B&M European Value Retail S.A.

Good day and thank you for standing by. Welcome to the BNM Retail H1 Fall Year 26 Trading and Operational Update webcast and conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Chia Jaegon, CEO. Please go ahead, sir.

Thanks very much and good morning everyone and thank you for joining us on today's call. My name is Chia Jaegon and I'm the CEO of BNM Retail and with me here and on the call is our CFO, Mike Schmidt. We wanted this opportunity to speak to you today following the trade and operational update that we issued at 7 a.m. this morning. and what you can expect from us in this update is that Mike will take us through the financial aspects in a moment and I will then basically talk about the back to BNM basics as we call it program that we've kicked up which is to basically improve our operational performance because it's obviously not where we want it to be but before that I would like to say a few words of introduction and So back in July, I shared my initial observations of our business via the webcast that accompanied our Q1 trading update. I was at that stage four weeks into my role, and it was clear to me that the BNM's business fundamentals were solid, but there were also many immediate opportunities to improve execution and strengthen the customer proposition. And over the past two months, I've had a comprehensive review of diagnostics to see where execution has fallen short, and come with solutions to return the business to its full potential. And this process has left me in no doubt that the original BNM value proposition is still strong. But unfortunately our execution has drifted. And this drift has impacted our trading performance, which is reflected in the four year outlook that we published this morning. We have though a clear action plan to tackle this. We're calling it Back to BNM Basics. And there's only one objective, and one objective only. is to bring back sustainable like-for-like growth to BNN UK. And we're doing so by realigning the business with the principles that make BNN so successful. More on this plan in a moment, but let me first hand over to Mike to run through H1 training and our outlook.

Thank you, Tjeerd. Good morning, everyone. So looking at the first half, our total group revenues grew by 4% to 2.75 billion. This was largely driven by UK total volume and average selling price growth and good trading momentum in BNM France, which delivered double digit growth. Clearly, the UK total volumes were helped by new store openings. We work with discipline on our capital allocation and we opened 23 gross new stores in the UK during the first half with 14 closures or relocations, which leaves an increase of nine net new stores. That puts us on track to open 40 to 45 gross new stores in the UK in this financial year. We also opened five new stores in France and a gross three or net one store at Heron. So in the UK, B&M's like-for-like sales were up by 0.1% for the half. That was led by a very strong April performance in general merchandise particularly, which was helped by an early Easter and by good weather, which pulled forward demand for our outdoor ranges. Our sales then were weaker in May as this trend reversed, following which, each period thereafter, we saw a progressive moderation in like-for-like sales declines from June onwards. And that was helped by the ranges returning towards higher value products and general merchandise, but also some selling price inflation in FMCG. Despite this improving trajectory, BNM UK sales declined by 1.1% in the second quarter, which was weaker than our expectations. So, as communicated in our first quarter trading update, the gross margin for BNM UK across that first quarter was impacted by the deflation that we saw in general merchandise ranges and the lower bought-in product margins, therefore. The negative effect of that price deflation moderated in the second quarter as we started to annualize the price changes and as new autumn-winter ranges were introduced with higher bought-in margins. So driven by those like-for-likes and the lower trade and gross margins, subject to the final review that we need to go through, we expect group-adjusted EBITDA for the first half to be published in November to be approximately 198 million pounds. Of course, you'll realize that the first half and the year-on-year P&L comparison will also include some of the sizeable cost headwinds that all retailers are facing. So that does include around £14 million in new extended producer responsibility tax costs. The full annual cost of that has to be expensed in the first half. There's also non-cash movements of £3 million in the first half relating to FX that will then reverse and unwind in the second half. And then thirdly, As expected, higher wage costs due to the rise in national minimum wage and employer national insurance. The unmitigated effect of the wage cost inflation in the half was around 30 million pounds. So now moving on to our outlook for the second half. So as Chirds shortly will set out, we're correcting the operational weaknesses we've identified to drive an improved financial performance. While we will see the full financial benefits building over time, we have actually seen some gradually improving trends in UK like-for-like sales and gross margins towards the end of the second quarter. So taking this into account, our fully 2026 financial year group adjusted EBITDA guidance range is 510 million pounds to 560 million pounds. We do have line of sight on the trading margins for autumn winter. and on our cost base. So really the principal driver of the outcome within this range is BNM UK's like-for-like sales across our key golden quarter period. We are very early in the season, as you will realize. We normally publish our update range in or guidance range in November. So at this stage, we're setting out a range based on between a low single-digit decline and a low single-digit like-for-like sales growth in the second half for BNM UK. Turning to our balance sheet. Of course, this is a business that's consistently cash generative. However, our leverage ratio is expected to be slightly above our one to one and a half times target range for the full year end, full financial year end, which reflects the lower earnings that we've seen over the last 12 months, but also our usual working capital peaks that are seasonal as we enter the golden quarter. So finally, as Sherwood will outline, the full impact of our back-to-BNM basics actions is going to take 12 to 18 months to take effect. However, with the like-for-like sales growth this plan will drive, we do expect that future adjusted EBITDA profit margins for BNM UK will stabilise at least at the 2026 out-to-turn level. So now I'll hand back to Church to walk you through the plan to drive our like-for-like sales growth.

