NEXT plc

good morning and welcome to the next plc half year presentation it is great to see all portions of our business moving forward in a positive way geographically the business in the uk both retail and online and our international business are all moving forward in a meaningful way here if you look at the data and from another viewpoint looking at our brands, our next brand, wholly owned brands, and third party brands are also very positive. While we're very pleased about our broad based growth, we maintain a balanced and cautious outlook for the future. Principally due to the external situation, both here in the UK, and around the world. in spite of what the external world may hold for us we believe that our strong management team balance sheet and financial position leave us very well positioned to withstand any external events before i turn over to simon i would like to publicly recognize the retirement of a very important long-serving and experienced executive her name is shona anderson And her final position at Next was both corporate secretary and corporate controller. Shona always seemed to wear at least two hats at Next. She was a great asset to the board and a great asset to the company. And I think she really embodied the culture of Next, very hardworking, very smart, willing to take the lead when necessary, but also worked very well in a team. to really meet our objectives. So Shona, many thanks, and I'm sure any board where you're an NED in the future will be very glad to have you. Simon?

Thank you very much, Shona. I didn't realise I was doubling up as a recruitment consultant as well. Excellent. Yes, thank you, Shona. So standing back from the numbers, really good first half, and I think the important thing to stress about these numbers is that there are there's news that is genuinely very good news and there's news that's not quite as good as it looks and the news that's very good news is the overseas sales there are it doesn't appear to us that there are any external tailwinds that are helping that business but in the uk we think the first half was definitely boosted mainly by the weather um this year was a particularly good summer last year was particularly poor and competitive disruption definitely helped us towards the back end of that half which is why we're not as optimistic for the second half as we have been or as our performance in the first half would indicate so moving on to those numbers total sales up 10.3% full price sales up just under 11% breaking that down in terms of uk uk up 7.6 percent online still ahead of retail but perhaps the most exciting or most surprising number here is the uk retail number and that is driven one percent of that comes from new space but the underlying strength we think is is down to the weather where weather seems to have a disproportionate effect on retail when particularly you get sudden changes people want the products immediately and overseas up 28 percent which was an unexpected but very good performance profit before tax up just under 14% tax rate pretty much in line with last year and as we expect it to be for the full year and then in terms of earnings per share earnings per share up 16.8% boosted by the share buybacks mainly by the share buybacks we did last at the end of last year in terms of the dividend 16 increase in the interim dividend we expect the full year dividend to be broadly to increase broadly in line with whatever we deliver in terms of eps in terms of the total dividend for the year in terms of cash flow and just to remind you all we talk about profit and loss and sales and when we talk about that for the group we we consult we report the percentage of the um businesses that we own so of the subsidiaries that we only report we own 70 of business will report 70 of their sales 70 of their profit in their cash flow and balance sheet um for reasons i don't quite understand it's impossible to get disaggregated according to our finance department so we'll show this on a fully consolidated basis and cash flow from profit 62 million in terms of capital expenditure up marginally on last year and a half just to reiterate where we are on capex 179 million which is pretty much what we expect expected to spend at the beginning of the year in terms of where the growth is coming from it's all coming from the increase in additional space it's not maintenance capex maintenance capex in the stores ran at 17 will run at about 17 million this year compared to 20 million last year and that's the sort of number that we would expect in terms of maintenance capex for the foreseeable future for the next few years in terms of the space expansion we mentioned at the beginning of the year Thurrock is a bit of a one-off it was it's the sort of first of a kind so we spent more on it than we would spend normally it's 19 million of that 54 million, and the only news here really is that having opened it, it's hitting its targets. But I wouldn't want you to look at the payback on this store and think that's what next targets are going forward. It is very much a one-off. In terms of the stores that we opened that weren't Zurich, they missed their target so far. They've missed their target by around 6%, 18% net branch contributions. they've beaten the internal hurdle that we set of 15% profitability but they missed the payback of 24 months and we expect them to miss the payback of 24 months and I think there is an important point to make here and that is that it's going to be much harder to open retail space in today's environment than it was 10 years ago and it's just worth spending a little bit of time explaining that if you look at what our stores were taking on average per square foot 10 years ago being around 300 pounds a square foot today on a like-for-like basis a store that was taking 300 pounds a square foot 10 years ago today would be taking about 30 percent less now as it transpires that's not as big a problem as it sounds because rents have come down on a like-for-like basis by pretty much the same amount so we've still got a profitable store portfolio the issue is the cash generated per square foot versus the cost of fitting it out so at let's say 25% cash contribution adding back depreciation of around 25% we were generating £75 a square foot but today that would generate £53 a square foot so if you look at the payback very simple basis is deteriorated not just because the cash per square foot has gone down but because the cost per square foot of fitting out shops has gone up significantly 32% in that interim period so what would have been a 22 month payback is today 42 month payback on a like-for-like basis now obviously actually our