SSP Group plc (SSPG) Earnings Call Transcript & Summary

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

Thank you very much. So good morning, everyone, and thank you again for joining us virtually for our preliminary results. On the call today, we have Jonathan Davies, our group CFO; and Sarah John, our Director of Corporate Affairs. So just to take you through the agenda, I will give you a short overview of the year, Jonathan will then take you through the financials, and I will review the business and our plans for recovery, and we'll finish with Q&A, and there'll be plenty of time for questions. So group highlights. COVID-19 continues to have a very significant impact on our sales. And on a personal note, I hope that you and your families are safe and are well. Before the onset of the crisis, we have made further good progress in expanding the business with net gains of 5.7%, solid like-for-like sales and good conversion into profits and cash. From the end of January, we saw the rapid escalation of COVID-19, and from March onwards, an almost total shutdown of the global travel industry. We took rapid and decisive actions to protect our people, hibernate the business and materially strengthen the balance sheet. From the outset, we expected the crisis to be prolonged, and so we've had to take some very difficult decisions to protect the business. However, we took an early action to retain the core skills at our head offices and in all our operations globally to enable us to reopen quickly. Indeed, by reengineering the cost base, we were able to start reopening units profitably with over 1/3 of our units open by the year-end. Tight control of costs and cash in half 2 enabled us to minimize the cash outflow well ahead of expectations and contain EBITDA losses to a minimum despite the lower-than-expected sales, which were down 86% in half 2. And importantly, we have liquidity headroom of over GBP 500 million and with a cash burn expected to stay in the range of GBP 25 million to GBP 30 million at the current level of sales. So we have significant liquidity. Whilst managing the day-to-day crisis, our mindset throughout was that we should use this time to further evolve and strengthen our competitive advantages. And so with that in mind, we've partnered with our clients, provided a safe service to the traveling customer and enhanced the proposition through digital technology. At the same time, we've redefined our corporate responsibility and our people strategy to reflect their importance to us. Our teams are motivated, and we are ready to open more units once again as the market begins to recover. And throughout all of this, I've seen SSP at its best. Teams have galvanized working swiftly and professionally and demonstrating their resilience, adaptability and can-do approach. And simultaneously around the world, countries have been doing what they can to help and support our local communities. So I wanted to personally thank all of our colleagues for their incredible efforts but also the sacrifices that people have made. I do believe there is now light at the end of the tunnel, and our business is on a really strong footing to rehire our people and take advantage of our strong market position as demand recovers to deliver sustainable growth for the benefit of all of our stakeholders. And with that, I will hand over to Jonathan to take you through the financials.

