SSP Interim results Wednesday, 3 rd June 2020 Simon Smith, Group - - PDF document

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SSP Interim results Wednesday, 3rd June 2020

Simon Smith, Group Chief Executive Officer Thank you. Good morning and thank you for joining us “virtually” for our Interim results. On the call today we have Jonathan Davies our Group CFO and Sarah John, Director of Corporate Affairs So just to take you through the agenda. I will give you a short overview of the first half, Jonathan will then take you through the financials and I will review the business and our plans for recovery. And we will finish with Q&A where there will be plenty of time for questions So to start, COVID 19 has clearly had a very significant impact on us all. And on a personal note, I hope that you have been able to deal with these challenging times and that you and your families are safe and are well. In a moment I’ll take you through our response, but before that a few words on how the business performed in H1 before this crisis. So, before COVID 19, SSP had a good first half and we were on track to deliver another strong set of results, in line with expectations. We have made good further progress in expanding the business, opening new units in existing and new sites, with strong new business wins further strengthening our pipeline. Our like for like sales were in line and we had made further efficiency gains. From the end of January we saw the rapid escalation of COVID 19 right across the business, and as Jonathan will take you through in a moment, its impact reduced sales in Q2 by around £150m and profit by some £65m. The pandemic has been unprecedented and resulted in an almost total shut down of the global travel industry. Now our experience in Asia helped us, inform us of the likely trajectory of the virus. And our response was to take quick and decisive action, to protect our people, our cash and our business from a very early stage. We immediately planned for a variety of trading scenarios, and, using the “pessimistic”, we increased liquidity to cover this scenario and create additional headroom. This puts us in a very strong position to manage though this crisis.

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Furthermore, we have now hibernated the business and are operating around 10% of our units. Throughout all of this, I've seen SSP at its best. Teams have galvanised, working swiftly and professionally and demonstrating their resilience and “can-do” approach. And simultaneously, around the world countries are doing what they can to help and support our local communities. I'm immensely proud of what’s been achieved, and in many ways this experience has strengthened us as a team and, I believe, puts us on an even stronger footing to re-launch

• ur business as demand recovers.

But we are not complacent, and although the travel market still remains largely closed, it will recover over time, and we will play our part in helping to build customer confidence to travel

• again. We have planned how and what to re-open, and are starting to test this.

Simultaneously we are reducing fixed cost and driving more flexibility into the model. Building on our existing strengths and market position, I believe the actions we are taking no, will leave SSP a fitter, stronger business. With that, I will hand over to Jonathan to take you through the financials. Jonathan Davies, Chief Financial Officer Thank you. Good morning everybody. So as Simon’s already shown you, our first half results were heavily impacted by COVID 19, but were in line with the expectations we set out in our trading update of 25

th March.

Just before I start, it’s worth saying that this is our first set of results on an IFRS 16 basis, but I’ll show you IAS17 comparatives throughout the presentation and I’ll explain the impact of any adjustments. Overall sales were down by 2.7%, on a constant currency basis, with net gains adding 5.7% to sales. Operating Profit was just above break even, at £1.3m, compared with £62.5m last year, and under IFRS16 we saw a small loss of £5.8m. EPS showed a loss per share of 4p, or 7.5p under IFRS16 Net debt increased to £458m, including the proceeds of the equity placing of £209m in March. So first looking at the overall P&L. The sharp fall in sales due to COVID 19 hit all of the P&L ratios, as would be expected, and indeed as indicated in March, leaving Operating Margin down by around 5% year on year. If you look at the IFRS16 impact, first you can see that concession fees are lower at £113m, compared with £254m pre-IFRS16, as this now represents only the variable element above the minimum annual guarantee.