Thanks, Mike. I want to share the full details of our Back to B&M Basics plan with you today. But before I get there, let me first remind you what makes B&M such a special business. And what I would like to point your attention towards on the slide is our earnings value. And it starts top right with the strength of our brand and our unique value proposition. You know, everyday low prices across FMCG combined with a very rapidly changing, very broad general merchandise range to excite customers and drive life-or-life sales across our footprint. And we scale this formula through a large and expanding store estate in both UK and France. And by the way, in both countries, we see considerable equity for future growth. And underpinning this expansion is a very strong and solidly financially disciplined approach to that space growth that demands positive contribution margin with a local store model with, I would say, industry-leading fast payback times. We combined it with a direct sourcing model, quite disruptive, very low operational overhead relative to other retailers, and as a consequence, we're able to deliver superior margins and strong cash returns for our shareholders. We couldn't do it, of course, without the skills and expertise of our teams, and they, of course, built the business in the two decades to where it is today. But this is, of course, when the model works really well. Unfortunately, our performance over the last 18 months has not been at the right level. And that's mainly because we've drifted. We've drifted in the execution of this model, and we'd like to give you more insights on the next slides, what we have reviewed, and what we have diagnosed. And if you would then look at what we have done in this last couple of months, it's actually coming to understand why our UK like-for-likes have moved so negatively over the past two years. And to do so in a diagnostic, I must have held at least 70, 70, 101 meetings with key managers, I worked in stores, spent quite some time at our DCs, was in the French business. I even was able to visit our Hong Kong sourcing JV. And for me, it was clear. Our focus had drifted. And from the principles that made the company so successful in the past, in four key areas, we drifted. And those four key areas are price, promotion, range, and availability. And the diagnostics, how to tackle these and seize the opportunities that I see for those areas, we call a plan that's called back to basics. Actually, it's called back to B&M basics. And the idea is to restore the original value proposition and to make sure that we get back to a life-to-life growth and ultimately solid growth for the future. So I would like to take you through a bit more detail. And apologies for the operational nature of this update and the granular detail, but I think it's important to understand what we are doing and what we have seen in BNM. So first of all, of the four elements that make up our value proposition, I would like to share price. And what we've always shared with you and what the premise is of BNM is big brands and big savings. So basically A brands, 15% cheaper than the supermarkets after loading discounts. Where the drift has been is that we only focused on the total basket and we actually didn't look specifically at the line by line comparison. And as a consequence, we actually on the line by line comparison, we have become more expensive, for example, than the big supermarkets on at least 10% of our basket. And versus our closest competitor, we actually were about 25% of our lines, we were more expensive than our closest competitor. for a discount retailer, a very, very bad situation. And this has, of course, dented our value perception. We've taken immediate action on these lines, and since August, we're no longer more expensive on any line versus our closest competitor, and I believe we've got a healthy index both from a total basket and a line-by-line comparison with the big supermarkets. I do have to say also and to note the price perception takes quite some time to change and to influence, So the impact of the changes of this sharpened price position will become visible to our customers in the next few months. And we also would like to make sure the communication is supporting our better prices. Moving into promotion, so from the original B&M Blackpool days, the idea was there was great lines bought, come to the store, the store manager would take the lines out of the truck and would merchandise them in front of the store, hence manager special. That has now become a very static program, four weeks, same lines, no value improvement, no better value at the front of store. So it's become a bit stale, it's duplicate, and ultimately not really bringing customers to take the additional item in their basket. So we're changing this quite a bit. We're making sure that the front of store changes constantly. We bring the seasons to the front of the store. And from October, we have new guidelines that either items are great value, they're new to the business, or are seasonal. and otherwise they can't be merchandised in the front of the store. And we also will give, like in the old days, our store managers more discretion to trade and select the best lines in their local area, clearly within the framework, which means we can really trade locally harder like we did in the original days of D&M's foundation. The third one is range. I've got a very simple focus on where a discounter differentiates itself from other retailers. A discounter offers a discount on price, discount on time, discount in complexity, and we actually have not really made shopping easy at B&M. We've actually added significant range over the last years, and we haven't really adhered to our original premise of one new item in is one old item out. actually we lost a bit our way in terms of skew discipline and that unfortunately has led to a significant increase in ranges it undermines our value credentials and it's more difficult of course to merchandise in larger volumes when there's so many items on the shelf but also it makes running a store quite complex and expensive and running a DC very complex and expensive so we need to really address this and on top of this we also haven't been in my view the best discipline in terms of ranging, clearing end of season at the end of the season in terms of our general merchandise ranges. So to bring us back on track, we're going to edit our range. We're going to reduce our SKUs and focus on the big brands. Clearly, this will help us achieving better costs because we're buying deeper. It will help us making shopping easier and restore value credentials and operating our stores and DCs in an easier way. And also at the same time, we're reinstating a discipline on clearing end of season, which means that we are having cleaner shelves when the new ranges come in. And of course, in the seasonal buy, we allow for sufficient clearance. Then the fourth one, from the original model, there was a rigorous focus every single week on every single line and every single store if there was sufficient sales behind that line. So you could say there was a really strong focus on availability all the time. We drifted because we actually started sacrificing a sales culture for store standards. And what actually happens when you're focusing on standards, and it's not really, in my view, on purpose, but it was basically the side effect of focusing on store standards, which means when an item is sold out, instead of leaving the gap and checking the stock record and reordering, the item actually was phased over, the shelfage label was removed, and items actually got lost in the sea of products that we at the moment have in our business, and as a consequence, we've also lost a significant amount of available stock for customers, so we've become less reliable as a retailer if you would walk into our stores in terms of finding the product that you come out to buy at B&M. We're addressing this, we're changing the way we replenish our shelves, and we're changing the way we actually work. So moving on, we're moving at pace with implementing these changes, and some are already on the way. I think just to give you some color on the four elements, So on price, we've got a new price benchmarking methodology. We both look at basket and we look at lines. 