SSP Group plc

So good morning everyone and thank you again for joining us virtually for our preliminary results. On the call today we have Jonathan Davis, our Group CFO and Sarah John, our Director of Corporate Affairs. So just to take you through the agenda, I will give you a short overview of the year. Jonathan will then take you through the financials and I will review the business and our plans for recovery and we'll finish with Q&A and there'll be plenty of time for questions. So group highlights. COVID-19 continues to have a very significant impact on us all, and on a personal note, I hope that you and your families are safe and are well. Before the onset of the crisis, we had made further good progress in expanding the business, with net gains of 5.7%, solid like-for-like sales, and good conversion into profit and cash. From the end of January, we saw the rapid escalation of COVID-19, and from March onwards, an almost total shutdown of the global travel industry. We took rapid and decisive action to protect our people, hibernate the business and materially strengthen the balance sheet. From the outset, we expected the crisis to be prolonged. And so we've had to take some very difficult decisions to protect the business. However, we took an early action to retain the core skills at our head offices and in all our operations globally to enable us to reopen quickly. Indeed, by re-engineering the cost base, we were able to start reopening units profitably, with over a third of our units open by the year end. Tight control of costs and cash in half two enabled us to minimise the cash outflow well ahead of expectations and contain EBITDA losses to a minimum, despite the lower than expected sales, which were down 86% in half two. And importantly, we have liquidity headroom of over 500 million and with a cash burn expected to stay in the range of 25 to 30 million at the current level of sales. So we have significant liquidity. Whilst managing the day-to-day crisis, our mindset throughout was that we should use this time to further evolve and strengthen our competitive advantages. And so with that in mind, we've partnered with our clients, provided a safe service to the travelling customer and enhanced the proposition through digital technology. At the same time, we've redefined our corporate responsibility and our people strategies to reflect their importance to us. Our teams are motivated and we are ready to open more units once again as the market begins to recover. And throughout all of this, I've seen FSP at its best. Teams have galvanised, working swiftly and professionally and demonstrating their resilience, adaptability and can do approach. And simultaneously around the world, countries have been doing what they can to help and support our local communities. So I wanted to personally thank all of our colleagues for their incredible efforts, but also the sacrifices that people have made. I do believe there is now light at the end of the tunnel and our business is on a really strong footing to rehire our people and take advantage of our strong market position as demand recovers to deliver sustainable growth for the benefit of all of our stakeholders. And with that, I will hand over to Jonathan to take us through the financials. Thank you Simon and good morning everybody.

