DC..L Regulatory News (DC.)

Dixons Carphone plc

Interim Results for the 26 weeks ended 27th October 2018

H1 headline results as expected, strategy set, transformation underway

We Help Everyone Enjoy Amazing Technology

New vision and strategy launched

• Transformation plan underway to deliver a more valuable business

• Focusing on the core; two big growth opportunities in online and credit; revitalising our mobile business; and giving customers an easy experience

• Over 30,000 colleagues to become shareholders through new share awards, aligning business behind strategy

Results Summary

• Gained market share in electricals in all territories

• Group H1 like-for-like revenue(3) up 2%; Q2 like-for-like up 4%

• Group headline PBT(1) of £50 million (2017/18: £73 million)

• Statutory loss before tax of £440 million (2017/18: profit before tax of £54 million), including non-headline charges of £490 million (2017/18: £19 million), primarily relating to non-cash impairments, mainly goodwill(4)

• Free cash flow(5) of £116 million (2017/18: £174 million), with different working capital phasing year-on-year

• Net debt(6) of £274 million (2017/18: £206 million)

Financial Guidance(7)

• 2018/19 headline PBT guidance of around £300 million unchanged

• Transformation plan targeting:

o Market share gains and LFL sales growth

o Group EBIT margin improvement to at least 3.5%(8) over 5 years

o £200 million of identified gross cost savings available for reinvestment and margin progression

o Additional £200 million of capex over 3 years, to accelerate transformation, funded by working capital improvement

• Board committed to maintaining a strong balance sheet and investing in the colleague and customer experience to deliver long term shareholder value

o For 2018/19, dividend rebased to 3 times earnings cover; expected to grow dividends from this level

o Interim dividend 2.25p (2017/18: 3.5p)

• Expect to generate more than £1bn of free cash flow over 5 years

Alex Baldock, Group Chief Executive, said:

"We believe that Dixons Carphone is now on the path to sustainable success. We have set a clear long-term direction that will deliver more engaged colleagues, more satisfied customers and a more valuable business for shareholders.

We have powerful strengths, as a growing market leader with amazing people and capabilities no competitor can match. Our plan builds on those strengths. We're focusing on our core, and on four things that matter most: two big profitable growth opportunities in online and credit; revitalising our mobile business; and giving customers an easy experience. We'll deliver these through capable and committed colleagues, working in one joined-up business, with strong infrastructure.

We're underway and investing in all of these, including giving our colleagues at least £1,000 of shares, making every colleague a shareholder. We strongly believe aligning and energising the business behind our strategy in this way will benefit customers and shareholders.

There are headwinds and uncertainty facing any business serving the UK consumer, we've had our own challenges, and our plan will take time. But, with this plan, we can now see the way to unleashing the true potential of this business. We believe in our plan, are underway making early progress and determined to make it a lasting success."

H1 results summary

* - previously reported as combined UK & Ireland - see footnote 4

Quarterly revenue summary

Notes

(1) Headline results exclude amortisation of acquisition intangibles, significant reorganisation costs, significant impairments, businesses to be exited, property rationalisation costs, acquisition-related costs and other one-off, non-recurring items, net interest on defined benefit pension schemes and discontinued operations. Such excluded items are described as 'non-headline'. For further details see note 3 to the financial information. Comparatives have been restated following the classification of the honeybee operations as discontinued operations and are therefore included in non-headline results. For further details see note 13 of the financial information.

(2) ‌Change in local currency revenue reflects total revenues on a constant currency and period basis.

(3) ‌Like-for-like revenue is defined in the glossary on page 44

(4) During the period, the reportable segments of the Group have been changed and comparatives restated accordingly. The full year and half year restatements are detailed in note 2 to the financial information. As part of the strategic review, the Group has separated the previous UK & Ireland operating segment into the separate electricals and mobile operating segments. Given the challenges in the mobile market, and the corresponding change in the UK&I mobile performance in the period, the Group has changed the information presented to the Board to provide greater clarity over the relative performance of the two UK&I businesses and to support decisions related to the allocation of the Group's resources. This change has included the provision of separate financial information being provided in respect of the UK&I mobile and electricals segments. As a result of the change, the goodwill previously allocated to the UK & Ireland has been separated into UK & Ireland electricals and UK & Ireland mobile and an impairment review was then performed over the new segments. This identified a material non-cash impairment charge of £225 million recorded over the goodwill of the UK & Ireland mobile segment, together with impairment of related assets £113 million and additional onerous lease charges of £6 million to be recorded against individual stores.

(5) Free cash flow is defined in the glossary on page 46

(6) Net debt is defined in the glossary on page 46

(7) Dixons Carphone has in place substantial contingency plans to mitigate the expected operational disruption that could arise in the event of a 'hard Brexit'. However, all financial guidance is provided on the basis that there is no significant change in macroeconomic outlook.

(8) Excludes any changes in the revaluation of network receivables, the impact of which will continue to be separately disclosed.

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

Strategy update and medium term targets

Our strategy starts with the customer

We have developed a clear vision underpinned by strategic initiatives. We are building a sustainable business for the long term which will offer significant financial upside versus where we are today; with reinforced scale benefits; One Business with a simpler and lower cost infrastructure; and a profitable more cash generative mobile business.

