Marks and Spencer Group plc

Hi everybody and welcome to the M&S annual results for 2021. Before I come on to the presentation, I just wanted to say a massive thank you to all our colleagues who worked so incredibly hard in a very, very challenging year. They were getting up every single morning to commute to work, to keep the business going. And with that, dealing with, we should remember, store closures, space closures redundancies dealing with a bow wave of surplus stock and Honestly, it's just been a humbling experience to be part of so I just want to say a massive. Thank you To all of the people who worked so hard to get M&S to the place it is now with that running through the seam of the presentation that you're going to see today is our never the same again strategy. So what do we mean by that? Look, it boils down to the fact that we decided at the outset of the pandemic that the risk of change was far less than the risk of no change. So the time has come when If the decisions we were hovering over or thinking about or nettles that need to be grasped that have got put off or something we were thinking of doing in two years' time, we just said, now's the time, now's the moment, and we have to move faster and make it happen. So MS2, the management rationalization, the brands project launch, the Ocado switchover, the Sparx project and relaunching Sparx and making it the amazing, outcome it is today, that all adds up to the fact that we're emerging as a reshaped business from the pandemic. You know, somewhere in the media somebody said, I think in a slightly cynical way, that Marks & Spencer is a never-ending transformation. And I think a bit of that's true. Businesses today constantly have to go through a process of self-disruption. It doesn't end, and at M&S that's even more so. And yes, we did need to change, and yes, it has been said before. But the acid test, is it really happening this time? And I think that you will see from this presentation that we are now in a new phase, that the business is emerging from the chrysalis of COVID as a reshape business. And I think for the first time for three and a half years, we can say there is a lot to feel confident about. And there's enough green shoots and points of light in this presentation to believe that M&S is on the verge of becoming a growing business again. Now, Steve's going to introduce the presentation. Owen's going to go through the gory financial detail. And some of it is quite gory, but we're coming out in a good place. And then Steve's going to talk about the future and the strategy. Thank you.

Good morning and welcome to the M&S full year results presentation. Firstly, I hope you and your families are well. If you're watching the presentation on Wednesday the 26th of May, there'll be a conference call for analysts and investors at 9.30 a.m. And details of this are on the results release. This presentation is split into two parts. First, Owen Tonge, our CFO, will take you through the results for the year. I will then talk about how we've used this period of disruption as a catalyst to accelerate the transformation to ensure a reshaped M&S emerges from the crisis. In a year of disruption, our performance was resilient. Despite the heavy impact from COVID restrictions, we delivered an adjusted profit before tax of over £40 million. In addition, a strong focus on cash preservation resulted in healthy reduction in net debt. Underlying growth in food was strong and Ocado Retail made a substantial contribution. Clothing at home and international were impacted by store closures, the collapse in footfall and shifts in product mix. However, we managed stock effectively and online growth of over 50% resulted in strong profitability in that channel. Importantly, from the outset of the crisis, we recognised the pandemic would increase the market trends that we were already facing into. And as a result, we went faster and further in our transformation through the Never the Same Again program to forge a reshaped M&S. Our food business is strong. It's positioned to deliver underlying growth and progressively recover in hospitality and convenience. In clothing and home, a reshaped product engine and improved online capability is gaining traction with customers. And as we will have seen in our results this morning, there are some encouraging early signs with group sales in growth compared to the same period two years ago. Three years ago, I spoke to you about where the business was. I was clear that M&S needed to face facts about the deep-seated issues it failed to address over many years. A complex corporate culture and structure behind the curve in digital, lacking style and value in clothing and home, underperforming in food with a high cost to serve, and a store estate not fit for the future. I set out a three-phase strategy that began with fixing the basics. And while there'll always be a list of things to sort out in any trading business, through our Never the Same Again program, we've gone further and faster in our transformation. You can see this where I am today at our London Stratford store. I spoke to shareholders from here last year at the AGM, and since then, it's changed significantly. It's buzzing again with more shoppers, of course. Our food hall has been renewed, showcasing more of our range in an inspiring way. Our new clothing and home ranges are looking more contemporary and stylish, with a much stronger value message. And while our focus on complimentary brands is definitely online first, we're trialing some of them here, and as you can see, they look great. Before Owen talks about last year's result, this short clip highlights some of the ways we've fundamentally changed the business over the past three years. We're moving to our next phase of our transformation, and now is the right time to get us set up for the future growth and reinvest in the brand. So I'm pleased today to be joined by Owen, who's taken on strategy and transformation planning as part of his remit as Chief Financial Officer. Also joining are Katie Bickerstaff and Stuart Machen, our new Joint Chief Operating Officers. And with their support, I'll be better able to concentrate on building the M&S of the future and our path to growth. In addition, Mel Smith, who is the CEO of Ocado Retail and former strategy director at M&S, will be joining us.