Great. Thank you, Simon, and good morning, everybody. Clearly, our full year results were heavily impacted by COVID but were in line with the guidance that we gave in September with our pre-close trading update. Overall sales were down by around 50% year-on-year to about GBP 1.4 billion. We saw an underlying operating loss of GBP 212 million on an IAS 17 basis, all of which really arose in the second half, whereas the first half was just above breakeven. This compared with a GBP 221 million operating profit last year. Net debt increased to GBP 692 million, reflecting the EBITDA loss of GBP 98 million and of course the loss of working capital but benefiting from the equity placing of GBP 209 million at the end of March. Now under IFRS 16, we saw an underlying operating loss of GBP 315 million and net debt of just over GBP 2 billion, reflecting the additional lease liabilities of the minimum guaranteed rents of around GBP 1.3 billion. Now over the next few slides, I'm going to run through the reported numbers and explain the impact of IFRS 16. And then once I've dealt with the accounting, I'll move on to talk about the performance of the business and focus on the IAS 17 numbers. So looking at the overall P&L, you can see the impact of IFRS 16. Firstly, on concession fees, which are much lower at GBP 150 million compared with the GBP 350 million under IAS 17. This is, of course, because under IFRS 16, the concession fees represent only the variable element above the minimum guarantee. Now because of COVID, the IASB has issued a temporary amendment to IFRS 16, allowing any short-term changes to rental terms, for example, minimum guarantee waivers, to flow directly through the P&L rather than be accounted for as lease modifications where the impact would be spread over the life of the lease. However, they've also said that these amendments, if material, should be disclosed separately as an exceptional item. So as a consequence, in the underlying IFRS 16 P&L, the concession fees don't include the benefit of any of the short-term rent waivers we secured, amounting to around GBP 92 million. The second major impact of IFRS 16 is on the depreciation charge, which has increased to GBP 420 million from GBP 114 million under IAS 17, reflecting the capitalization of the minimum guarantees on the balance sheet as a right-of-use asset of GBP 1.3 billion under depreciation of those. So the real message here is that including the adjustment for the minimum guarantee waivers, the underlying operating profit would be fairly similar under both accounting policies. Now looking further down the P&L, we saw an overall net loss of GBP 224 million under IAS 17 or 45p a share. And under IFRS 16, this net loss increased to GBP 334 million or 68p a share. The net financing costs under IFRS 16 were around GBP 54 million compared to GBP 26 million under IAS 17, and this is all due to the unwind of the discount applied to the capitalization of those minimum guarantees over the lifetime of the contract. And just to complete the picture under IAS 17, the tax credit was about GBP 6 million, and the noncontrolling interest share of the losses was around GBP 10 million. And finally, a brief word about the exceptional items. The nonunderlying items added a further GBP 40 million to the reported net loss, largely reflecting assets and goodwill impairments and restructuring costs that offset by the temporary minimum guarantee waivers of GBP 92 million, which I just explained. So you can see we've impaired a number of fixed assets and right-of-use assets amounting to GBP 83 million in total as well as goodwill of GBP 33 million, which principally related to goodwill created from the acquisition of SSP by EQT back in 2006. These impairments were all a result of COVID, where we've assumed a very slow recovery in the travel sector in calculating these. The restructuring costs of GBP 23 million were mainly redundancy costs. There were also some costs associated with exiting contracts, most notably in Russia, where we pulled out of Sheremetyevo Airport. The exceptional financing costs principally reflected the adoption of IFRS 9 as in the previous year. So I'll now leave the accounting and turn to the performance of the business and our response to COVID. So firstly, looking at sales. During the third quarter, sales remained at very low levels, down nearly 95%, as you'd expect, given the almost total closure of the travel space. As lockdown restrictions eased over the summer, there was a gradual recovery through the final quarter. And by September, sales were down 76%, leaving the overall quarter 4 sales down about 80% year-on-year. This was largely driven by the resumption of air travel across Europe over the summer holiday season and a recovery in rail as we saw commuters returning to work. With the gradual reinstatement of lockdowns across Europe from mid-October, like-for-like sales in the first quarter are expected to be at a similar level to the final quarter, so down around 80%. Now looking at our regional performance. The gradual recovery over the second half was driven by Continental Europe, where we saw a limited return of air travel over the summer holiday season and where the rail sector strengthened throughout the quarter with more commuters returning to work in Germany and France than we saw in the U.K. Sales in the U.K., North America and the rest of the world have followed a similar trajectory, really, until more recently when the rest of the world has continued to strengthen, led by the recovery in domestic air travel, initially in China and more recently in Thailand and India. Simon will talk about the regional trends in more detail later on. So let me turn to profit. As a reminder, back in March, we said that we were planning for sales to be down 80% to 85% over the second half. And we