This is a business with a significant opportunity. This opportunity starts with the customer and with what they think of technology. Customers find technology exciting, but also confusing and expensive. We know they value help to discover, choose, afford and enjoy technology throughout the life of their products. Using strengths that derive from our scale there is no one better placed than us to help them do this.

Our strategy starts around a clear vision:

"We Help Everyone Enjoy Amazing Technology"

The strategy to deliver our vision focuses on our core, and on four things that matter most: two big profitable growth opportunities in online and credit; revitalising our mobile business; and giving customers an easy experience. This will be delivered through three core enablers: capable and committed colleagues; working in one joined-up business and strong infrastructure.

Big four levers of value

Online

This is a big profitable growth opportunity, where we have strong foundations and headroom for growth. Improving our Online proposition is important because:

• Online accounts for more than 100% of the growth in the market (electricals and mobile)

• We are underweight versus the market online despite strong foundations to build on

We currently have an Online business that is taking share in the overall online market with revenue of over £1.5 billion per annum in the UK & Ireland. This makes us the largest retailer in the category delivering multi-channel technology at scale. With our online market share below that of our store share we see opportunities to narrow this gap over time.

We will use what we uniquely have to accelerate online. We intend to achieve this by:

• Giving customers access to a much larger range accessible through all channels

• Making it easier to find, buy, and get hold of amazing technology online

• Focus on smartphone first, the growth channel within online

• Drive crossover benefits across electricals and mobile via credit and services

Online performed strongly in the first half, with revenues up 12% year-on-year in the UK and Ireland. We are making good early progress on our initiatives, including a 30% increase in site speed, a faster and simpler checkout process and improvement in the delivery and contact centre customer experience.

Credit

Credit is another big profitable growth opportunity and the largest and fastest growing segment of services with strong demand in both electricals and mobile. Technology is expensive, particularly at the big-ticket end of the market where we are strongest; our credit makes it affordable, as well as giving customers reason to shop with us.

• Credit is valuable to us because it:

o Attracts a greater number of new customers

o Allows customers to buy at a higher average transaction value (ATV) and with greater frequency

o Increases customer retention

o Drives the adoption of other services

o Is profitable in its own right

o Is important for both electricals and mobile

We have strong foundations with customer-focused colleagues who are trained experts in credit. We understand responsible lending. This gives us an opportunity to build profitably on our existing proposition. Our current credit proposition, Your Plan, has grown since 2016 to over 700k active accounts with more than £440 million of credit revenues expected this year and over £2 billion of approved credit.

We are building on these strong foundations and have signed a new agreement with our established strategic partner, BNP Paribas, which gives us better economics and better breadth of offer, still without taking on credit or fraud risk. We see significant headroom for growth and expect to at least double credit adoption from the 8% of our sales today.

Easy Customer Experience

We are obsessed with making the customer end to end experience of shopping with us easier through purchase, set up, to delivery and installations, and to resolving queries and issues. We will build a reputation for consistency and reliability and give customers fewer reasons to shop elsewhere.

We will make it easier for customers to:

• Find and buy the right products, whether in store or online

• Get products how they want them - through improved delivery and collection

o We are underway with e.g. smarter routing and improvements to our Supply Chain

• Resolve queries through improved contact centre performance

o We are underway with improvements to answer rates and more joined up contact centres

We have a clear plan focusing on the services that matter most to customers and that make the most of our strengths and scale. We will help the customer to get the most out of their tech, throughout the life of the product through our services, from connect, protect, set-up, maintain and repair, to trade-in and upgrade. Work is underway strengthening what we already have. Services for us are a means of making our customer relationships stickier and more valuable.

Today our customer satisfaction scores (NPS) are not where we want them to be. We see significant opportunity to improve.

UK&I Mobile

Mobile is central to our vision. It is the most important category for us, it is our largest, and the most important product to customers and where we are still number one in the market. But it is loss making and we need to change that. Our challenges are well understood in the market, i.e. reduced handset volumes and mix changes, have resulted in declining share for us. And our profitability has been impacted by mix, contractual pressure and an inflexible cost base.

We are responding, with a clear plan to restore mobile to profitability and cash generation:

· Reset our relationships with network partners onto a more sustainable footing with increased choice, improved access to best tariffs and improved terms:

o We are making good progress here and secured all the connectivity we need to achieve our plan

o We have a new deal with 3 which will see our own network be more competitive and new deals with other network partners.

o We have secured connectivity, improved choice and access, with improved economics and significantly eased the burden of hard volume commitments

· Radically improved our offer to the customer with the widest choice of handsets, connectivity, ways to pay, accessories and services.

· We are completing the Dixons Carphone merger to become truly one business and realise the top and bottom line benefits of doing so:

o We will deliver a better joined up experience for colleagues, driving significant cost opportunities

o We will deliver a better joined up experience for customers between mobile and other categories and drive opportunities to cross sell via bundles and credit

o We have made good progress with operating model changes as we move closer to a single retail leadership, supported by combined online and commercial teams

o We will have a large, optimised and profitable store estate. We are well underway towards that having nearly completed the previously announced store programme

o As we implement our strong infrastructure programme we will integrate and move to a single modern IT stack, our single biggest cost prize

All this will take time but make sure we reinforce our leading position in the category and deliver a sustainable, profitable and cash generative business underpinned by working capital improvements.