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And secondly, you can see the increase in the depreciation charge to £203m, from £55m pre-IFRS16. Reflecting the capitalisation of the minimum guarantees on the balance sheet as a “right of use asset” of about £1.5bn. Looking further down the P&L, we saw an overall Net Loss of £18m, or 4.0p a share. Including the effect of IFRS16, this Net Loss increased to £34m, with Net Financing costs higher, at £27m compared to £12m pre-IFRS16. This of course is due to the unwind of the discount applied to the capitalisation of the minimum guarantees over the lifetime of the contracts. The tax charge is a small credit, reflecting our estimated losses for the full year as a result of COVID 19, and represents an effective tax rate of 7% Non-controlling interests were also lower, again due to the impact of COVID 19 on our joint venture operations. So now turning to the impact of COVID 19 on sales. Prior to the pandemic sales were running at around 1%, like for like sales running around1%, in line with expectations. They weakened dramatically in February, as a result of the COVID 19 across Asia, and then even more dramatically in March, as the impact spread across the rest of the world. In fact sales were down only 20-30% in early March, but down over 90% in the final few days of the month. During April and early May, sales have remained at very low levels, down around 95%, reflecting the almost total closure of the travel space, and our very rapid response, closing

• ver 90% of our outlets during March and early April.

So how did this translate into overall sales and profit? In our February update, we indicated the sales impact, mainly in the Asia Pacific region, would be something like £10- 12m over January and February, with a corresponding impact on profit of £4- £5m. In the March update we estimated that the impact would be a further c £125-135m in sales with a corresponding profit impact of £50-£60m The actual impact on our results was at the higher end of the range, reflecting the almost total shut down of the travel sector in the last days of March. Looking briefly at the impact by region. As you can see, like for like sales were down across all regions. The rest of the world was hit slightly harder due to the earlier timing of COVID 19 in Asia, and the UK and North America slight less due to the slower timing of the lock downs. The Net Gains were still up 5.7%, despite COVID 19, due to the strength of our new business opening programme particularly in North America and in Continental Europe. Without COVID 19 we would have anticipated Net Gains for the Full Year to be slightly ahead of this, at just over 6%. Now looking at the profit impact. The most extreme impact was in Continental Europe which made an operating loss in the first half. This largely reflected the higher labour costs across the region and the fact that in many of the Continental European countries it takes longer to reduce staff numbers than, say, in the UK or US. It’s also worth remembering that Continental Europe was impacted by the strikes in France in December and January, as well as significant pre-opening costs from some large new contracts. The rest of the divisions were all profitable, despite the impact of COVID 19, albeit with lower profits year on year.

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So turning to cash flow. The free cash outflow in the half was £177m.The working capital

• utflow was £45m, benefitting from actions taken to manage short term liquidity, which will

unwind in the second half. Capital was £120m, up £11m year on year, reflecting the strength of the net gains and the new opening programme. We have now put our capex programme essentially on hold until such time as we have more clarity, and are anticipating capex of £10-15m in the second half. We also invested £27m on acquisitions, principally on the Red Rock airport operations in Australia and the Station Food rail business in Germany. Now, looking at Net Debt. Net debt at the end of March was £458m, representing leverage of 1.7 times EBITDA. This benefitted of course from the equity raise of £209m in late March. So excluding this, on a proforma basis, Net Debt was about £667m, with leverage at about 2.5 times. This included cash on the balance sheet and undrawn committed facilities of around £205m, prior to the equity raise. In March, we took swift and decisive action to strengthen the balance sheet and provide additional liquidity. The next chart shows the impact on sales and profit, in the second half of the Pessimistic scenario that we set out in March So just to recap, in this scenario, we assumed an almost total shutdown of the travel sector with sales down 80-85% in the second half, with the impact in third quarter being more severe and a very slight improvement in the final quarter. This represented a sales reduction of some £1.4bn against previous expectations, with a profit impact of between £350m and £420m, representing a profit conversion of between 25% and 30% on the lost sales. This would translate into an EBITDA loss of between £120m and £190m in the second half. And in terms of Operating Profit that would represent a second half loss of about £180- 250m, with a similar number of course for the full year. As I said earlier, sales are running slightly below this level. However even if we were to see sales at the current run rate for the entire second half, we would still anticipate EBITDA for second half to be within the range we indicated in March. Why is this? Well it is mainly due to the speed and scale of the cost base reductions that we’ve been able to achieve already. In particular through negotiating reduced rents, mainly the waiver of minimum guarantees, and the access to Government support through furlough schemes in most of our major countries, which have been much more extensive than we had

• riginally anticipated.

