NEXT plc

Good morning to everybody and welcome to the half year results. Thank you for being here and a special welcome to anybody who's here for the first time. It's certainly a pleasure for me to kick off the proceedings given that the next results continue to be very positive. The first half has been a strong period for the company with continued sales and profit growth. especially in the international area now this performance doesn't come by accident and it certainly reflects the hard work and courageous decision making of all our employees worldwide and I want to thank them and I'm going to leave all the details of what has happened in the first half to our chief executive so over to Simon all right thank you gentlemen morning everybody

total group sales up 9% full price sales up 7.7% the difference is not the subsidiary companies growing much faster next it's all about markdown last year we had a very small end of season sale because we exceeded our targets by significant amounts this year sale stock returned to more normal levels in terms of our expectations we thought we were going to be up 4% You can see that we exceeded those expectations in the UK and overseas, much more so in overseas, and I'll be talking about both of those in more detail as we go through. Profit up more than sales, up 10.5%, net interest significantly higher than last year. That's all about the fact that last year we had a lot of cash on deposit because we weren't able to buy back shares. This year we bought a lot of shares back at the beginning of the year which means we didn't get the interest income that we had this time last year. Profit margins snatched forward by 0.3%, profit after tax pretty much the same, no change in tax rate and earnings per share up to around 2% more than Underlying earnings, and that's as a result of the buybacks that we did very early on in the current financial year. Interim dividend, we're planning to increase in line with earnings per share up to 12.6% to 98p. Moving on to cash flow, and just to re-emphasise the cash flow and balance sheet I'm going to talk here, unlike the P&L and all the other numbers I'll talk about, this is done on a consolidated basis, so this is done on the basis that we own all of the subsidiaries, most of which we only partly own. so good cash flow from operations and profit 54 million capex up 44 million on last year as expected what you can see here we showed you this graph at the beginning of the year hasn't hasn't changed much the the big increase came in warehousing where we spent much more than last year and less on stores this time last year we spent a lot on thorough a new and a new concept store which we didn't have again this year In terms of capex going forward, we're expecting roughly the same amount of capital expenditure for the next three years. And at the end of last year's presentation, sorry, the presentation six months ago, we talked about how that corresponded to capital consumption pretty much in line with our 20-year average. In terms of working capital, working capital up pretty much in line with sales in the first half, which is what you expect because a lot of that is stock. Corporation tax. A bigger increase than you'd expect, it's gone up more than profits. That's all about timing. Because we pay tax on account and last year we were consistently increasing our profit expectations which means that our tax didn't quite keep up with the result that we delivered at the year end. Surplus cash down 26 million on last year, still 180 million of positive cash flow and the difference in this year and last year mainly about capex. This is where the big change came. Last year we were pretty much locked out of the market and we thought we'd take a slow and steady approach to buying back shares. This year when we had the opportunity we bought as many shares as we could so we've done 355 million of share buybacks in the first half. That means net cash outflow in the first half is 177 million. For the full year we're expecting that to reduce to around 100 million which is the amount we plan The cash outflow from the business that we're planning for the full year. All of that is funded by a planned increase in debt. And just to explain that in a bit more detail, we started the year with leverage at 0.6, 713. Now these numbers are, you know, where we target is fairly arbitrary, but we had targeted 0.63. The reason it was lower than our target was because we generated a lot more cash in January than we expected as a result of better sales. We aim this year to push that back up, the leverage back up to 0.63 which will push our year-end debt to 815 million and that accounts for 102 million net outflow. In terms of how we get there, we think we'll have a very strong operating cash flow income around 996 million cash inflow from operations, 245 million of capex, 319 million of ordinary dividends and and that leaves around 500 million to distribute of which we spent 355 million. 180 balance and we will either give back a special dividend and buybacks or some other form of capital distribution. In terms of our cash resources, we're very comfortable for cash resources. We started the year with 1.2 billion of cash resources and we have increased are RCF by 200 million and the lion's share of that increase or about half of it will be used in October to pay off the 2026 bond and that will leave us with 1.3 billion of resources and if you compare that to our peak cash requirements we've got about 300 million in the bedroom which we think is is comfortable we're having we have increased Our net debt partly to account for making sure that not only does Next have sensible amount of headroom, but so do all the subsidiaries that we lend money to that have headroom sufficient to get them through a blip as well. In terms of that debt, it is much more than balanced by the financial asset that is our customer receivables. So we've got about 1.36 billion of customer receivables, which is much more than our peak headroom and broadly equal to our cash resources. Moving on to the balance sheet. The balance sheet investments went down in value by 42 million. This is one wonderful piece of accounting where one of the reasons that the balance has gone down is because they've become more valuable. Amortization takes 19 million off. 10 million is because joint ventures have paid a dividend to us. And final thing, the provision for minority acquisition. This is because a lot of the minority shareholders and management teams have options to sell their shares in their business on a fixed multiple of profits back to next. Those options rest over the next four or five years across various different businesses. Because those businesses are doing much better than expected, we have to provide a higher number which has the ironic effect of reducing the value of the more valuable businesses that we want to buy. Our stock, up 5.8%, pretty much in line with our sales expectations for the second half. Custom receivables, up 2.5%. Now these are sort of the beginnings of an important story, which we're going to elaborate at the end of the year here. Because what you can see is that, unlike the last 10 years, our credit sales are beginning to grow much faster. So we would normally expect that number to be plus or minus 1 or 2%. Our credit sales are now growing at 6.8%. The reason it's growing so strongly is partly because we're offering a new product which is our Pay in 3 offer. Pay in 3 offer allows customers to, it's very similar to the Klarna type offer, allows customers to buy the