Core enablers

Capable and Committed Colleagues

Capable and committed colleagues are our number one advantage. The best assisted selling to customers requires super-helpful colleagues. To deliver this we've increased investment in learning and development, creating customer-first training and will relaunch our Dixons Carphone Academy, equipping colleagues with the right tools for the job. To date there has already been a 25% increase in front line customer training hours.

Today, we are announcing the launch of a share ownership scheme which will see every permanent colleague with 12 months service granted at least £1,000 of shares each at over the next 3 years. By making every colleague a future shareholder we are energising our colleagues behind the vision and strategy in a way that will benefit customers and shareholders. The scheme is expected to cost c.£10 million per annum over the period with the shares vesting after 3 years.

One Business

As we move towards being one truly joined up business, this means:

• A joined up customer experience, so the customers get the full benefit of everything we have to offer

• A joined up business behind the scenes, realising the cost benefits of moving to One Business. We have firm plans across 10 areas, including IT, Supply Chain and central costs, to deliver £200 million of cost savings available for reinvestment, margin progression and to combat headwinds

Stronger Infrastructure

There is plenty of work ahead to upgrade our infrastructure to enable our transformation. In our Supply Chain we are focusing on building consistency and reliability to enable us to keep the promises we make to our customers. For example, we are investing in new Warehouse and Order Management systems and routing capabilities to improve right first-time delivery. As a result of this, we have already seen a 2% improvement in right first-time deliveries in the last six months, equating to a 30% reduction in missed deliveries year-on-year.

In IT we have plenty of work ahead to upgrade to an IT infrastructure that will enable our Transformation. We are:

• Focusing our spend in the areas that matter most across the big four levers of value; credit, online, easy, customer experience and mobile

• Infosec, to deliver a more secure experience for our customers

Most importantly, we are building in a way that will de-risk execution, led by a new IT leadership team, supported by new and improved partnerships. We are using vanilla, lower risk, proven solutions, minimising time, cost and risk.

We are underway with some early deliveries:

• Better kit and connectivity to frontline colleagues

• Stockless technology to extend the range

• Revionics tool - more trust in pricing

• Planning and forecasting systems for better product availability

International

We have a strong international business today, generating around 40% of the Group's profits this year and continuing to grow its market leading positions. First half results show good top and bottom line trajectory with strong management teams in place. The focus of our transformation today is on the UK & Ireland but we have a clear plan that is consistent with the UK but locally tailored. This includes growth opportunities in B2B, online, credit, an easy customer experience and focused on two growth categories, smart home and kitchen.

Financial Guidance

Our transformation is reshaping the business to be one which responds to how customers shop across all categories and to one which, over time, will deliver sustainable earnings growth with higher cash flows.

2018/19:

• No change to headline PBT guidance of around £300 million, despite an expected modest loss in mobile.

• As we commence the transformation we expect capex of c.£190 million. Given regulatory and data incident costs we now expect exceptional cash costs of £100 million (previous guidance of c.£30 million)

• Net debt, broadly flat year-on year

• All other guidance is unchanged

Medium term targets:

• We will continue to grow market share in the categories of technology retailing where we operate in the UK & Ireland, Nordics and Greece. This will lead to like-for-like sales growth

• UK mobile will go through a period of transition for 3 years, whilst we build new propositions, infrastructure, capability and combine mobile with other categories into One Business

• Group EBIT margin will grow to at least 3.5%(1) as we complete the transformation to One Business. Savings in operating costs of £200 million will be sufficient to more than offset the headwinds and to support investments in our customers' experience

• We believe that a steady state capex run rate of c.£175 million per annum is sufficient to maintain a well-invested business. Over the next 3 years we plan to invest an additional £200 million, weighted to the early years, to complete the merger and to create one modernised business with unified IT infrastructure

• The additional capex will be funded by a significant reduction in working capital

• With this plan, we expect to deliver more than £1 billion of cumulative free-cash flow(2) over the next 5 years

Capital Structure and allocation

We intend to maintain a strong balance sheet throughout this business transformation. We believe that net debt is at about the right level now.

We expect next year, FY20, to be the low point of cash flow generation, because the additional capex for transformation of £200m will be front-end loaded, whilst working capital reduction will take time to build.

We plan to increase pension fund contributions next year, following the next triennial valuation, in agreement with the trustees, to reduce the recovery period to less than the current 12 years.

We will revert to the previous policy of 3 times cover for dividend, which will lead to a reduction of approximately 40% in the dividend this year. This is intended to allow the dividend and the pension fund contributions to be at least covered by free cash flow, which we consider to be prudent.

Going forward, our cash flow will build and we will apply it according to the following priorities, to maximise long-term shareholder returns:

1. Invest to grow the core business

2. Pay and grow the ordinary dividend and fund the pension deficit recovery plan agreed with the trustees

3. Any appropriate strategic investment to enhance the core business

4. Any surplus available for distribution to shareholders

(1) Excludes any changes the revaluation of network receivables, the impact of which will continue to be separately disclosed.

(2) Free cash flow: see glossary for definition.

Investor and analyst presentation and webcast

There will be a management presentation for investors and analysts at the London Stock Exchange at 8:30 am (GMT) this morning. There will be a video webcast of the presentation, details of which can be found on our corporate website, www.dixonscarphone.com and there will be an accompanying conference call:

Dial-in details: +44(0) 20 3936 2999; passcode: 310100

Seven-day replay: +44(0) 20 3936 3001; passcode: 793333

Next announcement

The Group will publish its Christmas 2018/19 trading update on 22nd January 2019.