said this would knock something in the region of GBP 1.4 billion of our second half sales and something like GBP 350 million to GBP 420 million of operating profit compared with previous expectations. This would have represented a profit conversion of 25% to 30% on the lost sales. Now the good news is that despite the lower level of sales with the second half actually down 86%, the impact on profit has been mitigated by the speed and the extent of the actions we've taken to reduce operating costs as well as our success in negotiating rent concessions, particularly the waiver of minimum guarantees. So as a result, we've limited the profit conversion on the reduced sales to around 26%. That's left the EBITDA loss for the second half as GBP 154 million. So pretty much in the middle of the range of expectations. And as a result, operating loss for the full year at GBP 212 million. Now looking at the P&L for the second half, you can see the operating cost reductions that we've made in response to COVID. And we've achieved this by opening our units selectively, trying to match the number of outlets as closely as possible to the passenger numbers in order to make the cost base as flexible as possible. Clearly, we can do this because the vast majority of our operations are in multi-unit locations. So we managed to cut rents by well over GBP 200 million year-on-year in the half, mainly through agreeing minimum guarantee waivers, covering around 70% of the business as well as negotiating lower concession fees in some cases. We've reduced labor costs by around 70% through the careful management of the opening program and using contractual layoffs and government furlough schemes where available as well as through redundancies but only where absolutely necessary and in the absence of government support. We've also been able to reduce the rest of our cost base dramatically, taking over 50% out of our overhead costs. Gross profit margins were down, in fact, nearly 5%. This was all due to the stock write-offs on perishable goods early in the half as we rapidly closed down around 90% of our units as well as a shift in the sales mix towards the rail sector, a retail format, both of which operate with slightly lower gross margins. Now turning to cash flow. The free cash outflow in the half was GBP 195 million, which was around GBP 25 million better than we indicated at our pre-close announcement in September and, importantly, around GBP 170 million better than the guidance earlier in the year, and all of this outperformance was due to the working capital. So the working capital outflow was only GBP 22 million in the half compared to our earlier indications that it might be as much as GBP 180 million to GBP 200 million. In reality, the stronger sales towards the end of the year helped, and we achieved that to some degree by opening additional units, and that delivered something in the region of an additional GBP 50 million of negative working capital. The rest of the working capital improvement, so around GBP 120 million was down to our tight management of short-term liquidity, including agreeing rent deferrals with clients as well as utilizing government support, such as on VAT and payroll taxes. Of this, we would expect something around 2/3, so around about GBP 80 million to reverse during the next financial year, with the remainder reflecting longer-term payment deferrals and extended terms. As we've said previously, we've put our CapEx program pretty much on hold at present until such time as we have more clarity on the recovery. And we successfully limited CapEx to around GBP 15 million in the second half, mainly reflecting the completion of projects already underway pre-COVID. So moving on to net debt. The overall net cash outflow in the second half, including restructuring costs and the dividend was GBP 235 million. So better than the GBP 250 million to GBP 270 million we'd indicated in our preclose update. This left net debt at GBP 692 million at the year-end, as I said earlier, benefiting from the GBP 209 million placing in March as well as the small placing of GBP 11 million in June, which allowed shareholders to reinvest their final dividend from the previous year. And under IFRS 16, net debt increased to GBP 2 billion, of course, due to the lease liability on the minimum guarantees. So finally, looking forward, liquidity is clearly very important in the current circumstances. And by the end of the year, we have liquidity of around GBP 520 million, with cash on the balance sheet of GBP 185 million, further undrawn facilities of GBP 175 million from the Bank of England, CCFF, and an undrawn RCF of GBP 150 million. Importantly, we've agreed further covenant waivers with both our banks and U.S. private placement investors for the period through to March 2022, and we've also reached an agreement to waive the next amortization payment on our senior debt due in July next year. So even at the current very low levels of sales, down around 80% versus pre-COVID levels, we expect our cash burn to be in the region of GBP 25 million to GBP 30 million a month. Clearly, any improvement on the level of sales will both reduce the cash burn and provide a cash inflow as we start to see the recovery in our normal negative working capital. So as a result of the actions we've taken to manage the cash flow and the liquidity available, we remain in a very strong position to operate through a long and slow recovery of the travel sector. Having said that, the recent news regarding vaccine developments is encouraging, and we're optimistic about the recovery during the second half. However, in the meantime, we continue to plan cautiously for the first half, assuming no further recovery and sales continuing to run at current levels. I will now pass across to Simon to cover the business review.