average pounds per square foot in the portfolio hasn't dropped by nearly as much as the like-for-likes and that's because generally we've opened smaller shops losing a little bit of potential in locations, but in order to boost the £2 effort to attempt to pay for the shop foot. Nonetheless, we haven't hit the 24-month payback. The question that we are asking ourselves that we haven't completely answered yet is looking at the portfolio that we've opened, 18% net branch contribution, 38% internal rate of return, um payback and that's based on the assumption that the stores declined by two percent like for like each year after opening um the question is would we today close those stores because they were performing like that and the answer is no and so what we need to do if if we are to continue to open space and there is a big if there we're going to have to look at we won't be able to do it at 24 months payback i don't think And I think the answer is to come up with different hurdles and to raise the hurdle, to reduce the risk of the shops by raising the profitability hurdle, entering where we can into turnover rent arrangements or total occupancy cost arrangements to de-risk shops. And I think in those circumstances, and only in those circumstances, we can afford to take a slightly longer payback. We're going to be thinking about, we haven't come to a sort of definitive set of hurdles, but I wanted to give you a sense as we move the goalposts, the direction in which we're moving the goalposts, if and when it happens. I think one of the important things that will feed into our consideration is what happens to wage costs and the outlook for our employment equal pay. Because if we think wages are going to continue to go up dramatically as a result of sales, then that will affect this decision also. And so that's new stores. In terms of working capital, 18 million less. This is mainly about the timing of payments for staff incentives. Actually, it's all about the payment we made last year in respect of the previous year's performance, which was a very good performance. In terms of repay the staff bonus or the employee bonus. in the financial year after it's been earned which is why you should get this tail out of that given this cash boost stocks up 35 million and we'll be talking more about that later so total surplus cash up 87 million on last year buybacks up 43 million this isn't because we've consciously slowed down our buyback program it's because for a lot of the last six months we've been locked out of the market got annoyed with them when i said locked out of the market in the rehearsal because it made it sound like somehow we weren't allowed to trade we were but we were above our internal um hurdle for price um it looks like you've very helpfully helped us with that today but um our intention will be to carry on buying back shares as and when we can um net cash flow up 141 million um moving on to the balance sheet investments appears to have come down by 17 million this is all about the amortization of brands on the balance sheet stock I need to talk a little bit about stock because our stock has gone up more than you would expect and in fact more than we expected and I need to explain that and actually in the next brand it's gone up by 16 percent just to explain that two years ago we were on around 20 weeks cover of stock that's the stock in the business and the stock on the water last year we increased our cover to account for the additional time the stock was going to be on the water which is about two and a bit weeks and because we were experiencing disruption in Bangladesh so we moved to 23 weeks we thought that was it this year we're on 26 weeks and the reason for that is because last year a huge amount of our stock still turned up late mainly as a result of factory disruption but also disruption in the world's um logistics uh the freight markets um and so this year um teams built embraced the decisions by and they ordered early and i would stress this is ordering early rather than ordering more stock um but we clearly overdid it in addition not only that but because capacity has come out of the global supply network it feels like that to us factories have actually been delivering early they've got a window of two weeks they can deliver early and actually freight times have taken slightly less than we have put into our um calculations so both of those good news in a way but it means we've got much more stock in the business in terms of end of season sale and the total amount of stock we bought we're not anticipating that our stock before the end of season will be any higher than the forecast we've got for um second half growth so we think end of season stock combined with any mid-season stock the total stock for mark down here we think will still be at or just below four percent i think it is also worth mentioning there is a slight upside risk here on on on the sales numbers by having so much stock this time last year as we ran into christmas those delays were definitely impacting some of the sales on some of the products that we were selling so there's a potential outside from having all that stock in the business in terms of customer receivables customer receivables this email our customers owe us on their mail order accounts so i'm going back in time there on their online accounts um actually credit sales to customers up 5.2 percent but we're continuing to see um customers paying down their balances slightly faster we think that's a very encouraging sign that means consumers our consumers at any rate are not feeling squeezed in terms of default rates they are the lowest levels that we've ever seen them at 2.3 percent and we're still conservatively covered in terms of provisions at 7.6 although we've released 10 million of provisions this year, and we did the same thing last year in the first half. We are still, I would argue, adequately, but not over-provided, for Baghdad. I said the over-provided stuff just for the benefit of our auditors that are in the room, and we have regular, interesting conversations about it. Other debtors, 56 million, that's two things going on. First of all, the growth in our aggregation business, aggregation business is largely on commission which means that the aggregator people like Zalando about you take the sales and a month later give us those sales less their commission so there's a month lag and that increases cash out by 20 million and about a year ago or just under a year ago we stopped doing the interest-free credit in our stores on furniture with Barclays and took it in-house and financed ourselves and that's what's sucking out that other 19 million

of cash.