Clearly our full year results were heavily impacted by COVID. but were in line with the guidance that we gave in September with our pre-closed trading updates. Overall sales were down by around 50% year-on-year to about 1.4 billion. We saw an underlying operating loss of 212 million on an IAS 17 basis, all of which really arose in the second half, whereas the first half was just above break-even. This compared with a 221 million operating profit last year. Net debt increased to 692 million, reflecting the EBITDA loss of 98 million and of course the loss of working capital, but benefiting from the equity placing of 209 million at the end of March. Now under IFRS 16, we saw an underlying operating loss of 315 million and net debt of just over 2 billion reflecting the additional lease liabilities for the minimum guaranteed rents of around 1.3 billion. Now, over the next few slides, I'm going to run through the reported numbers and explain the impact of IFRS 16. And then, once I've dealt with the accounting, I'll move on to talk about the performance of the business and focus on the IFRS 17 numbers. So looking at the overall P&L, you can see the impact of IFRS 16 Firstly on concession fees, which are much lower at £150 million compared with the £350 million under IAS 17. This is, of course, because under IFRS 16, the concession fees represent only the variable elements above the minimum guarantee. Now, because of COVID, The IASB has issued a temporary amendment to IFRS 16 allowing any short term changes to rental terms, for example, minimum guarantee waivers to flow directly through the P&L rather than be accounted for as lease modifications where the impact would be spread over the life of the lease. However, they've also said that these amendments, if material, should be disclosed separately as an exceptional item. So, as a consequence, in the underlying IFRS 16 P&L, the concession fees don't include the benefits of any of the short-term rent waivers we secured, amounting to around £92 million. The second major impact of IFRS 16 is on the depreciation charge, which has increased to 420 million from 114 million under IAS 17, reflecting the capitalization of the minimum guarantees on the balance sheet as a right of use asset of 1.3 billion and the depreciation of those. So the real message here is that including the adjustment for the minimum guarantee waivers, the underlying operating profit would be fairly similar under both accounting policies. Now, looking further down the P&L, we saw an overall net loss of 224 million under IAS 17 or 45 pence a share. And under IFRS 16, this net loss increased to 334 million or 68 pence a share. The net financing costs under IFRS 16 were around 54 million compared to 26 million under IAS 17, and this is all due to the unwind of the discount applied to the capitalization of those minimum guarantees over the lifetime of the contract. And just to complete the picture, under IAS 17, the tax credit was about 6 million and the non-controlling interests share of the losses was around 10 million. And finally, a brief word about the exceptional items. The MON underlying items added a further 40 million to the reported net loss, largely reflecting assets and goodwill impairments and restructuring costs that offset by the temporary minimum guarantee waivers of 92 million, which I've just explained. So you can see we've impaired a number of fixed assets and right of use assets. amounting to 83 million in total, as well as goodwill of 33 million, which principally related to goodwill created from the acquisition of SSB by EQT back in 2006. These impairments were all the result of COVID, where we've assumed a very slow recovery in the travel sector in calculating these. The restructuring costs of 23 million were mainly redundancy costs, There were also some costs associated with exiting contracts, most notably in Russia, where we pulled out of Sheremetyevo Airport. The exceptional financing costs principally reflected the adoption of IFRS 9 as in the previous year. So I'll now leave the accounting and turn to the performance of the business and our response to COVID. So firstly, looking at sales. During the third quarter, sales remained at very low levels, down nearly 95%, as you'd expect given the almost total closure of the travel space. As lockdown restrictions eased over the summer, there was a gradual recovery through the final quarter, and by September, sales were down 76%, leaving the overall quarter for sales down about 80% year on year. This was largely driven by the resumption of air travel across Europe over the summer holiday season and the recovery in rail as we saw commuters returning to work. With the gradual reinstatement of lockdowns across Europe from mid-October, like-for-like sales in the first quarter are expected to be at a similar level to the final quarter, so down around 80%. Now, looking at our regional performance, The gradual recovery over the second half was driven by continental Europe, where we saw a limited return of air travel over the summer holiday season, and where the rail sector strengthened throughout the quarter, with more commuters returning to work in Germany and France than we saw in the UK. Sales in the UK, North America and the rest of the world have followed a similar trajectory really, until more recently when the rest of the world has continued to strengthen, led by the recovery of domestic air travel, initially in China and more recently in Thailand and India. Simon will talk about the regional trends in more detail later on. So let me turn to profit. As a reminder, back in March we said that we were planning for sales to be down 80 to 85% over the second half and we said this would knock something in the region of 1.4 billion off our second half sales and something like 350 to 420 million of operating profit compared with previous expectations. This will have represented a profit conversion of 25 to 30% on the lost sales. Now, the good news is that despite the lower level of sales with the second half actually down 86%, the impact on profits has been mitigated by the speed and the extent of the actions we've taken to reduce operating costs, as well as our success in negotiating rent concessions, particularly the waiver of minimum guarantees. So as a result, we've limited the profit conversion on the reduced sales to around 26%. That's left the EBITDA loss for the second half at 154 million, so pretty much in the middle of the range of expectations, and as a result, operating loss for the full year at 212 million. Now, looking at the P&L for the second half, you can see the operating cost reductions that we've made in response to COVID. And we've achieved this by opening our units selectively, trying to match the number of outlets as closely as possible to the passenger numbers in order to make the cost base as flexible as possible. Clearly we can do this because the vast majority of our operations are in multi-unit locations. So we've managed to cut rents by well over 200 million year on year in the half. mainly through agreeing minimum guarantee waivers covering around 70% of the business, as well as negotiating lower concession fees in some cases. We've reduced labour costs by around 70% through the careful management of the opening programme and using contractual layoffs and government furlough schemes where available, as well as through redundancies, but only where absolutely necessary and in the absence of government support. We've also been able to reduce the rest of our cost base dramatically, taking over 50% out of our overhead costs. Gross profit margins were down, in fact, nearly 5%. This was all due to the stock write-offs on perishable goods early in the half as we rapidly closed down around 90% of our units, as well as a shift in the sales mix to the rail sector and retail formats, both of which operate with slightly lower gross margins. Now, turning to cash flow, the pre-cash outflow in the half was 195 million, which was around 25 million better than we indicated at our pre-close announcement in September, and importantly, around 170 million better than the guidance from earlier in the year. And all of this outperformance was due to the working capital. So the working capital outflow was only 22 million in the half, compared to our earlier indications that it might be as much as £180 to £200 million. In reality, the stronger sales towards the end of the year helped, and we achieved that to some degree by opening additional units, and that delivered something in the region of an additional £50 million of negative working capital. The rest of the working capital improvement, so around £120 million, was down to our tight management of short-term liquidity, including agreeing rent deferrals with clients, as well as utilizing government support, such as on VAT and payroll taxes. Of this, we would expect something around two-thirds, so around about 80 million, to reverse during the next financial year, with the remainder reflecting longer-term payment deferrals and extended terms. As we've said previously, we've put our CAPEX programme pretty much on hold at present until such time as we have more clarity on the recovery. And we successfully limited CAPEX to around 15 million in the second half, mainly reflecting the completion of projects already underway pre-COVID. So moving on to net debt. The overall net cash outflow in the second half, including restructuring costs and the dividend, was £235 million, so better than the £250 to £270 million we'd indicated in our pre-close update. This left net debt at £692 million at the year end, as I said earlier, benefiting from the 209 million placing in March, as well as the small placing of 11 billion in June, which allowed shareholders to reinvest their final dividend from the previous year. And under IFRS 16, net debt increased to 2 billion, of course, due to the lease liability on the minimum guarantees. So finally, looking forward, Liquidity is clearly very important in the current circumstances. And by the end of the year, we have liquidity of around £520 million, with cash on the balance sheet of £185 million, further undrawn facilities of £175 million from the Bank of England, CCFF, and an undrawn RCF of £150 million. Importantly, we've agreed further government waivers with both our banks and US private placement investors for the period through to March 2022. And we've also reached an agreement to waive the next amortization payment on our senior debt due in July next year. So even at the current very low levels of sales, down around 80% versus pre-COVID levels, we expect our cash burn to be in the region of 25 to 30 million a month. Clearly, any improvement on the level of sales will both reduce the cash burn and provide a cash inflow as we start to see the recovery in our normal negative working capital. So as a result of the actions we've taken to manage the cash flow and the liquidity available, we remain in a very strong position to operate through a long and slow recovery of the travel sector. Having said that, the recent news regarding vaccine developments is encouraging and we're optimistic about a recovery during the second half However, in the meantime, we continue to plan cautiously for the first half, assuming no further recovery and sales continuing to run at current levels. I will now pass across to Simon to cover the business review. Thank you, Jonathan.

