SSP Group plc

Thank you very much. So good morning everyone and thank you for joining us again virtually for our interim 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 first six months. Jonathan will then take you through the financials. I will then review the business and our plans for recovery and as always we will finish with the Q&A and there'll be plenty of time for questions. So COVID-19 continues to have a significant impact on our business, but despite this, SSP has delivered a resilient performance in a challenging market. And I'm really proud of what the teams have achieved, both operationally and financially, delivering a valuable service to the travelling public, as well as supporting local communities. So I want to again personally thank all of our colleagues for their incredible efforts. So turning to our performance, whilst the rollout of vaccines in part of the world has been successful and resulted in the start of domestic travel, as we all know, there are still some countries that continue to be really challenged by the pandemic. In the first half, our revenue was £257 million, down almost 80% compared to pre-COVID levels. Now extensive action to reduce and variable the cost base as well as local government support enabled us to contain the drop through on the lost sales to 22% ahead of the previously indicated range of 25 to 30%. And minimizing our EBITDA losses together with the tight control of cash kept our underlying cash usage to 130 million, or an average of 22 million cash burn per month, ahead again of the previously indicated range of 25 to 30 million. Following the action to strengthen the balance sheet, our pro forma liquidity was £854 million and under the base case scenario shared as part of the rights issue, this will give us significant financial capability to invest in the recovery. Now whilst the pace of the recovery varies around the world and does remain volatile, we are now seeing encouraging signs, particularly in the UK and America, led by domestic travel. We are reopening units in these regions and driving profitable sales, having reopened around 250 units since March. We now have about 40% of the estate operating again, and we are ready to accelerate reopenings in our other divisions as demand recovers. And we expect that travel will largely recover by 2024. And it is this recovery combined with our market position, strong operational model and balance sheet capacity that will enable us to deliver long-term sustainable growth and create significant value for our shareholders. And with that, I will hand you over to Jonathan to take you through the financials. Thank you, Simon, and good morning.