35% of the lines have been repriced, about 2% each. You could say that's a small amount. You could also say that every penny for customers counts. And especially in these more challenging economic times, I think many customers would love to see the best prices at B&M shelves, even if it's only 3 or 4 or 5p cheaper. And we believe with this, we've restored competitiveness to our lines. The second phase of pricing is to also restore price messaging, so we make sure that the value credentials are properly communicated. And we brought in a ratio which is called higher, equal, or lower. And you can see that before we address this, with one competitor, we had 29% of our, let's say, comparable lines. We were more expensive. And another retailer, 12% of lines. And baskets like 400 lines. You talk about dozens and dozens of lines where we were out of kilter and as a consequence, impacted our price perception negatively. So that's been changed. And those are promotions. I think I said it before, so we've stopped the aesthetic ranging merchandising at the front of the store, brought the seasons in, so we're now taking the opportunity to, we took first the back to school at the front of the store. We've never done that before with good results. We then brought harvest in, which is our transitional range between summer and winter. And then now we're trading Halloween at the front of the store, which we've never done in the past, but it actually has got good results. And customers appreciate the excitement when you walk into a B&M, and that's what B&M is all about. And then moving on in terms of other elements of the mix that we're improving, if you talk to range, clearly we have to use analytics and data to make the right decisions, which items are remaining in range and which items are going to be exited. But you look at the numbers on the left bottom of the chart, within, let's say, a scope of 18 months, we've added 3,500 SKUs to our base, which is clearly not where we want to be. So we will start reducing those ranges. We're now assessing category by category what the right number is. We're not just doing assessments behind the desk. We're also implementing change for customers. So by the end of this month, three category pilots will be kicked off so we can see what the impact of the changes are and then learn from this and then scale and then ultimately do a comprehensive reboot across the whole estate on reducing our SKU count. And then finally on availability, so we have a best-selling line group that we are focusing on. We've taken an assessment in terms of on-shelf availability. There was never really a metric the company would be focused on, but I think it's a really important metric the company should be focusing on. We found out that 86% of our lines were available for customers. That sounds quite a lot of lines available, but actually it's a significant departure from what needs to be in terms of best practice of availability in the retail market. That's about 98%. So there's a 12% gap between best practice and where we are today. And just to my experience in also other markets, you've got about a third of lost sales with a lack of availability, short term, but of course longer term, you also lose customers when you're always out of stock. But if you then apply that one third, you could actually say there's potentially a 4% sales improvement latent if we are able to improve our availability. And that's the focus now for the store's themes to really focus our availability on the best in lines and then clearly being a better shop for customers. And then moving on, let's try to put these actions all in the context because clearly this is all very much an operational plan to improve our business, which also I think is the right thing to do where we are today. But clearly there's also a perspective. Back to B&M basics is all about focusing on restoring like for like growth and making sure we do the best possible job for our customers and we bring back the great value proposition B&M has always been. I can also say that a very similar approach is currently underway at Heron Foods where the team is also working hard to bring back good growth because also the performance of Heron Foods is below where we'd like it to be. But then moving on to the phase two and phase three, we also believe we can strengthen our foundations and use data and insights more than we have done so far. I think there's a chance to simplify our way of working. Our processes are quite complex and quite a few times at store level even paper-based. There's a big chance to flex our formats. Our customer missions are not really met, in my view, properly, especially in town center sites. And then we also think there's a chance to update and store experience. That's all phase two. And then phase three, with those foundations in place, we can actually strengthen our growth. I think France has a great opportunity to go faster and great success over the second quarter, so it's competing well in its own market. I think we're looking into long-term opportunities to go faster there. There's no decision taken, but we need to have a clear view on e-commerce, loyalty and private label for this business, and those topics we would like to share with you when we do our interim results in November. But we don't want to be distracted, so for now, it's back to being in basics is our sole focus. And before we open the floor to Q&A, we've come nearly to the end of the update, I would like to summarize our objectives. and also our key takeaways for you today. Our back to B&M basics is underway, and mind you, this is my fourth month, so I think we're moving at pace. We expect these actions will take effect over the next 12 to 18 months, just as a function of the amount of categories we want to cover, the impact on customer, and the change of processes. Our number one priority, as I said before, our laser focus is returning the UK to like-for-like growth. And as Mike said in the Financial Outlook, with returning to like-for-like growth, we believe that will enable our profit margin to stabilize at least at the FY26 out-turn level without the need for any price-led reset. In the meantime, we continue to apply the same financial discipline to growth opportunities to drive strong returns on investment and the cash generations that are clearly the hallmarks of our earnings model. To sum up, and then I really give the floor to the people on the call who have been very patient, so thank you very much for that. To sum up, our fundamentals are strong, but we acknowledge that our execution has not been as strong, and it needs improvement. We've done a full diagnostics, and we believe we've drifted. We've drifted from our core value proposition, but we have a plan in place to fix this, and with a focus to return the UK sustainable like-for-like. The first phase is of a long-term plan, fixing the basics before deepening our foundation and finally accelerating our growth. And thank you so much for listening. And Mike and I are very happy now to take your questions. So I'd like to hand over to the operator. Thank you.