So I wanted to start by reminding you of the four phases to our COVID response, outlining some of our key achievements and reminding you of where we see ourselves now. Firstly, I again want to recognise upfront just how tough this crisis has been on all of us, especially on our colleagues, our customers, our clients and our brand partners. And as I said earlier, at the outset, we took rapid and decisive action. Protecting the health and safety of our colleagues was our first action. We quickly hibernated the business and by April we had just 10% or around 300 of our units open. We expected the crisis to be prolonged, so we restructured and we simplified the business. We also prepared to reopen units systematically. We've created a new, lower cost model. And as demand started to increase, we selectively reopened our units. So by the year end, we had over a third reopened, the vast majority of those being profitable. At the same time, We've accelerated the rollout of our digital technology program, and we developed our corporate responsibility and people strategies, which are integral to our long-term approach. Throughout each phase, we have been absolutely focused on creating the required liquidity to trade through a prolonged period of very low sales and manage our cash burn. This slide clearly illustrates the scale of our actions and our management approach. which has and will always be to take swift and decisive action. Having created 750 million of liquidity by April, we were able to contain cash burn to 230 million in the second half. So with now over 500 million of available liquidity and a monthly cash burn in the region of 25 to 30 million at the current level of sales this winter, we have considerable headroom to withstand a prolonged recovery. So I thought it'd be useful to take a look at how the business has developed from a regional perspective. As I said earlier, from a position where sales in April and May were just 5% of pre-COVID levels, by September they were 25%, with over a third of our units having reopened. In terms of volume of activity, Continental Europe performed relatively well, as national governments were effective at getting people back to offices, particularly in Germany and France. We also saw a rapid increase in demand for regional leisure in both air and rail travel over the summer, when restrictions lifted across a number of the countries. And by year end, we had over half our units open in this region. The UK also significantly scaled up from July onwards, From just nine units being open at the height of the crisis, the UK was back to a third or around 200 of our units open at the financial year end. Rail passenger numbers gradually increased from being down 95% at their lowest to around 65% down in September as people started to go back to city centres to shop and socialise and return to offices. Again, August saw increased demand for holidays to predominantly European destinations, and we were able to open most of our air units to support the demand for leisure travel. In the rest of the world division, where we had around 25% of our units open at the year end, the picture has been mixed. There has been a very strong resurgence in domestic and leisure air travel, led by China, which is now being followed by Thailand and India. But the largely international hubs, for example in the Middle East, have however remained closed. And finally, North America is making steady progress. With domestic air accounting for around 80% of the US business, we are seeing a gradual recovery and by the year end, we were back to having about 30% of our units open. More recently, the second lockdown has meant we've had to close some of our units that we opened over the summer in both the UK but also in continental Europe. As I said at the interim, it is our expectation that domestic travel is going to lead the recovery and that is exactly what we've seen in China and now in other parts of Asia as well as in America. You can see the sharp rebound in domestic passenger numbers and China domestic air is now down less than 20% versus pre-COVID numbers. Thailand down around 30% and America and India are also now recovering. Digging a bit further into this, you can see on the chart on the right the demand in Hainan, which is primarily a local holiday destination, is almost back to pre-COVID levels, supporting our view that there is significant pent-up demand for leisure travel. So as I said earlier, we have created a lower-cost, flexible multi-site model, and we are ready to reopen more units as demand recovers. As you would expect, this approach to reopening units has been data-driven and systematic. Grounded in passenger traffic volumes, we prioritise which units to open based on customer demand, unit location to capture footfall and expected profitability. Importantly, having multi-site operations, often with five or more different concepts at one site, has allowed us to open units selectively. Starting with the best locations at the site and the concepts most in demand, like retail and quick service restaurant units, We've been able to capture the available passengers through a smaller number of locations, so keeping ourselves to store at a higher level than if we had to open all of the units. Again, using passenger data, we've flexed our opening hours to align with day park volumes, which means we can avoid incurring unproductive cost. Critical to being able to reopen has been agreeing the right rent deals with our clients. which is typically meant moving to a percentage of revenue and where possible reducing that percentage. The structure of our business, where we have experienced local teams in each country, has been a critical advantage for SSP as it has enabled us to quickly agree flexible rents and a lower cost base. The same has been true of franchise fee percentages. And equally, by re-engineering and simplifying our offer, Focusing on best selling, high margin items, we've been able to reduce waste and drive greater cost purchasing and production efficiency. We've also accelerated the rollout of service digital technology, which has been very well received by our customers, as well as driving up our average transaction value and reducing our labour costs. And lastly, we have selectively added complementary revenue streams, for example, adding a set of travel and health essentials, as well as providing food for COVID testing centres at airports and feeding airline staff. Just to give you a couple of examples of the reality of these actions. So we found that simplifying our menus has brought multiple benefits. While still offering a breadth of choice, for example, including healthy options, vegetarian options, and meat-based items, we've removed less popular or more complicated items. That means less highly skilled labor, fewer ingredients to make the dishes, which allows us to simplify our operation and make a greater profit from what we have on offer. A good example of our more streamlined menus, which you can see on the slide, is from our O'Leary bar and restaurant. which are principally located in Sweden and Norway. As you can see, the menu is now half the size with a focus on recipe consolidation, maximising the use of same ingredients, including photos of the highest cash profit items to encourage trade-up, only including add-ons where the ingredients are already being used for other dishes, and making sure we benchmark our choices and pricing against our competitors to maximise our sales. I would expect to hold on to some of these benefits as the market recovers. Moving on to technology, which is becoming a key element to our service model. Our customers want to experience an easier contactless experience, a trend that has accelerated through the crisis and one we have proactively responded to. Trials so far are delivering improved ATV and improved customer experience and indeed greater operational efficiency. So we are now beginning to roll out four key customer order pay technology models in all of our divisions. These are order at table, where the customer scans the QR code at the table within the unit, orders and pays through