Thanks, Steve, and good morning to everyone. It goes without saying that this has been an unprecedented year, with these results spanning the beginning of the first national lockdown in the UK through towards the end of the third national lockdown, and the associated impacts are evident in our results. Group sales were down nearly 12%, Yet in the face of material headwinds, the group delivered an adjusted profit before tax of 41.6 million. And this is compared to the loss we predicted when we set out our original scenario a year ago. There is a lot to unpick in the performance. And as you will see in the results release, there were a number of significant movements relating to COVID within the adjusted results, including government support of 306 million. The performance on cash was good, and critically, we reduced debt over the period. And of course, if we remember, we at one stage had worried debt might materially increase. I will now take you through the results in a little more detail, starting with food. Like for like sales were slightly up on the year, but the underlying performance was strong. Our hospitality business was closed for a large part of the year and our food business is also exposed to travel and office locations with a high dependence on convenience and food on the move and these were of course impacted significantly. Therefore, excluding hospitality and franchise, you'll see we delivered strong underlying growth. In summary, the repurposing of space towards core categories, together with the ongoing transformation of our ranges, helped to offset the loss of convenience trade. It's worth noting that these sales do not benefit from a direct online grocery presence, which for us are reported through Okada Retail. You can see that performance excluding hospitality and franchise was largely consistent across the year, including through the lockdowns at over 5% ahead of total like-for-like performance. Operating profit decreased 10% and margin was therefore down in the year. There's a lot to unpick here. Firstly, we saw an adverse gross margin mix impact, driven by the lower hospitality and convenience sales. This was partially offset by the benefit of business rates relief. In costs, we had the benefit of more efficient staffing and furlough support, although this was less than the related wages of furloughed colleagues. We did also see increased COVID costs such as door hosts and social distancing measures in our supply chain. And finally, we absorbed a number of Brexit headwinds in the fourth quarter. Turning now to the contribution from Ocado Retail. This has been an exceptional period for grocery online and Ocado Retail performed strongly. As already reported by Ocado Group, the business benefited from higher than normal basket size and a consistent trading profile across the week. The exceptional item relates to business interruption insurance receipts due to the Andover fire. Overall, Ocado Retail generated a substantial contribution to group results, driven by this top line growth, as well as excellent CFC and delivery efficiencies and reduced marketing costs. Moving on to clothing and home. The overall result for the year was heavily impacted by lockdown and restrictions. As you can see from the numbers in the graphic opposite. The business also saw a steep decline in formal and occasion wear, which is partly offset by outperformance in casual clothing, kids and home. Similar to food, stores in high streets, shopping centres and city centres created an extra drag on the sales performance. As you can see, the online business built momentum through the year as we implemented MS2 and were able to capitalise on the change in customer shopping patterns. This was a result of strong traffic, active customer growth, improving frequency and lower returns, as well as a good service and fulfilment performance. Overall, clothing, home and operating loss of 129 million. At a headline view, while online profitability increased to 14%, this was insufficient to offset the decline in store sales. Going into more detail, you will of course see that gross profit was down significantly as a result of the reduced store sales, with the margin rate reflecting an increased mix of clearance sales as we manage stock flow. As I will outline later, better than expected sell through of seasonal stock has resulted in a reduced COVID inventory provision at year end. Operating costs reduced overall with effective management of staff costs supported by the furlough scheme, which partly covered the cost of furlough colleagues, good cost control elsewhere and indeed the benefits of business rates relief. Higher fulfillment costs online to service growth were partly offset by lower distribution costs to store. Some of these additional costs were also recovered in higher delivery income reported in revenue. Moving on to international, performance reflected the pandemic impact and lockdowns across markets, partly offset by a strong shift to online sales. Clothing at home reflected slower store sales in the Republic of Ireland and a robust performance with partners to manage the effects of the pandemic, partly offset by online sales, which more than doubled, as you'll see in the graphic here. Food sales were more resilient, particularly in the Middle East and Asia, as COVID refocused