goods and if they pay off in three instalments and pay it all on time, they pay no interest. If they don't pay those instalments on time, if they choose not to, they can do that, but they then incur interest on the balance that they haven't paid. Because those Pay in 3 accounts, by design, pay down much faster, It means that our credit, our receivables don't grow by as much as sales and we expect that to be a sort of continuing trend as we move forward. These balances are less overall debt and we think are likely to be, to incur less bad debt as well. So I think going forward you'll see credit sales rising faster than balances with perhaps some benefit on bad debt. I say perhaps, we've yet to prove that. Other debtors up 53 million. Our biggest number here is international aggregators. This is the fact that websites like Zalando, they sell our product, take a commission and then pass us the balancing proceeds a month later. That month, as we've grown so fast, that month that they owe us of net sales is growing, so that's a good thing. Cash in transit, I think I mentioned this last time, one of the very few accounting standard changes over the last 20 years that I can remember that makes a lot of sense and this is because we are no longer able to count the cash that we've taken on credit cards that we haven't yet received. We're no longer able to count that as our cash and that change on last year cost us 31 million and then the subsidiaries have been better at collecting in their debt as well. Creditors moving the opposite direction to what you'd expect. We'd expect creditors to go in line with sales. What's happened here is that the 53rd week put a large payment week into the first half that wasn't there last year. So that's all about the timing of payments rather than any underlying significant change in the creditor base. That leaves net debt 890 million all driven by the time and that increase is all driven pretty much by the timing of buybacks. In fact the 352 is only 3 million off what we spent on buybacks. Moving on to the detail of the business, and just to remind you, we're treating the UK online business separately from the international business because they have very different moving parts. Starting with UK online, UK online was up 7.4%, the total sales were up 8%, and what you'll see on all the online businesses is that the markdown sales grew faster than full price sales which didn't happen in retail and that was a conscious decision for us to push more of the changing balance of markdown into our online channel rather than retail. Full price sales accounted for 83 million of growth and just looking at how that breaks down between the different types of brands we sell on Next, see 14 million came from Next which grew at just 2.1% and wholly owned brands and licenses by a really strong 33.5% and I'll be saying more about that later and continued growth of our third-party branded business driven largely by better selection of existing brands rather than new brands. In terms of margin, margin up just 0.1% but a lot going on underneath the surface here. Balls in gross margin down 0.2% We've got two things pulling in opposite directions here. First of all the underlying bought in gross margin on next stock went up and we consciously did that in the UK to pay for inflationary wage costs and overseas change in prices which we'll see later on driving up margins to pay for increased fuel surcharges. But the underlying next product, half a percent up, the impact of mix and because we're growing our wobble business and third party business much faster than Next push net margins down because you make lower bought in gross margins on those and just to give you a flavour for the different net profitability of those three businesses in the UK Next makes around 21% net margins that's net margins after accounting for allocation of all fixed overheads so wobble lower than that 18% still very respectable but 3% lower and third party as you'd expect because we don't put the effort into building the brand we make lower margins on that at 12% and it was the growth of Wobble and third party that offset the growth in the underlying margin of Next. Markdown adverse movement we had more stock going into the end of season sale and our clearance rates online dropped a little bit against last year. Warehouse and distribution a significant gain here but again lots of different things going on wage inflation and fuel inflation between them adding 0.8% to costs we've got big productivity gains 0.6% on productivity and 0.3% leverage over fixed overheads and really you need to take the productivity and fixed overheads together because the fixed overheads include all the depreciation on the money we've been spending on mechanisation and both of those numbers put together are testament to the Efficiencies that we're now getting out of the mechanization and investment that we've made in our new Ansell 3 warehouse. And then returns and average selling prices meant that we handled fewer units to achieve the same sales and that pushed warehousing costs down by 0.5%. Again that's partly as a result of mix on the whole third party and wobble business is more expensive. the next branded stock but also it's that continued effort to weed out the high returning and low priced stock particularly within brands that pulls our profitability down. Getting leverage over technology and you can see that warehousing technology contributed 0.7 towards margin and then we pretty much spent all of that on marketing. I should stress But it's not that we build up a pot of money and then spend it on marketing, come whatever. The returns justify us spending that much money. But you can see in terms of the shape of the business, what you're getting to is a business that spends less on facilitating and serving the customer and more on telling the customer about the service. So a shift out of technology and warehousing into marketing. So longer term, I think that is a theme that you'll see continuing in the UK, but we'll see more strongly overseas. And just to remind you that the return per pound spent on marketing and the way we measure our marketing is we look at each campaign, measure what we think of the incremental sales, which is not an exact science. Look at the incremental profit on those incremental sales, depending on the mix of that particular campaign in terms of product mix and returns rates. and then compare it to what we spent. We have to make at least £1.50 of incremental profit before fixed overheads for every pound spent on marketing. And basically as long as we can do that, we'll spend as much as we can. Central costs, a big gain here. This is mainly about last year's exceptional performance leading to an exceptional staff incentive payments at the end of the year. So that normalises this year. Looking forward, if full price sales are up 5.2% in the UK online, we expect our margins to nudge forward by around 0.2%. A very similar story for the full year that we've had for the half. Moving on to international, this is a little bit more exciting. Full price sales up 24%, total sales including markdown up 26. That number really only tells half the story because the first quarter was adversely impacted by disruption in the Middle East. So you see the second quarter was much more exciting. Don't get too excited by that second quarter number because there was definitely, we could see this in the Middle East, there was definitely pent-up demand in the Middle East that contributed towards that 37%. So don't assume the underlying growth