Marks and Spencer Group plc

Good morning all and welcome to the M&S full year of results presentation. Firstly and most importantly, I hope you and your families are well. Here today with me are Archie Norman, our chairman, and David Sado, our interim CFO. If you're listening on Wednesday, the 20th of May, there will be a Q&A conference call at 9.30am for analysts and investors and a media call at 11 o'clock. And the eagle-eyed amongst you will have seen the details of this on this morning's results release. The presentation has three parts to it. David and I will talk you through the results for last year. I will then talk about our response to the COVID-19 pandemic, managing effectively through the crisis with the help of our phenomenal colleagues and securing the future of the business through decisive action. And finally, I will talk about how we are using the lessons of the crisis to accelerate the transformation of M&S. To start, an overview of our performance last year. As you will already have seen, we reported adjusted profit this morning of $403 million, which included an estimated adverse impact on trading of around $52 million for the pandemic in March. Prior to this, 2019-20 was a year of substantial progress against the transformation plans. We completed the investment in Ocado Retail, which will accelerate growth in food and is now more relevant and strategically valuable than ever before. Food consistently outperformed the market. And in clothing, we began to see the green shoots of resetting the business in half two. The work we've done to engineer the basic infrastructure of the business has helped us respond to the crisis in a more agile way. And we've been reflecting the accountable business model. We've shifted to segmental reporting of food, clothing at home and international. The results illustrate the strength and flexibility of having combined operations under one M&S brand, which has never been more important. Looking in more detail at the food business, volume grew ahead of the market and performance accelerated throughout the year. It was a year of real progress and demonstrates the strength of our strategy. 18 months ago, we began the move to trusted value by halving promotions and investing in price and broadening the appeal of M&S food through a new program of innovation supported by family-focused marketing. In the past year, we have taken some major steps towards our ambition of doubling the size of the M&S food business. We've opened five test and learn stores, which showcase the full range in an engaging, innovative and modern retail format. We've been rolling out Project Vanguard to 90 stores in the second half, which ultimately aims to unlock more productive stores through changes to processes in our supply chain. And of course, we've been completing the transformational investment in Ocado Retail, for which we are reporting a first time contribution this morning. In clothing and home it was, and please do forgive the pun, a year of two distinct halves. Following availability issues in H1, we implemented a number of actions to drive improved availability performance in H2. And these included reducing the options in H2 by over 11%, focusing on hero categories such as denim, knitwear and lingerie, and these were supported by even more relevant marketing campaigns. We continued to drive full price sales throughout and had shorter, sharper approaches to clearance sales. And we introduced fixes to search and had a later cutoff for delivery at mns.com. And as you can see, we began to see the benefits of this on trading prior to the effects of COVID-19 in March. In international, we have shifted from an owned model to one that is largely a franchise and JV operation. In the past year, we're focused on localizing our offer and range through investment in lower pricing and product design specifically for the local marketplace. We've been modernizing the store environment across more than 70% of the estate. And as you can see on the chart, franchise shipments began to improve in half too, again, prior to the effects of COVID in March. We've also started to make strong progress in developing the online proposition for the international business. I'm now going to hand over to David, who will take you through the financials.

