Carphone Warehouse 2009 Annual Report Download - page 10

6 The Carphone Warehouse Group PLC Annual Report 2009
Directors’ Report – Business Review
Chief Executive Officer’s Review – continued
Accessing the internet via
mobile phone is still a relatively
under used and limited activity.
How will customer expectations
drive innovation?
Q&A
Two of the innovative
handsets that allow
customers to access the
internet, almost anywhere
and at anytime.
Charles Dunstone, Chief Executive Officer
Our conversations with investors
generally revolve around just a few
key questions. These change over time
as our strategy and the marketplace
evolve, but currently these are the
main discussions we are having.
Q How are you responding to the
tough macro environment?
A While the economy has entered
what is for most of us uncharted territory,
I view it as much as an opportunity as
a threat. I take the view that in buoyant
markets, anyone can do well, and
innovators are easily copied. When
times are tougher, imaginative and
well-nanced businesses can put clear
water between themselves and their
competitors. So the business remains
committed to its growth avenues –
through the evolution of the existing
retail proposition, the launch of Big Box
consumer electronics stores, and the
expansion of our US franchise.
At the same time, you have to remember
that customers have two choices: rstly,
whether to spend their money or not;
and secondly, who to spend it with. As
a retailer, you have to give customers
a reason to part with their money, and
by offering outstanding value, exclusive
products and a unique new customer
proposition, we are growing our market
share. There is a cost to us in margin,
but as markets recover, our increased
market power will help us to rebuild
that over time.
In the broadband business, TalkTalk
is the clear value proposition in the
marketplace, focusing on simple,
transparent tariffs where customers
only pay for what they want. There are
signs of building momentum within this
business thanks to its outstanding value
and improving service and innovation.
Finally, all businesses need to protect
their bottom line. We have had to make
some difcult decisions as part of our
cost reduction exercise, and our goal
has been to offset further deterioration
in gross margin through a matching
reduction in operating costs.
Q How are you going to improve
cash generation?
A We have been disappointed by our
cash generation over the last couple
of years. There have been three main
reasons: an overspend on capex and
subscriber acquisition costs a couple of
years ago; working capital outow within
the retail business; and foreign currency
exposure in a weak Sterling environment.
We are now past the peak of investment
in our broadband network: capex has
fallen sharply this year and will fall a little
further next year, to a sustainably low
run-rate. At the same time, broadband
gross adds and churn are lower than
they have been historically, reducing the
overall cost of recruiting new customers.
On working capital, the way we earn
commission from networks automatically
creates a lag between payment to
handset suppliers and receipts from
network operators. This is well
understood by investors. However,
our terms vary between networks,
with the working capital of certain
partners being greater than others;
so our business mix over the last year
accentuated this trend. We expect a
more normal mix going forward, resulting
in a continued working capital outow
but at a much reduced rate.
Finally, we have closed out our Swiss
Franc hedging position, leaving our
currency exposure now just to the Euro,
where we hedge our Euro-denominated
trading assets. This should result in
much reduced volatility in our net
debt gures.