Thank you, Jonathan. So I wanted to start by reminding you of the 4 phases to our COVID response, outlining some of our key achievements and reminding you of where we see ourselves now. Firstly, I again want to recognize upfront just how tough this crisis has been on all of us, especially on our colleagues, our customers, our clients and our brand partners. And as I said earlier, at the outset, we took rapid and decisive action. Protecting the health and safety of our colleagues was our first action. We quickly hibernated the business. And by April, we had just 10% or around 300 of our units open. We expected the crisis to be prolonged, so we restructured and we simplified the business. We also prepared to reopen units systematically. We've created a new lower cost model. And as demand started to increase, we selectively reopened our units. So by the year-end, we had over 1/3 reopened, the vast majority of those being profitable. At the same time, we've accelerated the rollout of our digital technology program and redeveloped our corporate responsibility and people strategies, which are integral to our long-term approach. Throughout each phase, we have been absolutely focused on creating the required liquidity to trade through a prolonged period of very low sales and manage our cash burn. This slide clearly illustrates the scale of our actions and our management approach, which has and will always be, to take swift and decisive action. Having created GBP 750 million of liquidity by April, we were able to contain cash burn to GBP 230 million in the second half. So with now over GBP 500 million of available liquidity and a monthly cash burn in the region of GBP 25 million to GBP 30 million at the current level of sales this winter, we have considerable headroom to withstand a prolonged recovery. So I thought it'd be useful to take a look at how the business has developed from a regional perspective. As I said earlier, from a position where sales in April and May, which is 5% at pre-COVID levels, by September, they were 25%, with over 1/3 of our units having reopened. In terms of volume of activity, Continental Europe performed relatively well as national governments were effective at getting people back to offices, particularly in Germany and France. We also saw a rapid increase in demand for regional leisure in both air and rail travel over the summer when restrictions lifted across a number of the countries. And by year-end, we had over half our units opened in this region. The U.K. also significantly scaled up from July onwards. From just 9 units being opened at the height of the crisis, the U.K. was back to 1/3 or around 200 of our units opened at the financial year-end. Rail passenger numbers gradually increased from being down 95% at their lowest to around 65% down in September, as people started to go back to city centers to shop and socialize and return to offices. Again, August saw increased demand for holidays to predominantly European destinations, and we were able to open most of our air units to support the demand for leisure travel. In the Rest of the World division, where we had around 25% of our units opened at the year-end, the picture has been mixed. There has been a very strong resurgence in domestic and leisure air travel, led by China, which is now being followed by Thailand and India. But the largely international hubs, for example in the Middle East, have, however, remained closed. And finally, North America is making steady progress. With domestic air accounting for around 80% of the U.S. business, we are seeing a gradual recovery. And by the year-end, we were back to having about 30% of our units opened. More recently, the second lockdown has meant we've had to close some of our units that we opened over the summer in both the U.K. but also in Continental Europe. As I said at the interim, it is our expectation that domestic travel is going to lead the recovery, and that is exactly what we're seeing in China and now in other parts of Asia as well as in America. You can see the sharp rebound in domestic passenger numbers. And China domestic air is now down less than 20% versus pre-COVID numbers, Thailand down around 30% and America and India are also now recovering. Digging a bit further into this, you can see on the chart on the right that demand in Hainan, which is primarily a local holiday destination, is almost back to pre-COVID levels, supporting our view that there is significant pent-up demand for leisure travel. So as I said earlier, we have created a lower cost flexible multi-site model, and we are ready to reopen more units as demand recovers. As you would expect, this approach to reopening units has been data-driven and systematic. Grounded in passenger traffic volumes, we prioritized which units to open based on customer demand, unit location to capture footfall and expected profitability. Importantly, having multisite operations, often with 5 or more different concepts at one site has allowed us to open units selectively. Starting with the best locations at the site and the concepts most in demand like retail and quick service restaurant units, we've been able to capture the available passengers through a smaller number of locations, so keeping our sales per store at a higher level than if we had to open all of the units. Again, using passenger data, we've flexed our opening hours to align with daypart volumes, which means we can avoid incurring unproductive cost. Critical to being able to reopen has been agreeing the right rent deals with our clients, which has typically meant moving to a percentage of revenue and where possible reducing that percentage. The structure of our business, where we have experienced local teams in each country has been a critical advantage for SSP as it has enabled us to quickly agree flexible rents and a lower cost base. The same has been true of franchise fee percentages. And equally, by reengineering and simplifying our offer, focusing on best selling, high-margin items, we've been able to reduce waste and drive greater cost purchasing and production efficiency. We've also accelerated the rollout of service digital technology, which has been very well received by our customers as well as driving up our average transaction value and reducing our labor costs. And lastly, we have selectively added complementary revenue streams, for example, adding a set of travel and health essentials as well as providing food for COVID testing centers at airports and feeding airline staff. Just to give you a couple of examples of the reality of these actions. So we've found that simplifying our menus has brought multiple benefits. While still offering a breadth of choice, for example, including healthy options, vegetarian options and meat-based items, we've removed less popular or more complicated items. That means less highly skilled labor, fewer ingredients to make the dishes, which allows us to simplify our operation and make a greater profit from what we have on offer. A good example of our more streamlined menus, which you can see on the slide, is from our O’Learys Bar and Restaurant, which are principally located in Sweden and Norway. As you can see, the menu is now half the size with the focus on recipe consolidation, maximizing the use of same ingredients, including photos of the highest cash profit items to encourage trade-up, only including add-ons where the ingredients are ready being used for other dishes and making sure we benchmark our choices and pricing against our competitors to maximize our sales. I would expect to hold on to some of these benefits as the market recovers. Moving on to technology, which is becoming a key element to our service model. Our customers want to experience an easier contactless experience, a trend that has accelerated through the crisis and one we have proactively responded to. Trials so far are delivering improved ATV and improved customer experience and, indeed, greater operational efficiency. So we are now beginning to roll out 4 key customer order pay technology models in all of our divisions. These are order at table where the customer scans a QR code at the table within