would have been 37, all things being equal. Full price sales were 133 million overseas. in terms of how that breaks down by region, lion's share of the growth, the 100 million coming from Europe which grew very strongly at 28% partly driven by the step change in our sales on Zalando as a result of the ZEOS integration. Middle East 14% but again you've seen an even bigger swing first quarter to second quarter in the Middle East. We've mentioned the United States for the first time we've never really talked about the US before because we've really had no traction we have a very small business in the United States but we have just managed to find this year we've really managed to find productive ways profitable ways of marketing the business and we're seeing very significant growth in the United States still small numbers nothing to get excited about today because the numbers are so small but it does bode well for the future of the business in the States Oh, I should say, actually, rest of the world, if you've got that 3% growth, that is two countries have pulled that back, and we're not sure why. Kazakhstan and Australia. If you know why those two businesses have underperformed, please let us know, because we're racking our brains. In terms of the breakdown between the different brands, what you can see here, much stronger showing from the next brand, up 16% overseas. Wobble, astonishing growth, 82%. Part of that is that we have put more options of our wobble brands on our overseas sites and customers are beginning to find them and get used to them. And the third party are very respectful as well. But much, much smaller overseas because most third parties will go to a local aggregator rather than to Next. Profit margin down 0.4%. and as with you know all businesses when you've got a bad number the good thing is to blame it all on one thing that you hope will go away so we'll start with that we think the Middle East conflict in the first half cost us 0.8% and that is the balance of the increased surcharges which would have cost us 1.3% and the price increases that we put through which because we wanted to see how the war would pan out before we put prices up We only managed to put prices up sort of half the season so that's why we didn't quite cover the cost or didn't cover the cost of those surcharges. As we move into the second half those things will balance out and the Middle East will be cost neutral and so is the conflict will be cost neutral because the price increases were put through. 14 gross margin up 0.4% The same but different story here. Underlying Next margin up 0.5%, impact of Mix not nearly as adverse as it was. And the reason for that in simple terms is because relatively we make a lot more margin on our Wobble brands overseas, where they appear to have much more pricing power than they do in the UK. Wobble brands make 20% compared to Next at 14%. Now you're looking at that and thinking, well, If wobble brands have grown by 82%, that should be pushing margin up, not marginally reducing it. The reason it doesn't is because there are two competing factors. Yes, wobble grew by more and it does make more margin than next, but last year it was at 24% net margins. And we consciously took the decision to lower prices to become more competitive in our wobble brands last year. So those two effects pretty much offset each other. Aggregator commission, we're getting better rates of commission from our partners. Warehousing, technology, central costs, I could go through all of those in detail but I would just be repeating the sorts of changes as the movements that we've had in the UK because the story is pretty much the same. And again all of those gains invested, more than all those gains invested in marketing at 1.5%. that leads to the overall margin movement of minus 0.4 and we think a very respectable margin for the business to make. Full year we anticipate margins around 15.1% flat on last year so that's because the price increases will pay for the surge in the second half in a way that they didn't in the first. In terms of customer base, some interesting things going on here. UK credit and cash For years you'll have looked at this and seen cash growing much faster than credit. The reason that that's changed is because of the Pay In 3 product I talked about earlier and some of that, the reason the cash number isn't up by more is because a lot of the credit customers will trade with us first on cash and then after they've transacted a few times will convert to Pay In 3. So that net reduces the cash customers. The total UK up 7% pretty much in Lima sales. international sales up 29% total excluding aggregators up 14% in terms of sales per customer there's no real story here other than the fact that there isn't a story is important because overseas given the level of growth we've had in sales you would expect to see our sales per customer moving backwards because new customers tend to spend less than established ones if you fill up with a lot of new customers that will push it The reason we think it hasn't is because of the increase in choice of product on the website, particularly the wobble brands, which we think have pushed sales per customer up. Moving on to retail, this is our new store in Bluewater. And you might be thinking, sort of, oh, here's another one of those. and you know physically it doesn't look the same but financially it's much much better because when you look at i know what a lot of you were thinking oh yes white elephant good joke um it's actually um the the economics of blue water still were much better than they were in thorough and this still will make a very healthy return on the capital that we invested in it's already open and delivering sales in ahead of our expectations in terms of space for the full year we expect space to grow by around 1.3 percent as a result of opening eight new stores and six of them are open and if we look at the six that we've opened and the forecasts that we've got since opening we think the internal rate of return on the investment will be around 30% so much healthier than the portfolio we opened last year retail sales down 0.4% full price down 1.7% we didn't put more stock into the end of season sale than retail not significantly but actually we did have better clearance rates New Space was 1.6% and like so it's minus 3.3. That number, although it's bad, isn't better than we're expecting. I know that's no consolation, but we're expecting it to be around minus 5. Margin up by 0.4%. It's a bit of a story here. Bought in gross margin. This was the planned increase in bought in gross margin to help pay for National Insurance and National Living Wage wage inflation. Markdown was flat, payroll effed up all of the gross margin gains and the increased costs of themselves would have eroded margin by 1% but lots of productivity measures that we've taken in our stores have contributed to around a 0.4% gain in productivity in shops. Store occupancy, the new space is more expensive than our existing space that's partly because on the whole it's slightly higher rent but mainly because none of its assets have been depreciated so that when we open a new store you've got full depreciation charge a lot of our existing stores have low or no depreciation charge and you can see the expenditure on depreciation on new stores is largely offset by the stores that are now fully depreciated which gives us a 0.5 gain in the opposite direction. Warehousing distribution Wage Inflation and Fuel but a relatively modest impact because warehouse and distributions