Clearly, our first half results were heavily impacted by COVID-19, but were in line with the trading update and guidance that we gave in March with the announcement of our rights issue. Overall sales were £257 million in the first half, down by 79% year-on-year. We saw an underlying EBITDA loss of 110 million on a pre-IFRS 16 basis and an operating loss of 161 million. Net debt increased to 840 million, reflecting the continued cash burn over the last six months, but of course, this was prior to the recent rights issue. Under IFRS 16, we saw an underlying operating loss of 227 million, and net debt of just over 2 billion, reflecting the additional lease liabilities for the minimum guarantee rents. 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 focus on the pre-IFRS 16 results. Firstly, concession fees are much lower at 28 million compared with the 85 million pre-IFRS 16. This is because under IFRS 16, the concession fees represent only the variable element of the rent above the minimum guarantee. As we saw in the full year results, the reported numbers reflect the temporary amendment to IFRS 16, such that any minimum guarantee waivers flow directly through the P&L, rather than being accounted for as lease modifications where the impact would be spread over the life of the lease. However, under the current ASB rules, these minimum guarantee waivers must be reported as an exceptional item, and so the underlying IFRS 16 concession fees don't include the benefit of any of the short-term rent waivers we've secured amounting to around 53 million. The second major impact is on the depreciation charge, which has increased to 184 million, compared with 50 million reflecting the depreciation of the capitalized minimum guarantees. In summary, if we included the adjustment for the minimum guarantee waivers, the underlying operating loss will be fairly similar under both accounting policies. Now looking further down the P&L, Pre IFRS 16, we saw an underlying net loss of 161 million or 30 pence a share, and this compared with the reported net loss of 222 million. The reported financing costs were 35 million compared to 21 million pre IFRS 16 due to the unwind of the discount applied to the capitalization of the minimum guarantees. Pre IFRS 16, the tax credit was 17 million and the non-controlling interests share of the losses were 4 million. A brief word about the exceptional items. The non-recurring items added a further 39 million to the reported loss before tax, reflecting impairments, restructuring costs and debt modifications. was offset by the temporary minimum guarantee waivers of 53 million that I've just referred to. We've made a number of further impairments to fixed assets and right of use assets amounting to 27 million, as well as further goodwill impairments of 3 million, all of which reflected the slower recovery in the travel sector that we're now assuming compared to our expectations last year. The restructuring costs of 10 million were mainly redundancy costs, and we've also expensed the bank fees for the amend and extend on our main facilities, which we negotiated alongside the rights issue. The exceptional financing costs principally reflect the treatment of the debt modifications under IFRS 9 as a result of the revised arrangements with our lenders and the higher interest costs that we will pay during the waiver period. Now, Leaving the accounting and turning to the underlying performance of the business, firstly, a look at sales. During the second quarter, sales remained at very low levels, down 78% year on year and around 81% down compared to pre-COVID levels. As you'd expect, given the reinstatement of lockdowns at the turn of the year across many of our markets and the even tighter restrictions imposed in many European countries, during the early parts of 2021. With the gradual easing of lockdown restrictions in recent weeks, like-for-like sales are currently running at around 70% down versus pre-COVID levels, and we expect quarter three like-for-like to be down by around 75%. Now looking at our regional performance, sales in all regions have remained very consistently at low levels during the second quarter, with the UK performance the weakest at around 10% of pre-COVID sales, reflecting the extreme lockdown measures. Whereas in continental Europe, sales have remained slightly more robust despite the lockdown, largely due to the rail sector as passengers have continued to travel in countries such as France and Germany. Over the last three months, there has been a real recovery in North America. Now, as over 50% of 2019 sales driven by strengthening domestic and leisure passengers, and also in the UK, now at around 25% of 2019 sales, driven by the gradual recovery of the rail sector. However, you can see that in the rest of the world, the further restrictions in recent weeks in India and to a lesser degree in Thailand have reversed some of the earlier improvements in the region. Now, Simon will talk about the regional trends in more detail later. So turning to profit, despite the low level of sales down around 1 billion versus pre-COVID levels, the impact on profit continues to be mitigated by the extent of the actions that we've taken to reduce operating costs and the extension of furlough and other government support measures, as well as our further success in negotiating rent reductions, principally minimum guarantee waivers. So as a result, we've managed to limit the profit conversion on the reduced sales to around 22%, which was better than the 25% that we had indicated in December, and in line with the update we provided in the rights issue for the four months to January. That's left the operating loss for the first half at £161 million, And we would expect profit conversions to remain in the region of 25% on the lost sales versus pre-COVID levels in the second half. Now, looking at the P&L for the first half, you can see the operating cost reductions that we've made in response to COVID taking out over £480 million from labour, concession fees and overheads. We've achieved this by opening outlets very selectively, trying to match the number of units as closely as possible to the passenger numbers in order to make the cost base as flexible as possible. Of course, we can do this because the vast majority of our operations are in multi-unit locations. So looking down the P&L, you can see we've reduced overall labour costs by 62%, benefiting, as I said, from keeping units closed where passenger numbers remain low, and of course, continued access to government furlough schemes. We've managed to reduce rents by around 66%, mainly through continuing to agree minimum guarantee waivers with our clients. And we've also been able to reduce the rest of the cost base dramatically, taking out well over 50% from our overhead costs, again helped by reduced unit numbers. Gross profit margin was up 1.5% year on year to 72.2%, reflecting mainly changes in channel mix, but also all of the work that we've done to simplify and optimize our ranges during the COVID period. Now turning to cash flow, we continue to manage cash very tightly using around 130 million of cash over the half, that is around 22 million a month. So below the cash burn guidance we'd given previously of 25 to 30 million. This was driven by the EBITDA losses being slightly lower at around 18 million a month and a good working capital performance And in fact, you can see from the chart that we saw a working capital inflow in the half of 22 million, despite the sales remaining at very low levels, reflecting the further successes in things like rent deferrals and accessing government support. And as we've said previously, we've been very disciplined with our capital investment program, limiting capex to around 25 million over the first half. So moving on to net debt. Net debt at the end of March was £840 million, as I've said, reflecting the underlying cash usage of £130 million and exceptional costs of around £11 million. Importantly, including the net proceeds from the rights issue, pro forma net debt would be around £389 million. So in terms of liquidity, Following the rights issue in April, we have pro forma liquidity of over £850 million, with cash on the balance sheet of nearly £700 million and further undrawn committed facilities of £163 million. This includes the Bank of England CCFF of £300 million, which has now been fully drawn down and will be repaid in February 2022. However, excluding this, we still have over 550 million of available liquidity. And even at the very low levels of sales we've seen in the third quarter, so down around 70 to 80% versus pre-COVID levels, we will anticipate our cash burn to be in the region of 20 to 25 million a month. Now, as you saw in the rights issue recently, we've agreed further covenant waivers and extensions with all of our lenders through to early 2024. So in summary, as a result of the actions we've taken to raise additional liquidity and the action we've taken to manage our cash flow, we're really in a very strong position to trade through a slow recovery scenario. But having said that, we're primed to reopen rapidly over the coming months and, of course, to accelerate our investment programme in due course. And finally, I'd just like to recap on our medium term expectations. So as we indicated in March, along with the rights issue, we expect the travel sector to recover in the medium term with our like-for-like sales returning to broadly pre-COVID levels by 2024 under our base case scenario. On top of this, The current secured pipeline, along with the full-year impact of units that we opened pre-COVID, should deliver a further 10% to 15% of net contract gains over this period. And by then, we would expect our EBITDA margin to be back at a similar level to 2019. Our strategy for medium-term leverage remains unchanged. That is, for leverage to be between 1.5% and 2 times net debt to EBITDA, And under the base case, this would give us the financial capacity for an additional 350 to 400 million in capex to drive further business growth and capitalize on the recovery of the travel sector. So I'll now pass back to Simon to take you through the business updates.

