SSP Group plc (SSPG) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the SSP Interim Results 2020 Call. My name is Stuart, and I will be the operator for your call this morning. [Operator Instructions] I will now hand you over to Simon Smith, Group CEO; and Jonathan Davies, Group CFO. Please go ahead.

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'll 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've 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 half 1 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, and with strong new business wins, further strengthening our pipeline. Our like-for-like sales were in line and we have 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 quarter 2 by around GBP 150 million and profit by some GBP 65 million. The pandemic has been unprecedented and resulted in an almost total shutdown of the global travel industry. Now our experience in Asia helped us, informed 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 a pessimistic one, we increased our liquidity to cover this scenario and create additional headroom. This puts us in a very strong position to manage through this crisis. Furthermore, we have now hibernated the business and are operating around 10% of our units. Throughout all of this, I have seen SSP at its best. Teams have galvanized, 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 am 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 relaunch our 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 reopen and are starting to test this. Simultaneously, we are reducing fixed costs and driving more flexibility into our model. Building on our existing strengths and our market position, I believe the actions we are taking now will leave SSP a fitter and a stronger business. And with that, I will hand over to Jonathan to take you through the financials.

Thank you. Good morning, everybody. So as Simon has already shown you, our first half results were heavily impacted by COVID-19, but were in line with the expectations that we set out in our trading update on the 25th of 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 IAS 17 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 breakeven at GBP 1.3 million compared with GBP 62.5 million last year and under IFRS 16, we saw a small loss of GBP 5.8 million. EPS showed a loss per share of 4p or 7.5p under IFRS 16. Net debt increased to GBP 458 million, including the proceeds of the equity placing of GBP 209 million 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 IFRS 16 impact, first, you can see that concession fees are lower at GBP 113 million compared with 254 million pre-IFRS 16, as this now represents only the variable element above the minimum annual guarantee. And secondly, you can see the increase in the depreciation charge to GBP 203 million from GBP 55 million pre-IFRS 16, reflecting the capitalization of the minimum guarantees on the balance sheet as a right-of-use asset of about GBP 1.5 billion. Looking further down the P&L, we saw an overall net loss of GBP 18 million or 4p a share. Including the effect of IFRS 16, this net loss increased to GBP 34 million, with net financing costs higher at GBP 27 million compared to GBP 12 million pre-IFRS 16. This, of course, is due to the unwind of the discount applied to the capitalization of the minimum guarantees over the lifetime of the contract. 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%. Noncontrolling 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% in -- like-for-like sales were around 1% in line with our 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% to 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 over 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 GBP 10 million to GBP 12 million over January and February, with a corresponding impact on profit of GBP 4 million to GBP 5 million. In the March update, we estimated that the impact would be a further GBP 125 million to GBP 135 million in sales, with a corresponding profit impact of GBP 50 million to GBP 60 million. The actual impact was -- on our results was at the higher end of that range, reflecting the almost total shutdown 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 U.K. and North America slightly less due to the slower timing of the lockdowns. Net gains were still up 5.7% despite COVID-19 due to the strength of our new business opening program, particularly in North America and 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 labor 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 U.K. or in the U.S. It's also worth remembering that Continental Europe was impacted by the strikes in France in December and January, as well as significant preopening 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. So turning to cash flow, free cash outflow in the first half was GBP 177 million. The working capital outflow was GBP 45 million, benefiting from actions taken to manage short-term liquidity, which will unwind in the second half. Capital was GBP 120 million, up GBP 11 million year-on-year, reflecting the strength of the net gains and the new opening program. We've now put our CapEx program essentially on hold until such time as we have more clarity, and are anticipating CapEx in the GBP 10 million to GBP 15 million range in the second half. We also invested GBP 27 million 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 GBP 458 million representing leverage of 1.7x EBITDA. This benefited, of course, from the equity raise of GBP 209 million in late March. So excluding this on a pro forma basis, net debt was about GBP 667 million, with leverage at about 2.5x. This included cash on the balance sheet and undrawn committed facilities of around GBP 205 million 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% to 85% in the second half, with the impact in the third quarter being more severe and a very slight improvement in the final quarter. This represented a sales reduction of some GBP 1.4 billion against previous expectations with, a profit impact of between GBP 350 million and GBP 420 million, representing a profit conversion of between 25% and 30% on the lost sales. This would translate into an EBITDA loss of between GBP 120 million and GBP 190 million in the second half. And in terms of operating profit, that would represent a second half loss of about GBP 180 GBP to GBP 250 million, with a similar number, of course, for the full year. Now 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 the second half to be within the range we indicated in March. Why is this? Well, it's 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 has been more extensive than we'd originally anticipated. So whilst we hope to see sales and, therefore, profits pick up as the lockdown eases and more units open over the coming months, the timing is still very difficult to predict, and therefore, we 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, we would -- this scenario would represent an EBITDA loss in the range of GBP 120 million to GBP 190 million. On top of this, we see a loss of negative working capital of somewhere between GBP 180 million and GBP 200 million due to the sharp fall in sales, and there would be other net outflows of between GBP 40 million and GBP 50 million. This is very much in line with the scenario that we set out in March. 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 2-year deferral of our term loan repayments of GBP 32 million, 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're also looking to retain in the business as much of the cash from the final dividend of GBP 27 million 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 cash usage in the region of GBP 340 million to GBP 440 million in the second half. And in terms of the ongoing cash burn, we would expect this to be in the region of GBP 25 million to GBP 30 million by the end of the half. Now looking at the latest position in terms of the available cash and facilities, at the end of March, we had GBP 413 million of liquidity. That is cash on the balance sheet and undrawn RCF. And during April, we've put in place a further GBP 337 million, giving us total liquidity of just over GBP 750 million. This was principally through gaining access to the Bank of England COVID commercial finance facility, which will provide a further GBP 300 million for nearly 2 years. The terms of the GBP 112 million liquidity facility that we announced in March required that any drawings will be repaid as soon as we access the Bank of England scheme, and therefore, has been effectively superseded. Since the end of March, we've also secured access to a number of other smaller liquidity lines, including government-backed facilities in France, Spain and Switzerland, providing a further GBP 37 million. So as a result, we would still have significant liquidity reserves by the end of the year in the region of GBP 310 million to GBP 410 million. And therefore, even if there was no improvement in sales, as I said, we will 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 U.S. private placement debt over the next 2 periods. In other words, that's right through to September '21. So in summary, with the additional funding that we've raised, 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 a slow recovery. And with that, I'll pass over to Simon to update you on our business plans.

