Marks and Spencer Group plc

Good morning everybody and welcome to the M&S interim results. In a moment Steve and then Owen are going to go through the entrails of the half year. But what matters to me is that it is now four years since we embarked on this transformation program at M&S. And I met the other day one of our distinguished alumni, somebody actually who you probably all know, and he made a very good remark to me. He said, the trouble with M&S is it's a great British institution, but is it a business? And I think that sort of sums it up. Now our project is about turning a great institution into a great business and there have been plenty of doubters and cynics along the way and I understand that and probably I would have been one too but I hope you'll see from these results that we are very very serious about the reshaping of the business. You know, I've never seen short-term profits as the most important measure of our success. It is quite nice to have some, but probably the really important thing from today in terms of results is that we've substantially strengthened the balance sheet with very strong cash flow, and that's investment and growth for the future. But the real test, and in a sense the quiz for you guys, is look behind the label and answer these questions. What has happened to the perception of quality, style and value in the clothing business? What's happened to the perception of quality and value in the food business? What's happened to our market share in food? Not over one year in pandemic, but over two years. So comparing now to before the pandemic struck. What's happened to the percentage of full price sales in clothing and home? And what's happened to our market share? Not of discounted sales, but full price sales in clothing and home, particularly women's wear and kids wear. Is our online growth now matching the relative decline in the store sales so that overall we're on the cusp of getting back to a growth business? What percentage of our space is in danger of becoming modernized and conforming? And perhaps more qualitatively, is the management team and the business structure unrecognizably different with real pace and energy and determination to change? Now, these are the questions that the board is asking, and I think they're the questions that you should answer. And meanwhile... It's quite nice to be making some money again. Thank you.

Good morning and welcome to the M&S half-year results presentation. I hope you and your families are well. If you're watching the presentation on Wednesday the 10th of November, there will be a conference call for analysts and investors at 9.30 a.m. Details of this are on the results release. This morning's presentation is split into two parts. Firstly, Owen Tonge, our Chief Financial Officer, will take you through the results for the half year. I will then talk in more detail about how our transformation has, along with some COVID bounce back, driven a strong performance. Four years ago, I spoke to you frankly about where we were. I set out a three-phase strategy that began with fixing the basics, which had been ignored for too long. Now, there'll always be a list of things to sort out, as in any trading business, and I've always been clear that I will never over-claim on our performance. We have seen some tailwinds from the effects of COVID bounce back, as well as some headwinds from the well-documented turbulence in relation to supply chain issues. However, we have delivered a strong performance with, for the first time, underlying improvements in all main businesses. I'm out in some of our stores for today's presentation and it's here you can see our progress. For example, our Hackney store first begun trading 85 years ago as a full line store. And in August, we reopened it as a renewed food store with a bigger, better, fresher offer. This includes options to help our customers shop more sustainably with fill your own on cupboard essentials to help reduce plastic and packaging use. This is one of the many steps we're taking to become a net zero business scope three by 2040 through our refocused sustainability action plan, Plan A. Overall, we've reported a strong financial result compared to two years ago. We generated double-digit revenue growth in food. Ocado Retail drove strong order growth despite tough comparatives to last year and made another solid contribution to group results. Clothing at Home has delivered double-digit full-price sales growth and online sales are up over 60% compared to two years ago. In addition, a focus on working capital and disciplined investment has resulted in healthy reduction in net debt. Underlying improvements are evident across the main businesses with gains in market share and customer perception. M&S Food is growing market share with improving quality and value perception. Ocado Retail has increased capacity by over 50% since the M&S investment. In clothing and home, style and value perceptions have increased and market share is now growing across the online and store channels. We have record online customer numbers and strong levels of retention illustrating the future potential of MS2 to accelerate our online growth. The store pipeline now includes over 20 full-line stores and many new food stores, leaving us well positioned to close legacy sites and move rapidly towards our goal of a modern, fit-for-purpose estate that supports omnichannel retailing. The international business is rebounding, growing online sales despite dealing with the dual headwinds of lockdowns in some markets and EU border-related costs. I'll share more detail on the transformation shortly, but before I do, I will take you through the numbers.

