Marks and Spencer Group plc

Hello everybody, it's Archie Norman here and welcome to the M&S 2023 results presentation. In a moment I'm going to pass you on to Stuart Machin who's going to update you on how we're progressing with the reshaping of M&S and then he's going to pass on to Jeremy Townsend, our redoubtable new Finance Director who is going to take you through the detail of the financial performance, perhaps less arduous than in some previous years. And then Katie Bickerstaff, hopefully now on two legs, will talk you through omnichannel and international. Now, I believe that all new leadership teams need to arrive like a thunderclap, whether they're coming from inside or outside the business, to create that new sense of direction, of electricity. of appetite for change. And what this set of results shows is not just a strong set of financial results, which they are, but also that acceleration of the pace of change, the drive for performance and the drive for innovation at M&S. I always believe that when the results are strong, the chairman should say less. So with that, I'm going to hand you straight over to Stuart.

Thank you Archie and good morning everyone from our busy renewal store here in London Colney. Thank you for joining us for our full year results presentation. If you're watching this on the 24th of May there is a conference call for analysts and investors at 9.30 this morning where we will be happy to take your questions. So now to the results. It's been a strong year, despite the headwinds, as M&S invested in trusted value and did not pass on the full force of cost increases to customers. While this reduced gross margin, sales growth has been strong in both clothing and home and food, and we delivered profit before tax and adjusting items of £482 million. As you will remember, last year's profit included some business rates relief, so excluding that, underlying profits are up. Clothing and home sales growth was double digit. While store sales outperformed, online sales were also increased. Excluding the rates impact, profits were up nearly 10%. In our food business, it was a tale of two halves. Our investment in value in the first half reduced margin and profit. However, a strong customer response to our value proposition drove accelerating sales and market share growth in the second half. The benefits from the GIST acquisition as well as operational efficiencies also supported an improved performance in our food business in the second half. where profit excluding rates was down 2%. International saw a strong bounce back in partner demand and profit growth. This was despite exiting Russia and the ongoing impact of EU border costs in the Republic of Ireland. Ocado Retail generated a loss, but under new leadership, a reset of that business is underway, and it has substantial capacity for profitable growth. And most importantly, free cash flow from operations was robust. This enabled us to successfully acquire and integrate GIST, our primary logistics provider, and to further reduce our debt. This disciplined approach to capital allocation means our medium-term growth plans can be funded and the Board can restore dividends to shareholders starting at the interim results this year. In short, we've made good progress, but there remains so much to deliver in the year ahead. Over the past year, Katie and I and the executive leadership team have found a strong working rhythm and I've asked Katie to raise the bar this year even further when it comes to our omnichannel strategy. I'm also delighted that Jeremy Townsend will be working with us now until May 2025, supporting us to deliver our plan. And on that note, I will now hand over to Jeremy, who will walk you through the financial results.