For further information

Performance review

The performance review below refers, unless otherwise stated, to headline information for continuing businesses. Statutory performance is discussed in the statutory results section below. The basis for the preparation of this information, including restatements due to businesses to be exited, discontinued operations and segmental classification, is described on page 2.

Group

Group revenue has increased 2% on a local currency basis, 2% on a like-for-like revenue basis and 1% on a reported currency basis to £4,893 million. This is primarily driven by strong performance in the UK&I electricals segment of 2% on a like-for-like basis, together with the Nordics region and Greece, reporting 3% and 11% like-for-like revenue growth respectively, with UK&I mobile like-for-like flat.

Headline EBIT has decreased to £61 million (2017/18: £82 million), largely driven by decreased EBIT of £28 million for UK & Ireland electricals, which is discussed below.

UK & Ireland electricals

Revenue increased by 2% to £1,997 million (2017/18: £1,953 million), with like-for-like revenue for the half year up 2%. This was driven by an increase in consumer electronics as well as strong gaming growth, including the successful rollout of gaming stations in 7 stores. Computing markets remained softer, against which we gained share.

Headline EBIT decreased £28 million year-on-year to £42 million (2017/18: £70 million) primarily in gross margin due to one-off credits in the prior year (including the systems reconciliation item previously disclosed) and in the current year, the shift in category mix away from computing as well as increased online penetration led to lower services attachment.

UK & Ireland mobile

Revenue decreased by 4% to £1,009 million (2017/18: £1,056 million) with like-for-like revenue for the half year flat. The reported decrease reflects the challenges in the 24 month postpay market in the period, partly offset by improvements in SIM Only and SIM Free categories. Like-for-like revenue grew 1% in Q2. Overall revenue was impacted by the closure of stores as announced in May 2018.

Gross margin has increased by 50 bps including the positive impact of 60bps resulting from network receivable revaluations year-on-year, partly offset by the continued challenging 24 month postpay market conditions.

Headline loss before interest and tax was £31 million (2017/18: loss of £36 million). This includes a negative revaluation of network receivables of £10 million (2017/18: negative revaluation of network receivables of £19 million offset by a positive £3 million relating to system reconciliation releases). This leads to a year-on-year positive impact on EBIT of £6 million relating to these one-off items.

Nordics

The first half has seen a strong performance in the Nordics with 4% local currency revenue growth. Reported revenue in the first half was up 1% to £1,675 million (2017/18: £1,666 million), the difference from local currency due to the strengthening in the Pound.

Like-for-like revenue grew by 3%, maintaining our leadership position with good growth in most categories particularly in telecoms and gaming, supported by strong online growth of 19%. This growth was particularly pleasing given the strong comparatives, with two year like-for-like up 12%, and was supported by further improvement in availability and customer satisfaction.

Gross margin improved c.20bps, with a more stable competitive environment, coupled with improved distribution cost efficiencies following the previously announced investments in the Jönköping distribution centre, as well as efficiencies resulting from the consolidation of brands in Norway, with the rebranding of Lefdal.

As a result, Nordics headline EBIT improved by £2 million to £44 million (2017/18: £42 million).

Greece

Greece has continued to grow strongly, with like-for-like revenue increasing 11%, local currency revenue increasing 11% and reported currency revenue increasing 11% to £212 million (2017/18: £191 million), with market share increasing across all categories. Gross margins remained stable, and reported EBIT of £6 million remained flat year-on-year (2017/18: £6 million) reflecting continued investment in core operations to support future growth.

Finance costs

Headline net finance costs have increased to £11 million (2017/18: £9 million) largely as a result of increased interest rates on the revolving credit facility. The non-headline costs of £6 million (2017/18: £8 million) relate to the interest on the UK defined benefit pension scheme.

Tax

The full year headline effective tax rate is expected to be 22%. The Group's headline effective rate of taxation applied to this period is 23%, due to the weighting of profits in the first half (2017/18: 24%). The rate is higher than the UK statutory rate of 19% due mainly to higher statutory rates in the Nordics and certain non-deductible items arising mainly in the UK.

Free cash flow

Free cash flow before restructuring in the first half was an inflow of £138 million (2017/18: £193 million), with the Group benefiting from a working capital inflow of £109 million (2017/18: £165 million). Working capital inflow is largely as a result of seasonality. The reduction in working capital benefit year-on-year is as a result of the timing of intake payments associated with product launches on extended payment terms with third parties of £61 million (see note 9 of the financial information).

Capital expenditure in the first half was £84 million, a reduction of £8 million compared to the prior period. The transformation programmes are now underway and expenditure in the second half of the year is anticipated to exceed that in 2017/18 recovering the shortfall seen in the first half.

Taxation paid has decreased from £30 million to £24 million due to overpayments in the prior year recovered in this year and the impact of reduced profitability.

Interest paid has increased primarily due to higher borrowing and increased interest rates following the LIBOR increase.

Restructuring costs comprise the cash costs associated with non-headline charges, including the strategic change programme, property rationalisation and the data incident as outlined in the non-headline section below.

A reconciliation of free cash flow to cash generated from operations is presented in note 9 to the financial information.