the unit, orders and pays through their mobile phone; virtual kiosks, where, again, the customer scans QR codes, typically in our takeaway units and, again, orders and pays with their mobile; and then physical kiosks in our quick service restaurant units like Burger King, where customers can order and pay at kiosks instead of at the counter and self-checkouts, typically in our retail brands like Marks & Spencers. Despite the low level of travel over the past 6 months, we've continued to make good progress on business development. We have started to profitably extend and renew our existing contracts on favorable terms. We've also won some new contracts and opened some new units. Starting with contract extensions. At Vienna Airport, we've extended our units for another 6 years; at Zurich Airport, we've negotiated contract extensions for another 5 years; and we've also extended 15 units at Seattle Airport and a number of units across our airports in Thailand. In terms of new wins, we've secured 3 new units at Hobart Airport, where we've been operating for the past 5 years as well as extending our existing business for 5 years. We've also won a contract to provide onboard catering for the Norwegian-Swedish rail line, which is a full-service contract, meaning we'll do everything from developing the menus, producing the food to the logistics and getting everything onto the trains. New openings include multi-brand food courts in Shenzhen and Shanghai Hongqiao Airports and also new openings in America following contract wins last year in Seattle and Salt Lake City. So despite COVID, you can see there's still been business development activity around the group. And as ever, we'll continue to look for opportunities in existing and new locations where we believe we will get good returns. So at this point, I thought it'd be helpful to change gear and take a strategic look at how I see our business and our future, a future that delivers for all of our stakeholders. Over the past 5 years, we have created a really good business, which I believe we can continue to evolve to become a truly great business, the leading food and drink operator in travel locations worldwide. Though we've been greatly affected by COVID-19 this past year, we have done and continue to do everything we can to put ourselves in the best possible position to capitalize on passenger demand when it recovers. Our stakeholders are critical to our success, and it's the cumulative effect of getting it right across all these groups that will, I believe, propel us to the next level of performance when we recover. It's worth reflecting on how we see our structural advantages in the sector. As a leading provider of food and drink in travel locations, we have unique food travel expertise and are specialists in complex and challenging travel environments. We have a detailed understanding of our individual markets through a combination of local insight and international scale. So we understand both what our clients and what our customers want. We have market-leading positions in our sector, a sector that was valued at around GBP 23 billion before the pandemic. And with multisite operations, we are able to adapt our offer as required to maximize profitable sales. We've also built long-term and successful client relationships, and we have excellent colleagues in all our markets who support those relationships and are highly experienced. So at the core, we benefit from having a truly great portfolio of long-term contracts in great locations and an experienced management team to deliver profitable growth. So our strategy to deliver long-term sustainable growth is fundamentally unchanged. Building on the priorities I set out at the prelims last year, I can see further opportunities in which we could evolve. The scale of our business gives us access to a wealth of consumer insights. And as I said last year, we want to use this to deliver the right proposition investing in product innovation and digital, for example, with the objective of giving us the best platform from which to improve our like-for-like growth. Prior to COVID, we had a strong track record of winning new business and have delivered double-digit growth in North America and rest of world, where our local knowledge and the development of more localized concepts gave us better access to these markets. Once the market recovers, we expect these opportunities to reemerge at existing and new sites and potentially new geographies where the returns are attractive. We will also seek out new revenue streams, as I talked about earlier, where we can leverage our existing skills and infrastructure. As you know, running efficient operations is a core competency of SSP and deeply embedded into our culture. We will continue to relentlessly strip out unproductive costs, simplify and automate processes to drive efficiencies. Holding on to the benefits from rent rationalization, lower rentals and simplified overheads will be an important part of our strategy. And we will also invest in value-creating automation and technology where this drives increased revenue and cost efficiency as well as product innovation to keep us competitive. Capital investment is also an important part of our model as it drives contract renewals as well as contract growth, and we typically get paybacks of 3 to 4 years on the CapEx we invest. The challenges of COVID may also present selective acquisition opportunities. And finally, the profit and cash flow growth we generate will enable us to delever over time and generate growth for our shareholders. So we've also taken the opportunity through this crisis to consult with our key stakeholders to understand how their priorities have evolved through this pandemic, and I think it will come as no surprise that social elements protecting and engaging our people, diversity, inclusion, health and well-being and communities were all key areas of focus. So we have refocused our approach prioritizing the areas where we could have the most impact, and you can see that on the slide. We've also taken time to refresh our people strategy, which focus on engagements, inclusion and developments. And the delivery of this will, I believe, enhance our colleagues' experience of working at SSP and further underpin retention and long-term performance. So whilst we've been really busy managing the business day-to-day through this crisis, we have also taken the time to plan how we can sustainably grow our business over the long term. And so to summarize, as I said at the outset, prior to the onset of COVID, SSP was performing well and in line with expectations. That said, the impact of the virus has been significant on all of us. But our response has set us up well to manage through the crisis. We have gained enormous experience, rightsizing and simplifying the business whilst creating a robust model that has enabled us to open many more units than we had envisaged some 6 months ago. We continue to manage the business in a granular and systematic way, opening and closing units in line with demand and we've kept cash burn to a minimum. Indeed, we have considerable headroom with more than GBP 500 million of available liquidity and a cash burn of GBP 25 million to GBP 30 million at the current very low levels of sales. We've also taken the time to improve our digital capability as well as refocus and refresh our CR and people strategies. We plan for a tough winter. However, I do expect that alongside the vaccination program, we will start to see a recovery in the travel sector, led by domestic demand and international travel more broadly. And we are ready. We're ready to reopen the rest of our estate profitably, we are ready to rehire our people as the market recovers, and we are ready to provide food and services to our clients, our brand partners and, of course, all of our customers. Indeed, the protection of our people and our customers is key to me, and we will remain absolutely focused on delivering for all of our stakeholders in a sustainable way. And finally, before finishing, I want to again thank our teams who are doing a great job. And with that, I will now open up to Q&A.