Thank you, Jonathan. And so turning to COVID-19. I'll describe our response in 4 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 through our response and our planning for each phase. 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. Now my expectation is that we will see a gradual recovery in our 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 on 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. Units 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. So we faced our liquidity challenge head on and having quickly planned for the pessimistic scenarios, with revenues down 85% for half 2, and importantly, with scope for further protection, we sought to bolster existing facilities, raising around GBP 550 million through new equity and access to government loan schemes. We also suspended the share buyback program and deferred the final dividend. Through all of this, we've sought to minimize the impact on our colleagues and have been regularly communicating with our teams to keep them well informed. And 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 we have undertaken around the group. Now I've been humbled by the efforts of our team to support their local communities and some of which you can see on this slide. I'll just pick out a couple. In the U.K., Millie's Cookies has worked with suppliers to make and distribute 100,000 freshly baked cookies for our NHS hospital staff. And in India, through our joint venture with TFS, we have taken part in an initiative, working with local NGOs, to cook meals for people who have lost their livelihood as a result of the government lockdown. And to date, more than 1 million meals have been supplied. So before moving on, let me try to give you a flavor of what's happening around the 36 countries in which we operate. So 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 U.K., 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 open to support our key workers. With the slight easing of restrictions, we are now preparing to test opening some units in rail later this month. And if successful, we'd expect to have around 50 units opened by the autumn. In Continental Europe, the picture is mixed. In Germany, the easing of restrictions started in April and the momentum behind relaxations continued to grow, with the rail network still partially operating through the crisis. In 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, our expectation is to open more units in each country, so for the whole of the Continental Europe region, we anticipate having around 200 to 300 units opened by the autumn. In North America, which is exclusively an air business for us, 80% of which is domestic, the lockdown is easing state by state. And 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 our 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 Southeast Asia and the Middle East, travel is still closed. Australia is beginning a very cautious relaxation of lockdown, and India is doing the same. And in both these countries, I'd expect to see domestic air business open up first. All in all, in our Rest of World division, we are aiming for around 100 to 150 units to be opened 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 SSP's 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 4,000 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 of May, daily flight number is up and now over 10,000. It's 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 or of almost no domestic air sales, we are now tracking at around 30% to 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, there are a few common trends emerging. The rail sector seems likely to recover first, followed by domestic air and, finally, international air. And 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 reopening our units is data-driven and systematic. We are tracking traffic volumes and prioritizing which units to open first, based on customer demand, unit location of our sites and profitability. 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 all -- as really important. 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: to test, learn and 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 put this theory into practice and what we've actually opened to date. In Germany, we've prioritized units with low complexity and waste. So predominantly, our retail Spar Express format and our bakery brand, Heberer, opened first. With a simplified offer focused on the most popular items, reduced opening hours and a lower franchise fee, we can make the work offer work at lower levels of sales. In China, we continue to operate a number of units at our key airports, including Xian, pictured. We've implemented strict health and safety protocols, including temperature checks, 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. Importantly, having multisite operations, often with 5 or more different concepts at 1 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 numbers of sales. Ahead of opening units, we're reengineering the cost base to enable us to make profit at a low level of sales, and the immediate focus is on reducing rents, our minimum guarantees and franchise fees and, of course, taking down our 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 our clients. Getting our units open at the right time and in the right way will, I believe, support the process of rebuilding customer confidence to travel again. My approach to our overhead is to strike the right balance between rightsizing the business for the 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. [Audio Gap] Meeting 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. 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 gives us a unique opportunity to stay ahead of 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 try new technology. For example, order from [ seat ] and delivery to our customers in our locations. 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, obviously, 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've done in our first half. Whilst travel will undoubtedly be disrupted, it will recover and we will continue to seek out value-creating growth opportunities. We opened an important new businesses in half 1, 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, and we won that business with a compelling offer of local and international brands, supported by service technology enhancing the customer experience and a credible sustainability plan, which includes removing the use of single plastics and using local and certified ingredients. In North America, we've had another strong period of net gains. And we've 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 a good first half. The impact of the virus has been very significant. But I think our response to date has set us up 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 a slow recovery. That said, whilst the 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 U.S.A. and Asia. So our focus now is to gradually and safely reopen 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 focused on delivering for all of our stakeholders in a sustainable way. And, finally, before finishing, again, I want to thank our teams who are doing an amazing job. And with that, I will now open up to Q&A and pass to our moderator.