Thank you, Jonathan. So before moving on, I just wanted to remind you of our strategic objectives. Operating in a large, structurally growing and fragmented market gives SSP the opportunity to deliver long-term sustainable growth for the benefit of all our stakeholders, and it's getting it right across all these groups that builds momentum and drive performance in our business. We are continuously improving the business to deliver long-term competitive advantage, and our values underpin this approach. So as you saw from the previous slide, making a positive contribution to our environment, our people and the local communities is really important to us. And over the past year, I've seen numerous examples of our teams doing this, whether that's in supporting the local communities, furthering our sustainable sourcing agenda or launching innovative food waste programs. And having established a new strategic framework with updated targets, our teams have been busy developing their local corporate responsibility plans to support the overall strategy. And I'll update you in more detail on the progress that we've made, as well as some of our key focus areas at our year-end results. So turning to the next slide, now you've seen this slide a number of times before, but it is important to remind ourselves of the extensive action taken during this crisis to protect our people and our business. We acted decisively and quickly, keeping our team safe, creating the liquidity needed, whilst at the same time, removing significant cost and creating a more flexible operating model, which enables us to break even at lower levels of sales. With the recovery in domestic travel now commencing, our focus will now evolve towards the recovery and driving sustainable growth. So reminding you of our strategy, our immediate focus is to reopen our units safely and to drive profitable sales. Our approach to reopening remains data driven, the lead indicator being passenger volumes through our sites, safety, speed of service and digital capability are all important to our customers. We are focused on capturing every sales opportunity we can, particularly while some of the competitor units remain closed. And that means being nimble and flexible around what we sell through our brands and ensuring our ranges are in line with evolving customer needs. Our business development, the immediate priority is to renew and extend contracts where we can on improved terms. As Jonathan has just mentioned, we have a significant pipeline of contracts which we have won but are yet to open, and we will do this as demand recovers. Whilst it's still early, we are now seeing some new tenders and our client and brand partner relationships, which have been strengthened through the crisis, our broad-ranging customer offer and, of course, our robust balance sheet plus us in a strong position to respond. And I'll take you through some examples of this later in the presentation. Aside from investing capital to drive new business, we are continuing to reinvest in the business to drive competitiveness in our consumer proposition, including brand and menu innovation and in our digital agenda. And it's the combination of profitable sales and a disciplined approach to capital investment that all underpin the delivery of shareholder returns. So I thought it'd be helpful to give you some insight into the sales trends that we're seeing across the business, starting with the UK, where sales are currently around 25% of pre-COVID levels. After very limited rail activity in the winter, passenger numbers have started to improve, and in the first week of June, mainline station passenger numbers were around 50% of pre-COVID levels. Customers are gradually starting to use trains for both leisure, especially on the weekends, and to go back to offices. The UK air sector is just starting to open, and we expect this to gather pace over the summer months. So we've been rapidly reopening units and currently have about a third of our units open. And if the current trends continue, we expect to have around half the estate opened over the summer. Demand is strong for our retail brands like Marks and Spencer's, as well as quick service and grab-and-go coffee offers, including Starbucks and Burger King. In continental Europe, where sales are currently around 30% of pre-COVID levels, the recovery continues to be led by rail, which accounts for about one third of our business there, and where around half the rail sales are from leisure travellers. And whilst activity in air remains subdued, we expect some improvement and we hope to have over half our estate trading over the summer. Again, consumer trends are similar to those in the UK, including strong demand for retail, which I'll talk about in a moment, as well as more indulgence and wellness items. We're also seeing a strong take up of the digital customer ordering solutions and we continue to roll out our technology. We've seen a good recovery in the United States where sales are around 60% of pre-COVID levels. And whilst Canada remains largely locked down with sales at around 10% of pre-COVID levels, the US recovery is being led by domestic travel and passenger numbers that have recovered to around 75% of pre-COVID levels. We currently have around 160 units trading with further plan to trade over the summer and I'll talk about this more in a moment. And finally in the rest of the world division where sales are less than 20% of pre-COVID levels, we have about 260 units open or about a third of the estate. Now the situation here varies by region and we expect it to remain quite volatile in the So, for example, China and Australia have both shown very strong demand for domestic leisure travel, but international travel remains subdued in the region, and India has sadly been heavily impacted recently by COVID. Close to home, we're seeing increased demand in Egypt with tourism reopening. Despite the slower recovery, we have seen some new business opportunities in the region. We've recently extended a number of contracts in Greece and in India, which again I will cover in more detail later in the presentation. So I did want to share just a couple of case studies to illustrate some of what we've been discussing this morning and turning first to North America. So as I said, we are seeing travel start to reopen, led by domestic travel, as you can see from the graph, with international travel improving, but more slowly. Passenger growth really started to increase from the spring break in March through April and has been growing steadily since. Sales in the United States last week were back to 60% of pre-COVID levels. Domestic demand is being fueled by leisure travel and we are seeing a pent-up demand for holidays with a more even pattern of demand during the day and more families traveling. In terms of consumer trends, grab and go is important. So we've added takeaway stations to our table service restaurants, and we're seeing more demands for treats and indulgence purchases. So we've added more opportunities to buy these from our sites. So with the return of domestic air travel, we've been really busy opening units in the United States, and on the slide is just