Funding

At 27 October 2018 the Group had net debt of £274 million (2017/18: £206 million). A reconciliation of net debt is presented in note 9 to the financial information. Free cash flow was an inflow of £116 million (2017/18: inflow of £174 million) for the reasons above.

Of the free cash flow, £90 million was returned to shareholders in the form of dividends for the 2017/18 financial year.

Acquisition and disposals primarily relates to consideration received for honeybee of £8 million, offset by £5m of additional payments for honeybee related costs and £3 million payment for warranties in relation to previously disposed operations in Portugal.

Pension contributions of £46 million are consistent with the prior period, and in line with the current agreement with the Trustees of the fund. Annual contributions are paid in full in the first half of the year.

Other items in both the current and prior periods relate to foreign exchange gains and losses on net debt.

Statutory results

Income statement - continuing operations

EBIT decreased from £71 million to a loss before interest and tax of £423 million predominantly reflecting the non-headline costs described below of £484 million (2017/18: £11 million) and decreased headline EBIT as discussed above.

Net finance costs remain in line with the prior year at £17 million.

The full year headline effective tax rate is expected to be 22%. The increased tax charge in the current year is primarily due to the tax provision of £46 million as outlined below, offset by additional tax credits due to the non-headline charges recorded.

The decrease in statutory basic EPS reflects the reduced profit after tax in the period, with no significant changes in the number of shares in issue.

Non-headline items

Statutory loss before tax of £440 million (H1 2017/18: profit before tax of £54 million) includes non-headline charges of £490 million (H1 2017/18: £19 million), of which £338 million relates to non-cash impairments. These charges are analysed below:

Acquisition / disposal related costs in the current year relate to amortisation of acquisition intangibles and the release of contingent consideration for a previous acquisition. Prior year costs relate to amortisation of acquisition intangibles, results of businesses to be exited and income received from previously disposed businesses.

Strategic change programmes relate to significant reorganisation, additional property rationalisation costs provided and costs to exit non-core businesses. Prior year costs include functional transformation costs and property rationalisation costs.

Data incident costs relate to costs associated with the data incident announced on 13 June 2018, Regulatory matters relates to an increase in pension liability as a result of Guaranteed Minimum Pension equalisation of £18 million, on-going employee related matters and other ongoing regulatory matters.

As part of the strategic review, the Group has separated the previous operating segment in the UK & Ireland into the separate electricals and mobile operating segments. Given the challenges in the mobile market, and the corresponding change in the UK&I mobile performance in the period, the Group has changed the information presented to the Board to provide greater clarity over the relative performance of the two UK&I businesses and to support decisions related to the allocation of the Group's resources. This change has included the provision of separate financial information being provided in respect of the UK&I mobile and electricals segments. As a result of the change, the goodwill previously allocated to the UK & Ireland has been separated into UK & Ireland electricals and UK & Ireland mobile and an impairment review was then performed over the new segments. This identified a material non-cash impairment charge of £225 million to be recorded over the goodwill of the UK & Ireland mobile segment, together with impairment of related assets £113 million and additional onerous lease charges of £6 million to be recorded against individual stores.

Net pension interest was £6 million (2017/18: £8 million) reflecting the charge incurred in relation to the Dixons Retail UK pension scheme. Further details on the pension scheme can be found in the Pensions section later in this performance review.

The tax charge of £8 million represents a tax credit on the above non-headline items of £38 million, offset by an additional tax provision of £46 million in relation to pre-merger legacy corporate transactions.

For further details of non-headline items see note 3 to the interim financial information.

Discontinued operations

On 4 May 2018, the Group agreed to sell the honeybee operations through an asset sale, which was completed on 31 May 2018. These operations were classified as a disposal group held for sale in the year ended 28 April 2018.

During the 26 weeks ended 27 October 2018, no profit or loss on disposal was recognised from the completion of the sale of the operations. Additional costs of £6 million have been recorded following the sale in relation to onerous contracts of £3 million and compensation to previous employees of £3 million.

Balance sheet

Goodwill has decreased by £206 million to £2,882 million largely as a result of impairment to UK & Ireland mobile goodwill.

The net working capital liability has increased by £195 million to £291 million, driven by increases in trade payables due to the timing of payments to suppliers, seasonal increase in inventory balances in readiness for peak trading, and an increase in provisions in the period as a result of the non-headline charges described above. Overall net debt has increased by £25 million as described in the cash flow section above.

Tax, pension and other liabilities have increased by £42 million driven by the increase in the UK defined benefit pension scheme of £44 million.

Cash flow statement

The statutory EBIT for the Group has decreased for the reasons discussed in the performance section above. The statutory EBIT includes the charges of £484 million relating to the 'non-headline' items. Depreciation and amortisation charges remained relatively consistent in the period. Working capital movements are due to the reasons described in the free cash flow section above, together with the movement of provisions recorded associated with the non-headline costs incurred and timing variances.

Other operating cash flows primarily relates to pension contributions and taxation cashflows.

Acquisition outflows of £1 million (2017/18: £3 million) relate to deferred consideration payments in the Nordics for the 'Epoq' kitchen business. Investment in joint venture of £3 million related to further contributions into the Sprint joint venture prior to disposal.

