of shares in issue approximately doubled following the Merger.

The Group's Headline effective rate of taxation for the full year has been estimated at 25% (2013: 20%) with this rate being applied to the half year results. The rate is higher than the UK statutory rate of 21% due mainly to higher statutory rates in the Nordics and non-deductible depreciation, mainly in the Dixons Retail UK business. The rate for the first half of the year is higher than the full year rate owing to certain items falling discretely in to the first half of the year and forming a higher proportion of half year profits.

The acquisition balance sheet of Dixons Retail remains open for a period of twelve months following completion of the Merger, and may therefore be affected by changes in estimates arising from new information obtained in the second half of the year. On this basis, the acquisition balance sheet is at this stage provisional.

Non-Headline items

Headline profit before tax is reported before non-Headline charges of £100 million. These charges are analysed below and are reported on a statutory basis with the Dixons Retail business only consolidated from completion of the Merger on 6 August 2014.

Costs incurred in relation to the Merger include transaction costs of £8m, predominantly reflecting banking and professional fees, and merger integration costs of £3m primarily being professional fees associated with the integration process. Further integration costs will be incurred during the second half of the year as the integration of the two businesses continues.

As a result of the challenging markets in Germany and the Netherlands described earlier in this performance review, restructuring activities have taken place in these markets including store closure programmes, head office restructuring and the closure of the wholesale hardware business in Germany.  A charge of £9m has been recognised in relation to these programmes reflecting the anticipated costs of restructuring programmes to which the business had committed at the end of the period. Charges of £58m, reflecting the write-down of tangible and intangible assets associated with these businesses and the goodwill associated with the Netherlands, were also recognised reflecting the store and business closures and uncertainty over future cash generation in the Netherlands.

Net pension interest was £4m reflecting the charge incurred in relation to the Dixons Retail pension scheme following completion of the Merger.  Further details on the pension scheme can be found in the Pensions section later in this performance review.

The charge for the amortisation of acquisition intangibles was £18m (2013: £5m) with the current period including a full seven months of amortisation of intangible assets recognised following the CPW Europe Acquisition and, since 6 August 2014, the amortisation of intangible assets recognised as a result of the Merger.

For further details of non-Headline items see note 3 to the condensed financial statements.

Non-Headline items included within Dixons Retail results in the period prior to the Merger comprised £9m in respect of the acceleration of share based payment charges which vested on the Merger, £12m of merger related professional fees and £6m of merger integration planning costs committed to prior to completion of the Merger, £42m of debt restructuring costs in respect of early repayment of the bonds previously held by Dixons Retail and £4m of pension interest costs. As these items were incurred prior to the Merger they do not form part of the Group's consolidated results.

Discontinued operations

On 4 December 2014 the Group completed the disposal of Virgin Mobile France resulting in net cash proceeds of £104m.  The gain on disposal will be reflected in the Group's full year results.

On 11 August 2014, the Group completed the sale of its Electroworld operations in the Czech Republic and Slovakia (Central Europe) following an agreement previously entered into by Dixons Retail prior to the Merger and recorded in the results of Dixons Retail prior to the Merger.  No gain or loss is included in Group results, as described further in note 11 to the condensed financial statements.

Cash and movement on net funds

The information provided below is on a pro forma basis and aggregates the net funds / (debt) and cash flows of the Group, Dixons Retail and CPW Europe, as though Dixons Retail and CPW Europe had been 100% owned by the Group throughout the current and prior periods, to enable a complete understanding of cash flows.

Free cash flow - pro forma basis

Pro forma free cash flow before restructuring in the first half was an outflow of £197m (2013: £83m). The Group experienced a working capital outflow of £216m (2013: £157m) on a pro forma basis with the year-on-year increase largely reflecting the change in period end for Carphone Warehouse affecting network and supplier payment profiles and stock levels relative to the period end.

Capital expenditure in the first half was £95m on a pro forma basis (2013: £63m) reflecting incremental investment in honeyBee, the platform that will support the continued development of both our retail and Connected World Services businesses, and other Connected World Services platforms, in addition to the development of the Carphone Warehouse branded SWAS across the Currys and PC World estate.

Restructuring costs in both periods predominantly reflect cash costs associated with the exit of the Carphone Warehouse retail business in France, which was provided for last year.

Funding - pro forma basis

(1)    Opening net funds in the current period reflects net funds for Carphone Warehouse at 29 March 2014 and for Dixons Retail at 30 April 2014. Opening net funds in the prior period reflects net funds for Carphone Warehouse at 31 March 2013 and for Dixons Retail at 30 April 2013.

(2)    Closing net debt in the current period reflects the consolidated net debt of the Group at 1 November 2014. Closing net debt in the prior period reflects net debt for Carphone Warehouse at 28 September 2013 and for Dixons Retail at 31 October 2013.

At 1 November 2014 the Group had net debt of £293m. Prior period pro forma closing net debt, as at the end of September for Carphone Warehouse and as at the end of October for Dixons Retail, was £138m. Pro forma net debt at the end of October 2013 for both businesses was £357m. Average net debt on a pro forma basis for the period April 2014 to October 2014 was approximately £300m.

Free cash flow was an outflow of £211m (2013: £127m) for the reasons described above.

Merger transaction costs reflect professional and banking fees, the cash cost of share option exercises as a result of the Merger and the cost of redeeming the bonds previously held by Dixons Retail.

Cash flows from acquisitions and disposals including discontinued operations in the prior period were £374m predominantly reflecting cash outflows associated with the CPW Europe Acquisition. Cash outflows in the current period were £31m reflecting the first payment of deferred consideration for the CPW Europe Acquisition and cash outflows in discontinued operations which were partly offset by the cash received on the disposal of non-core assets in Spain.

Other items resulted in an outflow of £8m (2013: £20m) predominantly comprising the revaluation of cash balances held in non-UK subsidiaries and in the prior period the purchase of own shares.

The Group has a total of £900m of committed borrowing facilities comprising: i) a £650m multi-currency term and revolving credit facility, and ii) a £250m revolving credit facility, both of which mature in April 2017. The £650m facility is split into two tranches: a £400m revolving tranche and a term loan tranche of £250m, which amortises by £25m on 30 June 2015 and by a further £50m on 30 June 2016.

Goodwill

The provisional goodwill of £2,638 million arising from the Merger reflects the fact that the value of Dixons Retail is based on its cash generating potential rather than its existing assets and the fact that many of its key strengths, such as its scale and expertise, do not represent intangible assets as defined by IFRS. For further details see note 4 to the condensed financial statements.

Pensions

The IAS 19 accounting deficit of the defined benefit section of the UK pension scheme of Dixons Retail amounted to £382 million at 1 November 2014 which is an improvement on the £430 million at the date of the Merger on 6 August 2014. The assumptions used for determining the accounting valuation use a consistent basis to that adopted within the financial statements of Dixons Retail for the year ended 30 April 2014 and which build from the most recent actuarial valuation as at 31 March 2010. Contributions during the period under the terms of the deficit reduction plan amounted to £13m on a pro forma basis (2013: £10m).

The deficit has reduced largely as a result of the increase in asset values, partially offset by changes in financial assumptions which determine liabilities. The triennial valuation as at 31 March 2013 remains in progress and the results are expected later in the financial year.

Dividends

The Board has declared an interim dividend of 2.50p per share, up from 2.00p per share last year. The ex-dividend date is Friday 2 January 2015, with a record date of Monday 5 January 2015 and an intended payment date of Friday 23 January 2015.

Consolidated Income Statement