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Edited Transcript of APGN.I earnings conference call or presentation 20-Sep-19 7:30am GMT

Half Year 2019 Applegreen PLC Earnings Call

DUBLIN Sep 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Applegreen PLC earnings conference call or presentation Friday, September 20, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph James Barrett

Applegreen plc - COO & Executive Director

* Niall Gearoid Dolan

Applegreen plc - CFO, Company Secretary & Director

* Robert Etchingham

Applegreen plc - CEO & Executive Director

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Conference Call Participants

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* Allan Smylie

Davy, Research Division - Transport, Distribution and Logistics Analyst

* Darren Shirley

Shore Capital Group Ltd., Research Division - Research Analyst

* Jason Molins

Goodbody Stockbrokers, Research Division - Analyst

* Ned Peter Hammond

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Applegreen plc analyst and investor call to announce the group half year financial results for 2019 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Bob Etchingham. Please go ahead, sir.

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Robert Etchingham, Applegreen plc - CEO & Executive Director [2]

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Thank you. Good morning, everybody. It's Bob Etchingham here, CEO of Applegreen. I'm joined by my 2 colleagues: Niall Dolan, our CFO; and Joe Barrett, our COO. And I will start by going to the slide deck and taking you through the first few charts, and then Niall will talk to you about the trading and financial performance. And we can have a Q&A then towards the end.

And so maybe if we turn to the slide deck. And Slide 5 is, I guess, a summary of our vision and the strategy, the direction of travel, if you like, of the business because it will be useful just to remind people of some of these issues.

Our vision really for this business is that we want to be the leading roadside retailer serving the needs of consumers in transit in each of our national markets in Ireland, the U.K. and the U.S.

The business -- the strategy that we followed in developing the business is that we generally established a presence through the acquisition of small local Petrol Filling Stations sites. We built up the estate slowly but surely over a period of time and established a local management presence, developed relationships with key suppliers, key brokers, et cetera. We've expanded and moved on up into the Service Area category and focused on growing our EBITDA from nonfuel sources predominantly from food and beverage consumers.

At this point in time, we see ourselves really well positioned to capitalize on certain long-term growth trends and the 3 principal ones being the move towards eating out of home. Food on the go has seen very strong growth over the last number of years, and most people predict that, that trend will continue. Convenience retailing is also a strong growth sector, growing much more strongly than big-box retailing. And an emerging trend that's literally in the early stages is the adoption of Electric vehicle and, in particular, recharging on the strategic road network. We believe our Service Areas will be net beneficiaries of that trend in the future.

But just to put some context on this, Applegreen currently at the moment, if you look at where our EBITDAR comes from, about 70% of it is derived from Service Areas, which only account for about 20% of our site numbers. And currently at the moment, about 3/4 of our gross profit is derived non-fossil fuel revenue streams.

Slide 6 gives you some data on our track record since we listed in mid-2015. I would just comment that the gross profit bar chart on the top right-hand side, that is actually non-fuel rather than total gross profit for the company. But just to make that point. But you can see there are some very strong numbers and a very rapidly growing business over the last number of years.

So moving on to Slide 8. We attempt to summarize what's been a very busy first half for us. Obviously, we were always going to have strong headline numbers with the acquisition of Welcome Break. It was -- as you can see, we've also got very strong underlying growth from the core Applegreen space as well, which was very good scene.

The underlying Applegreen estate grew EBITDA at 37% in the first half. Strong like-for-like growth, strong fuel margins and generally strong performance in each of our 3 markets. So a very credible performance.

We did make real efforts to ensure that Welcome Break didn't -- we didn't take our eye off the ball as a result of the efforts to integrate Welcome Break. And we have identified a number of significant additional synergies in Welcome Break since we last spoke to you. We expect that we'll be able to deliver at least GBP 10 million by the end of 2021, which is twice our original expectation for our Welcome Break synergies.

The estate continued to expand. 483 sites at the end of June. We had a relatively quiet time in terms of the core Applegreen business. 11 sites added in the first half in the Republic of Ireland and the U.K., plus we didn't add any additional sites in the U.S. We have been very busy and have identified the 2 packages that we've subsequently announced in June and August, and we'll be taking those into our business during the second half of 2019.

A few comments about leverage. Our leverage in the core Applegreen business was down to 2x, and the consolidated adjusted pro forma leverage for the group was 3.5x, which was down from 3.9x EBITDA at the year-end.

You can see there are some comments about net debt, the quantum of net debt, and we are, at the moment, in the process of a refinancing, which we hope to include very shortly. So leverage is very high in our priority list, and we remain committed to the objective of getting our net debt down to 2.5x group leverage by the end of 2020.