[Operator Instructions] Your first telephone question today is from the line of Jaafar Mestari from Exane BNP Paribas.

I hope everyone is well. And I had 3 questions, if that's okay. The first one is on rent relief, where you say that the savings so far have been even a little bit better than expected. And then you sounded consistently confident on getting almost universal rent relief from your landlords. And other concessions players have been a little bit more measured, talking about some landlords sticking to their guns on the minimum guarantees and others agreeing to postpone the payments but not cancel them. So I was just wondering if you could give us some more color on how landlords have reacted in each geography. And is there may be a conclusion that landlords in the U.K. and in Europe have been more accommodative than landlords in the U.S. sometimes, even for you? And secondly, on liquidity, it looks like you're indeed well covered if we're talking about short-term cash needs. Now I guess there's a separate question, which is how much extra debt do you end up with in the recovery? And when you look at what's the 2022 or 2023 balance sheets could look like, what's an acceptable leverage level? Can you get there by deleveraging just organically over a number of years? Or do you need a more repaired balance sheet earlier and, hence, the scenarios we've seen at companies like Compass Group or Whitbread could be on the table at some stage? And then just lastly, I wanted to compare a couple of numbers on IFRS 16, and I appreciate it was very difficult to pinpoint these numbers. But lease liability, if I'm correct, it ended up lower than your guidance. The P&L impact on net earnings was almost a full year guidance already just in H1, GBP 20 million versus GBP 25 million for the full year. Cash lease payments, GBP 140 million in the cash flow. In previous annual reports when you disclosed fixed rents, you were talking about GBP 350 million. I just wanted to get some color on whether things had moved, whether the soft results had caused this move, whether new contracts came with different economics. Any reason for those small deltas, please?