Thanks, Stuart, and good morning. I'll start with the group headlines, which highlight a year of strong performance. Group sales were £12 billion, up almost 10% on last year, with profit before tax and adjusting items of £482 million, demonstrating a robust performance despite significant cost pressures. Profit before tax and adjusting items was 7.8% below last year. As a reminder, business rates relief of £59.8 million was included within profit last year. A focus on strengthening the balance sheet has delivered positive free cash flow from operations and reduced net debt, with credit metrics sustained at investment grade levels. I'll now take you through the results in a bit more detail. Starting first with a profit bridge. Excluding the impact of business rates relief in the prior year, the Group generated an increase in profit, with growth in clothing at home and international. In food, price increases for customers were lower than the inflation experienced in costs, which lowered margin and delivered a slight reduction in operating profit. Ocado retail had a difficult year and recorded a loss. This was driven by higher fixed costs from underutilised capacity, as well as lower sales, which were impacted by lower basket sizes, reduced shopping frequency post the pandemic. The contribution from M&S Bank declined due to pressures in the macroeconomic environment, causing an increase in bad debt provisions predominantly related to the forward economic guidance. Net finance costs benefited from a higher pension credit, reflecting the opening accounting surplus, reduced net debt, higher interest rates on cash deposits and the partial buyback of our 2023 and 2025 bonds. Adjusting items included store estate programme costs and costs relating to the GIST acquisition. As announced at the half year, a credit has been recognised relating to a reduction in the fair value assessment of the contingent consideration for Ocado Retail. I'll now take you through the business areas in more detail. The food business generated another year of life-like growth, supported by investment in innovation and trusted value. Hospitality and franchise showed strong recovery and we saw growth in categories such as food on the move alongside basket building categories such as frozen and groceries. We performed well in events with ambient celebration delivering double digit growth on the prior year. While basket value reduced, larger baskets continue to grow and overall basket value remains well ahead of pre-COVID levels. Operating profit decreased, although this was in part due to the inclusion of £24.6 million of business rates relief in the comparative. Operating margins declined, driven by an investment in value, as well as the impact of business rates, as I mentioned. However, in the second half, margins were ahead of last year, reflecting the benefits of the GIST acquisition. Looking at the drivers of margin in a little more detail, gross margin declined as a result of the previously mentioned investment in value, with price increases for customers lower than cost inflation of goods sold. Although operating costs increased by 5.7%, this was at a lower rate than the increase in food sales, resulting in a beneficial impact on the margin of 0.7 percentage points. The increase in operating costs was largely driven by colleague pay increases and energy inflation. Further investments were made in in-store technology and a new forecasting and ordering system. These cost increases were partially offset by savings and efficiencies from retail operations and the ending of the gist management fee following the acquisition as previously mentioned. The clothing and home business generated another year of like-for-like growth, supported by the benefits of an omnichannel model. Menswear and womenswear performed strongly, and sales also benefited from third-party brands providing customers with more choice. There was increased footfall and traffic into stores from the normalisation of shopping behaviours post-pandemic. Online sales remained in growth, with average order values up, supported by click and collect sales. Return rates increased during the year as customer trends normalised and reflected the impact of third-party brands. Operating profit decreased, largely due to a lower gross margin and the inclusion of £35.2 million of business rates relief in the comparative. The H2 margin was lower than H1, with customer prices increasing by less than the cost of goods inflation. Looking at margin in a little more detail, gross margin reduced, as previously mentioned, with customer price increases lower than cost inflation. Cost of goods increased, driven by sourcing and freight inflation, as well as currency related cost pressures, which particularly impacted margins in H2. Similar to food, the clothing and home operating profit margin was helped by the fact that although operating costs increased by 5.2%, this was at a lower rate than the increase in clothing and home sales, resulting in a beneficial impact on the margin of 2.7 percentage points. Again, as with food, the main drivers of the increase in operating costs were colleague pay increases and energy inflation. Clothing and home also made investments in technology to support the omnichannel offering. The operating cost increases were partially offset by savings and efficiencies in retail operations and logistics. The international business generated another year of growth despite a number of market exits, including Russia. Sales increased in the year, driven by clothing and home sales in India and strong partner demand in Asia and the Middle East. Similar to the UK, sales growth was stronger in stores than online. With sales up 12.6% and with a slight increase in operating margins, operating profit before adjusting items increased by 15%. Ocado retail revenue declined despite growth in active customers and orders due to lower basket size following an unwind from the pandemic. Despite this, M&S grew sales through the channel. Ocado Retail EBITDA before exceptional items was down, reflecting lower gross margins, underutilised capacity and higher fulfilment and delivery costs. The credit in exceptional items is driven by insurance receipts related to the Andover and Erith distribution centres. Overall, Ocado Retail made a loss after tax in the period of £59 million, of which M&S's share was £29.5 million. The group generated free cash flow from operations in the year. Working capital outflows were lower than expected, in part reflecting phasing at the year end of around £50 million. Capital expenditure increased with a focus on investment in the grouped key strategic areas of store rotation, supply chain and digital, which I'll talk about in a moment. Ocado Retail drew down £30 million on its shareholder loan facility in the year. The business is expected to require further cash requirements in the coming year with an additional drawdown of up to £70 million. Cash tax increased as UK tax payments resumed. Adjusting items within cash flow relate primarily to the exit of the Russian franchise business, store rotation and structural simplification. We acquired GIST at the half year, which resulted in a net cash outflow of £103 million. The reduction in net debt is driven by free cash flow, with lease debt broadly level year on year. As I previously mentioned, the CAPEX programme is focused on our three strategic transformation areas, store rotation, supply chain and digital. For the appraisal of investments in stores, we apply hurdle rates commensurate with risk, with a primary focus on cash payback. Store rotation was focused on modernising the store estate, including the opening of three full line stores, six food stores and upgrades to clothing and home space. Supply chain expenditure reflects investment in infrastructure together with spend on upgrading vehicles. An investment in digital included replacement and upgrades of technology in stores, continued investment in website design and investment in food supply chain planning systems. In the year ahead, we expect to continue focusing on our strategic priorities with a similar level of overall investment. In order to fund a group's strategic transformation programmes, the primary focus is on generating cash flow to fund investment. Hurdle rates are applied to store investments and supply chain and digital investments are prioritised on the basis of their expected impact on sales or cost reduction. Investments in capital expenditure are subject to the group maintaining a strong balance sheet in the form of investment grade credit rating metrics. Last year, the group generated free cash flow from operations and continued strengthening the balance sheet. This included buying back part of the 2023 and 2025 bonds, which helped to reduce growth debt. Investment grade metrics were maintained for another year and we are seeking to not only maintain these but to achieve an investment grade credit rating in the year ahead. The focus on cash flow, investment returns from capital expenditure and an investment grade credit rating creates a virtuous cycle which is expected to deliver an improvement in free cash flow from operations and a stronger underlying balance sheet. This in turn provides the Group with the capacity to resume dividend payments and, as Stuart and Archie have already mentioned, the Board plans to do this at the interim. Now, looking forward to this financial year. We've had a good start with both food and clothing and home growing sales. While the outlook is uncertain and our customers still face high cost inflation, there remains much within the Group's control. Modest growth is expected in revenue, driven by omnichannel, as well as from the benefits of store rotation. We plan to make further investment in quality and trusted value and we expect this will only be partially offset by actions to mitigate sourcing cost pressures and stock loss. In the year to come, we will see the annualisation of the GIST benefits and the delivery of at least £150 million of cost savings, which will help in mitigating the impact of underlying cost inflation. Therefore, despite the uncertain outlook, the overall objective is to build on performance delivered last year. Thank you. I'll now hand back over to Stuart.