[Operator Instructions] Your first telephone question from today is from Jamie Rollo of Morgan Stanley.

First, on the balance sheet. Could you please quantify the new monthly tests for maximum net debt and the minimum liquidity covenants, maybe there's a lot changed. But if you could just quantify them anyway. And also, please, can you qualify the new minimum EBITDA threshold and interest cover tests for next September and December, please? Secondly, just on rents. It sounds like the waivers and deferrals are sort of short-term action. Did you expect sort of future rent roll or concession fees to change once revenues have recovered, whether in absolute cash terms or maybe a different mix of variable and fixed minimum? And finally, sort of more of a longer-term question, just on your comment about benefiting from travel infrastructure and capacity expansion. I mean quite a few airports seem to be slowing their expansion plans or delaying it. Do you see your mix of contract wins maybe coming more from other competitors rather than greenfield sites?

Okay. Thanks, Jamie. So Jonathan, if you pick up the first question and I'll take the second 2.

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

Thank you. In terms of rents, you're right, Jamie, we've done a good job over the last year in renegotiating our rents, waiving many of our minimum guarantees and, in some cases, negotiating some short-term concession percentage reductions. I think over the medium term, our job will be to make sure 2 things. Firstly, that we continue to negotiate, wherever possible, flexibility in our minimum guarantees, so minimum guarantee per passengers, which we were already doing before the crisis but, I think, has become more important through the crisis, and we're making very good progress in that area. And then secondly, wherever possible, negotiating lower rental percentages. The reality is, I do think the market will recover, and the market is attractive. So I don't think we're going to see a significant change to our rental percentages. But I think at the periphery, there might be opportunities, and obviously, we'll take advantage of them. In terms of the long-term question around capacity expansion, particularly in airports, I think a couple of things there. Firstly, it's a little bit too early to say what will happen with some of those long-term structural projects. Actually, what we're seeing at the moment is a desire for those projects to continue when we think about countries like America, which is very much a domestic-based market and require the infrastructure investments. So if anything, I don't see a significant slowdown where we are based and where a lot of our sales are. In the short term, I think a number of our competitors may not reopen all of their space. And actually, we'll be quite happy for that just to like fallow in the short term because, obviously, that pushes more of our customers into our units. And maybe in the medium term, there may be some opportunities for us to then pick up units in existing locations. But fundamentally, I think the market will recover. And if you sort of follow that hypothesis, then you will see continued investment in infrastructure.

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

Absolutely right. We have very significant headroom. So I don't really consider them to be an issue. And they've changed only insofar as they've been clearly extended through the period through to March '22.

Yes.

But that's similarly very high levels.

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

Jonathan?

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

The next question comes from the line of James Rowland Clark with Barclays.

3 questions, please. The first is just on margins. You've spoken a lot in the presentation about the gross margin optimization, cutting labor and overhead costs, renegotiating rents. Can you just discuss whether you are confident that you can return to FY '19 margin levels in an outer year, essentially a lower level of sales? That's the first question. Secondly, on working capital in FY '21. Can you just discuss, let's say that sales return to FY '19 levels by the end of 21, what sort of working capital inflow you would expect given that you have GBP 92 million of deferred rent payments coming in or going back out, I mean, in FY '21? And then thirdly, in terms of concession with contracts, you just mentioned in the presentation that you've extended some contracts on favorable terms. Can you just discuss a little bit about what sort of terms are favorable? And are you winning new contracts on favorable terms as well?