Sure. Thanks, Jaafar. So I'll pick up the first question around rent relief and how we progressed. And then Jonathan will pick up liquidity and IFRS 16. So in terms of rent relief, firstly, what I would say is we have negotiated and had good support from our clients over April and May, where effectively, as you know, travel has locked down to almost no sales. Most of our clients we've had relationships with for 10, 15 years. And remember, the way SSP is structured is we have strong local business development teams that have formed and developed those relationships over the years. And I think that actually supports us well, because it's in times like these where those relationships really count. We have made really good progress and we have negotiated the majority of our minimum guarantees in the short term. The reality is that as we look forward, we now, as part of our business plans to reopen, have to agree with our clients what units we open when, based on demand. And the key part of that will be at what rent level can we pay to make sure that it is a sustainable opening program? So that's the negotiation that is ongoing and will continue right the way through the year. There isn't a big difference for us regionally. You've asked the question around is Europe sort of more supportive than the U.S. or Asia. I'm not, obviously, going to go into contract by contract, but broadly, we are seeing similar levels of support right across the world with our clients. And it is absolutely critical that we continue to agree and negotiate the right terms to allow us to get our business up and running as soon as we can as demand recovers. Jonathan, do you want to pick up questions 2 and 3?

Yes. So Jaafar, your question -- your second question was really about the net debt and what we'd anticipate looking forward. I mean the first thing I should say is that we don't really wish to give guidance looking ahead to '21 at this stage because the pace of the recovery is unknowable. However, it is worth saying that if you take the indications and the scenario that we've painted for the second half, and even under circumstances where we saw a slower recovery than we were talking about even in March, where you saw sales down still in the region of 2/3 at the start of next year and recovering very slowly, there is a scenario whereby you would be at levels of net debt that would be compliant with covenant tests in terms of leverage by the end of 2021, at around about 3x. Now I can't give -- certainty around the pace of recovery, but certainly there are scenarios that would get you back into the right sort of levels of leverage over that time period, when those covenant tests come back into play again. Under those scenarios at the peak, you would expect net debt to peak in the region of sort of GBP 800 million to GBP 850 million at the peak, which would be sort of probably towards the end of the calendar year. But again, that is broad brush strokes and it is very difficult to anticipate quite what that would look like in the future. But it really all depends on what you would choose to model in terms of the pace of the recovery looking into next year. With regard to your question about IFRS 16, the numbers are very similar. They're broadly similar to the numbers that we gave you at the end of last year. In fact, the right-of-use asset, which we said was about GBP 1.6 billion at the end of last year is actually sort of nearer to GBP 1.45 billion. And that is essentially a consequence of the fact that as we've done more detailed work, and indeed, there are some changes to -- there are some changes to the nature of some of the contracts, there are, in aggregate, slightly fewer minimum guarantees, and we found that some more of the rents actually have passenger deflators in them, for example. So -- but substantively, that's the change. The other thing we should point to is FX, which has also reduced that number. Now coming to your point about the phasing, it was always anticipated that there'll be a bigger impact in the second half, like you trade ahead of the minimum guarantees more. So in reality, the total impact over the full year will not be very materially different to what we first gave you. I mean there is a secondary point here, of course, which is in a world of waived minimum guarantees that Simon has been talking about, it is still unclear as to what the shape of the P&L will look like next -- in the rest of this year because we are still awaiting guidance from the FRC as to how IFRS 16 will treat waived minimum guarantees. In other words, are you asked to -- as it were, recalculate the right -- the value of the right-of-use assets and calculate the whole impact from scratch essentially to reflect that over the lifetime of the contract? Or, as I think will happen, there is guidance to allow you for a period of time to account for those differently and take those waivers through the P&L, presumably, as depreciation. But we're still waiting for guidance from the audit world on that.

[ If I'd squeeze one on ] on net debt. Obviously, I was not expecting a net debt guidance for '21. What I really meant is if you end up at N level of leverage, which is higher than the previous range you seem to be comfortable with, do you then decide that your equity story for the next number of years is to deleverage organically? Or do you go we need to fix this, it's better for our stakeholders, it's better for our business development to...