Thanks, Steve. Good morning, everyone. I'm now going to take you through the financial results for the year, which is a reminder, consistence with the half year are now reported under IFRS 16. Sales were slightly down at 10.2 billion and group adjusted profits reduced by 21%. there was an adverse impact to our adjusted profit of around £52 million in March compared to estimate that we largely attribute to COVID-19. Statutory profits were down 20%. We have recognised 213 million of COVID-specific adjusted items, which I will explain shortly, and we therefore estimate the total impact of COVID-19 to be £265 million. The effective tax rate was 20.7%, which was slightly lower than expected. We generated over £200 million of free cash flow and our net debt included leases reduced 1.2% on last year. As previously announced, we will not be paying a final dividend for the last financial year. During the year, we undertook a full review of the way operating costs are allocated between the businesses, and we are now reporting the full P&L down to operating profit for each of our three segments – food, clothing and home, and international. This allows the financial information to align with the way the business is managed and holds leadership appropriately to account. Firstly, food performance. Sales were up 2.1% with our strategy to lower prices, remove promotions and broaden appeal, improving volume growth through the year. Operating margin increased by 30 bps. Within this, gross margin decreased more than we expected as continued investment in price and inflation were not fully offset by cost savings and a reduction in promotions. Operating costs reduced both in absolute terms and as a percentage of sales. As we made good progress in our £350 million cost saving programme, efficiencies in store staffing and in other store costs more than offset the pay review and cost inflation. Central costs reduced due to lower depreciation as previous investments reached the end of their life and there was a one-off system write-off last year. Distribution costs increased largely due to cost inflation. We estimate that the increased demand pre-lockdown in March benefited food adjusting operating profit by approximately £4 million. In clothing and home, sales were heavily impacted by COVID-19 in March. After a disappointing first half, we saw improved sales both in store and online, supported by rationalisation of ranges, better availability and growth in key categories. Gross margin was down more than planned as a result of sourcing headwinds in labour and raw materials and the adverse impact of higher than expected promotional sales and shorter clearance periods. Despite all categories of operating costs reducing year-on-year, lower depreciation and cost efficiencies in store staffing and our move to a single-tier network, these were not sufficient to offset the fall in like-for-like sales and inflation and therefore caused a decline to operating margin. Re-estimate that the significant drop in demand and the shutdown of clothing and home store operations post-lockdown negatively impacted March adjusted operating profit by approximately £44 million. Turning to international, both sales and operating profit declined. We estimate adverse effect on March operating profit of 12 million, largely related to COVID-19. In our owned business, the full year sales decline was driven by Ireland, partially offset by 17 new store openings in India. These new stores, however, came with opening costs which impacted profit. The franchise operating profit was impacted by our strategic investment in lower prices and ongoing efficiency initiatives by key partners, leading to destocking as well as the effects of the political disruption in Hong Kong. Now looking at the profit bridge. As we have seen, the increase in food operating profit was more than offset by clothing and home and international declines. Within other, M&S bank income declined by 10 million, predominantly as a result of bad debt provisions taken at the year end, reflecting the higher risk of customer default. Offsetting bank within the other bar is 2.6 million pounds of our share of the Ocado retail profit. As a reminder, that is for the period from acquisition to the end of February. The interest cost benefit largely reflects a hedge unwinding and lower lease interest with other factors such as our new bond issue and cash proceeds from the rights issue offsetting each other. Within this year's adjusted items, we have recognised a charge of £213 million relating to the COVID pandemic. This includes a charge for stock provisioning to write down items which are unlikely to be saleable when stores reopen or will be cleared below cost and for stock that will be hibernated. In addition, there is an incremental charge to the impairments of stores and goodwill recognised using our COVID-19 scenario cash flows. Turning to the net debt bridge. As a reminder, under IFRS 16, there are a few more items on the bridge this year. We have started at EBITDA before cash rent to allow you to get a clearer view of the underlying cash flows. At the end of the bridge, we show the net effect of capital repayments and new leases on total debt. Free cash flow was lower than last year. This reflects a lower EBITDA of 1.2 billion, a working capital outflow and higher capital expenditure. In terms of working capital, you may remember that we had a planned reduction of inventory levels last year. We ended this year with higher than planned levels of stock as a result of food stockpiling demand and lower than expected clothing sales in March. As a result, you can see that after payment of our final dividend, net financial debt decreased by 53 million pounds. Total net debt, including the effects of capital repayment of leases and net new leases capitalized, however, decreased by 50 million relative to the opening position. That's it for me. Thank you very much indeed. I will now hand you back to Steve.

Thank you, David, for that comprehensive review. Now, of course, right now, the results from last year seem almost like ancient history. And as I will walk you through shortly from the outset, we recognize that we are facing a crisis whose effects and aftershocks will last for the coming year and beyond. And despite the trauma of the crisis for everybody, I have never been prouder to lead M&S. The way our people have rallied to support our customers and communities has been nothing short of awe-inspiring. And here's a short film which will bring that to life with a few of their actions.