So whilst we hope to see sales, and therefore profit, pick up as the lock down eases and more units open up over the coming months, the timing is still very difficult to predict and therefore we will continue to plan for this very pessimistic scenario. So what would this scenario imply for cash usage? Looking at the second half, as I’ve just shown you, this scenario would represent an EBITDA loss in the range £120-190m. On top

• f this we‘d see a loss of negative working capital of somewhere between £180-200m, due

to the sharp fall in sales, and there would be other net outflows of between £40m and £50m. This is very much in line with the scenario that we set out in March.

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And it’s worth emphasizing here, that as soon as we see any recovery in sales, from these very low levels, we will benefit from the rebuilding of the normal negative working capital, which is not assumed in this scenario. Just to complete the picture, we’ve taken further action to protect liquidity, including negotiating a two year deferral of our term loan repayment of £32m, which was due in July. We, of course, are not paying an interim dividend and as I said earlier we are effectively putting our capital program on hold. We are also looking to retain in the business, as much of the cash from the final dividend, of £27m, through a small placing today, which will offer shareholders the opportunity to convert their dividend into new shares. Therefore, under this scenario, even with no recovery in sales, we would still anticipate a cash usage in the region of £340-440m in the second half. And in terms of the ongoing cash burn, we would expect this to be in the region of £25-30m by the end of the half. Now looking at the latest position in terms of available cash and facilities .At the end of March we had £413m of liquidity, that is cash on the balance sheet and undrawn RCF, and during April we have now put in place a further £337m, giving us total liquidity of just over £750m. This was principally through gaining access to the Bank of England COVID Commercial Finance Facility, which will provide a further £300m for nearly 2 years. The terms of the £112m liquidity facility that we announced in March, required that any drawings would be repaid as soon as we accessed the Bank of England scheme, and therefore has effectively been superseded. Since the end of March we have also secured access to a number of other smaller liquidity lines, including government-backed facilities in France, Spain and Switzerland, providing a further £37m. So as a result, we would still have significant liquidity reserves by the end of the year, in the region of £310 - £410m. And therefore, even if there was no improvement in sales as I said, we would still have sufficient liquidity for over 12 months. As well as raising additional funding we’ve also negotiated leverage and interest cover waivers on our senior facilities and our US Private Placement debt for the next 2 periods, in

• ther words that’s right through to September 2021.

In summary, with the additional funding raised and the actions we’ve taken to protect liquidity and manage costs, we believe that we’re in a strong position to operate through a really prolonged crisis and slow recovery. With that I’ll now pass over to Simon to update you on our business plans. Simon Smith, Group Chief Executive Officer Thank you Jonathan. And so turning to COVID 19, I’d describe our response in four phases: business protection, hibernation, planning for, and the recovery itself, and beyond that, a return to sustainable

• growth. And over the next few slides I’ll talk though our response and our planning for each

phase.

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Now what matters to me most is being decisive at each stage, doing the right things to set us up for the next stage, and always leading with health and safety. The actions we’ve taken to date have consistently followed this approach. My expectation is that we will see a gradual recovery in the Travel channels, led first by our units in the Rail channel and then through our domestic Air locations before more international travel later this year. So in phase 1 our immediate focus was business protection. The priority was the health and safety of our colleagues and customers, and in practice this meant instigating and communicating new hygiene protocols based on local health advice, and directing office colleagues to work from home. We immediately engaged with our landlords and sought to remove minimum guaranteed

• rentals. And as we took the decision to close more and more units we implemented unit

closure procedures around stock, deep cleaning and security. Unit and head office staff were furloughed where possible and the business was effectively hibernated. To preserve cash we immediately reduced discretionary spend and capex to the minimum levels required, and the Board and senior management took salary reductions. We faced our liquidity challenge head-on and having quickly planned for the pessimistic scenario with revenues down 85% for the whole of H2, and importantly with scope for further protection, we sought to bolster existing facilities, raising around £550m through new equity and access to Government loan schemes. We also suspended the share buyback programme, and deferred the final dividend. Through all of this, we’ve sought to minimise the impact on our colleagues, and have been regularly communicating with teams to keep them informed. We’ve also tried to support those most in need during this crisis by donating to local charities and health services. And the next slide gives you a snapshot of some of the initiatives that have been undertaken around the Group. I’ve been humbled by the efforts of our teams to support their local communities, some of which you can see on this slide but just to pick out a couple. In the UK, Millie’s Cookies has worked with suppliers to make and distribute 100,000 freshly baked cookies for our NHS hospital staff. And in India, though our joint venture TFS, we’ve taken part in an initiative working with local NGOs to cook meals for people who have lost their livelihoods as a result of the government

• lockdown. And to date, more than one million meals have been supplied.