Yes. Okay. No, apologies, Jaafar, I thought you were looking for something more precise than that. So to that question, that's -- it's a jolly good question. And I think that -- I mean, we have, armed with the benefit of hindsight, thought about what the balance sheet should look like when we're through this. And our view is that we will probably operate with lower levels of leverage going forwards, in all honesty. I mean, clearly, a feature of the business model for many years has been the benefit of the negative working capital that we enjoy and that's -- and, clearly, we have been able to run what we felt was, frankly, a very conservative level of leverage 1.5x to 2x. I think having seen the brutal impact of COVID-19, I think we would always wish to have probably more immediate liquidity to hand. And therefore, I don't -- I think that will affect us, the level of leverage on the balance sheet, as we look forward as I say post the recovery.

The next question is from Jamie Rollo from Morgan Stanley.

Three questions again, please. The first 2 is sort of connected. But first of all, could you talk about the drop-through margin on any sales recovery? So sort of looking forwards now to maybe next year, should that be, do you think, lower than the 25% to 30% on the way down because the furlough schemes come to an end, your front-loading costs are ahead of revenue and so on? Just sort of generally talk about that, please. Secondly, you talked about new unit economics and being more profitable at lower levels of sales. Are there any figures you can sort of give us in terms of quantifying any permanent savings going forward? And I guess what we're looking for is what percent of last year's sales do you need to be recovered to get back to last year's margins, basically? And then finally, you sort of touched on M&A in the prior questions and have talked about balance sheets, but how much distress is there out there amongst the smaller players, the other independents? Is there like a pipeline building? Are you getting in your reverse inquiries there?

Okay. So I think what I'll do is I'll take the M&A one first, and then Jonathan can pick up some drop-through margin and savings, and I'll add anything along the way. So I'll take 3 and then Jonathan will pick up 1 and 2. So Jamie, it's probably a bit -- honestly, it's a bit too early to see the impact on the kind of landscape that we're operating in. My expectation given the market dynamics -- and by that, I mean, you know it's a very fragmented market, so we have around 10% global share of the market and there is a very, very long tail of smaller players. So my expectation is that over the next 3 to 6 months, we will see a shakeout of some of those smaller players, either some competitors that, frankly, sort of strayed from the High Street into travel or players that just don't have the scale, flexibility or liquidity that we have. So I think for us, what will be really important, and you know how we are, is to remain very disciplined in appraising those opportunities, because we'll want to make sure that we get the right returns over the right period. I actually think that given our 500-plus brands, our diversified portfolio, our local business development talent, which I talked about earlier, as well as our liquidity, I actually think that puts us in quite a strong position to potentially grow more quickly, even if the travel market is tough over the next 2 years. But let's wait and see because it's still too early to be sure whether those opportunities are attractive or not. Jonathan?