Okay. Moving on to Chart #9. That gives you in summary form some of the highlights of H1 2019. These are obviously on a pre-IFRS basis. You can see there the revenue, gross profit and adjusted EBITDA numbers including and excluding Welcome Break. Strong performance across all categories. 11 new sites, 483 in total. Capital expenditure of EUR 33.5 million. Adjusted diluted EPS of EUR 0.1280. And as I said earlier, group leverage down to 3.5x, and the core Applegreen leverage number is 2x and a 5% increase in the proposed -- in the interim dividend.

So just looking at a little more detail now at some of the acquisitions that we've made over the past 12 months. Welcome Break, first of all, I think we flagged back in March that the -- sector-wise, it's resilient, and it was seeing some softness in Q1 in the run-off to the first exit days -- Brexit date from -- at the end of March, and that definitely had an impact on consumer sentiment and consumer spending. And we would see that as something that seems to have receded now as the year has gone on. People seem to have come to terms with Brexit and all of the -- some of the -- well, a lot of the nervousness, I think, seems to have dissipated.

We were also impacted by roadworks by, let's call it, smart motorways, which caused a lot of our sites to be impacted, but traffic flows impact us in the first half of the year.

But in the round, traffic volumes and turn-ins to our sites continued to grow. We saw a slight fall in our conversion from the proportion of people that actually spend in the shop, which to us indicates a certain fragility there among consumers. And in the round, gross profit remained flat for the first half of the year versus last year.

As we said earlier, significant additional synergies have been identified. We expect to deliver GBP 2.5 million in 2019 with at least GBP 10 million delivered by the end of 2021, which is, as I said, is twice our original expectation.

The areas where those synergies are coming from, are -- as we've previously indicated, the whole area of back office administration is something that we've been able to bring quite a bit of automation to and streamlined very successfully.

In the forecourt area, we've been able to make quite a few labor efficiency improvements. And the hotels and the overall procurements have benefited from the integration with Applegreen.

Some more comments on Welcome Break on Slide 12.

We've initiated a pilot fuel supply, branding and pricing change at Hopwood Park just by Birmingham that kicked off at the end of July. Still very early days, but the indications are positive. We're getting a good response from consumers, and volume is up significantly. But it's still too early to reach any conclusion as to whether it's going to be beneficial for the business in overall terms.

We rebranded the store from Shell to the Welcome Break brand, both the store and the forecourt canopy. And as we have indicated, the trial involves us significantly reducing forecourt fuel prices below the prevailing rates on motorway service areas.

Just to make the point that the Shell fuel supply contracts expire in Q1, and we do expect to see significantly improved terms and enhanced working capital benefits from that point onwards.

We have been looking at our hotels. We didn't -- in any case, we were reviewing our strategy for hotels. That work has now concluded, and we do see significant performance improvement possibilities for us. We've appointed a new team to manage the business, and we're not proposing any significant change in the hotel sector at this stage.

As I indicated a short time ago, we're in the process of refinancing our senior debt. That involves GBP 330 million of senior facility, plus GBP 40 million of CapEx. And it'll -- and it's basically an institutional term loan. GBP 165 million will be for a 10-year term, and the remainder will be a 7-year bank facility. That will deliver a material interest cost savings and obviously mitigates future financing risks.

Okay. Moving on then. A few comments about 2 acquisitions that we've made in the U.S.

We announced earlier that we had concluded a deal with CrossAmerica Partners to acquire 46 Petrol Filling Stations in the Midwest, in Minnesota, Wisconsin and Michigan, centered on the metropolitan area of Minneapolis-St. Paul. And as is usual with CrossAmerica, these are on very favorable lease terms, and the initial term is 10 years with a number of tenant-only renewal options thereafter.

Sites are branded and a number of different forecourt brands and a significant potential, we believe, to improve the performance and the margins within the store. And that last acquisition will be managed by our northeastern group, who are based in -- just outside Boston.

Another acquisition which we announced recently was a stake in a group of 23 Service Areas. The location is along the I-95, which is the main route connecting New York City and Boston. We have 40% interest in that with a 20% -- an option to acquire a further 20% in 5 years' time.

The concession agreement has a further 25 years to run. The rest have been newly built, about 9 or 10 years old. You can see some photographs there on the right-hand side of Slide 13 of the facilities and very modern. And a good tenant lineup. McDonald's and Dunkin' Donuts would tend to be the core tenants. And whilst there's, in the end, scope for us to operate directly ourselves at the moment, there is some future potential to do that from taking over some of the units that are vacant at the moment. And we have the rights to -- for electric vehicle charging on the sites. And we've got potential -- as current leases expire, we've got potential to move in and operate ourselves. So we see this as a very -- strategically a very important move for the business in the future.