a small selection. We've talked in the past about a systematic approach to reopening, and you can see there's a significant amount of analysis that goes into deciding what to open and where to capture the best sales opportunity. The start point is to analyze what's open in the zone by brand, range, operating hours, et cetera, and then overlay passenger volume data from the airport. From this, we make our reopening decisions. Recruitment in some of our locations is currently a challenge, so deploying simplified menus, our order and pay technology, as well as leveraging central kitchens are all important actions to help us open our units and maximise our sales in line with passenger demand. The sales and profitability report then looks at how to maximise those profitable sales once open. We test and trial different initiatives like menu changes, operating hours and promotions. And then the daily sales profitability report evaluates how effective we are being and we change and adapt where we see opportunities to drive performance. As we've reopened, we've used many of our COVID learnings to drive performance. With a focus on driving performance, there are many opportunities to rationalize and simplify our menus and deliver our service more efficiently. For example, we've reopened our Urban Crave brand with around half the previous menu items. Focusing on our best sellers, which align with customer preferences, we can deliver this menu really quickly and just with one chef. And remember, having multi-unit sites gives us the flexibility to move our brands around. At Seattle, we took the opportunity to swap a local brand, Asian Box, to a Mikasa Cantina, one of our own brands, to meet customer demand. The new Mikasa, with its all-day menu offering breakfast, has delivered a 12% sales uplift and at a higher margin. Again, with a focus on capturing sales, we're trialing grab-and-go promotions like this carry-on combo to encourage customers to take their in-flight meal onto the plane. We also saw a rapid increase in take-up in demand for digital customer ordering during COVID, and in response we're accelerating the rollout. Where we install order at table and virtual kiosks, we're regularly seeing average transaction value increases of around 5%. We're also making good progress in renewing and expanding our business in Europe. So in Europe, we've renewed and extended contracts with long-standing clients, for example, with Svedavia in Swedish airports and Nantes Airport in France. In both cases, we've extended contracts and agreed better terms and have a reopening plan in place as passengers return. On NewSpace, although there have been fewer tenders, clients are selectively continuing with expansion and development plans. For example, we've run a 10-year contract for eight units at Martinique Airport in the French West Indies, which is being significantly expanded. We also saw strong demand in Germany for our retail brands during COVID, as customers sought to access a one-stop shop service for the on-the-go or take-home consumption. So we've partnered with a market-leading German convenience brand to launch Rev2Go, which is a new format for them at Dortmund Rail Station. And if successful, we could see this roll out in the German rail channel. Strong client and brand partnerships have also helped us begin to access sites where competitors have withdrawn from travel operations. For example, at Zurich Airport, where we've taken over two Starbucks units, as well as in Denmark and Copenhagen Airport, where we've taken over the operations of the Gorm's Pizza unit. And finally, in adjacent markets, we've recently expanded the footprint of TOG Service from Norway into Sweden. Now, TOG Service provides a full range of rail catering and platform vending services, and we've just started operating onboard rail services between Stockholm and Narvik in the north of Norway. And we've also recently agreed a new venture with Norwegian airline FLIR, to operate in-flight food services. Now this leverages our food production capability. We can use existing kitchen production facilities to provide the new service. There does continue to be significant amounts of business development activity right around the globe, with the team focusing on rent negotiations, renewals, extensions, planning the mobilization of all those recent wins, as well as tendering for some new space opportunities where they arise. Some examples of renewal include at Goa Airport, where we will continue to operate 22 units for a further four years on preferential terms, and in Thailand, where we've also renewed 20 units at Savannah Bumi Airport. We also have a substantial amount of previously won new units to mobilize as passenger demand recovers, including, for example, 11 units at Dublin Airport, eight units at Cincinnati Airport, and nine units, one across regional leisure airports in Greece, amongst many others. We've agreed an opening plan with each client, determined by passenger volumes, location, and customer offer. We are also just starting to see some new tender activity. So alongside the European examples that I referenced earlier, we've also recently secured new business at the Gold Coast Airport, which expands our presence in Australian airports to six. And we continue to grow our joint venture business in India with an additional two units, one, as well as three new units in Thailand's Savarnabhumi Airport. And it's the combination of our range of brands, our robust balance sheet, and the strong partnerships we've forged with our clients throughout this crisis that have all helped us win these tenders. So there is plenty of business development activity. And so to summarise, despite the challenging trading conditions, we have continued to minimise our losses and cash burn while systematically reopening our units in line with demand. The creation of additional liquidity has strengthened our business and in the base case scenario provides significant firepower to invest in the recovery as well as downside protection if the recovery is more prolonged. Whilst the pace of recovery is unknown, we do expect sales to recover by 2024 and this, combined with our disciplined approach to efficiencies, our strong domestic and leisure mix, should deliver margins similar to pre-COVID levels over the medium term. We are already seeing a strong domestic recovery led by leisure travel in parts of the world, and we are using our learnings from COVID to help optimize performance. And as other markets recover, we are ready to do exactly the same there. Our market position with over 500 brands to choose from and with multi-unit operations gives us a competitive advantage. we will continue to invest in our customer proposition to keep us competitive and the rollout of our strength in digital and CSR strategies underpin our performance. So once again, I did want to thank our teams around the world for their incredible commitment. It is their hard work that means we are poised to take advantage of the many opportunities that will arise as the global travel market reopens and to deliver long-term sustainable growth for our shareholders. And with that, we are happy to move to questions.