their mobile phone. Virtual kiosks, where again the customer scans the QR code, typically in our takeaway units, And again, it orders and pays through their mobile. And then physical kiosks in our quick service restaurant units like Burger King, where customers can order and pay at kiosks instead of at the counter, and self-checkouts, typically in our retail brands like Marks and Spencer's. Despite the low level of travel over the past six months, we've continued to make good progress on business development. we have started to profitably extend and renew our existing contracts on favourable terms. We've also won some new contracts and opened some new units. Starting with contract extensions, at Vienna Airport we've extended our units for another six years, at Zurich Airport we've negotiated contract extensions for another five years, and we've also extended 15 units at Seattle Airport and a number of units across our airports in Thailand. In terms of new wins, we've secured three new units at Hobart Airport, where we've been operating for the past five years, as well as extending our existing business for five years. We've also won a contract to provide onboard catering for the Norwegian-Swedish rail line, which is a full service contract, meaning we'll do everything from developing the menus, producing the food, to the logistics of getting everything onto the trains. New openings include multi-brand food courts in Shenzhen and Shanghai Hongqiao airports. And also new openings in America, following contract wins last year in Seattle and Salt Lake City. So despite COVID, you can see there's still been business development activity around the group. And as ever, we'll continue to look for opportunities in existing and new locations where we will believe we'll get good returns. So at this point, I thought it would be helpful to change gear and take a strategic look at how I see our business and our future, a future that delivers for all of our stakeholders. Over the past five years, we have created a really good business, which I believe we can continue to evolve to become a truly great business, the leading food and drink operator in travel locations worldwide. Though we've been greatly affected by COVID-19 this past year, we have done and continue to do everything we can to put ourselves in the best possible position to capitalise on passenger demand when it recovers. Our stakeholders are critical to our success and it's the cumulative effect of getting it right across all these groups that will, I believe, propel us to the next level of performance when we recover. It's worth reflecting on how we see our structural advantages in the sector. As a leading provider of food and drink in travel locations, we have unique food travel expertise and are specialists in complex and challenging travel environments. We have a detailed understanding of our individual markets through a combination of local insights and international scale. So we understand both what our clients and what our customers want. We have market-leading positions in our sector, a sector that was valued at around 23 billion before the pandemic. And with multi-site operations, we are able to adapt our offer as required to maximize profitable sales. We've also built long-term and successful client relationships, and we have excellent colleagues in all our markets who support those relationships and are highly experienced. So at the core, we benefit from having a truly great portfolio of long-term contracts in great locations. and an experienced management team to deliver profitable growth. So our strategy to deliver long-term sustainable growth is fundamentally unchanged. Building on the priorities I set out at the prelims last year, I can see further opportunities in which we could evolve. The scale of our business gives us access to a wealth of consumer insights, and as I said last year, we want to use this to deliver the right proposition investing in product innovation and digital, for example, with the objective of giving us the best platform for which to improve our like-for-like growth. Prior to COVID, we had a strong track record of winning new business and had delivered double-digit growth in North America and the rest of the world, where our local knowledge and the development of more localised concepts gave us better access to these markets. Once the market recovers, we expect these opportunities to re-emerge at existing and new sites, and potentially new geographies where the returns are attractive. We will also seek out new revenue streams, as I talked about earlier, where these leverage our existing skills and infrastructure. As you know, running efficient operations is a core competency of SSP and deeply embedded into our culture. We will continue to relentlessly strip out unproductive costs, simplify and automate processes to drive efficiencies. Holding on to the benefits from range rationalisation, lower rentals and simplified overheads will be an important part of our strategy. And we will also invest in value creating automation and technology where this drives increased revenue and cost efficiency as well as product innovation to keep us competitive. Capital investment is also an important part of our model as it drives contract renewals as well as contract growth, and we typically get paybacks of three to four years on the capex we invest. The challenges of COVID may also present selective acquisition opportunities. And finally, the profit and cash flow growth we generate will enable us to de-leather over time and generate growth for our shareholders. we've also taken the opportunities through this crisis to consult with our key stakeholders to understand how their priorities have evolved through this pandemic and i think it'll come as no surprise the social elements protecting and engaging our people diversity inclusion health and well-being and communities were all key areas of focus so we have refocused our approach prioritizing the areas where we can have the most impact and you can see that on the slide We've also taken time to refresh our people strategy, which focus on engagement, inclusion and development. And the delivery of this will, I believe, enhance our colleagues experience of working with SSP and further underpin retention and long term performance. So whilst we've been really busy managing the business day to day through this crisis, we have also taken the time to plan how we can sustainably grow our business over the long term. And so to summarise, As I said at the outset, prior to the onset of COVID, SSP was performing well and in line with expectations. That said, the impact of the virus has been significant on all of us, but our response has set us up well to manage through the crisis. We have gained enormous experience, right-sizing and simplifying the business whilst creating a robust model that has enabled us to open many more units than we had envisaged some six months ago. We've continued to manage the business in a granular and systematic way, opening and closing units in line with demand, and we've kept cash burn to a minimum. Indeed, we have considerable headroom with more than 500 million of available liquidity and a cash burn of 25 to 30 million at the current very low levels of sales. We've also taken the time to improve our digital capability as well as refocus and refresh our CR and people strategies. We plan for a tough winter. However, I do expect that alongside the vaccination program, we will start to see a recovery in the travel sector led by domestic demand and international travel more broadly. And we are ready. We're ready to reopen the rest of our state profitably. We are ready to re-hire our people as the market recovers, and we are ready to provide food and services to our clients, our brand partners, and of course, all of our customers. Indeed, the protection of our people and our customers is key to me, and we will remain absolutely focused on delivering for all of our stakeholders in a sustainable way. And finally, before finishing, I want to again thank our teams who are doing a great job. And with that, I will now open up to Q&A.