So with that, I'll hand you over now to Niall Dolan to talk about the trading and financial performance of the business.

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Niall Gearoid Dolan, Applegreen plc - CFO, Company Secretary & Director [3]

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Okay. Thank you very much, Bob, and good morning to everybody.

Turning to Slide 15 then. Firstly, we'll start with this graphic, which I think really highlights the change in our gross profit mix, both on a product and a geographic basis. I think it underlines the mix of movement of gross profit towards non-fuel, which is very much in line with our strategic direction that Bob spoke about earlier.

You'll see in the top graph that in H1 2019, fuel accounted for 25% of our total gross profit, which is down materially from a 35% level in the same period last year. So I think that highlights, again, our reduction in dependency on fossil fuels as a key driver of gross profit.

Turning to the bottom graph, you'll see geographic mix. Ireland now accounts for 25% -- 26% of gross profit, which is down from 58% in the prior period. The U.K. obviously post the Welcome Break acquisition has increased to 61% of gross profit. And whilst the U.S. declined marginally on a percentage basis, the absolute level of gross margin has grown pretty significantly from EUR 17.2 million in the first half of 2018 to EUR 33.9 million in the second half of '19. So material growth in the U.S. continues.

Turning to the next page, we'll do a deeper dive into each of our 3 markets, first of all starting with the Republic of Ireland, where we generated EUR 70.8 million in gross profit, up 12% from the same period last year.

We added 6 new sites in the period, 2 company-owned sites and 4 dealer sites, which means now we have a total of 199 sites trading at the end of June, and 34 of those were service areas.

I made a point earlier about strong nonfuel revenue growth. I think a couple of initiatives. We launched in H1 our vegan sausage roll. You'll see a picture on the previous slides -- or slide it was introduced in the period and driving good nonfuel growth in gross profit in the Irish estate of 5.3%. And indeed, there's further vegan and clean eating initiatives planned for the coming period to help sustain that growth.

You'll be familiar with our Fuelgood premium fuel offering which was launched last year. That adoption has proven very successful and, along with very good performance from our fuel terminal facility in Dublin port, has driven very strong like-for-like performance in fuel in the Republic of Ireland.

And we've launched a -- in September of this year, we launched an EV charging -- own brand, Applegreen-branded EV charging facilities at our M7 MSA site at Birdhill. And one other event of note was we have a transformational ERP project underway. That went live on the 1st of July very successfully. So that's a significant milestone for the business.

And lastly, any of you who will be familiar with Applegreen will know that giving back -- the concept of giving back is a core value of our business. This year, we celebrate 10 years of our charitable efforts, and there's been over EUR 3 million of fundraising to date from those efforts.

On Slide 17, the United Kingdom, obviously gross profit is significantly up as a result of the Welcome Break acquisition. We added 3 petrol filling station sites to the legacy U.K. PFS estate. We also opened Rothwell Trunk Road Service Area and truck stop in June, which was the first site we, Applegreen, developed under the Welcome Break brand. It was one of the greenfield sites we transferred into Welcome Break as part of the whole Welcome Break transaction. So again, significant event for us in terms of our Welcome Break journey.

We also opened one new stand-alone hotel. That was a contractual commitment we inherited on acquisition of the Welcome Break -- on acquisition of Welcome Break in October of last year.

And then Bob also referred to the Hopwood MSA rebranding and the discount fuel pricing pilot that's ongoing.

It's worth noting that we have 283 electric vehicle charging bays now in the U.K., and the plan is, in Q1 2020, to introduce more own-brand Applegreen charges similar to what we have done in our commence date in the Republic of Ireland.

So at the end of the period, we have 163 sites trading in the U.K., 49 of which were Service Areas. And we spent EUR 13 million in the first 6 months on capital expenditure, mostly focused on the Service Area estates through Welcome Break.

Slide 18 then, the United States. Obviously, as I mentioned previously, significant growth in gross profit, 97% up on the same period last year. In the Northeast, we had 29 sites trading at the end of June, including 7 7-Eleven convenience stores. And a big milestone to call out is we're in the process of developing our first U.S. Trunk Road Service Area at a site in Sturbridge in Massachusetts. That site will include a Burger King restaurant, a Dunkin' Donuts offer and will sell fuel under the Mobil brand.

Moving down to the Southeast, we have 92 sites trading between our location in Columbia, South Carolina and the Florida Panhandle. Two sites were converted to 7-Eleven convenience stores during the period, bringing a total of 4 stores trading at the end of the half year.

And Bob touched on the Midwest acquisition. We're in the process of integrating, completing that transaction and transitioning those sites into Applegreen. Once that's complete, we will have 167 sites trading in the U.S.