are much smaller percentage of retail sales than it is of online sales. Technology costs, those are again here slightly higher than in online and I'd love to say that that was because we've had a big review of all of our tools and communications networks, it's not, it's really because we've rebalanced the allocation of stock between retail and online to get to make that allocation more accurate. So online gained about 0.1, retail 0.2. Between the two of them, it's about halfway between the two of them. Essential overhead, same story there about staff incentives. And that's what gives us our net margin movement at 0.4%. If we look forward to the full year, assuming that sales for the full year are down 0.9, our margins we think will come in at around 10.2, so just over 10%. if you would look at that 0.9% and think that I would look at it and go that looks ridiculously optimistic because it's much much better than the first half to give you some comfort on that if you look at the difference in quarter one and quarter two you can see that quarter one was where we took the big hit and this is because last year the summer came early so we got a big benefit in Q1 last year Q2 we had the same warm weather as last year but we also had the compressed disruption last year which we think benefited the stores. So we think if we take the Q2 number and throw it forward into H2 that is a sensible guess. But if you were to ask me what is the one number that you're most worried about is that number. I think that might be optimistic. Moving on to Total Platform. Total Platform has had a really good, the subsidiaries have had a really good half year Profits up 40%. You need to discount half of that 8 million growth because it was all about provisions that we took in the first half of last year but underlying profit growth in the subsidiaries of 18% and what we're finding is that the businesses that were doing well last year are doing better this year and the businesses that were doing badly last year or were struggling are doing much better and one in particular has gone from loss to profit this year. The services on Total Platform profit is up by 23%. That looks high, but it corresponds to the growth in our partners' online businesses, which is what we charge them for. In terms of the margin on our services, we make around just under 20% on what we charge our clients, which amounts to around 6% of their online sales. Looking forward to the year end we expect another 15 million of additional profit in the full year from our subsidiary set of businesses and if that comes through then the return on capital on all the investment we've made both in buying those businesses, funding them and also on the capex for the total platform is around 26%. So it's looking like a very good, as a portfolio it's been a very good investment. Moving on to full year guidance. These are the H1 numbers, 3.6% in the UK. We are anticipating H2 relative to our expectations. We have lowered our expectations for the UK and obviously part of my function at this meeting is to depress everyone a little bit. I've seen too many people smiling so I just want to explain why we are cautious about the UK and it's a combination of the fact that fuel inflation in particular but other forms of inflation as well look like they will begin to bite harder in the second half than they have done in the first and that's going to put pressure on the consumer and unlike past squeezes where government has been able to intervene we think that there is really no room for government to move in fact worse than that we think that they may have to The problem is going to be for them funding £100 billion deficit that they've got. And if you look at these three graphs, they kind of tell the whole story. Spending as a percentage of GDP has not been as high as it is today for the last 65 years, other than in the oil crisis, the financial crisis and Covid. So it doesn't look like there's a lot of room to increase spending. In terms of debt to GDP, we haven't seen debt levels in the UK this high since we were in the shadow of the Second World War. and tax as a percentage of GDP is higher than it has been for the whole of the last 65 years and we think that's important because again potentially unlike in the past we think any attempt to increase any taxes is likely to have some negative knock-on effect on the economy and we've gone into a little bit of detail about that in the in the tax so I think tax increases will be self-defeating if they're used to fund stimulus and if they used to fund a government deficit then they will place a further drag on growth and all those things put together mean that we think it's wise to trim our expectations for the second half. In terms of international, we were at 14%, we've gone to 20.5%. You might look at that and go oh well they're still being a bit cautious because they're up 24% in the first half and that was with the Middle East war. There is one factor that I need to remind you of, and that is that this time last year, as we went into the second half of the season, we got a huge boost in our aggregation business from Zalando. So aggregator business in the first half of last year was up 33%, in the second half that jumped to 61%. As we begin to annualise that number, that growth will begin to reverse that, and you'll see the beginnings of that as we move through the presentation. So that's why We are more optimistic about our international business, but not as optimistic as the numbers that we delivered in the first half. That gives us 6.7% for the full year. In terms of what that means in terms of profits, the growth in online sales we think will deliver £116 million worth of additional margin. We will lose, assuming we hit our targets, we'll lose 6 million from a slight decline in retail sales. That gives us 110 million. Add 15 million for subsidiaries. Then in terms of cost increases, there's lots going on here. And it's important, I think, to separate them out. So the £44 million increase in marketing, it's not... This is a wilful act of cost increase and we consider it to be an investment because all of that £44 million has a return attached to it. Not all of it will come in the current year. So obviously the customers who recruit this year, their second order and a lot of the profit is only made next year. Then true underlying inflation that we can't do anything about is around £70 million of fuel and wages. And then the higher interest costs are really about capital returns. We're paying high interest costs because we don't have the interest income from the money that we had on deposit this year, sorry last year, but this year we have given back to shareholders. In terms of cost savings, stroke margin gains, you can see 37 million of margin gains which go a long way towards paying for the wage inflation, lower employee incentives because last year was so high, and the warehouse and distribution efficiency is coming through at around 22 million and that number is that estimate is higher than it was at the beginning of the year that gives us about 1.255 billion of profit up 8.4% in terms of what that means for shareholder returns post-tax EPS we're expecting to be in the order up 10% and if we add dividend on top of that to look at TSR which is what we we ourselves measure as a measure of the total return to shareholders we think that will come in at around 12.6% which we think for you know old-fashioned sleepy retailers quite a good number but particularly exciting given that last year the equivalent number was more than 