Thank you. To ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. We will now go to the first question. One moment, please. And your first question today comes from the line of Vandita Sood from Citi. Please go ahead.

Morning. Thank you for taking my questions. I just had three, if that's okay. First one, it's just on your guidance. On my maps, if I think about the EBITDA in the first half year-on-year, if I exclude the EPR and FX, it's about 60 million lower year-on-year. But then if I assume... sort of the midpoint of your guidance range, it implies that the second half EBITDA will be just about 10 million lower year on year. So what's the bridge there? Is it all gross margin or is there anything else? And should I take them one by one?

Yeah, I'm happy to pick that one up straight away, Gandita. Hi. So, in terms of the guidance, I think we've set out what we think is a realistic range for the full year. We're clearly still early in our key autumn-winter season. But when we look at the first half, as you rightly say, there are some one-offs coming through. But then secondly, there is also that trading margin and like for like picture that we've called out. So that is to say that we saw lower bought-in margins in the first half for our spring-summer ranges. We've seen that trend moderate, reverse into the autumn-winter ranges as we expect. That's one area where we see a difference. The second area is clearly what the like-for-like outturn will be. And so we saw 0% across the half as a whole, albeit a negative second quarter, but an improving trend. And clearly the range that we've set out for the second half is based on low single-digit negative through to low single-digit positive outturn for that second half picture overall. And so, look, as we continue to trade through, I think we'll get a clearer picture. It is early in the season, but we do think we've based the range appropriately and realistically.

Thank you. My second question was, What makes you confident that the 1.8% price cuts are enough? So if, as a basket, you were 15% cheaper, but clearly on some products you were less than this, does around 2% make it enough for people to recognize that you are the cheapest place to be? And also, what kind of things can you do to communicate that you will end up being cheaper, let's say, for someone who's not walked into your store? So typically you've shied away from marketing and things like that.

Yeah, that's a good question. I think the number we've quoted, of course, is the investment to date. And pricing, of course, is a dynamic process. So clearly you react to competition because you want to make sure you always got the best prices. So that's the investment to date. It actually shows two things. I think it shows that actually overall we were not far off from where we need to be, but we were not sharp enough. So that's why we need an incremental investment in pricing. And it's very simple. We don't want to be more expensive, especially with our closest competitor and equal or lower is then the focus. So I think where we stand today, I think our gap to competition in terms of pricing is the right one. Where we miss an opportunity is twofold. I think to go back to your question, how could a customer see that you've got great value? I think that's actually an issue at B&M. So first of all, because of the large number of SKUs, many of our items, even bestsellers, are on one or two facings. Now, any other retailer would merchandise these products quite dominantly, full shell, full bay. And then immediately, even if you would have no reference, you would see as a customer there's great value to be had. And we normally don't also communicate any, let's say, RRP difference. And many, of course, of our brands have a RRP from the manufacturer. If you would take that as a reference point, even if you would not know B&M very well and you didn't see the B&M price, you would know that there's great value to be made at B&M. So I think those are two very simple principles of merchandising we haven't applied at B&M. And it actually doesn't really take a lot of marketing spend to actually achieve that. But those are the changes we intend to make. So value is all about merchandising in an assertive way. and then making sure you reference the price in the market properly. And then there's great value at BNM. And the anecdotal evidence we see in the stores where we are trialing, you know, merchandising more dominantly, we see the early effects is that those products actually do sell even stronger than they do today. So we don't believe there's currently a price issue. It is executing those items in a stronger way.