Other investing cash flows relate to proceeds on disposal of fixed assets, representing consideration for a property sold in the previous period and the consideration received for the honeybee assets (2017/18: proceeds received following the disposal of the Group's Spanish operations and the disposal of the Sprint joint venture in the period and additional consideration received in relation to prior period disposals). Other financing cash flows of £81 million primarily relate to the repayment and drawdown of cash under the revolving credit facilities.

Comprehensive income / changes in equity

Total equity for the Group has decreased from £3,196 million to £2,598 million driven by the statutory loss of £472 million in the period, the gain on retranslation of overseas operations of £19 million, dividend payments of £90 million and the decrease in the IAS19 defined benefit pension deficit for the UK pension scheme. This latter result reflects the change in discount and inflation rates in the period, giving an actuarial loss of £66 million.

Pensions

The IAS 19 accounting deficit of the defined benefit section of the UK pension scheme amounted to £514 million at 27 October 2018 (28 October 2017: £492 million, 28 April 2018: £470 million). Contributions during the period under the terms of the deficit reduction plan amounted to £46 million (H1 17/18: £46 million, FY 17/18: £46 million) reflecting the timing of contributions following the 2016 triennial valuation.

The deficit has increased during the first half largely as a result of changes in discount and inflation rate assumptions, together with an additional £18 million relating to increases for Guaranteed Minimum Pension equalisation as discussed in the non-headline section in note 3 of the financial information.

Dividends

The Board has declared an interim dividend of 2.25p per share. The ex-dividend date is 27 December 2018, with a record date of 28 December 2018 and an intended payment date of 25 January 2019.

Consolidated income statement

* Headline results exclude amortisation of acquisition intangibles, significant reorganisation costs, significant impairments, businesses to be exited, property rationalisation costs, acquisition-related costs and other one-off, non-recurring items, net interest on defined benefit pension schemes and discontinued operations. Such excluded items are described as 'non-headline' as discussed in note 3.

The headline and non-headline results have been restated for the 26 weeks ended 28 October 2017 to reflect the classification of the honeybee operations as discontinued as discussed in note 10 and note 13.

* Headline results exclude amortisation of acquisition intangibles, significant reorganisation costs, significant impairments, businesses to be exited, property rationalisation costs, acquisition-related costs and other one-off, non-recurring items, net interest on defined benefit pension schemes and discontinued operations. Such excluded items are described as 'non-headline' as discussed in note 3.

Consolidated statement of comprehensive income

Consolidated balance sheet

.

1 Accounting policies

a) Basis of preparation

The interim financial information for the 26 weeks ended 27 October 2018 was approved by the directors on 11 December 2018. The interim financial information, which is a condensed set of financial statements, has been prepared in accordance with the Listing Rules of the Financial Conduct Authority and International Accounting Standard 34 "Interim Financial Reporting" (IAS 34) as adopted by the European Union and has been prepared on the going concern basis as described further in the section on risks to achieving the Group's objectives.

The accounting policies adopted are those set out in the Group's Annual Report and Accounts for the year ended 28 April 2018 which were prepared in accordance with IFRS as adopted by the European Union, except for as disclosed in note 1b, where the impact of new accounting standards is detailed for IFRS 9 "Financial Instruments: Recognition and Measurement" and IFRS 15 "Revenue from contracts with customers". Additional amendments to standards and IFRIC interpretations which became applicable during the period were either not relevant or had no impact on the Group's net results or net assets.

The interim financial information uses definitions that are set out on pages 44 to 48 of this document.

The interim financial information is unaudited and does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006, but has been reviewed by the auditor. The financial information for the year ended 28 April 2018 does not constitute the Company's statutory accounts for that period but has been extracted from those accounts which have been filed with the Registrar of Companies and are also available on the Group's corporate website www.dixonscarphone.com. The auditor has reported on those accounts, their report was unqualified, did not draw attention to any matters by way of emphasis, and did not contain statements under Sections 498 (2) or (3) of the Companies Act 2006.

The Group's income statement and segmental analysis identify separately headline performance and non-headline items. Headline performance measures reflect adjustments to total performance measures. The directors consider 'headline' performance measures to be an informative additional measure of the ongoing trading performance of the Group and believe that these measures provide additional useful information for shareholders on the Group's performance and are consistent with how business performance is measured internally.

Headline results are stated before the results of discontinued operations or exited / to be exited businesses, amortisation of acquisition intangibles, acquisition related costs, any exceptional items considered so one-off and material that they distort underlying performance (such as significant reorganisation costs, impairment charges, property rationalisation costs and non-recurring charges) income from previously disposed operations and net pension interest costs. Businesses exited or to be exited are those which the Group has exited or committed to or commenced to exit through disposal or closure but do not meet the definition of discontinued operations as stipulated by IFRS and are material to the results and/or operations of the Group. 

A reconciliation of headline profit and losses to total profits and losses is shown in note 2, together with a description of the nature of the non-headline results recorded.

Items excluded from headline results can evolve from one financial year to the next depending on the nature of exceptional items or one-off type activities described above. Headline performance measures and non-headline performance measures may not be directly comparable with other similarly titled measures or 'adjusted' revenue or profit measures used by other companies.

The accounting policy for the use of these measures is outlined in the 'Alternative Performance Measures' section of the Glossary.

b) Impact of new standards

The Group has adopted IFRS 15: 'Revenue from Contracts with Customers' and IFRS 9: 'Financial Instruments: Recognition and Measurement' from 29 April 2018. Both standards have been applied using the modified retrospective approach.