You'll see from the CapEx slide we spent EUR 2 million in the first half of the year. So our growth in the U.S. continues on a capital-light basis.

So then, turning to our financial review. You'll see on Slide 19, I presented a profit and loss account that includes the results of Welcome Break. The next slide over has a similar slide for the core Applegreen business excluding Welcome Break.

So we're very pleased to announce a very strong set of results for the group business with adjusted EBITDA of EUR 58.9 million. A couple of other lines to note on this slide are interest costs up obviously materially compared to the same period last year at EUR 14 million. We have taken on a new debt in core Applegreen plc as well as the legacy debt we've taken on, on the Welcome Break vehicle. But that's all translated into a profitable attributable -- profit attributable to Applegreen plc of EUR 15.6 million for the first 6 months of the year or EUR 0.128 per share on a fully adjusted diluted basis. So that's a significant increase of almost 36% in adjusted diluted EPS compared to the first 6 months of last year, notwithstanding the dilutionary impact of the Welcome Break equity raise. So very, very happy with that performance.

Turning to Slide 20 then. As I said, this is the P&L excluding Welcome Break for the core Applegreen estate. Very strong growth in revenue, up 25%. Likewise with gross profit, we've increased it by 27% and managed to grow our gross profit margin by 20 bps to 13%.

Cost control is ongoing. Selling and distribution costs have increased 25%, which is below the level of growth in gross profit. And admin expense growth has moderated to 17.4% against the same period last year as we've come through a fairly significant period of investment in back-office management support infrastructure.

All in all, the legacy core Applegreen business has generated EUR 26.5 million in adjusted EBITDA for the first 6 months, which is up 36.6% on the same period last year. So again, as Bob has referenced, very strong growth compared to the same period last year.

The key drivers of that -- one of the key drivers of that really has been very strong like-for-like growth, which has been a feature of our business for some time now. So you'll see presented on this page fuel gross profit was particularly strong at 14.3%. And let's -- we acknowledge that first half of 2018 was disrupted by adverse weather events. I think fuel initiatives, through the introduction of new fuel grades and our investment in the fuel terminal in Dublin port, as well as just generally very positive performance across our 3 markets have led to very strong gross profit like-for-like growth of 14.3%.

You'll see food revenue increased by 2% -- 2.8% on a like-for-like basis, which translated into 3.5% growth at a gross profit level. So again, strong performance in the Republic of Ireland driving that growth and an exceptionally strong performance in store, where we saw 8.9% like-for-like growth at constant currency in our gross profit on store. Again, very strong performance in the Republic of Ireland and the U.K. and with mix improvements associated with our 7-Eleven conversions driving good growth in the U.S. So very strong performance on a like-for-like basis that we're pleased to report.

Turning then to Slide 22. Cash flow. Those of you who are familiar with the business will know that cash generation has continually been a very strong characteristic of the Applegreen business. And for the first 6 months of the year, we managed to generate EUR 63.5 million of cash from operating activities, which is available to be utilized for the repayment of debt and reinvestment in our business. And we invested EUR 34.5 million in the first 6 months by way of capital expenditure.

Well, the other issues to note were an equity injection of EUR 19.1 million which was by AIP, which is a part of the completion of the [Innova] transaction that was initially contemplated in the Innova -Welcome Break acquisition transaction. That proceeds -- those proceeds were utilized to repay a chunk of a junior mezzanine debt finance in Welcome Break. Expensive debt. So you'll see long-term borrowings repayment of EUR 23.3 million in the second last line on the page there, which means that we've grown our cash balance -- cash reserves by EUR 13.8 million and delivered a cash conversion ratio on a last 12-month basis of 131%.

Moving to the balance sheet on Slide 23. I think the main points to call out here are really around leverage, again, which Bob called out in his highlights earlier in the presentation. Reduction of leverage is something we're absolutely committed to and delighted to see that group consolidated leverage has reduced from 3.9x at the end of 2018 down to 3.5x at the end of June. Our core Applegreen plc leverage also continues to reduce down to 2x from 2.2x at the end of last year. And total external debt stands at EUR 605.3 million with debt drawn -- and of that drawn debt, just over EUR 391 million sits in the Welcome Break entity, which, of course, is nonrecourse to Applegreen plc.

And when we look at return on capital employed metrics on an LTM basis, we're delivering an 11.7% return on capital employed.

And then lastly, IFRS 16 -- to discuss the impact on our business of IFRS 16. This is a change in accounting treatment on lease rentals, which applies on the 1st of January 2019. I think the opening point to emphasize is that it will have no impact or has no impact on cash flow or on the strategic development decisions we make in the business or indeed on any of our bank covenant tests, which are all on a constant GAAP basis.