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, let's start followed by one to ask a question. And your first question today is from the line of Jamie Rollo of MS. Please go ahead.

Thank you. Morning, everyone. Three questions. Morning. Morning. The first one is trying to compare the percentage of units that are currently open and your sort of summer guidance against the sales trajectory. It looks like 1,200 to 1,500 units possibly open over the summer, sort of 40% to 50%. of the units. And I'm just trying to work out what that might imply for where you think sales might go. Clearly you're trying to focus sales in fewer units, but for example, in North America, your sales are running above the proportion of units open and it's the opposite to the other region. So I might be reading too much into that, but it'd be quite helpful to talk a bit about that outlook, please. On the flow-through margin, it looks quite conservative at 25% against what you've delivered. Why might it not be as good as it was in the first half? Are there any other factors we should be thinking about? And then finally, just on North America, where you say the numbers look pretty good in recent weeks, is it fair to say that the US, at least, if not North America, is now breakeven? Thank you.

Okay so I'll pick up the first and third question and Johnson will pick up flow through margin the second question. So Jamie you're right our plan as things are at the moment is to open somewhere between 1200 and 1500 units so around 40 to 50 percent of the estate. The reality is it is difficult to give a forecast for Q4 as you know the global situation remains very fluid What I can tell you is we have absolutely seen the start of recovery in domestic travel. And as you've mentioned, USA is seeing the strongest recovery, followed by UK, particularly due to the success of the vaccination program and the gradual easing of restrictions. There isn't much to talk about between the different units and the sales performance. Most of that is really around timing and the rollout of units, Jamie. So the fact that we've got a few more sales coming through North America than we have in some of the other regions compared to their units is just more about the timing of recovery and when we're getting units open. We have a very systematic approach to what we open when and to make sure obviously that it's breaking even and that we're generating profitable sales. So I'd love to be able to give a stronger forecast to Q4, but at this point in time, I think given the fluidity of the situation, our job is just to really focus on every single location, make sure that we can open those units really quickly as demand recovers. And as I said earlier, with over 10,000 people ready to be redeployed, we can respond really, really quickly in all of our regions.

Jonathan, do you want to pick up the flow through questions? Morning Jamie. So with regard to the profit conversion on the lost sales, I wouldn't read too much into what we say here. We're really maintaining the guidance that we've given both in March and in December with recent announcements. Clearly, There is still uncertainty and there are a number of moving parts in this so as we've said a number of times over the last 12 months or so there is an unknown around for example our ability to get ongoing waivers of minimum guarantees with clients, there is a certain unknown about the further extension of furlough across many of the countries we operate in. So I think we just need to be a tiny bit cautious, conscious of that. Having said that, as you've seen, we've continued to negotiate minimum guarantee waivers at a very similar level throughout the COVID period thus far. And indeed, as sales have remained low, furlough arrangements and other forms of support from various governments have been extended. We would really assume that to be the case, but I think we're just taking a slightly cautionary position. In the knowledge that there are certain aspects of government support, for example, here at home in the UK, business rate relief will fall away in the latter part of this year. But I wouldn't read too much into that. Essentially, we're maintaining historical guidance.

Thank you, Jonathan. So the last question was around, is America a break even? So as we previously discussed, we would expect that when sales are north of about 50% of 2019 sales level, at an EBITDA level, we would break even. Now with the United States being better than that, I think you can read across that at an EBITDA level, we are more than breaking even. Great. Thank you very much.

Thanks, Jimmy.

The next question is from the line of James Rowland-Clark of Barclays. Please go ahead.

Hi. Morning, everyone. Thanks for taking my question. I've got three. Just on the new tender opportunities, please could you elaborate a little bit about the competitive environment there and the kind of terms you're seeing on any bidding processes that you're currently involved in and how that differs by region? And then secondly, on the rent, could you give an idea of what proportion of the estate you've managed to link minimum guarantee to passenger numbers and the proportion of contracts you'd expect to extend during these discussions? And then finally, on the unit model going forward during the recovery and on the recovered sales base, could you just talk a little bit about the shape of the units in terms of pricing, the shape of menus, staff per site, and the level of automation. That's just in reference to, I think, your earlier comment about kiosks potentially offering 5% upside to transaction values.