IFRS 15: 'Revenue from Contracts with Customers'

The Group has adopted IFRS 15 using the cumulative effect method of initially applying IFRS 15 as an adjustment to the opening balance of equity at 29 April 2018. Therefore, comparative information has not been restated and continues to be reported under IAS 18 and IAS 11.

The majority of Group sales are for goods sold in store and online, where there is a single performance obligation and revenue is recognised at the point of sale or, where later, delivery to the end customer. There is no impact from the adoption of IFRS 15 on these sales, other than reclassification of returns provisions currently recorded within accruals in the balance sheet, to a gross expected return liability and asset.

For network commission revenue, there is no impact from the adoption of IFRS 15, and revenue continues to be recognised in a manner consistent with the current accounting policy as detailed in the 2017/18 Annual Report.

For certain other revenue streams, the adoption of IFRS 15 has had an impact on the timing of revenue recognition and the allocation of total transaction price between performance obligations based on relative standalone fair values. The revenue types affected, revised accounting policy and impact are disclosed below:

1 Accounting policies (continued)

b) Impact of new standards (continued)

· Customer support agreements - under IAS 18 revenue was recognised with reference to the stage of completion of the contract based on the contracted term or, for monthly contracts, our estimate of customer tenure, and the profile of total expected costs.

IFRS 15 introduces new requirements relating to the assessment of the contract length over which revenue is recognised, and recognition over time or at a point in time. Due to the cancellation options and customer refund clauses within the agreements, the term has been reassessed to be either monthly or a series of day to day contracts.

Revenue has therefore been recognised in full as each performance obligation is satisfied. For monthly agreements revenue has been recognised in full in the month to which payment relates. For arrangements assessed as being a series of day to day contracts revenue has been recognised on a 'straight-line' basis.

The impact of these changes has been a release of £24 million of deferred income recorded in the FY 2018/19 opening balance sheet for current contracts to reserves. This impact will unwind to the income statement over a 5 year period. The impact on the statement of comprehensive income in the six months ended 27 October 2018 has been a decrease in revenue and headline EBIT of £3 million in the UK&I electricals reportable segment.

· Commission from insurance products - The Group receives sales commission from the sale of third-party insurance products and for the provision of brokerage and other claims handling services on behalf of the insurance provider.

Under IAS 18, sales commission from the sale of these products is recognised when the insurance policies are sold, and revenue from the provision of administration services is recognised over the life of the relevant policies.

Under IFRS 15 the Group has re-assessed the standalone selling price of the commission and administration services provided, which has resulted in a reduction in the level of commission receivable recognised on the opening balance sheet of £18 million, to reallocate consideration from commission (recognised up front) to other services (recognised over time). This has led to an increase in reported Revenue and headline EBIT of £1 million in the six months ended 27 October 2018 in the UK&I mobile reportable segment.

In addition, a small impact has been identified in relation to the treatment of credit sales in the Greece reportable segment, which has resulted in a reallocation of £1m in the six months ended 28 October 2018 from revenue to finance income.

Classification of contract assets and contract liabilities

Under IFRS 15, assets and liabilities previously recognised as accrued income and deferred income have been reclassified as contract assets and contract liabilities respectively and have been presented under the trade and other receivables and trade and other payables categories in the consolidated balance sheet.

IFRS 9: 'Financial Instruments: Recognition and measurement'

As at 28 April 2018, financial assets were assessed for impairment using the IAS 39 incurred loss model. IFRS 9 requires financial assets to be assessed using the expected credit loss model. The Group applies the simplified model to recognise lifetime expected credit losses for its trade receivables and other receivables by making an accounting policy election. The application of the model has led to a change in the recognition of credit losses to bring forward the impact of future expected credit losses compared to the previous accounting policy. The financial assets affected by this change largely relate to credit receivables in Greece, franchise receivables in Nordics and Greece and the B2B businesses in the UK&I electricals operating segment. The network commission receivable in UK&I mobile is unaffected by the change. The overall impact has been a reduction in opening reserves of £2 million, with no impact on the statement of comprehensive income in the six months ended 27 October 2018.

IFRS 9 contains three classifications of financial assets, they are: measured at amortised cost, fair value through other comprehensive income (FVTOCI) and fair value through profit and loss (FVTPL). Guidance set out by IFRS 9 states that the business model of the entity which holds the financial asset and its contractual cash flow characteristics determine how the asset is classified. Categories of assets such held to maturity, loans and receivables and available for sale that applied under IAS 39 are no longer valid.

Under IFRS 9, equity investments are held at fair value including those that do not have a quoted price in an active market for an identical instrument. The adoption of IFRS 9 has not had a significant effect on the Group's accounting policies for financial liabilities.

Other than reclassifications, the adoption of IFRS 9 has not had led to any valuation changes or changes in treatments for financial assets or liabilities other than the impairment change described above.

All Group hedging relationships designated under IAS 39 at 28 April 2018 met the criteria for hedge accounting under IFRS 9 at 29 April 2018, and are therefore regarded as continuing hedging relationships.

The Group has taken advantage of the exemption allowing it not to restate comparative information for prior periods with respect to classification and measurement changes under IFRS 9. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are therefore recognised in retained earnings and reserves as at 1 January 2018.