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your telephone keypad. If you change your mind and wish to remove your question, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. To confirm, that's star followed by one to ask a question. Your first telephone question from today is from Jamie Rollo of Morgan Stanley. Please go ahead.

Thanks. Good morning, everyone. Three questions, please. First, on the balance sheet, could you please quantify the new monthly tests for maximum net debt and the minimum liquidity covenants uh maybe they've not changed but if you just quantify them anyway and also please could you quantify the new minimum either dollar thresholds and interest cover tests for next september and december please um secondly just on rents it sounds like the waivers and deferrals are sort of short-term action did you expect sort of future rent roll or concession fees to change once revenues have recovered and whether in in absolute cash terms or maybe a different mix of variable and fixed minimum. And finally, it's a more of a longer term question, just on your comment about benefiting from travel infrastructure and capacity expansion. I mean, quite a few airports seem to be slowing their expansion plans or delaying it. Do you see your mix of contract wings maybe coming more from other competitors rather than greenfield sites? Thanks.

OK, thanks Jamie. So Jonathan, if you pick up the first question, I'll take the second too.

Well, Jamie, as you know, we don't disclose the covenant tests. The only thing I would say is that as we indicated back in June where we achieved the first round of covenant waivers, the new tests that were put in place were framed around a very, very pessimistic scenario for the recovery. The same is true this time round and we will have huge headroom, quite frankly, against those. So I don't really consider them terribly relevant.

Simon, thank you. In terms of rents, you're right Jamie, we've done a good job over the last year in renegotiating our rents, waiving many of our minimum guarantees and in some cases negotiating some short term concession percentage reductions. I think over the medium term, our job will be to make sure two things. Firstly, that we continue to negotiate wherever possible flexibility in our minimum guarantee. So minimum guarantee per passengers, which we were already doing before the crisis, but I think has become more important through the crisis. And we're making very good progress in that area and then secondly wherever possible negotiating lower rental percentages the reality is I do think the market will recover and the market's attractive so I don't think we're going to see a significant change to our rental percentages but I think at the periphery there might be opportunities and obviously we'll take advantage of them in terms of the long-term question around capacity expansion particularly in airports I think a couple of things there. Firstly, it's a little bit too early to say what will happen with some of those long-term structural projects. Actually, what we're seeing at the moment is a desire for those projects to continue when we think about countries like America, which is very much a domestic-based market and requires that infrastructure investment. So, if anything, I don't see a significant slowdown where we are based and where a lot of our sales are. In the short term, I think a number of our competitors may not reopen all of their space, and actually we'll be quite happy for that just to light fallow in the short term, because obviously that pushes more of our customers into our units. And maybe in the medium term, there may be some opportunities for us to then pick up units in existing locations. But fundamentally, I think the market will recover, and if you sort of follow that hypothesis, then you will see continued investment in infrastructure.

OK, thanks. If I could just possibly come back on Jonathan's response. So we can take it as read that the new monthly maximum net debt and minimum liquidity cover, those haven't actually changed, you're saying, given they were already based on huge headroom. Is that right?

Absolutely right, we have very significant headroom so I don't really consider them to be an issue and they've changed only in so far as they've been clearly extended to the period through to March 22 but that's similarly very high levels.

Okay and where the going concern statement mentions requirement to raise additional liquidity is that debt or equity or both?

I mean The answer is it's premature to speculate. Clearly, in a Gearing Concerns statement, one has to anticipate a very, very pessimistic scenario. That's the nature of those statements. And clearly in the current climate, one can anticipate some scenarios. You can create scenarios that will require further liquidity. But as we've said earlier on, the reality is we have banks of liquidity against pretty much any trading scenario that we can imagine, given the expectations of recovery in the second half. Thank you.

Thank you, Jamie.

The next question comes from James Rowland-Clark with Barclays. Please go ahead.