Thank you. Yeah, sure. So I'll do one, three again, and Jonathan, you want to pick up two? So in terms of business development, worth remembering that the absolute primary focus of the business development teams is make sure that they continue to renegotiate the rents, particularly minimum guarantees, make sure that we continue to extend business because as we all know, renewals are profitable. And then on top of that, agree an opening program for a very large pipeline of units based on all the things you'd expect, Jamie. So, you know, sort of passenger numbers, location and offer. Once they've done that, then we're into kind of in parallel, where do the new opportunities arise? I think as we've said before, we expected and indeed are seeing that in much of the sort of developed mature markets that we have, so for example across Europe, while there is a little bit of development activity, Because of all the financial support that the companies are getting, so by that I'm talking about things like furlough, we didn't expect to see much change to the competitor landscape this year. However, if you go further afield to the rest of the world where there is less support financially for companies, we are seeing the shakeout of what we'd call the smaller competitors. So we've previously talked in countries like India, where the sort of smaller private competitors have fallen by the wayside. It doesn't mean that the larger portfolio players that we compete against have fallen away at all. You know, they're still, like us, are very rational, but the sort of the tail of less rational competitors definitely haven't reopened their units, and there's a consequence Some of the tenders now, where typically you might see eight or nine people tender, now it's sort of three or four. A good example of that actually was one of the examples that I touched on in the presentation, which is the units that we've won at Gold Coast Airport in Australia. So really interesting. The business came up for tender. We were successful in bidding there, not actually on the financials, which were fine, but actually on our offer and also on our reputation. The client actually referenced Perth Airport where we trade and the Perth Airport gave us a glowing sort of commendation based on how we have behaved through the crisis, so keeping our units open, supporting local communities, and that played quite an important part in winning the business in Gold Coast. So I think for me, there's a combination of things going on. First and foremost, the business development team have to focus on the priorities I've outlined, but where new business comes up, there is a bit less competitive, we're seeing, but also the way we have behaved over the last year, as I've just described, I think gives us a competitive advantage and we obviously intend to optimize that. Jonathan, do you want to pick up on rent?

Yeah, sure. So with regard to the first point about the percentage of deals whereby we've converted to a mag per passenger, the first point I'd make is that we have continued to see just over two thirds of our contracts with the minimum guarantees waived, so we are only paying the concession fee, and that's been a very consistent pattern throughout the pandemic. We haven't disclosed the degree to which those are explicitly renegotiated to be a MAG per pax over the lifetime of the contract, partly because we've got quite a bunch of different models out there, to be honest. So we have got some long-term contracts where that has been the case, and that therefore gives us protection over the life of the contract. Equally, in many cases, we might have got that construct in place just for a year or two, or in some cases it will be an explicit agreement that until passengers get back to a certain proportion of pre-COVID levels, we will pay concession fees. So, difficult to precisely articulate the mix there, but I think the key message is we continue to get at least two-thirds of the minimum guarantees waived. And clearly, as we see sales recover, that will become less and less important, although it may be slightly more challenging to negotiate new terms. Again, with regard to the proportion that we have got extensions, difficult to call because it's quite a complex picture. I mean, the reality here is, I think Simon just alluded to this, it's early days and We've got a mixture of longer-term and shorter-term extensions, some of them with preferential terms, clearly stating what's probably clear to you. For the clients, in many cases, going to a full-blown tender isn't particularly in their interest at this point in the cycle, and therefore they are prepared to give us shorter or medium-term extensions, anticipating a tender in the future, often with preferential terms, quite frankly, because there's no real competitive tension for them to exploit. But difficult to put precise dimensions around that at this stage, but hopefully that gives you a flavour of what's going on.

So just finally, in terms of unit model, so as you know, we've got around 2,800 units. And we've effectively, whilst we've only got 40% of them open at the moment, we've effectively rebuilt for each individual unit an operating model. And by that I mean smaller menus, more efficient back office, as well as more efficient and customer-friendly front of house, so digital solutions being the obvious one. As we reopen, that obviously allows us to break even on the lower level of sales. As we look forward, I think that's going to be really, really important because obviously we are suggesting that we'll get back to sort of pre-COVID margin in the medium term. And in order to say that, what we are balancing is all of those initiatives across all of those units where typically our menu sizes at the moment are about half that that you'd normally see. We're balancing that with a very aggressive opening program and new business, which, as you know, has a drag on the margin in the year. Can you take the new store opening cost into the year? As well as some cost inflation, which we always see and we'd expect and is built into our plan. So for me and for the team, all of that work on menu, operations, and customer solutions is the balancer to make sure we've got a lot of momentum to then, as you always know, focus on long-term compounding growth by opening 10 to 15% of new business over the next couple of years. Good. Thanks very much. Does that help? Thanks, James. Yeah, thanks. Thank you.

The next question is from the line of Leo Carrington of Credit Suisse. Please go ahead.

Good morning. Morning. Just two questions from me, please. Firstly, in the Spanish press, there's been some recent coverage of disputes with IENA. To the extent that this affects you and the extent to which you can say, can you outline the details of this? What the likely resolution will be in your view and just how this particular scenario compares to that with other landlords. Clearly, you mentioned two-thirds have given waivers, so potentially there isn't that much really cross, but I'd love to hear your view on that. And then secondly, in the references to the pipeline and business development activity, Of the 10% to 15% net gains you've indicated you expect, how much of these have been achieved so far, I suppose, through 2020 and this year? And how much is still in the pipeline, if you like?

Yeah, okay. So I'll do the first one, Jonathan will do the second. The first will be quite a quick answer. So, obviously, what you're alluding to is the various business press around court cases recently with our largest client in Spain. We obviously can't comment on that for legal and business confidential reasons. What I would say is that we have taken a prudent view in our business in terms of the accounting. I can't give you any more comments at this stage in terms of the actual discussions going on. Okay.