Thank you. And the last one, just a quick one. You say that there's an opportunity from improving availability. Just wondering if you have what typically B&M's availability has been versus the 86% today or the industry.

Yeah, so it's a good question. We didn't really have, let's say, metrics in place that measured on-shelf availability in a way that I'm used to. So other retailers would have... planogrammed ranges and then you would have a gap scan in the morning so you would actually know very well what your on-shelf availability is. If you have an online channel next to it, you would know straight away your on-shelf availability. We don't have both, so for us it's never been really a focus, but there are ways though without planograms and without online to find the right metrics to analyze and measure on-shelf availability. We've taken the best-selling, let's say, 250 lines as a proxy. There we came to a number of about 86%. We haven't done the measurement on the complete estate, but given that normally people in stores will be quite focused on those lines, you would probably assume that the rest of the FMCG availability probably is even a bit worse than that. But let's assume it's 86% across the fleet. Then we believe there's still a significant upside to bring to best practice in terms of availability. 86 is the number that we know. It's for the best-selling lines. I could assume that actually it's probably a bit worse for the rest of the FMCG range in our stores.

Thank you. Thank you. We will now take the next question. And the next question comes from the line of Ben Hunt from Panmure. Please go ahead.

Good morning there. One thing you haven't touched on much in the presentation was your thoughts on the size of the estate and whether you've had any thoughts about the right size of that. And then the second question I have is just on the reduction of the skews. How should we think... How is this going to affect the top line versus bottom line dynamics? Are we going to see this effect come through lower items in baskets or is it going to be less footfall or lower frequency? Clearly, there's a trade-off between selling less and your addressable market. Any sort of color you can give or how you think that's going to come through?

First of all, size of the estate. We have a very focused allocation of capital and very disciplined. Every single store that we open has to be approved by Mike and myself. There's a very clear framework of hurdle rates that new sites need to basically hit before we actually approve. And there's also a post-mortem review of sites opened by cohorts to make sure that we've hit the right benchmarks with our execution and that we It needed to be changed model. We've got a very, very healthy estate. I've worked with very few retailers with so many positively contributing stores as BNM, so it's quite remarkable how healthy this estate is. We are still able, and we've done historically, of course, it's been a long-term ambition to go to 1,200 sites over time without a clear timeframe pinned to this. And I think that ambition, as you could have seen over the last five to ten years, the growth of B&M was a combination of opening our own stores, green fields, but also taking advantage of some retailers, let's say, exiting the market. And we believe the dynamic will continue over time. And so we are currently reviewing, again, the assessment of how many sites we could trade in a positive way. That work is underway. As I stand today, we have guided today that we still believe for this year a gross opening number of 40 to 45. I think the state currently today in the UK is very healthy, and we still believe there's significant opportunities to grow over time. We will confirm the longer-term number when we do our interims in November, but I don't see a need at this stage to change that assessment. to a large extent. So I think I basically guide towards that opportunity. Then in terms of reduction of SKUs, it's interesting. So my experience actually has been that less is more. So if you actually take out proliferation and you take out duplication of choice, actually customers actually buy more because it's an easier shop. And especially in a retailer like B&M where you are basically doing an FMCG Let's say we're a supporting function to the main supermarkets in a way. You know, you're here to stock up, you're here to buy a great deal for a great price or a unique line that you couldn't see in the supermarket. That function will only be better if we have less range because it's easier to shop. So my experience is that actually less range actually leads to better outcomes. And the other benefit, of course, with less range comes less complexity. So for our store teams, it's easier to execute store. For RDC, it's better to run their business And for our buying teams, they can actually buy at better cost. So I actually, my experience is less range actually drives higher sales. And it's visible first, of course, in ATV, sorry, average transaction value. And over time, clearly you will be able to get customers to come more frequently to you. So it will also be visible in more transactions. Great, many thanks.

Thank you. Your next question comes from the line of Manjari Dhar, From RBC, please go ahead.

Good morning. Thank you for taking my questions. I just had two, if I may. You've outlined a number of actions that you're taking in store, but I was just sort of wondering if you'd give some color on which of these actions you think will become most apparent to customers in stores first, and when you'd expect the full range to be visible and appreciated by the consumer. And then secondly, I just had a question on the leverage and a potential share buyback. How comfortable do you feel buying back shares with leverage above target at the moment? Thank you.