So before moving on, let me try to give you a flavour of what's happening around the 36 countries in which we operate. Until recently, we've seen virtually no activity at all across the regions. However, we are now starting to see some relaxation of the global lockdown, led by China, with most of Europe following suit. The early evidence suggests that when restrictions begin easing, it takes both time for people to have the confidence to start using public transport again. And there of course remains a degree of uncertainty in how quickly our customers resume their spending habits. So now turning to each region; in the UK, at the moment almost all of our units are closed, with the exception of some M&S simply food stores located in hospitals that we kept these

• pen to support key workers.

With the slight easing of restrictions we are preparing to test opening some units in rail later this month, and if successful we would expect to have around 50 units open by the autumn.

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In Continental Europe the picture is mixed. In Germany the easing of restrictions started in late April, and the momentum behind relaxation has continued to grow. With the rail network still partially operating throughout the crisis. In the Nordics, rail is just starting to open up again, but conversely there is almost no activity in France or Spain, the latter being solely an air business for us. Again, expectation is to

• pen more units in each country, so for the whole of the Continental Europe region, we

anticipate having around 200 - 300 units open by the autumn. In North America, which is an exclusively air business for us, 80% of which is domestic, the lockdown is easing state by state. Whilst it’s still very quiet, the expectation is for a gradual return, led first by domestic air travel, and we are planning to open around 50 units in domestic terminals by the end of the summer. And finally in the rest of world. Again the picture is mixed. I’ll talk about China in a moment, but aside from China, in most of South East Asia and the Middle East travel is still closed. Australia is beginning a very cautious relaxation of lock down, and India is doing the same. In both of these countries I expect to see the domestic air business open up first. All in all, in

• ur rest of world division, we’re aiming for around 100-150 units to be open by the autumn

So let’s just take a closer look at China The Asia Pacific region which includes China and Hong Kong accounts for around 8% of SSPs revenues. Following the outbreak of COVID-19, China locked down in January and air travel declined quickly. And you can see that from the charts on the right. The number of flights executed in February was less than 4000 daily or about 20% of the

• capacity. And this was down from more than 17,000 in January.

As China starts to emerge from its lockdown, flight numbers are picking up, and by the end

• f May daily flight numbers are up and are now over 10,000. This is clearly led by domestic

air, with very little change in International flights at this stage. Encouragingly, around 45% of our business in China is in domestic air, and from a low of almost no domestic air sales, we are now tracking at around 30-40% of normal levels in those airports which are almost exclusively domestic. So, as I look around the world, although the travel sector remains largely closed, they are a few common trends emerging; the rail sector seems likely to start to recover first, followed by domestic air and finally international air. Our focus now is on planning for the recovery as we gradually progress into the recovery phase. And so to my immediate priorities. As always it’s health and safety first. Getting colleagues back to work, safely, and our units ready for customers is key. We’re implementing additional health and safety protocols and new operational and social distancing measures to help restore confidence. As you would expect, our approach to re-opening our units is data driven and systematic. We’re tracking traffic volumes and prioritising which units to open first based on customer demand, unit location at a site, and profitability.

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Customer research in the rail sector has highlighted the demand for more grab and go, speed of service, mobile ordering, cashless payment and social distancing, as really important. Importantly, having multi-site operations, often with 5 or more different concepts at one site, we can open our units selectively over time as passengers’ return, so we have the flexibility to open the right units, in the right locations, and do profitably, even at lower levels of passenger numbers and sales. Ahead of opening units, we’re re-engineering the cost base to enable us to make profit at lower levels of sales. And the immediate focus is on reducing rents, our minimum guarantees and franchise fees, and of course taking down in unit overheads. Clearly not all of our units will open now. And for those that don’t, assets are safely and securely hibernated, and we’ve agreed rent holidays with clients. Getting our units open at the right time and in the right way, will I believe support the process

• f rebuilding customer confidence to travel again?