We've elected to apply the modified retrospective approach. And you'll see that lease rental expense in the P&L is effectively removed and replaced by a straight line depreciation charge on the right-of-use asset and an imputed interest charge on the lease liability that we bring on to our balance sheet. So whilst we're stripping away a rental charge of EUR 33.9 million, which means our new adjusted EBITDA post IFRS 16 is EUR 92.8 million, we're also increasing our depreciation charge by EUR 15.5 million and increasing our finance cost with this imputed interest on lease liabilities of EUR 24.4 million. So the net impact in our P&L is a reduction of EUR 5.7 million for the 6 months or a reduction in adjusted EPS of EUR 0.0467 per share from EUR 0.128 to EUR 0.0812. Obviously, just to emphasize that this is a temporary timing difference and thus a reduction in profitability will reverse in the future as we move through the lease term.

Then lastly, on Slide 26, just to focus on the balance sheet impact. The right-of-use assets that I mentioned earlier is EUR 445.5 million, increasing our total noncurrent assets. We've also recognized a deferred tax asset of EUR 32.7 million, which means our noncurrent assets now increased to EUR 1.58 million.

You will see the capitalized value of future lease obligations that we brought on to our balance sheet totaled EUR 642.9 million. And we've -- the group weighted average discount rate to calculate that liability is 8%.

So our group leverage on a post-IFRS 16 basis increases to 5.6x, which is an increase of 2.1x, and I would have previously guided the market an increase of between 2x and 2.5x. So that increase has come in at the lower end of that range.

So with that, I'll hand back to Bob, who will leave you with an outlook for the business for the remainder of the year.

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Robert Etchingham, Applegreen plc - CEO & Executive Director [4]

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Thanks, Niall. I'm just going to cover the outlook by looking at 3 aspects of the business.

First of all, the core underlying Applegreen business, the legacy business as we sometimes call it. It's continued to perform very well over the summer months, and the outlook for the remainder of the year, we believe, is positive.

We've had, as Niall said, very strong fuel margins in all our markets this year and good, positive like-for-like nonfuel sales, especially in the Republic of Ireland and the U.S., which we expect to continue for the remainder of the year.

Obviously, the U.K. and Irish consumer, their confidence level will be impacted possibly by what might happen with Brexit and the type of Brexit that we end up getting. So that's a little bit of a health warning, I think, that needs to be attached to those sentiments.

Just looking in a bit more detail at Welcome Break. As we said earlier, the trading performance has continued to improve as the year has progressed. We've had a good summer, and that is very important because that's the seasonal peak for the business. And indeed, that's continued on into September. So we're encouraged by that and are positive about the outlook for the rest of the year, again Brexit uncertainties notwithstanding.

Our focus really in Welcome Break is unwinding some of the legacy commercial and legal issues is quite a complex business. And we're looking really to streamline it now and to integrate this more fully into the Applegreen business and the Applegreen way of doing business. Brexit uncertainty, obviously, is going to be featured in the second half of the year because in the round we think we demonstrated that this is a very resilient business. And we have a large number of self-help initiatives and synergies, which are going to help to mitigate any potential impact that may -- negative impact that may come from Brexit.

Just some other points then. Leverage reduction continues to be our primary strategy. We're bringing -- committed to bringing leverage down to 2.5x by the end of 2020. This is all happening within our markets where we're seeing some very active M&A transactions and valuations continue to be elevated really in all our markets. And we continue to look at opportunities, which we think may be value-enhancing and consistent with our longer-term strategy.

So in the round, I'd summarize by saying that the underlying Applegreen business continues to grow at a very satisfactory rate. Currently, there can be no certainty around the timing and the impact of Brexit, but our business is a very resilient one. And as I said, our self-help initiatives should help to protect us from any potential downside. We, therefore, remain confident in the prospects for the business for the rest of 2019 and beyond.

So that's it. Thank you all for listening, and we'll be happy now to take any questions that you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question from Allan Smylie from Davy.

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Allan Smylie, Davy, Research Division - Transport, Distribution and Logistics Analyst [2]

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Allan here from Davy. Three just to kick off with Welcome Break at the start, if that's all right. So I guess, the first one is just backward looking, I thought given you the business now pretty well better than for almost a year. If you could give us a fiscal year '18 EBITDA number for Welcome Break, if you would like to disclose, that could be helpful. And if not, then perhaps if you could tell us how the business trended for H1 and H2 last year would help us think about fiscal year '19.

The second question was just on the phasing of synergies. So how should we think about that step from EUR 2.5 million this year up to $10 million in 2021? Is that -- will that be a linear progression? Or is there any kind of phasing we should be aware of? And also, if there's any updated thinking on the working capital benefits you expect to extract from Welcome Break in 2020?