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

Sure. Yes. So I mean, if we saw, as you suggest, a recovery in sales by the end of the year back to pre-COVID levels, clearly, that would bring with it a recovery of all of our negative working capital, which, as we've said before, is somewhere in the region of GBP 200 million or so. So at that level, we would expect to see probably GBP 170 million, GBP 180 million of recovery of working capital from the current position. However, as you've correctly identified and as I've said earlier, we have benefited at present from deferrals, principally of rents, by agreement with our clients. And as I said earlier, we would anticipate in a full recovery probably GBP 70 million or GBP 80 million of that reversing. So I mean, as a consequence, you would -- we would be expecting to see a recovery in working capital of something in the zone of 100 -- possibly GBP 100 million zone if that's -- under that scenario.

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

The next question comes from the line of Leo Carrington with Crédit Suisse.

2 questions. The first on the landlord relationships. I suppose I was surprised here that 30% of landlords have not waived the minimum annual guarantees. Are these where pockets of traffic are stronger? Or does it reflect some landlords being less accommodating? And the second question on CapEx. The CapEx during H2 was obviously very low. Does that reflect the sort of real level of CapEx? Or is it that some CapEx is to be deferred into next year once volumes come back and once the timing of reopenings is known?

Sure. Okay. I'm going to split those. I'll do the first. You can do the second, Jonathan. So in terms of client relationships and sort of your question around why it's up around 30% still not waived minimum guarantees, the truth of it is that a lot of those are still work in progress. In some cases, where those businesses take time to make decisions, it's actually better for us to wait and negotiate over the long term because some people had a different view of the recovery time line to us. So if you take an optimistic view and we negotiate too early, then people may not want to, frankly, go on to variable rent. So sometimes it takes clients a bit of time to catch up with our way of thinking and actually see what's happening out in the marketplace. So we have a whole load of negotiations well underway with that 30%. And I expect to be successful with a significant proportion of those in time. Jonathan, do you want to pick up the CapEx?

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

That's helpful. Simon, if I might just ask a follow-up just or another thought. What's -- on the contracts where you've agreed modifications of the minimum annual guarantees, what kind of duration to the modifications? Are they sort of quarterly rolling or longer term?

Yes. Yes. Massive variability is the quick answer. As you'd expect, hundreds of clients across thousands of contracts. In general, when we said this, I think, in the summer, there is now a trend to longer-term deals. So this started off very kind of months, even quarters, but now they're moving a little bit more to quarter 6 months annual. But again, big variability by division and even within country.

The next question comes from the line of Tim Barrett with Numis.

I have 2 things left, please. One was just a follow-up. Jonathan's comment on the rent working capital impact, was that a contingent payment or should we model it that it will come what may in 2022? And if so, when? And then the second question was we haven't really talked much about regional, but I noticed that Continental Europe still has a worse drop through. And that area, unfortunately, seems to be the most impacted at the moment in the second wave. Is that factored into your guidance for 2021?

Sure. Thanks, Tim. So Jonathan will pick up 1, I'll pick up 2.

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

Yes, that's really helpful.

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

Okay. So Europe should be better, but the group is similar guidance to last year?

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

The next question comes from the line of Paul Ruddy with Goodbody.

Just 2 quick questions from me. The first is just on how the estate looks in, say, 12 to 18 months on a kind of recovered basis. Is there any major shift you foresee between channel or geographic mix? Will there be any kind of pruning potentially of the estate, maybe things that were still profitable pre-COVID that you look at now? And the second question then is just around leverage and particularly about potential market share gains and whether you'll have there -- it's obviously very clear that you're very comfortable on liquidity. But how you think about leverage now and the potential to capture any potential market share gains that may exist as we exit the market -- or exit the crisis?