customer demand to favour eating in. This helped to offset a weaker performance in travel franchise sales in Europe and disruption from Brexit in quarter four. Overall, operating profit was sharply down. Gross profit declined due to lower store sales, only partially mitigated by online growth. Store staffing and other store costs declined as we benefited from government support and rent relief. Distribution costs increased as a result of the growth of online sales and costs incurred as a result of Brexit, offset by lower distribution costs to stores. Turning to the group profit outturn, as discussed, headwinds in the food business and the decline in the clothing and home in international businesses were only partially offset by the strong contribution from Ocado Retail. M&S Bank contribution declined due to a significant decrease in income from credit card and travel money sales as a result of the pandemic. Lower net interest was driven by an increased pension credit. And overall, the group delivered a 41.6 million adjusted profit before tax. Adjusting item charges in the period were 243 million, which I will cover next. And that left a total loss before tax of 201.2 million. Within adjusting items, we have booked a charge for the organisational restructuring announced in August as part of the agenda to reduce costs and change our ways of working. Store estate charges reflect the accelerated rotation programme with a new self-funding principle, which Steve will talk more about. Adjusting items also include the release of the COVID stock provision following better-than-anticipated sell-through of clothing and home stock, as mentioned earlier. Turning to cash flow, you may recall at the start of the year, we had anticipated drawings against our credit facilities of around 300 to 350 million by the end of the year. But in fact, we generated cash in the period and net debt fell. This firstly was a result of better than expected EBITDA, the drivers of which I have already discussed. There are a number of other important points to note. Firstly, we had a strong working capital performance in the period due to an extension in supplier terms in clothing and home, strong Easter trading, a reduction in food franchise receivables and other initiatives. CapEx levels were much lower in the year as a result of careful management of discretionary spending due to the pandemic. It is worth noting that the cash flow contains both CapEx booked in the year and prior year accruals. Adjusting items largely relate to the organizational restructuring. There are, of course, other ups and downs, but overall, a financial net debt reduction of around 300 million in the period is robust in the context of the trading backdrop. it is worth noting that our lease obligations also reduced. We continue to do a lot of work on our leases and further colour is included as an appendix slide in the pack. As a result of cash generation and preservation, we have more than 1.5 billion of headroom against our facilities at year end, which puts us in a robust position for the coming year. Our balance of maturities on our debt is also well spread, and we have already refinanced our December 2021 maturity during the year. Now, turning to the outlook. Since year end, overall trading has been ahead of the comparable period in 19-20 and our central case for the year ahead, with even stronger results in the five weeks since most of our UK stores reopened. Whilst we are encouraged by this performance, it is unclear how the recovery will develop, whether consumer activity will sustain a clothing home, and what the eventual pace and shape of recovery in hospitality and convenience in food will be. Therefore, our central case for the current year assumes a gradual return to more normal customer behaviour. In this central case, UK costs normalised to levels broadly consistent with 19-20, underpinned by the benefit of the restructuring. This will largely offset an increase in base pay rates, costs related to transformation, and higher variable costs such as online fulfilment. We have a strong programme of capacity growth at Ocado Retail, but expect some normalisation with respect to its economics. International continues to face headwinds with ongoing disruption in various markets. The business is also exposed to additional costs following Brexit, largely due to the administrative burden on exports of food, particularly to the island of Ireland. Capital investment for the group will increase to similar levels to 19-20. As we invest in the transformation, we start a programme of store maintenance and accelerate rotation. Our central case is therefore that we will generate adjusted profit before tax of between 300 to 350 million. And our ambition is to further reduce debt. As I've touched on before, our capital allocation model remains unchanged. The priority is to invest in the transformation. As we recover balance sheet metrics consistent with investment grade, we will of course assess the reintroduction of dividends. Although as we focus on restoring profitability, this is unlikely in the current year. Overall, we believe the business is set up well for the medium term. And with that, I will now hand you back to Steve, who's going to talk more about the progress on the transformation and our plans looking ahead. Thank you, Owen.