And just a final one for me to start. On the hotels, it would just be useful to get some insight in your thinking about keeping the hotels. You clearly see a significant upside. So just how you're thinking about that business? And also perhaps some of the experience that the new management team is bringing in, and if you could help us think with that, that'll be useful.

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Niall Gearoid Dolan, Applegreen plc - CFO, Company Secretary & Director [3]

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Okay. I think we've -- I've captured all that, Allan. And I think, first of all, starting with 2018, EBITDA performance for Welcome Break, it was pretty consistent with what was expected in the marketplace. I think there was -- it was GBP 69 million, GBP 70 million was the number that was in the consensus documents that were released in back end of 2018. So the actual performance came in very similar to that. I think in terms of seasonality, I think our business has been quite seasonal. July and August, the summer months, Q3 tends to be the peak period. So we have -- haven't looked back in detail over the last number of years, but generally a 40-60 split is always what we would say that, in general terms, is a reasonably sensible split from half year to half year. I think in terms of synergy phasing, we've called out GBP 10 million per annum to be delivered by 2021. That's sterling. We're looking at delivering GBP 2.5 million in year -- next year. The target is for an incremental GBP 5 million in 2020 and an incremental GBP 2.5 million in 2021.

I think the third part of your question then, if I recall, related to working capital. I think we're still reasonably on target to deliver the type of working capital benefits we called out at the time of the acquisition. So as Bob said, the Shell fuel supply contracts come to end-of-life beginning of 2020. And we're still quite confident of getting materially enhanced working capital benefits from any renegotiation of our fuel supply contracts in Welcome Break. And so the target is still about similar levels as previously indicated, I think there's -- I think we called out a figure of about GBP 30 million. At the time of the acquisition, we still stand over that and are confident in delivering something of that magnitude. Maybe I'll just hand over to Joe Barrett here to discuss the hotels question or answer the hotels question.

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Joseph James Barrett, Applegreen plc - COO & Executive Director [4]

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Good morning, Allan. I think first thing I would start by saying kind of the hotels have got a lot of light shown in the last year because of the figures put in for the other category, and we have significant revenues that we received under our parking and our gaming. And I would suggest hotels are probably given far too much more sunshine than they deserve in the discussion. However, what we have done is we've taken in some consultants -- external consultants who are still working with us, who are very seasoned. We're restructuring our operations, so that we've got a commercial demand side operation and then -- which are bringing more customers in. And then secondly, the day-to-day operational setup, and that's going well. We're improving our websites and doing a lot of work in that side of it. So we're happy that we're going to make some significant improvements in that business.

What I would say is 23 out of the 31 locations are all co-located on our existing facilities and amenities, and certainly the assets are worth a lot for us, not only just as they are but also for potential alternative use. And it's our strong opinion that we're better to hold on to those assets, improve what we have and in the future look at alternative uses if required. I hope that answers you sufficiently.

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Operator [5]

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(Operator Instructions) We have our next question, Jason Molins from Goodbody.

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Jason Molins, Goodbody Stockbrokers, Research Division - Analyst [6]

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A few questions for me, if you don't mind. Now just following up on your comments around the phasing and the seasonality of the Welcome Break business. Given the comments you've made around recent trading and around the summer month, July and August, and I think, Bob, you mentioned September. Can you just shed a bit of light in terms of how important those months are for the overall Welcome Break business?

Second question, just on the synergy uplift from the GBP 5 million to GBP 10 million. Could you maybe elaborate a bit more in terms of where you see the sort of key differentials between your initial expectations and your previous expectations to give you comfort on increasing that synergy target? And then just finally, just in terms of the U.S. You obviously closed a couple of deals in the last few months, how should we think about the pipeline and your ambition to grow further in that market? And then just in terms of the performance in the U.S., can you give any color around the store uplift that you've seen from rolling out the 7-Eleven stores? And how should we think about further rollout of those 7-Eleven convenience stores into the rest of your portfolio in the U.S.?

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Niall Gearoid Dolan, Applegreen plc - CFO, Company Secretary & Director [7]

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Okay. Well, I think probably I referred to 40-60 split in Welcome Break trading as being sensible -- a sensible way to look at it, Jason. I think that really emphasizes just how important Q3 is to the business. When you think Q4 is a relatively quiet period, October, November, December, December does have an uplift for a week over Christmas. But generally, quarter 4 in pretty quiet period. So Q3 is the standout quarter for an MSA business like Welcome Break, which would be consistent with our experience in MSA sites in Ireland. So we're saying we're happy, very happy with how the business has traded over July and August. So that gives us a good level of confidence. So yes, we're happy. I think Q1 was quite a challenging quarter for the reasons Bob outlined in the discussion. We saw an improving trend over the course of Q2. And I think we're happy that we've traded reasonably well or traded well over the course of July and August. So I hope that answers the question in terms of the criticality of that period.