Yeah, I'll take the first one. Mike will take the second one. So on the customer side, Clearly, we would like our customers to notice, of course, all the improvements as soon as we implement them. But unfortunately, even though we are very passionate retailers, most customers are not that very focused when they walk into our store. So it will take multiple visits to our store before they really, really notice the changes. So there's always a bit of a lag. If you look at the four main drivers of our improvements, clearly price with actions. And we've got a very... rigorous focus every single week on our pricing to the most senior levels. So price is visible, but clearly will take a bit over time for customers to notice. And the moment we take out a bit more range and we merchandise more assertively and we've got better price communication on shelf, then clearly that will even have more effect. The availability will take a bit of time to flow through. We need to change the way of working for our teams. Promotions, that's the most visible part. If you walk into a B&M today, you won't see replication of core FMCG range, but you'll see the seasons being triggered now at our store. I think to answer your question, I think the longest time we would probably need to change and refocus our ranges across the whole shop. FMCG clearly is a more, let's say, core routine replenishment type of product, but JM is a seasonal buy, so we need a couple of seasons to address the whole store. And then clearly it will take some time for the customers to change their behavior. So we expect that the full benefits and the full effects of all of this will be visible in 12 to 18 months. But as I said before, the first impact is on pricing and promotion.

Yeah, and your second question, Manjari. Look, we're clearly not discussing capital allocation today. But we do, as you know, have a strong free cash flow generation. and a track record of returning that excess cash back to shareholders. The reason we're pursuing the change in domicile is that we do view share buybacks as being potentially an attractive use of capital. And the one to one and a half times range is something that we target at reaching at year end once we've traded through the golden quarter. And the half year position that we're reporting on today is always impacted by the timing of stock arriving into the business. So from our perspective, you know, I think it's too early to be having that conversation. Let us trade more of the golden quarter and we can then discuss in November and January. But, you know, going back to the fundamentals, to the fundamental strengths of this business, this is a business that has always been and we expect to continue to be strongly cash generative and we will use those cash returns to drive value for our shareholders.

Thank you. Thank you. Your next question comes from the line of Adam Cochrane from Deutsche Bank. Please go ahead.

Good morning. Thanks, guys. A couple of questions from me. In terms of the dynamics in the second quarter and your review of the business, do you think you're facing more of a footfall challenge or an average basket challenge? size or number of items per basket challenge at the moment?

The answer is very clearly it's an ATV basket challenge. Actually, if anything, our footfall numbers, so our transactions over the half actually have been stable, which is positive because in the end it is significantly, it's a sign of strength of the brand that customers still return to B&M but actually are buying a bit less from us and a bit less, I think as you know, Part of it is self-inflicted in GM, where we have basically, let's say, bought the lower-priced items. And part of it is also because we were not attractive enough in FMCG. But it's really a basket opportunity at the moment to drive a higher basket.

Secondly, in your analysis, have you worked out exactly why consumers are coming into store? In days of old, they came into B&M for that. the food, the FMCG, big brands, low prices. But given how much your general merchandise range has evolved, in my very anecdotal visits to B&M, it feels like more customers are going in for the general merchandise offer first. Is that something that you're seeing as well? Or do you think that customers are still going in for food?

That's correct. So actually, we're very light on customer insights. But the customer insights that I have seen, especially on motivations and drivers for people to come to B&M, the majority of customers now state that they come to B&M to buy general merchandise. That's correct. And I think that's actually a good starting position because I think there's very few physical retailers in the UK that have the breadth and the depth of our range in general merchandise at our price points. So it's a very strong position. And with the seasons, there's always a need and a reason to come to B&M, and actually we see the same thing in France. The opportunity, of course, is to strengthen our FMCG so that people will not only come to general merchandise, but also will come for FMCG. So I think in the end, you know, retail is a dynamic industry. I'm more than happy to accept the fact that people are now coming for RGM, because RGM is also, I think, stronger at the moment than FMCG. So there's a chance to strengthen FMCG, and as a consequence, strengthen our proposition for customers.

In terms of we've heard for a number of years how pricing was in the right place and now we're being told that it's not in the right place. So is this really just a matter of changing the way that you're looking at how you benchmark pricing on the per line basis rather than the per basket basis? And Mike, you've been there for a while and the trading team has been there for a while. What's driven the change in the way that you look at pricing?

So I think it's important to focus on how we can fix it. I think in the end I wasn't there in the past. So for me, there are three elements to price. And I think people always think that the price index is the only area to go for, but that's just one element of the price perception, because ultimately that's your goal as a retailer, to improve your price perception. It's the actual pricing, and if on a line-by-line basis on key items that you buy, we are more expensive, even though it's only 3, 4, 5p on an item, we are more expensive, period. That's really hurting your price perception with a group of customers that know the price of that item. Secondly, from a range perspective, key items with key value need to be merchandised dominantly. You don't have space in our stores to actually do this. And thirdly, then you have to communicate this consistency to customers. Now, in point two and three, were not done in recent years, and our index was strong, but our line-by-line comparison wasn't strong. It's those three items in tandem that actually drive a better price perception, and that's what we've started to rebuild.