1 Accounting policies (continued)

b) Impact of new standards (continued)

Impact on opening reserves and primary statements

The impact of the change on opening reserves is as follows:

Consolidated statement of comprehensive income

Consolidated balance sheet

1 Accounting policies (continued)

b) Impact of new standards (continued)

IFRS 16: 'Leases'

IFRS 16 'Leases' is applicable for periods beginning on or after 1 January 2019, and will therefore be applied by the Group in the 2019/20 financial year. IFRS 16 will require the Group to recognise a lease liability and a right-of-use asset for most of those leases previously treated as operating leases. This will have a material effect on both non-current and current liabilities, fixed assets and the measurement and disclosure of expense associated with the leases which under the new standard will be treated as depreciation and financing expense which were previously recognised as operating expenses over the term of the lease.

The adoption of the standard will materially increase total assets, as leased assets will be recognised on balance sheet, primarily relating to our trading store portfolio. There will also be a material increase in liabilities in relation to these committed leases. Lease expenditure will be reclassified and split from the current presentation in operating expenditure to depreciation and interest costs. This will result in a change to the profile of the net charge taken to the income statement over the period of the lease.

The Group intends to apply the modified retrospective approach on transition. A project continues across the Group to finalise the overall impact of the standard. Given the complexities of the standard, and the sensitivities to key assumptions, it is not yet practicable to provide a full estimate of the impact.

2 Segmental analysis

The Group's operating segments reflect the segments routinely reviewed by the Board and which are used to manage performance and allocate resources. This information is predominantly based on geographical areas which are either managed separately or have similar trading characteristics such that they can be aggregated together into one segment.

Changes to operating segments

During the period, the operating and reporting segments of the Group have changed, and reflect the updated segments reported to the Board, who are considered the Chief Operating Decision Maker under IFRS 8 "Operating Segments". The previously disclosed UK & Ireland segment has been separated into UK & Ireland electricals and UK & Ireland mobile. Given the challenges in the mobile market, and the corresponding change in the UK&I mobile performance in the period, the Group has changed the information presented to the Board to provide greater clarity over the relative performance of the two UK&I businesses and to support decisions related to the allocation of the Group's resources. This change has included the provision of separate financial information being provided in respect of the UK&I mobile and electricals segments. The UK & Ireland electricals operating segment consists of the CurrysPCWorld and Dixons Travel businesses, and the UK & Ireland mobile segment relates to the Carphone Warehouse, iD mobile and Simplify Digital businesses and the Connected World Services B2B operations.

In addition, as disclosed in the Annual Report and Accounts for the year ended 28 April 2018, following the classification of the results of the honeybee segment as discontinued operations, these are no longer presented as a separate operating segment.

The restatement of comparative information for these segments has been set out in part (b) of this note.

Discontinued operations are excluded from this segmental analysis. Results are reviewed by the Board on a headline basis by segment.

The Group's operating and reportable segments have therefore been identified as follows:

• UK & Ireland electricals comprises operations of CurrysPCWorld and the Dixons Travel business.

• UK & Ireland mobile comprises the Carphone Warehouse, iD Mobile and Simplify Digital businesses and the Connected World Services B2B operations.

• Nordics operates in Norway, Sweden, Finland, Denmark and Iceland.

• Greece, consisting of our ongoing operations in Greece and for non-headline items, our previously disposed operations in Southern Europe.

Non-headline results are allocated to each reportable segment. Where these relate to businesses to be exited or income or expense from previously disposed operations, they are allocated where practicable to the region in which the operation was originally held.

UK & Ireland electricals, UK & Ireland mobile, Nordics and Greece are involved in the sale of consumer electronics and mobile technology products and services, primarily through stores or online channels.

Transactions between segments are on an arm's length basis.

2 Segmental analysis (continued)

(a) Segmental results

Reconciliation of headline profit to total profit

Reconciliation of headline profit to total profit

2 Segmental analysis (continued)

(a) Segmental results (continued)

Reconciliation of headline profit to total profit

* - Headline results and total profit/(loss) have been restated to exclude the results of the honeybee operations which have been classified as discontinued operations, and comparatives have been restated accordingly as discussed in note 13.

 (b) Restatement of segmental information

As discussed above, during the period the Group's reportable segments have been changed, and comparatives have been restated accordingly. The below tables provide reconciliations for the headline revenue and headline EBIT for the year ended 28 April 2018 and 26 weeks ended 28 October 2017. The adjustment relevant for both periods are the reallocation of UK & Ireland results between the UK & Ireland electricals and UK & Ireland mobile segments.

The restated comparatives for the 26 weeks ended 28 October 2017 have also been adjusted to remove the iD Mobile Ireland and Sprint Joint Venture results which were previously treated as 'non-headline' as set out in note 3.

26 weeks ended 28 October 2017

2 Segmental analysis (continued)

(b) Restatement of segmental information (continued)

Year ended 28 April 2018

(c) Seasonality

The Group's business is highly seasonal, with a substantial proportion of its revenue and EBIT generated during its third quarter, which includes Black Friday and the Christmas and New Year season.

2 Segmental analysis (continued)

(d) Other geographic information

* Non-current assets above exclude financial assets, deferred tax assets and assets related to discontinued operations.

(e) Disaggregation of revenues

26 weeks ended 27 October 2018

26 weeks ended 28 October 2017

3 Non-headline items