Let me pick up the -- yes, let me pick up your outlook margin questions around the cost base, essentially, the drop-through. So if I turn it on its head a little bit, Jamie, because I think what you were really asking at the end of the question is at what sort of point are we breakeven, essentially. So our view at the moment is that once we are north of about 50% of the previous levels of sales, we are into breakeven territory. But it's difficult to be precise because there are a number of moving parts here. One part -- and both of these Simon has talked about already. One is the degree to which we get flexibility on rents. Clearly, we've been very successful to date in waiving the vast majority of our minimum guarantees. But there will be always some minimum guarantees that come back into play as sales start to recover. And the other one is the pace of opening the units. And as Simon said in his presentation, one of the great benefits that SSP has as a business is the vast majority of the business is in multi-unit sites. So we do have the ability to open units 1 or 2 or 3 at a time and that, effectively, gives us a much more flexible cost base. So you will have heard us talk historically, if we focus on the labor cost principally, you'll have heard us talk in the past about that being broadly 50/50 fixed and variable. In other words, the fixed component is making sure there is a unit manager there, there's someone to man the till, there's someone in the kitchen, et cetera. The variable bit clearly represents -- reflects the fact that as trade goes up and down, you might need fewer or more people to clean tables, man extra tills, add to the kitchen, et cetera. Now the reality here is that a lot of that is driven by the unit being open or not. And so the extent to which we can map the unit openings to the recovery in sales, gives us an opportunity to pretty much variabilize the cost base. Now we've clearly been looking very hard at this, as Simon was saying. But if you were to consider, for example, a situation where the sales were right about half of the previous level, and let's say we have about 2/3 of the units open, that effectively gives us a much greater level of variable costs and lower fixed costs in the business. So we think that would effectively take the labor margin from the region of 30% to 35%. If you were to consider that the rents, based on our experience to date, would probably -- you might see up to 20% of minimum guarantees in place, hopefully, lower than that. That would say the rent might go from broadly 20% to as much as 25%. Now under those conditions, with an assumption that most of our, what we call our overhead base, again, with lower number of stores would be largely variable, takes you to about breakeven. So a long-winded way around of trying to help illustrate how important it is that we get the number of stores opened right and we try to match that insofar as we can with sales due to the importance of getting at least some flexibility on rents. But that is -- with those caveats, that's the sort of broad-brush model that we're thinking about. To your final question about what does that mean for the cost base? Well, again, in very rough numbers, it takes our run rate in terms of labor down from the region of GBP 70 million to about GBP 40 million. And it will take our overheads down from -- we saw the run rate GBP 25 million a month to about GBP 15 million a month. We think those are eminently achievable, given some of the comments I've made and some of the actions we've already taken, because we are seeing those costs run at lower levels than I saw already. Does that go some way to answering your question, Jamie?

Yes, it does.

Okay. Thanks.

Next question is from Tim Barrett from Numis.

I'll stick to 2 things, please. The first is monthly cash burn, and I guess it follows up on Jonathan's last answer. But could you just be specific in terms of how your monthly -- your thoughts on cash burn have moved from when you were talking about GBP 15 million to GBP 20 million to now GBP 25 million to GBP 30 million. I guess sales is the biggest driver, but I'd love your comments there. And then secondly, what you've got on Page 21 is really helpful in terms of what might be open by autumn. Just doing very quick math, that's only about 20% of the estate and less than 10% in the U.K. What's the thinking there? And how quickly do you think you can ramp up thereafter?

Sure. So I'll pick up units, Jonathan will pick up cash burn. But I'll do units first in reverse. So you're absolutely right, Tim. At the moment, we are estimating around 20%, perhaps 25% of our units will be open. Again, obviously, we will open units more quickly than that if we see demand recover more quickly. So it is very much an estimate, and it's an estimate that changes on a daily basis, not even a weekly basis. In the U.K., you're right, it's about 10% of our units. But the news flow, even over the last couple of days with easyJet, et cetera, would suggest that it might be higher than that. For me, what's most important is, as I said in the presentation, firstly testing. So making sure we are health and safety focused, making sure we've got the ranges right, learning how to operate in a post-COVID world. So that's why we'll open up the units slowly to start with and gradually. As well as, of course, testing customer demand. But if that customer demand increases, then we -- of course, we will open more units. But we'll do that based on making sure that they contribute EBITDA and that they are the right units in the right locations to open. It's very much like Jonathan just said, it becomes a kind of really important part of our strategy that with all those units across the world, the sort of 2,800, 3,000 of them, that we systematically open them when demand recovers. And in reality, that might mean that we are opening and closing units all the time. So we could be in a situation where we would open a bunch of Upper Crust units, Monday to Friday, but close them on the weekend, or just open for breakfast or just open for lunch. And that's fine because we have a flexible model and we have many, many units in all of our sites. So it's one of those situations which it will evolve, but it's not binary. There will be lots of moving parts as we test, learn and adapt. Jonathan, do you want to pick up cash burn?

Yes. So your question about cash burn. I think in -- back in March, we first and foremost were talking about the sort of EBITDA loss when we talked about that sort of range. And it is, worth, as you indeed said yourself, Tim, that we are now looking at an EBITDA number that reflects a slightly lower level of sales than we were talking about then. So just for clarity, we are talking about what the overall cash burn is as we get to the end of this half under a scenario where there is no improvement in sales, i.e., we're down at current levels. It's worth saying that we are also factoring into this, as we look forward, things like interest costs, things like CapEx as well in getting to the GBP 20 million to GBP 25 million. But the important thing to say is it's at a very low level of sales. It is assuming no benefits from working capital recovery as sales inevitably improve. We don't know the pace at which they'll recover, which is why we've, essentially, given you the information that says there's no recovery. But again, I think when we talked previously, we may have been building in some improvements in working capital. And so -- again, it's worth stressing that this is in the context of the GBP 750 million of liquidity that we're talking about. So even under this pretty extreme view of the world, we have ample liquidity to trade for a prolonged period, to just reinforce that.