Hi, morning everyone. Three questions please. The first is just on margins. You've spoken a lot in the presentation about the gross margin optimisation, cutting labour and overhead costs, renegotiating rents. Can you just discuss whether you are confident that you can return to FY19 margin levels in an outer year, essentially a lower level of sales? That's the first question. Secondly, on working capital in FY21, can you just discuss, let's say that sales return to FY19 levels by the end of 21, what sort of working capital inflow you would expect given that you have 92 million of deferred rent payments coming in or going back out, I mean, in FY21? And then thirdly, in terms of concessions contracts, you just mentioned the presentation that you've extended some contracts on favourable terms. Can you just discuss a little bit about what sort of terms are favourable and are you winning new contracts on favourable terms as well?

Thank you. Thanks, James. So I'm going to pick up the first and third and Jonathan pick up the working capital question in the middle of all that. So the first question was around margin and sort of, given my presentation, what our expectations are. I mean, a couple of things. Firstly, it's clearly early days, James, in terms of margin expectation over the medium term. We have absolutely made real improvements to the business. We've simplified the organisation structure. We've removed management layer to streamline processes, we've cut discretionary spend. And then as I outlined in the presentation, as units have reopened, we have worked really hard to simplify our menus to keep our costs down. And obviously, we've moved to variable rentals. As we rebuild our business, we obviously want to hold on to as much of this benefit as possible, but importantly, while striking the right balance with our clients and our customers' requirements. So we'll want to still reinvestigate the business competitive. That said, I do expect us to achieve margins at the levels they were pre-COVID. The only question is timing, and that depends on the things I just talked about, as well as frankly the pace and mix of demand. Jonathan, do you want to pick up the second question?

Sure, yes. So, I mean, if we saw, as you suggest, a recovery in sales by the end of the year back to pre-COVID levels, that would bring with it a recovery of all of our negative working capital, which, as we said before, is somewhere in the region of 200 million or so. So at that level, we would expect to see probably £178 million of recovery of working capital from the current position. However, as you've correctly identified, and as I've said earlier, we have benefited at present from deferrals principally of rents. by agreement with our clients. And as I said earlier, we would anticipate, in a full recovery, probably 70 or 80 million of that reversing. So as a consequence, we would be expecting to see a recovery in working capital of something in the sort of possibly 100 million zone, under that scenario.

Thank you, Jonathan. So your third question is around contract extensions and favourable terms. So just a couple of points in there. As you know, extending profitable contracts has always been part of our strategy because it's a known quantum. You've got an existing infrastructure, you've got sales history and you've got experience. One of the things that we are keen to do more of is to take this opportunity to extend as many contracts profitably as we can, because obviously that gives us a secured income. In terms of favourable terms, the sorts of things I would allude to are things like, obviously we'll want to make sure we've got minimum guarantees for passengers, so more flexibility going forward at different levels of passenger numbers. Equally, in some cases we will have negotiated different rental percentages for different levels of sales. So again, if the sales increase and step up, we've got different rental percentages to allow us to make to frankly reopen our units on low levels of sales and then lastly wherever possible as we're extending our contracts they probably will attract a little bit less capital because obviously it's an existing infrastructure and so we are planning contract extensions in that way so you get a bit more flexibility in your rent and a bit more protection on the downside as well as obviously getting certainty in contracts that we are known and that we're experienced in running Thank you.

Thank you very much.

Thanks. The next question comes from Leo Carrington with Credit Suisse. Please go ahead.

Good morning. Thank you. Good morning. I've got two questions. First on the landlord relationships, I suppose I'm surprised to hear that 30% of landlords have not waived the minimum annual guarantees. Are these where pockets of traffic are stronger or does it reflect some landlords being less accommodating?

And the second question on capex, the capex bill on H2 is obviously very low.

Does this reflect the sort of real level of capex or is it that some capex is to be deferred into next year once volumes come back and once the timing of reopening is known? Sure, OK, I'll split those. I'll do the first, you can do the second, Jonathan. So in terms of client relationships and sort of your question around why it's around 30% still not waived minimum guarantees, the truth of it is that a load of those are still work in progress. In some cases, where those businesses take time to make decisions, it's actually better for us to wait and negotiate over the long term. Because some people had a different view of the recovery timeline to us. So if you take an optimistic view and we negotiate too early, then people may not want to, frankly, go into variable rent. So sometimes it takes clients a bit of time to catch up with our way of thinking and actually see what's happening out in the marketplace. So we have a whole load of negotiations well underway with that 30%. And I'd expect to be successful with a significant proportion of those in time.

Jonathan, do you want to pick up Capex? So in terms of Capex, I mean, you're correct, clearly. um keeping the capex spend in the second half of last year down to 50 million inevitably meant that we were deferring a lot of planned projects we've been able to agree that with our clients because of course the volumes of passengers were so so low and there's been really no need for additional space I think if we were to see something of a recovery, as we're expecting certainly in the second half of this year, I think we will see more pressure from our landlords to start investing in projects, many of which have been agreed and put on ice. I mean, in broad numbers, you would have expected capex in the second half of last year to be something in the region of 70 to 80 million. So that gives you a sort of an idea of the order of magnitude of the projects that have been put on ice. I think we will have no difficulty based on our current expectations of postponing much of that over the first half. I think we'll start to see some projects coming back into play in the second half. I'd have thought the first half might be a little bit more than we've seen in the second half of last year, but certainly our planning assumption is that it's not going to be much of a step up given the low levels of passenger numbers at the moment. Thank you. Thank you. That's helpful. Simon, if I might just ask a follow-up or another thought.