20% so we weren't expecting to live as strong returns this year so that's all I've got to say about numbers and guidance moving on to What is the more interesting but not necessarily interesting part of the presentation? I'm going to talk about two things. A little bit more insight into the numbers, in particular focus on our online customers, and then three areas of the business where we've got, we think, exciting things going on. I just want to share with you some of the things we're doing. In terms of the insight into our numbers, if you take the total 203 million of growth we've got, there's a brilliant page on page six which tells you pretty much everything you need to know about Next it gives you by product category and territory the growth of all of our businesses and the percentage of our business that each one of those segments provides when you look at that I think there are some things that need sort of calling out the first is that in the first half more than two-thirds of our growth came from non Next brands Wobble and Third Party when you break that down It's the Wobble that has performed best and that's really important because although they're non-Next brands, the Wobble brands are owned by Next. We buy the stock, even on licenses, although we pay a royalty, we own the stock, we develop it, we buy the stock, we take the stock risk. So when you look at the net margins of the Wobble business, and this is the net margins blend of overseas and UK, and compare the three businesses, you can see that Next is at 18.3, Wobble at 18.8, and Nonnext at 12. So I guess that whilst it might look worrying from a margin perspective that it's Nonnext brands that are growing the fastest, because the lion's share of that growth is delivered by brands that are owned by Next, it's actually good news for margin. Incidentally, we had a very exciting conversation about acronyms because we thought, you know, we've got Next-owned brands, which we thought we could call Novel. but I was banned from doing that so there we are, it's next owned brands. The Wobble brands have done exceptionally well and you might expect me to talk a lot about them, I'm not going to because for those of you who've had to sit through the last six of these presentations I've talked a great deal about Wobble brands and what we're doing to develop new licenses, new brands that are either starting or buying, creating an environment that is a brilliant place to incubate and build brands I've talked about their fashion price mix of the different brands and how we're trying to make sure that they don't compete, that they add something new to the next customer's wardrobe. So I'm not going to talk about that, but what I want to assure you is it doesn't mean that it isn't an area of the business that we're working really hard on. We still think there's lots and lots of opportunity to grow our wobble brands. Focusing, the other number that I think is the number that sort of sticks out is the next brand in the UK was down around seven million pounds but it was down and that number looks worrying because I think the question that it poses is well is there something fundamental about the next brand that is on the way. We don't think there is and in fact we think the next brand overall is in better shape than it was this time last year but that number does need some explanation in the UK. First thing to say is online obviously we were up but only slightly. That number of the 14 million increase needs to be taken in the context of the 70 million increase in the sales of non-next brands. We work very very hard to ensure that the brands we have are offering something different but inevitably there must be an overlap. So the fact that we've parked so many powerful competitors on next front lawn means that we think that some of you know the next wouldn't would have grown by more had those brands not been there so we think that two percent is not a fair reflection of how much better or worse the next brand is than last year and in retail um there this time last year we think that we've got a big gain from competitive disruption in the um second quarter and that obviously reverses out and if you look at the two year number for retail it's up around 2.3 percent for the next brand So we think, you know, taking those two things together, we think that we're not concerned about the next brand, particularly as when you look at the international business, the next brand is still growing very strongly, 16% delivering the lion's share of growth, well, more than half the growth overseas. If we just sort of break the overseas growth down into aggregators and next direct, what you can see here, I think straight away, is I think this is the first time for many years that we've reported the next direct business growing much faster than aggregator or not much faster growing as fast as the aggregator business and you can also see that aggregator business at 23 percent is lower than the 33 and 61 percent that we reported that we talked about for zeos in the second half so you can see that Our aggregator business, the growth there is beginning to moderate as we begin to annualise some of the gains that we made last year. Focusing on the next direct business and breaking that down into the sales that were driven by marketing and those that came naturally from underlying growth, 23% of our growth in the half came from marketing. And the surprising thing here is that having grown our spend by 63%, we haven't seen any erosion in the rates of return we're seeing on the advertising and they've nudged forward but we would expect those to move back not below the 150 but we'd expect them to be below last year's number and if there's one thing that is driving the exceptional growth of our overseas business it is the maintenance of these returns because we don't start with a fixed budget for marketing we spend as much as we can as long as we're getting the returns The things that we think are driving those returns are improving technology. This is not our technology, improved technology of the media partners we work with, the Googles and Netters of this world. Partly their better technology, better targeting of customers and partly us learning to use their technology more effectively. Secondly, and I can't understate the importance of this, all the work that we've done to improve the website functionality and delivery services serves to reinforce the marketing. If every customer who comes to our website through an advert has a higher probability of a sale because we've improved the functionality or the payment type or the way the basket works or the delivery service makes them more likely to come back, that marketing pound becomes more effective. So our websites and services have driven marketing growth. EU media costs have come down. We can't take the credit for this. This is all about the de minimis tax and £3 Levy in Europe which has dissuaded some of the companies who import very cheap stock at very low prices under the were important under the tax rate radar it has dissuaded them from spending as much on advertising in Europe and finally there were lots of countries where we had virtually no advertising last year so there was a virgin territory and we were able to spend more money in those in those territories without eroding overall margins and the final thing And again, I will stress this much more when I present this to my colleagues back at End of Day, but cost control and maintaining the right margins by getting our pricing right is absolutely central to delivering the