Next question is from James Rowland Clark from Barclays.

I've got 3 questions, please. Just following on from your answer to Jamie's question earlier about the level of sales you might need to see in order to breakeven, can we just talk about China where you're seeing pax at about 60% of what you might normally expect it to be? Is it fair to say that that's revenue of about 60% of what it would normally be, and therefore, is China turning an EBITDA-positive number at the moment on a run rate basis? And then secondly, on the covenants, you've replaced the leverage covenants with minimum levels of liquidity, maximum levels of net debt on a monthly basis. Are you able to share a bit of color on what those are? And then finally, are there any one-off costs associated with COVID-19 measures that you need to put in place for the foreseeable future?

Okay. Okay. So I'll pick up 1 and 3, and Jonathan, if you want to pick up leverage covenant. So your question, James, I think around are we getting to sort of breakeven or EBITDA contribution in China, based on the passenger numbers. Is that right? Just to clarify.

Yes, correct.

Okay. So a bit early is the honest answer. So our sales in our domestic airports, which is, obviously, a significant proportion of our China business, are around 40% of their previous index. So not quite at breakeven. But we are getting a lot of support from our local clients, so it's there or thereabouts. It's basically very little or no rent in those domestic airports. So the way I'd look at that is we're offering a service at the moment. You're right though, the passenger numbers are increasing all the time. So I don't think it will be long until they'll contribute a bit. And then you have to also remember the other part of China, obviously, is international, which is still completely closed. So again, even in the last sort of week to 10 days, we've seen improvements. And so over the next sort of couple of months, I'd hope to see China, certainly, on the domestic airports, contribute a little bit of EBITDA. But it's just a little bit early, frankly, at this stage. In terms of one-off costs, again, at the moment, the way that we are operating our business is we have effectively shut down 90% of the estate, furloughed the majority of our teams where those schemes exist. And they are -- obviously they vary by duration. So someone like Germany or France, the government schemes go right through for a year. And obviously, in terms of close to home, we're aware of what's happening in the furlough scheme in the U.K. So our anticipation at the moment is that those furlough schemes will continue and that we'll be able to -- and when they end, the demand would have recovered, such that we'll be able to, obviously, reopen our units. And that's my priority. That's my focus. Because I want to get people back to work, and I want to get -- frankly to, obviously, to get the economy going again. If those schemes then before demand recovers, then obviously, at that point, we'll be looking at restructuring. But it's too early to start to estimate how much that may or may not be, given the different durations by countries and given the breaking news flow every day in terms of demand recovery. Jonathan, do you want to pick up leverage?

Yes. So I mean, clearly, there wouldn't be any great merit in spending time negotiating waivers with our various lenders if we were then to set in place covenant tests that would constrain us. Equally, you could understand in the current environment why they would seek to have some sort of checks and balances as we look forward. So we have set liquidity and net debt tests, which broadly align, albeit, tests slightly different things, looking out over the next 18 months. But I should stress, those have been based on a very, very pessimistic view of the world, which, essentially, has no recovery until next calendar year. And essentially, that's what gives us comfort that those are unlikely to bite pretty much under any scenario. They are there, to some degree, to give the lenders comfort that, for example, we don't overinvest in CapEx or whatever, which is probably what you'd anticipate and is understandable under the circumstances. But suffice to say, we feel we have considerable flexibility through to the point where the normal leverage tests and interest cover test would come back into play at September '21.

The last question is from Mark Irvine-Fortescue from Stifel.