Sorry, Adam, you asked me the question there as well. I think the only thing that I'd build on to Sherd's point in terms of what is different versus the past is certainly We do have a more granular insight on the lines that make up the basket and that is helped by the tools that we are using. So that is the one change that has been put in place and that makes it a far more transparent conversation internally. It's a good point.

I understood in the past the price collections were done by the buying teams themselves and they went out and we used Excel as a base. We're now using a third party provider and we've got a portal and we've got analytics to analyze the basket in a much more sophisticated way.

And lastly, thinking about your comment, the full sort of future profit margins are expected to stabilize at at least the FY26 out-turn level. Is this a step away from the 12% to 13% UK EBITDA margin that we hoped and effectively now the new base is 10% there or thereabouts looking forward?

That's exactly what it reads and what it says and what it's meant to communicate. Exactly. Spot on.

Brilliant. Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 1 and 1 on your telephone. We will now go to the next question. And your next question comes from the line of Jonathan Pritchard from Peel Hunt. Please go ahead.

Good morning. Two or three if I may. Just back on that health of the portfolio. The closure number was pretty high, 14 in the first half. Is that just timing or is that something slightly more fundamental? And do you feel that the stores might need a bit of bit of cash spent on them. Is there a bit of store-under investment from a capital perspective that you might see? A couple more. On the sort of investment into the P&L, obviously, we're talking about communicating the price position. Could we see a bit more marketing going on? And do we need more payroll, more staff density? Do we need more bodies in the stores to help on availability, to help on QLFs, lenders, et cetera? And then just really a one-word answer on ultimate ambition in France.

Yeah, there's quite a few questions there. So you're right to point out that in the half we have had an elevated number of closures versus our normal run rate. I think it's two factors here. I think it's timing of relocations with a more lack of openings in the second half. But also, like any other retailer, whenever a lease comes up for renewal and profitability, and again, this is in BNM exceptional, but when profitability is marginal, it's then the right decision to close the store instead of continuing a marginal store, and with our density of network, the sales of that store will then flow through existing stores in the area, and you have a better outcome in terms of profitability for the company. But I wouldn't point to any structural changes here, this is just what we have done in this half, and it's mainly influenced by timing. In terms of capital for stores, You know, we've got quite a young estate. Many of our stores have opened in the last 10 years. And it's a low fit-out cost. Clearly, you know, I've outlined that for phase two, we're also focusing on store experience. And we'll revisit that when we have a chance to update you in November. But I would say overall, you know, given that the average tenure is quite young for a retailer, I think our stores are pretty well invested at this stage. And then finally in terms of staff in stores, I think what I do see though, and of course you always have to challenge like any retailer is balancing the hours that you put in stores and the cost levels that you want to run your business on in terms of keeping prices low. That's always, let's say, a dilemma. I think we've managed this in B&M to a good level. That said, as I outlined, if I would compare ways of working and especially the use of technology or rather the lack of use of technology to support store teams and I think there's this for us opportunity to simplify ways of working in stores remove administration and paperwork so lovely at work which could free up hours in store and and I think ultimately the right thing to do for the business is not to bank those hours but to to reinvest in an even better execution so I think there's an opportunity to to reallocate hours from low value ads to value ads. And as you outlined, then it's better to spend time at the tills to shorten queues. It's better to work on our shelves and replenishment than to spend time in the back of the store in the office doing all kinds of paperwork. So that's very much in sight for the second phase. And then on France, I think not for today. That's why it was on phase three. Clearly, if you look at the performance of France in the quarter, we were really pleased with that performance in a very competitive market. But we would like to come back to the opportunity we see in France over time when we share the interim results on the 13th of November.

Okay, thanks a lot.

Thank you.

Thank you. Your next question comes from the line of Jeff Lowry from Redburn Atlantic. Please go ahead.

Yeah, good morning, team. Just one question, really. You've been helpfully explicit about your bottom line margin expectations. But if we think about the gross margin level, pre-COVID B&M was roughly 34% gross margin. Last year was roughly 37% gross margin. Which of those numbers do you think is closer to being right for your mix of sales going forward? Thank you.

Yeah, it's a 37% margin. That's the margin we feel comfortable with.

Despite the price investment that you're talking to today?

Yeah, so I think we shared at the first quarter that we had made the decision last year to buy for significantly lower price points and as a consequence also lower margin rates in our GM part of our business. That's why bought-in margin came out lower than the prior year. If you would look strategically at the BNM model, you would rather actually do the inverse. So the way the model clearly was built, is you have got a significantly lower margin in FMCG. And that margin, to an extent, is also dependent on the price competitiveness of what's happening in the supermarket part of the retail industry. And of course, we want to be 15% cheaper. So if they become more competitive, we react. And on the GM side, clearly, that's where you get a chance with trends and with great design and with our unique proposition to have higher margins. And normally, the combination of the two would lead to the 37. And I think we have had the last 12 months, unfortunately, didn't take a decision to reduce the GM margins. So that's why the mix wasn't where it needs to be. But we believe we can bring the mix back to that level and as a consequence, be sharp in FMCG and still offer great value for GM.