On the contracts where you've agreed modifications of the minimum annual guarantees, what kind of duration do these modifications are? Are they sort of quarterly rolling or longer term? Massive variability is the quick answer. As you'd expect, hundreds of clients across thousands of contracts In general, when we said this, I think in the summer, there's now a trend to longer term deals, so they started off very kind of, you know, month even quarters, but now they're moving a little bit more to quarter six months annual. But again, big variability by division and even within country. Thank you. Thank you very much.

The next question comes from Tim Barrett with Newmist. Please go ahead.

Hi, morning both of you. I've got two things left, please. One was just to follow up Jonathan's comment on the rent working capital impact. Was that a contingent payment? Or should we model it? It will come up May in 2022, and if so, when? And then the second question was, we haven't really chatted much about regional, but I noticed that continental Europe still has a worse drop through and that area unfortunately seems to be the most impacted at the moment in the second wave. Is that factored into your guidance for 2021? Thanks a lot.

Sure, thanks Ian. So Jonathan pick up one, I'll pick up two.

So I mean just to make it clear, In terms of the rents, we have negotiated, as Simon has just described, both short and longer term restructurings. In some cases, it is plain and simple. We've agreed a waiver of the minimum guarantee for a period of time. And in almost all cases, that is not a contingent deal. There's no need to repay that. What we've done separately as part of these discussions with our clients in many cases is deferred payments. And it's the deferred payments that we've benefited from and we would expect to reverse probably only as the passengers return and the sales recover. So I think, again, whilst I've indicated, as I said in response to Leo a moment ago, I would expect there to be some reversal of some of those deferrals, something in the order of 70 to 80 million. Those would probably come as we see sales recover rather than against the backdrop we've got currently. Does that answer the questions?

Yeah, that's really helpful. So to the regional question, the quick answer is yes, they're factored in to our 21 view. I mean, the way to think about continental Europe, as I'm sure you know, Tim, is there is often a timing delay with getting costs out, particularly labour costs due to the different employment laws in different countries. And secondly, we're still negotiating some rents wages, frankly. So you've got a couple of big timing points there. But fundamentally, all of that is factored into our view of the year ahead.

Okay, so Europe should be better, but the Greek is similar guidance to last year.

Yeah, it should be, and it's all built into our overall expectation. I'm not concerned that continental Europe is going to be a significant drag. If anything, I think we're going to have a very busy summertime across continental Europe. I think from a consumer perspective, I'd be booking my holiday now if I was you in Europe.

Good plan. Thanks very much.

The next question comes from Paul Ruddy with Goodbody. Please go ahead.

Hi, morning, guys. Just two quick questions for me. The first is just on how the estate looks in, say, 12, 18 months on a kind of recovered basis. Is there any major shift you foresee between channel or geographic mix? Will there be any kind of pruning, potentially, of the estate, maybe things that were so profitable pre-COVID that you look at now? And the second question then is just around leverage and particularly about potential market share gains and, you know, whether you'll have the, you know, it's obviously very clear that you're very comfortable on liquidity, but how do you think about leverage now and, you know, the potential to capture any potential market share gains that may exist as we exit the market or exit the crisis?

Sure. OK, I'll pick up, Jonathan, by all means, add into the second one should you want to. So your first question is around in sort of a year, year and a half time, what might our channel mix be like? I think fundamentally we are operating in successful space, both in rail and air. Remember, the majority of our sales now are in the leisure part of the business. So, you know, over two thirds of our sales in air, for example, are in leisure. And actually, leisure plays a bigger part in rail than you might think, particularly continental Europe. So I think we are in long-term growth channels. I think the space we have, it's fundamentally profitable and good quality. So you know we have been obsessed with making sure that any business that we retain or win, it gives us good returns. So I don't see any major shift in our either geography or channel view over the next 12 to 18 months. I just think we will open our units within those locations as demand recovers. And I think that will be led, as I said in the presentation, by domestic travel and by leisure travel first and foremost. In terms of market share gains and leverage, I'll do sort of the market share bit and maybe Jonathan you can do the leverage bit. I think in the short term, the main job for us will be actually profitably reopening our units in a systematic way as demand recovers. And I do think demand will recover over the spring and summer, as I've said. I think that a number of our competitors will probably never reopen some or all of their space. And in the short term, fine, let it light fallow, we'll pick up the sales. So as I said six months ago, that's the way I saw the next 12 to 18 months. So for most of 21, that's what I think will be the reality. Beyond that, so 2022-2023, potentially space opportunities may arise. And as always, we will constantly be focused on, is it good quality space? Does it give us the returns we want? And does it fit our strategy? Jonathan, do you want to pick up on leverage?

Yes. Well, not much to add, really. I mean, I think in the short term, we will continue to plan cautiously, quite frankly, and keep CapEx pretty tight. in due course, as Simon said, opportunities we think will arise. It'll be, frankly, a quality problem to have if the size of that opportunity is such that it really becomes an issue for us in terms of our future planning of the balance sheet. But I don't think it's really an issue that we need to speculate on today.

Yeah.

Thank you. Does that answer your question? It does indeed. Thank you. Thanks.

The next question comes from the line of Ali Naqvi with HSBC. Please go ahead.