Sure. Okay. I'll pick up both, Jonathan, by all means, add in to the second one, should you want to. So your first question is around in sort of 1 year, 1.5 year's time, what might our channel mix be like. I think fundamentally, we are operating in successful space, both in rail and air. Remember, the majority of our sales now are in the leisure part of the business. So over 2/3 of our sales in air, for example, are in leisure, and actually leisure plays a bigger part in rail than you might think, particularly in Continental Europe. So I think we are in long-term growth channels, I think we -- the space we have, it's fundamentally profitable and good quality. So you know we have been obsessed with making sure that any business that we retain or win gives us good returns. So I don't see any major shift in our either geography or channel view over the next 12 to 18 months. I just think we will open our units within those locations as demand recovers. And I think that will be led, as I said in the presentation, by domestic travel and by leisure travel, first and foremost. In terms of market share gains and leverage, I'll do some of the market share there, and maybe, Jonathan, you can do the leverage bit. I think in the short term, the main job for us will be actually profitably reopening our units in a systematic way as demand recovers. And I do think demand will recover over the spring and summer, as I've said, I think that a number of our competitors will probably never reopen some or all of their space. And in the short term, fine, let it like fallow, it will pick up with sales. So as I said 6 months ago, and that's the way I saw the next 12 to 18 months, so from most of '21, that's what I think will be the reality. Beyond that, say '22, '23, potentially space opportunities may arise. And as always, we will constantly be focused on is it good quality space, does it give us the returns we want, and does it fit our strategy. Jonathan, do you want to take up on leverage?

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

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

Just a couple of questions for me. I wanted to ask how you're seeing the competition both on the smaller and larger end? How have they've been managing the reopenings? Are they doing it the same way you are? And then is there anything to say in terms of your market share post to reopening? I appreciate it's probably early days, but anything to read from that. And then Simon, you mentioned technology quite a bit in the presentation today. I think pre-pandemic, there was an assumption that you could use or apply technology to about 1/3 of your base and that gave you a 10% like-for-like uplift. Is that sort of still the case you think -- because it seems to be lower than other operators who use technology in the food and beverage space. Are you being conservative here? Or is there more to come possibly?

Okay. Fine. I'll have a go at both of those. In terms of competition, again, it is quite early, as you just said, to speculate. It does feel like we've been sort of in this crisis for 10 years, but is -- we are still in 2020, just . I think the way I would describe stuff at the moment, what we're seeing is kind of split. So the large portfolio players with multisite operations have, like us, the flexibility to negotiate what they open and close, and they have the brand's breadth to be able to satisfy consumer demand, whether that's a restaurant or a grab-and-go unit. So we're seeing similar behavior. We may be quite -- maybe a bit quicker at negotiating with some of them, but broadly, we're in the same space. It's the smaller players and those that are -- have 1 or 2 units in a location or 1 or 2 brands that I think continue to struggle because they just don't have that flexibility. And we're certainly seeing that in some of our countries. And as I said a minute ago, I would expect some of that space never to reopen. It's impossible at this point to quantify that because it ranges airport by airport, country by country. But that's the way I would sort of segment it at the moment, if I was looking at a broad brush. And obviously, we're a multisite operation, and we have all the benefits that come with that. And I think we're doing a good job of opening units when we can drive some cash out to them. In terms of technology, I'm not quite subscribing to the 10% like-for-like opportunity, as you'd expect. I would agree with you, though, that I think what this crisis has taught us is that the applicability of technology is much more of an opportunity, a much broader than anyone over the course of a year ago. And so I would expect us to be able to find some form of technology, and I described a couple on the presentation, to be able to use in the majority of our estate over time. Now obviously, there will be some concepts on brands, some operations where it just doesn't work for customers. But I don't see any reason why we can't get a greater rollout of a form of technology to help our customers and to drive ATV and to keep our costs down. In terms of the sales impact, again, I don't think it will be in the region of 10%, but we should get a couple of percent benefit out of that over time as long as we take the right actions and put the technology in the right areas. What we're actually finding in terms of technology is that consumers are spending a bit more, actually. So I mean, obviously, it's early days. We still have a low level of sales. But I think the trick will be making sure consumers have confidence, they're in control of their purchases. And if we do those things well, then over time, I think it will be a part, it's not a whole, but a part of our like-for-like growth story.

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

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

But just one perhaps additional bit of color on that. Clearly, as we've said to you in the past, it is in typically some of the developing markets where we've seen local operators getting what we would argue are excessive rents, which we've then not been prepared to match. I think now we are seeing some of those players suffer most. So I think that our expectation would be that, that position of transfer times. So in places like China and in places in India.

India, yes.

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

I just wanted to ask sort of on a more longer-term perspective. How the pandemic is maybe impacting your views about the strategy and the desirability of air over rail or even road type contracts or other less sort of volatile areas?

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

To conclude, back to presenters.

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

Thank you.

Thank you.

Bye-bye.

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