Thanks, Steve, and good morning to everyone. This time last year, I was presenting my first set of results to CFO, and what a year it has been for us all. Pleasingly, as these half-year results show, we are starting to see both the benefit of a bounce back after the challenges of COVID, and importantly, real underlying progression as a result of our transformation. This period has not been without its challenges, with parts of the business still in recovery mode. It is worth remembering that clothing and home stores were closed in the first week of the half and are still down double digits on pre-pandemic levels. Our food hospitality business was closed until mid-May, and along with our food travel franchise business, continues to trade well below pre-pandemic levels. So in that context, we are delighted with how the half has progressed. Now, before we dive in, an important point to note on how we are presenting today's results. Given the unprecedented nature of last year, throughout this presentation and in our press release this morning, all comparatives are given against financial year 19-20, unless stated otherwise, which we believe is a more meaningful measure of underlying performance. So, the group headlines. Group revenue was up 5% on 19-20, and the group delivered an adjusted profit before tax of £269.4 million. It is worth noting that the result includes UK business rates relief of 47.5 million. Performance on cash continues to be strong as we focus on recovering our balance sheet with a further healthy reduction in net debt in the period. I'm going to take you through the results now in a little more detail. Starting with food, food sales were up over 10% on 19-20, which is a really strong result. It's worth digging into the detail a little bit more here. If we exclude the hospitality and franchise businesses, which continue to be adversely impacted, core business performance was very strong, with sales consistently up around 17% throughout the period. And in some core categories like frozen, grocery, and household, up 30 to 40%. It's also worth noting that unlike our competitors, these sales numbers do not benefit from a direct online grocery presence, with these sales reported through Ocado Retail instead. In addition, whilst footfall and transactions remain below pre-pandemic levels, encouragingly, total basket size was up over 30%. Operating profit increased over £50 million and operating margin performance was strong. But we should look at the drivers of this in more detail. Gross margin was down, reflecting the lower revenue from our higher margin hospitality business, as well as additional warehousing and freight charges. This was partly offset by the strong growth in core categories and the continuing cost-saving programs, including synergies from Ocado. Our store staffing costs improved, both due to the restructuring efficiencies we announced last year, as well as other ongoing programs. These were partly offset by pay inflation and ongoing COVID costs. The improvement in other store costs relates largely to government business rates relief and lower depreciation charges as legacy store modernizations reach the end of their economic lives. In distribution and warehousing, increased costs reflect a number of items. Firstly, investment in our Milton Keynes Ambient Depot to support growth. Secondly, increased pay and incentives related to warehouses and haulage, which started to build towards the end of the period. Also, higher costs to serve from increased M&S.com orders for hampers, wine and flowers. And finally, inefficiencies from EU border-related processes related to serving Northern Ireland. So despite these headwinds, overall, this reflects a good performance. Turning now to the contribution from Ocado Retail. In this case, I'll talk to the results against last year, as we did not own our investment for much of this period in 19-20. Last year clearly was an exceptional period for grocery online during the lockdowns, and therefore we are annualising against this. This is reflected in the revenue performance. Also, towards the end of the period, trading was impacted by the fire at the Ayr with CFC. However, these two impacts were offset by strong underlying growth in our capacity to just over 600,000 orders per week. And the plan to ramp up capacity to drive growth remains very exciting. Encouragingly, M&S products continue to account for over 25% of the average Ocado basket. EBITDA was down, reflecting the revenue and cost impacts of the Aerith fire, as well as expected normalisation towards pre-pandemic basket size and shape of week. Exceptional items in the period reflect insurance receipts, as well as exceptional calls from Aerith. Further receipts are anticipated in the second half. Overall, the M&S Group share of Ocado retail profit after tax was 28.1 million pounds in the period. Moving on to clothing and home, sales were down 1% with growth reported in the second quarter. Overall, a strong online performance mitigated the lost revenue from stores. Importantly, full price sales grew by a very encouraging 17.3% as customers responded to better product in a period where we ran fewer promotions and reduced stock into sale. Our store business, which was closed in week one, recovered throughout the period, but remained significantly down. City centres and high streets continued to create a drag on sales, with a better performance from retail parks, which were flat compared to 1920. Average footfall on transactions continued to be materially behind pre-pandemic levels, but basket size was up, partly compensating for this. The metrics in our online business were strong on both a one and two year basis. Traffic increased overall, with traffic through our app up over 200% on 19-20 following the relaunch of Sparks last year. All this helping to drive the 60% growth in active customers over two years. As we anticipated, returns rates have started to normalize towards pre-pandemic levels, but remain around three percentage points lower due to continuing trends in customer behavior and product mix. This resulted in a good overall performance for the online channel. In total, clothing at home generated an operating profit well ahead of 19-20 levels. And at a headline view, online operating profit margins stayed strong at around 10%, with stores also delivering a 10% operating margin. Going into more detail, you will see that gross profit was up as a result of the strong full price trading and lower stock into sale, which more than offset cost headwinds of adverse currency and additional freight costs seen over two years. It's a similar story to the food business in both store staffing and other store costs. In