Yeah, and then look, I think just to expand on your question a bit more, if you go back and look at what has changed from pre-COVID levels, I think you're broadly right with the numbers that you're calling out. But what that doesn't address is the mix of products that were sold pre-COVID and the mix of products that are sold today. And we've grown stronger in certain categories. And as, you know, Chirds touched on earlier, customers are coming to us more as a GM destination. And clearly you see a different margin profile between the two sides of our business. And so, you know, some of that change is – Just reflecting the mix of the business, we've talked before about it being balanced between general merchandise and FMCG. That continues to be the picture today, but certainly it's that strength in the GM proposition in a number of those categories where we're very comfortable we've got the right pricing that gives us the confidence that the current gross margin is the right level.

Lovely. Thanks for the colour.

Thank you. As a reminder, if you wish to ask a question, please press star one and one on your telephone. We will now take the next question. And your next question comes from the line of Kate Calvert from Investec. Please go ahead.

Good morning, everyone. Two questions from me. The first question is on your ability to reduce the number of SKUs sort of near term. Can you impact the spring-summer buy or has that already been bought? And should we expect more material reduction to come through from the autumn-winter? And my second question is we've heard a lot about the fact the business didn't really have the right tools to measure performance properly. What other analytical tools are you missing which you need to run the business more efficiently? And should we expect IT investment and therefore depreciation to go up as a percentage of sales going forward? Thanks very much.

Yeah, so I'll take the first one, and Mike can talk to the second one. So in terms of the SKU reduction, clearly the performance of FMCG has been weakest. So our priority now is to make sure that we have the right SKU count in FMCG. And the timing there depends on making sure we use the right analysis, the right data to see where duplication is redundant and where we can actually take product out. Clearly, we also need to work through with our suppliers. There's grocery code if we want them to part ways with suppliers where we have a certain period of time where we need to, let's say, wind down our relationship. So there's practical but also analytical steps to take to make sure we got the right FMCG ranges. We're starting our first pilots end of the month. We'll then see what the impact will be and we'll take the learnings and then we have a program to execute this probably over the next six to 12 months in FMCG. The buys for spring, summer have been done. So clearly, that's why I mentioned it probably takes 18 months for the whole store to be done because we just missed that buy. And then as of every single buy now, the target for our buying teams is to reduce the number of lines compared to the year prior, and that's the way we then task them to buy deeper and take more volume per item. So that's why it will take for the complete store to be done in about 18 months. But the most important focus now, and I think also the biggest upside, is in rearranging and refocusing FMCG.

And I think your question in terms of analytical tools, I think you're right to say that there will need to be some additional spend to support the store processes. Likewise, though, this is a business that is very focused in terms of the technology that we introduce, and we do have discipline on any area of spend as a low-cost retailer. And so I think what we're really looking at here is targeted levels of spend that add to our IT costs. IT costs, generally speaking now, it's far more common to see software as a service, so it's as part of the OPEX spend rather than depreciation, Kate, and I'd expect that to be part of the picture, and that's very much built into our outlook for margins that we have discussed today.

And to add this, I think you could say that clearly our application of technology has not been leading edge, so we've probably been a bit behind the curve in terms of applying latest and greatest. I think that's now an advantage because, for example, with the replenishment opportunity in terms of availability, we're now, let's say, seriously evaluating the use of AI tools to help our store teams guide where the opportunities are in terms of missing items. These tools have become quite let's say, cost-effective, but will provide significant value. And if I compare it to full-bridge systems 10 years ago in retail, where you had to invest millions to get certain technology for stores, and now you basically can have a SaaS application, and AI will basically crunch your numbers and guide the store teams, and they all have these digital head terminals. So I think we're able now to actually take advantage of much more cost-effective tools that were not available 10 years ago, but we can now start applying, and that's what we're doing at B&M.

Great.

Thanks so much.

Thank you. There are currently no further questions. I will now hand the call back to Ted for closing remarks.

Yeah, I would like to thank you very much for your time and thanks very much for the questions. Clearly, you know, we have given our expectations for the year. Of course, the performance hasn't been where we'd like it to be. But I think you have heard today that we know where the issues are. We know where we've drifted. We know how to address them. That's the focus of the team. We're getting into our golden quarter. And if anything, I would like to encourage all of you to visit one of our stores because I can guarantee you we've got fantastic lines for Christmas. And trimming your tree and decorating your home will never be as good as if you've been to B&M. So thank you very much for your support. And I would like to thank you for your time. Thank you. Bye-bye.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.