Two things on non-financials, one on staffing and one on brands. Just with regards to staffing, can you -- have you got any sense of the attitude of your staff sitting on furlough about coming back to work? What's the communication dialogue with those colleagues? Are you confident that you can staff up units as required when you do decide to reopen? Just a little bit of thoughts around that would be helpful. And then the second one on brands, your brand partners. I'm sure some of those will be doing better than others during this crisis. Again, if there's anything you can say on dialogue there, I suppose the risk is that some of those brand partners might be less inclined to grow with you when we get back to normal, perhaps are anxious about investing in travel going forward. So if you can just give any update on dialogue with brand partners, that would also be helpful.

Sure. So I'll pick them up because the staffing one is a great question. It's not a soft question, it's a really important question for me. In reality, we've actually been trading a number of units for a while and getting people back to work. So if you remember, with Asia going into this crisis first, we have now effectively started to open some units and also get people back into the offices in Hong Kong, for example. And in a number of countries, actually, like in Sweden, we never closed the office. So we've got experience in getting people back to work already. And the way that we think about this really is clear, open communication, the right training and the right health and safety PPEs. So we have put in place an extensive and a -- extensive program with our teams to make sure that they feel confident in returning. And we are starting to, as I have said, return people to offices and to our trading units. Personally, I also speak to all of my teams regularly, and I'm doing fortnightly updates to the whole business versus video conferences to keep people informed as to what we're doing. Because a lot of this is about clear communication, being transparent and sharing, if you like, stories and best practice because confidence for me is one of those things that gathers momentum over time. So you need to start slow and be -- and gradually improve confidence. And to date, our staff and our teams generally have been tremendously supportive and also want to get back to work. They actually want to do what they've been doing for years. They enjoy what they're doing. We've got some tremendous long-standing team members and management, and they want to get back to work. But we're very cognizant in making sure they have the right training, the right safety equipment and it's their choice. In terms of brands and brand partners, so we, obviously, operate 500 top brands. So the first one is we have plenty of choice to grow, many, many options across all of our categories. It's worth also remembering the model kind of means there isn't that much risk for the brand partners. So in essence, SSP is investing the capital most of the time, not all the time, but most of the time. We are contracting with the clients on rents. We are employing the staff. So whilst there's variations in that, the vast majority of the investments and the financial support is from SSP. Where the brand partners come in, obviously, is giving us their services, their products and their know-how and we operate the brands on behalf of them. So in the dialogue I've had with some of the brands, and you'd expect I've had some of that, they actually look to us now, they look to us now to make sure that we're opening the right units at the right time. And we're also sharing learnings because where, for example, Starbucks has opened up in China a bit earlier in the High Street, they've worked out how their service has changed, how -- back to your first question, how the teams feel. And so we're making sure we're building those learnings into our units as we plan and then reopen. Does that help answer the question?

Lovely. Yes.

Thank you.

We have another question from Ali Naqvi from HSBC.

Jonathan, you mentioned the working capital cash swing for when sales build up. Is there any guidance or sort of thoughts you can give in terms of what that would give sales recovered to 50% to sort of where they were before, which you mentioned is sort of a breakeven level?

Yes. Okay. Yes, good question. So really consistent with what we've told you about the impact on the downside, we'd expect it to swing right back. So the rule of thumb is, broadly speaking, every sort of 10% of sales would give you sort of GBP 20 million of additional cash from working capital. So at a -- at that sort of 50% level of sales, you'd have another GBP 100 million of working capital or thereabouts back in the business. So again, it's very, very important when we talk about the cash flow to remember that there are 2 components. One is when we get to breakeven at an EBITDA level, as we were discussing earlier, and so you no longer got a drag on cash. But also, of course, at that point, you brought a lot of additional working capital back into the business. So it's a massive improvement in overall liquidity.

Okay. I'm going to have to call it to a close if that's okay, because I'm due on media calls right now. So hopefully, if there are no other questions, we can wrap up. And as Jonathan -- okay, fine. Good. We can wrap up. Is there any others? Just finishing up.

There are no further questions at this time. And I would like to turn the conference back over to Simon Smith and Jonathan Davies for any closing remarks. Please go ahead, sir.

I would just say thank you for your time. And in the interest of time, we look forward to seeing you when we're out of this crisis. And please keep safe and well in the meanwhile.

Great. And thank you very much, indeed, for joining the call, guys.

Thank you. Bye-bye.

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect. Goodbye.