My approach to our overhead is to strike the right balance between rightsizing the business for short term and having the right infrastructure in place for the recovery. So the focus is on the simplification of our structures and processes and the removal of low value discretionary spend. We will continue to invest in technology where this will further simplify our processes and support our efficiency plans. Communicating regularly with our people, being open and honest through every step of the process, and keeping them informed and treating them fairly. And finally we’ll continue to support the communities in which we operate. As I said earlier daily passenger data is informing us of what and when we open with the most prime locations opening first. Our approach is simple; test, learn and then adapt. As units open, our teams across the globe are able to share learnings and take this best practice to take into the next phase of our openings. So let me give you a couple of examples of how we’ve put this theory into practice, and in what we’ve actually opened to date. In Germany, we prioritised units with low complexity and waste, so predominantly our retail Spar Express formats and bakery brand Heberer to open first. With a simplified offer focussed on the most popular items, reduced opening hours and a lower franchise fee, we can make the offer work at lower level of sales. In China we continue to operate a number of units at our key airports, including at Xian,

• pictured. We’ve implemented strict health and safety protocols including temperature checks

and face masks and limits on customers who eat-in. Again we’ve adapted the menu to drive key items and encourage trade ups. And the units are trading well. And so to the longer term. As I said from the outset I want SSP to emerge from this crisis a fitter and stronger business. Our customer base gives us a unique opportunity to stay ahead

• f the changing customer trends, and I expect we will see further changes, including for

example, a gradual shift towards healthier eating as we move through the crisis. The demand for technology to order and pay is already a well-established trend, and we will continue to build our capability to deliver this as well as trial new technology. For example

• rder from seat and delivery to our customers in our locations.

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We will also continue to grow our business, building on the already strong new business pipeline, new opportunities will emerge. North America remains a significant opportunity for us, and we have a great business there which we will continue to invest in and grow. I’d also expect new opportunities including acquisitions may arise. We will benchmark these, and really focus on those that give us the best returns. And finally before finishing, just a few words overall on how we have done in our first half. Whilst travel undoubtedly be disrupted, it will recover and we will continue to seek out value creating growth opportunities. We opened important new business in H1, growing by 5.7% and added to an already strong pipeline of new business wins. So just a couple of recent examples of some of those wins. We won a new contract at Dublin Airport which commenced operations in February. We won that business with a compelling

• ffer of local and international brands, supported by service technology enhancing the

customer experience and a credible sustainability plan which included removing the use of single-use plastic and using local and certified ingredients. In North America, we have had another strong period of net gains. And we have also won business in Germany, in Scandinavia, amongst others. So in conclusion As I said at the outset, prior to the onset of COVID, SSP had had a good first half. The impact of the virus has been very significant, but I think our response to date has set up us well to manage through this crisis. Importantly, even in the pessimistic scenario and with extremely low sales, we have sufficient liquidity to withstand a prolonged downturn and slow recovery. That said, whilst a degree of uncertainty remains, my expectation is that we will see Travel recover sooner than that. Yes it will be a gradual recovery, led first by our Rail channel and then domestic air, especially in countries with significant domestic air infrastructure like in the USA and Asia So our focus now is to gradually and safely re-open our business where demand supports this, and simultaneously we will lower our cost base and reduce the fixed element of it, importantly by reducing our minimum guarantee commitments. Alongside this we will, at the right pace, open the units in our pipeline, and seek out and invest in new long term growth opportunities The protection of our people and customers is key to me and we will remain absolutely focussed on delivering for all our stakeholders in a sustainable way. And finally before finishing, again, I want to thank our teams, who are doing an amazing job. I would just thank you for your time and in the interest of time and look forward to seeing you when we're out of this crisis and please keep safe and well in the meanwhile. Jonathan Davies Thank you very much indeed for joining the call guys.

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Simon Smith Thank you. Bye bye.