profitability required to drive the marketing. All that sounds fantastic, but that doesn't mean that 1% number looks a bit anemic. It's not as bad as it looks. This is all about the war in the Middle East. The first quarter of underlying growth was down 8%, in the second quarter it was up 11%. The 11% isn't a good number because of the pent-up demand, but if we look at the last 15 weeks of trade, our underlying trade, the trade that isn't driven by marketing, was up around 8%. And that begs an interesting question about the nature of our overseas customers versus UK. What I'm going to talk about first of all on this is the customer spend. What this graph shows is for the UK, the spend by Kenya of customers. So customers who have been with us three years on average spend £203 a year. Those who have been with us for just a year spend £101. If we look at the shape of that maturity curve overseas, we were surprised to see that it was pretty much identical. A little bit lower. but it's pretty much identical and that is not what we thought we'd see we thought we would see far more occasional customers and that customers not coming back or extending their portfolio products overseas nearly as much as they had done in the UK and that number in fact is a little bit understated from the mathematical number because the Middle East takes so much per customer so these numbers are basically for all of our international customers excluding the Middle East the Middle East customers this line just shows what the Middle East customers spend per our customer and it's much much higher so if I'd included that it would have given an artificial view of what our international customer spending but underlying international customers seem to be behaving in a way that isn't dissimilar from our UK customers. We were, I said, surprised by that but all of you because you're so much cleverer won't be surprised because of course in the UK it doesn't mean that the next brand is as attractive overseas as it is in the UK because in the UK we've got schools and most of our online customers also spend in schools So it doesn't mean that the next brand will be as powerful overseas because we don't have the store sales. But it is nonetheless very encouraging for the economics and development of our online business. In terms of retention rates, again we were pleasantly surprised by this. We thought, these are the UK numbers, so if we have 100 customers in who we recruit this year, 35 of them will reorder next year. These numbers are sort of the normal numbers we'd see in an online world. if we look at the overseas numbers again remarkably similar we thought they'd be a lot lower because of we think stores both acting as collection and returns points and our credit offer would make the UK customers far more attentive than overseas customers the balancing factor is the amount we spend on marketing so in the UK we spend 3.8% on marketing and in effect overseas part of the 10% we spend on marketing isn't about just getting new customers, it's about doing the hard work that the stores are doing in the UK to retain customers. And all of that filters through into the economics of the two businesses. I should say on that, sorry, that if you look at the difference, part of that is paid for by Next by making lower margins overseas online than we do in the UK, and part of it is paid for by the customer by us making higher gross margins. We look at the three areas of focus, starting with product. Again, I've talked what many of you will consider to be, and certainly my colleagues consider to be, ad nauseam about newness, quality and choice driving our ranges forward. And I do think that we have made a step change over the last two or three years in terms of the newness in some of our ranges. What I want to talk about today is just some of the work that we've done on quality and choice because it could sound like this was just an act of will you know that oh yes the board say more newness and everyone rushes off and gets more news but it's much much harder than that in terms of giving customers real choice because it involves a whole load of work that if you don't do it you won't get the choice and quality that you would if you put the hard leg work into inspiration and I think again there's a bit of a myth here that people think well in an AI world all you've got to do is ask ChatGPT what the latest trends are and it will tell you. But of course all ChatGPT can do and all our numbers can do is tell us what has been. It can't get those flashes of inspiration that our buyers and designers get when they go on inspiration trips to overseas capitals, to fabric fairs in Shanghai, to new mills, to new suppliers. exhibitions, art galleries all of the things that give people that little spark of inspiration that actually you need a human being in our experience you need a human being to drive and you then need to spend the time designing it and again here I think there is a trap because when AI first came along people who you know I did actually sit down with one of our designers out next to me so he'd been to St Martin's College which he was saying oh look what I've got to do is put these prompts into AI and it generates these wonderful Graphic and that was exciting at first. What we found is those graphics didn't sell. It was pretty much universal. AI generated graphics didn't sell and the ones that, it seems to be going the other way. The graphics and stripes and designs that really work, the color balances are the ones that are down with human hand, human eye and so they have an emotional response and we're putting more time into the work we put into painting, drawing, screen printing, wood blocks. design shape design and finally you can get the inspiration in the design but you've then got to do the development to really elevate particularly fabrics and washes and dyes and that involves not going to the supplier and say can you give us a fabric that looks roughly like that involves going to the mill often long before you've decided what garment it's going to go into and develop fabrics with mills we're not doing that universally others do it more than us but it is something that the more we do it the better fabrics we get and it's not just about the base fabric it's also about the wash techniques and dyeing and spinning and yarn manufacture or materials that go into home the more we can do further upstream of the development does two things first of all it means we get better quality and secondly it means we're exposed to some of the new trends in materials that ultimately drive the trends in fashion all of that takes a huge amount of time and so whilst technology and warehousing, we have reduced their cost as a percentage of sales, actually in product we've increased product costs as a percentage of sales, partly to do this and partly to seed new wobble brands. So there are questions, is this just a question of us throwing more money at it or can we be cleverer? And we think there is a big pot of gold here basically and that is the amount of time that we spend are product teams. This is not an admin team in product. These are the product people themselves. The amount of time they spend on admin is around 25% of their time. And I checked with one of our product directors, you know, because the sort of O&M people came back and said, oh, it's 25%. And I went to one of our directors and said, is it really 25%? It can't be. And she actually said to me, no, no, it's more than that. And so the feeling is that it's actually taking more of their time. It's