I think the other one was synergies. In terms of the increase in the synergy targets, I think we've just probably done a fairly comprehensive review of all activities and operations in the Welcome Break estates. We have -- as Allan has referred to, we're there almost a year. We have our management team in place. We have some good operators from Applegreen in place in Welcome Break. So we've done a root and branch review of where synergies are coming from. So I think they're probably generally from the same sources, back-office administration, forecourt readjustments, fuel pricing optimization, fuel purchasing optimization. Labor efficiency is a big thing in both forecourt retail and across the retail and catering estate more generally. And then we've called out upside synergies we see from hotel reconfiguration. And then more broadly, procurement benefits, probably, I wouldn't focus on any particular procurement, but just a broad-based review has yielded improved synergy targets. So it's fairly broad-based. And obviously, we're very happy that, that part has gone to the level we're calling out today.

Lastly, then, maybe I'll just hand you over to Joe to discuss U.S. pipeline and our opportunities that we potentially see in that market.

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Joseph James Barrett, Applegreen plc - COO & Executive Director [8]

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Jason, so just in terms of things like the store uplift and our brand partnerships on 7-Eleven, so have 5 stores open now in the southeast, and they are going extremely well. Things like the whole area focus on slushes and ice-cold drinks is still very well done in the Southern markets where it's very warm and there's definite likeness to the U.S. customers than the U.K. customer, where they like brands. So partnering with the likes of 7-Eleven, Burger King, Subway, Pizza Hut has been -- has gone very well for us and continuing to grow in that way.

We're also very excited about our first partnership with Dunkin' Donuts in the U.S., where we will physically operate the locations. We have 3 Dunkin' Donuts already prepared and subcontracted spaces out to other people. So in our first TRSA and Sturbridge, we're going to be fully operating that location, and we're very excited about that. And some people may or may not know, but we partnered with Dunkin' Donuts about 23, 24 years ago down to first food location in the service area down in Rathcoole. So that was the start of our food operations many, many years ago. And so brands I think are very important to us. In terms of the growth pipeline, we're still seeing lots and lots of activity there. It would be fair to say there's more opportunities than time in the day to look at them all, but we're pretty much focusing along the East coast where our strengths are and where our management and people are between the Northeast and the Southeast. We're also, in addition to that, making a lot of investments in our back office and our IT infrastructure, where we now are implementing a single source of IT and partner with a company called PDI, which will be used across the whole estate, which gives a lot of efficiencies. That will also assist us when it comes to group buying. So for the first time now with our scale by adding on to the Midwest, we can now start dealing with some of the big suppliers on a group buying basis, which, again, is adding benefits to it.

If you have any follow-on questions, I'm happy to answer them but I think that's what you were asking for?

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Jason Molins, Goodbody Stockbrokers, Research Division - Analyst [9]

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Yes. Sorry, just in terms of further rollout of 7-Eleven stores. Is that something one should factor?

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Joseph James Barrett, Applegreen plc - COO & Executive Director [10]

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Yes, we're ongoing with them. We're taking our time with them. The food is the most important part of the business. So we would start with food as being, kind of, obviously, the first brand partnership. And then from that, depending on what the extent of 7-Eleven is, it'd be fair to say we're finding more success with 7-Eleven in the Southeast than we are in the Northeast because the food partnerships are more important up in the Northeast, but it is going well. So for example, our site in Sturbridge won't have a 7-Eleven unless we do our own shop. So we, like every site we have in Ireland, the U.K., we select the partners we think are most appropriate for each location, Jason.

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Operator [11]

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Our next question from Ned Hammond from Berenberg.

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Ned Peter Hammond, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [12]

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A few questions, a couple of operational and then a few on EV. So I'll start with the first 2 and then move on to EV afterwards. So first of all, are you able to give any further update on the U.K. service area development pipeline beyond the one that you opened in June? And then on the Connecticut Service station business, sort of, how many vacant units are there in our business at the moment? And how soon do you expect to sell them? And what brands do you plan to bring in? And will it be, sort of, similar ones to what you have elsewhere?

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Robert Etchingham, Applegreen plc - CEO & Executive Director [13]

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Okay, Ned, Bob here. I'll try and answer those 2 questions. The development pipeline for U.K. service areas continues. We're actively working on a number of large motorway service area opportunities. We have one that we are -- I think there's a cross-brand that we hope will come through for us around about the end of the year, but as we've always said, these things are a little bit uncertain in terms of the timing and the success rate will be relatively low. But nonetheless, we're still working hard at it, and we've got a good pipeline of projects that have been transferred now as part of the Welcome Break transaction. It's been transferred into that vehicle.