Hi, good morning. Just a couple of questions for me. I wanted to ask how you're seeing the competition, both on the smaller and larger end, how they've been managing the reopening. So they're doing it the same way you are. And is there anything to say in terms of your market share post to reopening? I appreciate it. It's probably early days, but anything to read from that? And then David, Tom, you mentioned technology quite a bit in the presentation today. I think pre-pandemic, there was an assumption that you could use or apply technology to about a third of your base and that gave you a 10% like uplift. Is that sort of still the case? Because it seems to be lower than other operators who use technology in the food and beverage space. Are you being conservative here or is there more to come possibly? Okay, fine.

I'll have a go at both of those. In terms of competition, again, it is quite early, as you just said, to speculate. It does feel like we've been sort of in this crisis for 10 years, but it is still in 2020 just. I think the way I would describe stuff at the moment, what we're seeing is kind of split. So the large portfolio players with multi-site operations have, like us, the flexibility to negotiate what they open and close. and they have the brand bricks to be able to satisfy consumer demand whether that's a restaurant or a grab and go unit so we think similar behavior we may be quite maybe a bit quicker at negotiating with some of them but broadly we're in the same space it's the smaller players and those that are have one or two units in a location or you know one or two brands that i think you to struggle because they just don't have that flexibility. And we're certainly seeing that in some of our countries. And as I said a minute ago, I respect some of that space never to reopen. It's impossible at this point to quantify that because it ranges airport by airport, country by country. But that's the way I would sort of segment it at the moment if I was looking at it broad brush. And obviously we're a multi site operation and we have all the benefits that come with that. And I think we're doing a good job at opening units when we can drive some cash out to them. In terms of technology, I'm not quite subscribing to the 10% opportunity as you'd expect. I would agree with you, though, that I think what this crisis has taught us is that the applicability of technology is much more of an opportunity and much broader than anyone would have thought of a year ago. And so I would expect us to be able to find some form of technology, and I described a couple on the presentation, to be able to use in the majority of our estate over time. Now, obviously, there'll be some concepts, some brands, some operations where it just doesn't work for customers, but I don't see any reason why we can't get a greater rollout of a form of technology to help our customers and to drive ATV and keep our costs down. In terms of the sales impact, Again, I don't think it would be in the region of 10%, but we should get a couple of percent benefit out of it over time, as long as we take the right actions and put the technology in the right areas. What we're actually finding in terms of technology is that consumers are spending a bit more, actually. Obviously, it's early days. We still have a low level of sales, but I think the trick will be making sure consumers have confidence They're in control of their purchases. And if we do those things well, then over time, I think it'll be a part, not a whole, but a part of our life growth story.

Thanks. And then just maybe to expand on the competition point, if you expect the small operators to subside and the market gets dominated by the larger operators, does that mean everyone acts a little bit more rationally in terms of how they bid for contracts in the future?

Well, as you know, I think we have always acted rationally. We've walked away from tenders which we don't think could make the returns. We've walked away from existing business if we thought that someone had paid a price that we couldn't make the returns off. So, you know, competitors will act as they act. And I think fundamentally it's an attractive market, so you're always going to get a spectrum. But what I'm focused on and what Jonathan and I are focused on is making sure how we act is as we always have done, which is, you know, focus on the data, focus on the returns, don't get carried away by market share or any of those things. Because there's plenty of growth out there and we should just focus on doing what we do well.

But just perhaps additional bit of colour on that. Clearly, as we've said to you in the past, it is in typically some of the developing markets where we see local operators paying what we would argue are excessive rents, which we've then not been prepared to match. I think now we are seeing some of those players suffer the most. So I think that our expectation would be that that presents a lot of challenges in places like China, places like India. Yeah. Good. Thank you. Thanks, Alan.

The final question today is from the line of James Ainley with Citi. Please go ahead.

Yeah. Good morning, everybody. Thanks. Hi, James. Hi. Just one remaining. I just wanted to ask on a longer term perspective, how the pandemic is maybe impacting your views about the strategy and the desirability of air over rail or even road type contracts or other left sort of volatile areas?

Yeah, it's a good question. I mean, fundamentally, this goes to the heart of what I was saying earlier. I actually think over the medium term, we will return to growth in our travel sectors. and we already have motorway service businesses, you know, in some of our countries. So if you take that hypothesis, which I wholeheartedly believe in, and then you step back and say, okay, that will be driven by domestic and leisure to start with, and then business over time, then I think the channels we're in are the channels we should be in. Now, clearly, we will look at every opportunity, as we always have done, whether it's a motorway service, whether it's rail, whether it's air, whether it's domestic, international, and assess them based on the growth potential and returns that they will deliver for us. So I don't think it's going to lead to a fundamental change in our approach or indeed the structure of our business, because I actually think over time the business will return to growth. The only question for me is in the short term, so I'll bring it right back to the here and today, how quickly can we reopen the estate we have? How quickly can we extend the profitable contracts that we have? And then over time, I think we will then have opportunity to grow again through the 500 brands we have, through the reputation that we have with our clients and our customers, and through the strength of our balance sheet. So I don't see a fundamental change in the shape of our business. I just think we need to build back sensibly and commercially, as you know, we will do.

Very clear. Okay.

Thank you. Perfect. So if that's the final question, so it just remains on behalf of myself, Jonathan, Sarah and the team to wish you a very merry brackets little close brackets Christmas and keep safe, keep well and we look forward to catching up with you in the new year. So take care everyone. Thank you.