a bit like kids homework, things you really hate doing seem to take a lot longer than the things you enjoy doing. But nonetheless, those admin tasks are because there is more and more data that only the designer, the buyer, the merchandiser can put into the system, whether it be information that the fabric mills need, that regulators need, the imports team, export team, the whole management of data for the websites. If you don't put in that a feature of a garment, if the buyer doesn't tell you that this is a super soft touch, whatever it is, then when the customer searches for super soft, it won't appear in the search results. So buyers have to do far more in terms of managing website attributes, admin, and store planning, warehouse management. All of those things require an enormous amount of data and only the product people can do it. And our systems at Next, when we have new people come to Next, the product people say these are brilliant systems your systems do in an integrated way what other companies do with a whole load of spreadsheets that are sort of loosely held together and that's great but that integrated system is one that we haven't fundamentally changed since 2003 we've just added the amount of data people put into it and it works like a spreadsheet it's incredibly arduous and difficult to put in the data and it's slow so we're introducing three new product systems this year production management system this is production management this is where we have we our merchandisers need to check that when the mill says they're going to produce the fabric on the 14th of September they really have done that and there's an interesting lesson for life here in that if you don't ring them and say have you done it it will run late so you've got to do that you know the squeaky door gets the oil and at every step of the production process if we are not monitoring it and managing it step by step things run late so that's it's a very arduous task in the production management system which to a degree allows our suppliers to link in and tell us when they've done things rather than us have to chase them or save a lot of time got an online imagery and attribution system and a data entry system and the last one of those of all the systems at Next, that is the one that I get the most vociferous complaints about. You could argue that's because product people are naturally more vociferous than those who are prepared to take it in other parts of the business but it is a really important thing. We think those systems all together can save at least half the time that we're spending on admin and that is time that we can spend on doing the things that product people are employed to do which is produce brilliant product. In terms of productivity, The other area where we're getting good gains in productivity is our warehousing. We've talked about the £500 million that we are planning to spend on Ansell 3. We've spent about half of that so far and the good news is that is beginning to pay dividends in terms of costs. So we can see warehousing costs coming down as a percentage of sales and I should stress that this includes the cost of the depreciation and rent of the new warehouses so this is fully costed still coming down as a percentage of sales a lot of that growth but not all of it is driven by people productivity and what this shows is the pence per unit dispatched per customer the amount we spend on wages divided by the amount that we send to customers in a given month that varies month by month naturally that's what it was in 2024 what you can see is that when we introduced the new When we introduced new mechanisation last year, we got a big dividend and we thought that was it. The exciting thing is that partly as a result of fine-tuning the mechanisation, getting it working better, and partly as a result of a whole raft of things we've done to improve warehouse productivity, we're still seeing gains and I think there's further to go on that versus last year, I think that will continue, and part of that 7 million upgrade today are the gains that we've got from the sort of unexpected improvement in productivity in our warehouses. In terms of service level, there's a sort of good news, bad news story here. Good news is this is what we call NOTIF, not delivered in full and on time. This is potential parcels that aren't delivered on time and in full. I should stress this looks like a very bad number. This is the 2024 numbers. It looks like a very bad number. It's not as bad as it looks, because the vast majority of failures are parcels where we deliver four of the five items today, but one of them is late and is delivered tomorrow. So this is not, you know, we're not saying 10% of everything feels late to customers. It doesn't. 2025, when we, as we got the new mechanisation working and new capacity up and running, you can see that improved. Still off our target of below 6%. This year, We started really well, we were below our target of 6% for two months so we thought we were on to a winner here but as volumes began to increase and the warehouse began to run hot you can see that still better than last year but we have seen a significant uptick and what that is all about is it's about the glitches in the system and the mechanization. When you're not that busy you can rectify and correct in day when you're running up to the wire at volume you can't afford to have those glitches and errors and some of the mechanization failures and system errors that are corrected very quickly and we would tolerate in quiet times we cannot tolerate at busy times of year so we have got I think we've got a big job of work to do to go back and say actually we kind of we need to move towards a sort of zero tolerance approach to glitches and it's not enough just to say we fixed them we need to do much more root cause analysis we need to do much more volume testing to actually generate those errors in advance of them happening in simulation so that we can correct them before we happen and that's a big job of work for our systems team it is a lower job it won't be as burdensome as it was with the help of AI and that is my slightly clumsy segue into the next section. Last time we talked about AI across the board, about how all the different departments were developing AI. I just want to focus on what is by far the most exciting part of AI development in the group and that's how our technology team are developing AI. We started to introduce assistive AI that I get told off for this, but to me this looks a bit like a spell checker in a predictive text for coders. So this helps you write code, and we introduced that in 2024, and it did affect both our headcount and our cost as a percentage of sales. So we think that was very positive. What we're looking at now is how we deploy agentic AI. And whereas assistive AI does what it says it does, A Gentic AI really does the work. It actually does it. And when you see it, it is astonishing. The only comparison I can think of is that it's like the difference between a calculator and a spreadsheet. Obviously, you're all far, far too young to remember the first calculator. But I remember the first time, age seven, I saw a calculator. And I was awed by it because I could work out whether my parents had paid me the right amount of pocket money and all of those sorts of things and I thought that was wondrous until the spreadsheet came along and then you realise the calculator is like a toy and that's what agentic AI is compared to assistive AI and just to sort of put that in context of what we're doing