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Interim 2008 HMV Group plc Earnings Conference Call - Final.

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OPERATOR: Thank you for standing by and welcome to the HMV interim results analyst conference call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. (Operator Instructions). I must advise you this conference is being recorded today, Thursday December 11, 2008.

I would now like to hand the conference over to your speaker today, Simon Fox. Please go ahead sir.

SIMON FOX, CHIEF EXECUTIVE, HMV GROUP: Thank you. Good morning everybody and welcome to the HMV Group interim results conference call. Today we're reporting on the Group's performance during the first half of the financial year, the 26 weeks ended October 25. In a moment, I'll be handing over to Neil who'll take you through the details of our financial performance by business for the first half. A number of slides accompany Neil's report so if you haven't yet downloaded them and you are in front of a PC, then these are available from the investor section of the hmvgroup.com website.

At the Group level, like-for-like sales for the first half were flat with a positive sales performance in HMV UK and Ireland and HMV International, offsetting the negative like-for-likes in Waterstone's. For the period as a whole, market share across all product categories was resilient.

We continued to make progress on our strategic initiatives during the half. HMV UK successfully launched pre-played games which we've called Re/Play. And uniquely our customers can trade in their pre-played games across our entire range of entertainment products. Overall, we've been very encouraged by our performance so far in pre-played games and I'm confident this will grow quickly into an important part of the HMV offer.

Trials of the HMV next generation store format are continuing and during the period we opened two new stores, including the 15,000 square foot store at Liverpool One and refitted a further six stores. After the end of the period, we also opened at the new Westfield Center in West London. HMV Canada opened seven new stores and refitted seven stores in this format. This will be our first Christmas trading a meaningful number of next generation stores, and so this will give us the learning we need to determine our plans for the future.

hmv.com launched its MP3 download offer in October, for the first time making our music downloads compatible with any music player including the iPod.

The HMV Pure loyalty card launched in two regions in October, and will be rolled out nationally to all stores and online in the second half. Waterstone's has 2.1 million members to its multi-channel loyalty scheme, just over a year following its launch, and cardholders are now driving a high number of in-store as well as online purchases.

We were also pleased to take the opportunity to enhance Waterstone's footprint in London by integrating into our estate eight former Books Etc., stores and as a Group we've been pleased with their performance.

With that, I'll now hand you over to Neil.

NEIL BRIGHT, FINANCE DIRECTOR, HMV GROUP: Thank you Simon and good morning. As Simon mentioned, slides are on the website which help summarize the first half results and which I'll talk to you now.

So starting with the financial highlights. Total sales were up 3.5% with flat like-for-likes. The operating loss increased by GBP1.3 million to GBP22.8 million, but this was more than offset by a GBP2.5 million reduction in the net interest charge. Overall therefore, the seasonal loss before tax decreased by GBP1.2 million to GBP27.5 million.

The interim dividend has been maintained at 1.8p. And net debt is up GBP27.2 million at GBP73.6 million. This reflects a combination of increased capital investment and also higher working capital which I'll take you through in more detail later.

So turning over to the next slide which is HMV UK and Ireland. Like-for-like sales grew by 1.6% against a very strong comparative with total sales up 6.1%. This reflected the continuing strong growth in online sales with like-for-like growth in the UK store portfolio partially offset by a disappointing performance in Ireland.

HMV UK and Ireland continues to gain or hold market share in all product categories. In music, which accounted for 30% of sales, we gained a further 1% volume share in a market which was down about 4%. While in DVD, which was 44% of sales in the period, the share was held in a market which grew by about 6% in volume although this was offset partially by about 4% deflation.

The games market continues to grow, up about 18%, and we achieved further market share gains. As a result, gains in technology grew to over 23% of sales in the first half.

Gross margin fell by 10 basis points with the underlying improvement in each product margin not quite offsetting the adverse mix effect of increased games and technology growth. And overall like-for-like operating costs increased by 2.7% in the first half, reflecting the continuation of the cost savings programs offset by some revenue investment in the first half across a number of these strategic initiatives, particularly the supply chain and pre-played games.

Turning to the next slide which is HMV International. Like-for-like sales grew by 1.7% in the first half with a 3.1% increase in Canada offset by declines in Hong Kong and Singapore of about just under 7%. At constant exchange rates, total sales grew by 5.1% compared to a 12.2% growth when we include the beneficial exchange rate effect.

HMV Canada successfully grew market share in both DVD and music and continued to expand its games and technology offer which more than doubled to 11.6% of sales during this period. The...