Jonathan? Okay. So, Leo, with regards to the question about the pipeline we've talked about. So, as you heard, we've said that we've got something around 10% to 15% of potential additional net gains in that secured pipeline, which you can therefore read as sort of in the sales region. Of that, something around 35-40% has already been opened. So clearly that leaves quite a significant pipeline still to be opened. I think we've talked before about that being sort of 100 plus units, which are still to come. But substantially, you know, a substantial amount has already been opened sort of immediately pre-COVID or just post-COVID.

Great. Thank you very much.

The next question is from the line of Tim Burrow at Numis. Please go ahead.

Hi, morning, both of you. I had a shorter term thing and then one longer if that's okay. Sure. It's helpful that you've given the June start, but obviously that's only a handful of days really. How representative do you think that could be of Q4, especially given it's a more leisure-centric quarter in the Northern Hemisphere? And then secondly, looking to next year, It's a few months on from the rights issue and in your presentation pack there, I think you were looking at, it seemed to be around minus 30 in like-for-like passengers next year. Clearly early dates, but anything you could, any way your thoughts have evolved on next year? Thank you.

Okay, I'll pick up sort of shorter term and then Jonathan, if you want to just pick up Second question, which is more longer term or medium term probably. So as I said a bit earlier, we're not going to give a forecast for Q4 for all of the obvious reasons. That said, I think you've hit on a very important point, which is we have a substantial European leisure business, both in rail, which as we've said in the past, but worth sort of emphasizing, in Germany and France, half of our sales are leisure, different to the UK where it's obviously more commuter. So we have a substantial business both in rail and air across Europe, the Nordics, Germany, France, Spain, and it's subject to the European vaccine passport going live as we understand it at the beginning of July, that will make the freedom of movement for our European colleagues much easier. And given our mix of leisure consumers, we would expect to be busy opening units. It's why we talked about opening another 100 or so units over the next couple of weeks to capitalize on that demand. And indeed, in the last few days, we are beginning to see encouraging signs of that. So it is linked to the vaccine passport, but as we understand it, that plan infrastructure is well underway. And if you've had two vaccines or you've had a test or you've recently had COVID, you will be able to travel freely in and around Europe. So stepping back from it, I don't think that the numbers we've given you are indicative of Q4. I just think we were trying to be helpful and give you the most recent data we could. I think the positive momentum should come from what I've just described, and that should, given our mix, be something, like we saw last year, by the way, that will give us reason to open more units. Jonathan, do you want to... briefly pick up on the medium term.

Yes, so I think what you were asking was if we look out over the medium term, were our thoughts changing versus the base case we announced in the rights issue? The simple answer is basically no. Whilst there's a bit of uncertainty around the very near term, we're still subscribed to the central view we took in the base case, which to recap was to see sales back at something around 50% of pre-COVID levels by the very end of this year and then grow to something like 80% as we got into the second half of next year. But again, clearly plenty of water to flow under the bridge, but I think we still feel that's a very reasonable scenario. And that, of course, is the base case that we talked about in March. Good. Thank you.

Great. Thanks very much.

No problem.

The next question is from the line of Douglas Jack of Peel Hunt. Please go ahead.

Yeah, good morning. Just returning to the capex of 350 to 400 million, that additional financial capacity you mentioned earlier and the net gains, I was just wondering if you could perhaps expand on the timing of that and perhaps the location where that would be spent. And where really I'm heading is what we should perhaps be penciling in in terms of total capex and net gains in 2022 and then 2023 if that's possible.

Okay, so I'll give a sort of half that answer and then I'll hand over to Jonathan to give you a little bit on the numbers as much as we can. So you've kind of asked where do we think we can deploy the 350 million that we have available and from my perspective and I hope it's it's coming across loud and clear, but we do see many opportunities as the travel market recovers. Obviously, our immediate priority is to reopen the units we've got and drive profitable sales, as well as I've said earlier, renewing and extending existing contracts, and then build that substantial pipeline of contracts that are won but are not yet open. So the first bit of that is building that substantial pipeline of contracts that will take some of our CapEx. Now, on top of that, once we've opened those units, The base case scenario that we set out a couple of months ago, the rights issue, did, as you said, indicate that we'll have a significant level of surplus financial headroom. And in part, we'll use that to reinvest to drive competitive advantage. So things that we talked about today, so technology, consumer propositions, sustainability. But as the resumption of new business starts, And you've heard from today that we are seeing a few new tenders start to come out. We will then deploy the remaining capital in those areas. And all I would say before handing over to Jonathan is we will retain our discipline and bid for contracts where we can see a return in line with our investment criteria, so three to four year payback. Jonathan, do you want to answer the second part of that?

Yes, so again, possibly unhelpfully, I think we can't really give you clarity on the precise timing, but just to sort of go back around what we described at the announcement of the rights issue. We said that there was something like £360 to £400 million of capital via power, as it were, to accelerate net gains. So if you take the central view there, based on our normal metrics around the sales to capex ratios, you would be talking about potentially over a three year period through to 2024, something like an additional seven, 800 million of sales, which would equate to as much as 25% of additional net gains. But remember that's over a sort of three, four year period. The timing is wholly uncertain. And again, this is merely guidance. We're not committing to investing that much because, as Simon said, this is all about, as ever, maintaining disciplines around our returns and making sure we take the right opportunities. But just to help you sort of get your head around the mask, clearly, that would be over and above the normal ongoing maintenance capital that we would see to maintain the footprint of the business, which in due course we think will resume trending towards pre-COVID levels from the very, very low levels we're seeing at present.