about it this is our total development life cycle and a lot of businesses will use the same development life cycle it's called agile, starts with ideas and concepts, specification, coding and deployment and support and those are the stages you have to go through in terms of the people required to do that you have lots of different roles and they don't all do one that they overlap in terms of those elements of the total development life cycle that they look after and what we're doing is we are developing agents to sit alongside all of those roles and to do those functions and the people managing those functions will move from the doers to managing the agents doing the task. That is kind of the vision. There is a lot of work to do here and you can't buy an agent out of the box and stick it out and say, well, get on with it, do my business specification. You need to put in the time to give it the business context, the business rules, apply guardrails. Very importantly, apply security. I think at the moment that security is a big part of designing agents, you need to train the agents, you need to design them in such a way as that they're LLM independent so that they consist of, it doesn't matter whether they're using as a sort of underlying engine whether they're using Claude or ChatGPT or another provider of AI because if you don't do that you'll end up overpaying for the underlying AI and you need to ensure that they are cost effective in terms of the way that they use processing power. So where we are up to with this is we've developed and piloted three of the agents and we've begun to deploy those three agents across some areas in the business. In terms of the total plan, we anticipate that we will have piloted all of these agents by February next year and be well on the way to deploying them by June, July next year. Now, to me, when you talk about a systems project, normally it's measured in years, not months. So I was surprised at the speed with which the systems team came to me and said they can do this. But so far, we have managed to pilot and deploy agents much faster than I thought would have been possible. And just to sort of give you a sense of the power of these agents. some of our websites and some of our apps we don't have a share function and we've always looked at it and it's just been too expensive to develop and considered not worthwhile and traditionally in terms of development time it would have taken 11 days to develop using traditional coding with assistive AI we've got a good gain maybe between 10 and 20 percent it might have taken 10 days when we gave the specifications to a coding agent to write it took them 24 minutes and 29 seconds to do what one of our coders with assistive AI would have taken 10 days to deliver. That's sort of 10 working days. It took about half a day, obviously, to manage the agent and get the coding right and to make sure that, you know, to weed out the errors, but still a very dramatic reduction in time and a huge increase in productivity. There's a caveat here, because it's a bit like that sort of demonstration that works brilliantly, but then when you look at the whole thing, and this whole project ends when we only save 17% of the time and that was partly because we had to put a lot of effort into developing the agent as we went along and some of that will be reusable and partly because these agents will only really work really effectively when you stitch them all together and that makes it look like it's a sort of you know a rugby line with a ball being passed down actually because there are lots of functions where different agents have to talk to three other agents so the work to stitch these all together means that the huge gains that we think are possible will take time to deliver but we're targeting 30% improvement in productivity by February 28. Now you'll know that we spent 200 million on software so instantly you'll go back to your spreadsheets and type in 200 million that's 60 million saving, don't do that, partly because nearly half of the cost of what we spend on systems is infrastructure and software and obviously the cost of that with agentica will go up but also don't assume it's 35 million saving on people because if that were to be the case it would be a huge failure because the really exciting thing about this in the context of a company turning over 6 billion or 35 million I think the other point to make It's not just about speeding up projects we would have done. It's about doing projects that in the past just wouldn't have been conceivable. We have a mainframe that sits at the heart of all of our stock and price processing. It's an incredibly effective machine at doing huge amounts of data. in very short period of time. But the coding for it, I said in the report hundreds of thousands, I checked with hundreds of thousands of lines of code, but the person who knows about these things said actually it was millions, but I didn't want to put that because you'd think I was exaggerating. It's millions of lines of the code that have been built over time and desperately need to be modernised in order to speed up the Thank you for watching. and that we'll be able to do it in a modular way that allows the rest of the business to continue moving forward. That does beg the question, what are people going to do? I think as well as producing far more volume and developing ideas we wouldn't have been able to do before, I do think the nature of systems work is going to change. solving business problems, devising new applications, making the business aware of what this new technology can do, training and managing our agents, building new agents, maintaining the security of the system, integrating with third parties and controlling costs are going to be a big job of work. So my hope is that we don't see a big reduction in people. I think over time we will see less cost but the real prize is to generate more productivity. and more production. Just as a final note on costs, spent 200,000 last year on AI, 1.2 million this year, we'll spend at least 3 million next year and unless we design our agents very very rigorously to use cost carefully we could end up spending more on AI than we did on the original people, not quite, but we could end up spending a lot of that productivity then. So there is still a big job of work to do, albeit a very different type of job. And on that note, we're going to finish. I'm going to go to questions. I think the summary is, well, we haven't done what we often do, is go to every area of the business and say what we're doing. We've just picked three areas where we think there are really exciting projects, products, warehousing systems. What I want to show you is that Pretty much every area of the business has exciting projects. This is not the three things we're working on. These are three of the things we're working on. But what I hope they do is give you a flavour of the sort of depth of thought and energy that is going into different parts of the business to move it forward. And on that almost motivational note, I'll throw them to you. Remember to use the microphones, everybody.

Thanks, it's Anne Critchley from Berenberg. I wonder if you could talk, please, about input costs, so polyester, cotton, freight, and any sort of price increases that you might expect to put through for spring, summer, on the back of those. And then secondly, could you talk about your thoughts on whether it's more attractive at this moment to create new wobble brands organically or perhaps look for acquisition opportunities? Thank you.