store staffing, the improvement was driven by both the restructuring efficiencies from last year, as well as ongoing efficiency programmes. These more than offset pay inflation. And in other store costs, the movement largely relates to government business rates relief and lower depreciation charges as legacy store modernisations reached the end of their economic lives. Within distribution and warehousing, we see the impact of costs to serve online demand, as well as increased pay and incentives relating to haulage. And finally, in central costs, investments in technology, data, and digital initiatives, as well as higher pay-per-click marketing activity to drive online growth, were partly offset by lower depreciation of technology assets. And finally, to international. Performance reflected disruption and complexity arising from the current EU border processes and food supply chains, predominantly in the Republic of Ireland, and the continued impact of COVID on Asian markets, in particular in India in the first quarter. Clothing and home revenue recovered to pre-pandemic levels, driven by strong online growth. And whilst performance in India was severely impacted in the first quarter, recovery has been stronger than anticipated in the second quarter. Similarly, in owned European markets, whilst trading restrictions remained in place at the start of the period, sales performance upon reopening has been strong. In our food business, EU border complexities have heavily restricted our ability to provide a chilled catalogue. This has resulted in significant costs and complexity to operate in Ireland, which has impacted these numbers. In addition, it has led to a review of our business model in the Czech Republic and a restructuring of operations in France. Overall, operating profit was down, driven principally by the cost of the current EU border processes and tariffs. Gross profit declined due to those tariffs, as well as due to additional waste from inefficiencies in EU border processes, partly offset by the online growth. In store staffing costs, the deterioration in leverage of the fixed and semi-fixed cost base due to revenue reduction was only partly mitigated by efficiency savings from the retail restructuring announced in the Republic of Ireland last year. The movement in other store costs reflects government support in owned markets and rent concessions in India. Distribution costs increased significantly as a result of EU border related processes, as well as from the growth of online sales. And central costs reflect the higher marketing costs associated with online sales. So bringing all that together for the group, As discussed, when compared to 1920, profit growth in food, Ocado retail and clothing at home offset the decline in international profit. M&S bank contribution declined, principally as a result of a significant decrease in income from credit card and travel money sales compared with two years ago. Net finance costs were level. Within this, a lower pension credit, reflecting the lower pension surplus compared to 1920, offset a reduction in the net interest payable on lease liabilities. Overall, the group delivered a £269.4 million adjusted profit before tax. Adjusting items in the period were £82 million, which I will cover next, and that generated a healthy statutory profit before tax of £187.3 million. Within adjusting items, the store estate charges reflect the impacts of the store rotation programme in the period. The Ocado Intangibles related charge increased in the period, reflecting deferred tax charges relating to the substantive enactment of the increase in the UK corporation tax rate. Adjusting items also reflect charges relating to the restructure of our European operations. Turning to cash flow since the start of the year. Overall, we had very good cash generation in the period, resulting in a further reduction of our net debt. This firstly was a result of EBITDA, the drivers of which I've already discussed. In working capital, strong trading and the timing of clothing home stock intake in advance of the peak Christmas period has resulted in trade payables increasing ahead of stock, leading to a benefit in the period. In CapEx, property maintenance spends normalized and we continue to invest in the transformation. Major investments in the period have included spend on nine new stores, seven food renewals and the expansion of the Bradford Distribution Center. The adjusting items cash outflows largely relate to the organisational restructuring costs in the Republic of Ireland from last year. There are, of course, other ups and downs, but overall, a further financial net debt reduction of over 280 million pounds in the period has resulted in a very strong cash position at period end. It is worth noting that our lease obligations also reduced. We continue to do a lot of work on our leases, and further colour on the breakdown of our lease obligations is included as an appendix slide on the website. Now, turning to the outlook. Pleasingly, trading for the first few weeks of the second half has remained consistent with trends reported in the second quarter. However, whilst we are encouraged by our strong performance in the first half and in recent trading, there are macro pressures now affecting all our core businesses, including labour shortages, COVID disruption in factories and continued EU border challenges. These will all lead to further cost pressures in the second half of the year. Consumer confidence also remains a little uncertain given planned increases in taxes and current pressures in household bills such as energy and petrol prices. However, given the underlying progression, we believe the business is well positioned to deal with most of these challenges as we head into our important peak period. Capital investment for the group won't be at pre-pandemic levels yet as some planned transformation investments will now fall into the next financial year. Our central case is therefore that we will generate an increased profit before tax and adjusting items compared to our previous guidance. We also expect a stronger reduction in net debt than previously anticipated. As I said before, our capital allocation model remains unchanged. The priority is to invest in the transformation of the business and the recovery of balance sheet metrics consistent with investment grade. As we outlined in May, we will continue to assess the reintroduction of dividend payments. But in the context of our capital allocation model, this remains unlikely in the current year, despite the stronger than expected cash performance. With that, I will now hand you back to Steve, who's going to talk more about our progression.