Good, thank you. We'll try to be as helpful as we can there.

Yeah, hopefully that goes some way to answer the question, Leo. The answer is we don't really know what the phasing is at this stage and certainly not what we're going to see in 2022.

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

Hi, good morning. Good morning. Three questions from me. Just on your conversations with landlords, what is the view on mags where, say, traffic is recovering in the US and will you have to start paying accrued rents back in that kind of region? Second question, you mentioned rationalising some of the menus for staff shortages. Where are you seeing these shortages and how much of this is going to be an issue on your reopening And finally, maybe asking the question on margins differently, is there anything in the medium term that you would expect to undo the improvements you've had in your operating model or indeed the gross margins? For example, do they sort of fall away when sales return more materially?

Okay, I'll pick up the first two and Jonathan can pick up the third margin question. So first of all, as we said in the past, we don't do sort of rent deals, which we don't have to pay back. So a waiver is a waiver. So that's not an issue for us at all. We have actually had a really good support from the majority of our clients to put back in place some sort of variable rent structure as we talked about earlier. What we're tending to see, because passenger numbers are still relatively low, I'll come back to North America in a minute, is those deals still stand and we're doing them on a quarter to quarter basis at the moment. I think I've said in the past that the negotiation becomes more sophisticated when passenger numbers get between sort of 50, 60, 70% of pre-COVID, because that's when clients will want to see their minimum guarantees come back. But if you use North America as a good case study, that is when you sort of bring other parts of the negotiation in to make it more sophisticated. So things like renewals, extensions, Things that create value, that means overall the deal you're doing with the individual client, bear in mind every single airport has its own client, creates value for us as an organisation. So as things stand at the moment, we are not coming under material pressure to go back to pre-COVID minimum guarantees in the States. I expect we will as those passenger numbers continue to rise, but the team are really good at then packaging up other stuff that creates enough value to make that worthwhile for us in the overall P&L. In terms of, well, you want to pick up the margin question, I'll pick up the other one after that because it's linked.

So in terms of the margin, Ali, I think Simon's arguably covered the key points earlier on in the call. You know, We have made progress, as you've seen from the first half results, in gross profit margins as a consequence of the sort of work that we've done to re-engineer the offer, tailor the range, et cetera, in a post-COVID world. So we're clearly pleased about that. It's something we've talked about more extensively in the past. And we will be looking to hold on to some of those benefits as we look forward. Equally, we would look to hold on to some of the benefits, for example, from some of the organisational restructuring that we've done over the last 12 months. However, having said that, there are clearly all going to be pressures on the business. We've talked about cost inflation. Indeed, you've pointed to that. So, as Simon said earlier, that's something we're very conscious of, albeit we've factored it into our plans. And clearly at some point as we move forward and we start to step on the gas with regard to business development, that will probably come with its own pressures in terms of the overall margin in the near term. So I think the message is that the guidance we've given looking down to the medium term is an attempt sort of peering into the fog to factor all these things in and that's why we feel confidence in saying that we can achieve pre-COVID margins but don't really want to stretch it beyond that.

So just in terms of your recruitment question, I'll broaden it slightly to start with. So first of all, remember in a lot of our businesses, we have substantial amounts of our existing team on furlough. So around 10,000 of our team across Europe and the UK are on furlough that we can bring back and indeed are bringing back. On top of that, where we anticipated still needing more teams, particularly in the UK, we made a strategic decision to start recruiting earlier because we could see that the market was quite hot in the UK, particularly for chefs. So we started our recruitment for our, if you like, the additional on top of the furlough, probably about a month earlier than the market, which means we're in a good place with our teams in the UK and, as I said, right across Europe. You're absolutely right. In North America, there is definitely an availability of certain skills that are harder to source than others. So, for example, chefs are proving harder to recruit than bartenders. And it is also in certain locations, particularly in tourist locations and leisure locations rather than the big cities. So, fortunately, We have a bit of flexibility in what we can do. So obviously, as we've spoken about in the past, we have multi-unit sites. So we're not betting the ranch by only having one big unit that we have to open. We could have 5, 6, 7, 10 units so we can pick and choose to optimize our profitable sales. But we've also been busy optimising our offer to make sure that we do all that we can to contend with that labour shortage. So, for example, that means more grab and go in our food-led units. It means simplifying our menus. It means leveraging the central kitchen capability so we can really push out a lot more food from one place rather than having lots and lots of chefs in individual restaurants. So there is competition for labour. We would expect labour inflation in the States to continue to rise, but that is built into our plans and why we keep coming back to our view that we'll get to pre-COVID levels of margin in the medium term.

Thank you.

Good. Perfect. Simon Smith for any closing comments.

Thank you. It just remains for me to say thank you for joining today. Hopefully the presentation and answers have been helpful and have a good summer and enjoy your holidays. Thank you very much.