On Connecticut, there is something like -- I think it's about 10% of the retail floor space would be unoccupied at the moment for various reasons. And we have a number of prospects to fill them out, companies like Panera Bread have expressed interest and Auntie Anne's, both of them are not particularly well known in Europe, but they're very strong brands up in the Northeast. And we're having discussions with a number of other brands also. So we're very confident that we would be able to fill them and probably operate the facilities ourselves also.

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Ned Peter Hammond, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [14]

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Okay. Great. And then on EVs, a few things. You couldn't figure out for what you've got in the U.K. Could you give a figure for the group as a whole? And then also, like how many EV target points we actually added this year? Then second question is, at your service stations at the moment, what proportion of cars are filling up are charging EVs or hybrids versus using fuel? And is that in line with the sort of proportion of the car park as a whole? Or is it higher than the average you get across the country? And then last question is, have you built your long-term plans for how you're going to generate revenue from EV charging at all? And is this the Applegreen branded charging points? Are they a sort of signal of intent that you'd like to operate charging points yourself mostly in the future?

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Robert Etchingham, Applegreen plc - CEO & Executive Director [15]

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Yes. Okay. First part of that question was how many charging points have we added this year -- or do we have? I think we have given you a number there for the U.K. From the top of my head, I think the number in Ireland is probably around about 30. We do have a number of Tesla outlets, but the Irish electricity boards, called ESB, have also put in a number of charging points, and we have just very recently added 2 Welcome Break branded charging points. You can see a picture of them actually on Slide #8 at the bottom, you can see the 2 charging points have gone into our motorway service area down in the Southwest of Ireland. They are the first Applegreen branded chargers. We will be charging the customer, if [toll] that charge, if you know what I mean. And that's the first of many that we expect to be rolling out over the next few years.

In Ireland, at the moment, the Electricity Supply Board do not charge the consumer. The power is free, believe it or not. So we're not able to charge at this point in time, but within a matter of months, they've announced that they're going to be charging people so we will start this at that point. And the economics of charging are relatively attractive compared to selling fuel. In a nutshell, you're talking about maybe a 50% gross margin as against a 5% gross margin on fuel. Tesla, at the moment, charge about 24p per kilowatt hour. Honestly, in the U.K., I think around about 35p per kilowatt hour. Typically, you can purchase electricity at about 11p, 12p per kilowatt hour. So you can see there is a good margin on it. We do intend putting our own units onto our service area sites. This would, in time, become a significant profit center for the business. And obviously, some people are there, they're going to be charged -- they're going to be there maybe for 20 minutes, half an hour and they'll hopefully be consuming something within our mainstream building whilst they're waiting.

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Ned Peter Hammond, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [16]

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Okay. Great. And so I guess, in the future, we'd expect the majority of charging points at your sites to be Applegreen branded ones? So that will be kind of your point here?

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Robert Etchingham, Applegreen plc - CEO & Executive Director [17]

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Yes. That's the direction of travel of business, maybe with the exception of Tesla, which is -- there's issues around the type of connections with EVs at the moment, but we would see ourselves having a universal ability to charge all cars with the exception of Tesla. So we will have something to cold test during the summer phase.

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Operator [18]

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(Operator Instructions) We will take our next question from Darren Shirley from Shore Capital.

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Darren Shirley, Shore Capital Group Ltd., Research Division - Research Analyst [19]

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Yes. In terms of the improved performance you've seen in Welcome Break sort of Q1, Q2, into the summer, I mean is that -- what have been the drivers of that? Has it been footfall? Has it been conversion? And is there anything you've done on those sites that improved our performance? Or is getting results sort of consumer sentiment-driven?

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Robert Etchingham, Applegreen plc - CEO & Executive Director [20]

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I think, Darren, it's a mixture of both. I would say that in Q1, particularly in the month of March, the Brexit issues definitely distracted consumers and made them more nervous than they would normally be. As you know, consumers are probably in a good place in terms of their own personal finances with wage growth and relatively low inflation, but they -- during times of distress, let's say, their inclination to spend is significantly reduced, and we found that in March. However, once we got past that point with a definite pickup in conversion. As we said earlier, traffic growth remains strong, turn-ins remained strong, but just the conversion from proportion of people who are spending on site was slightly down. They may have been coming in and using the bathroom and just going away again rather than spending. We did, however, have a number of self-help initiatives that we introduced as the year progressed. As a point was something like our offer of GBP 1 water with every coffee purchased. That has got a very good response from consumers. It's still a very profitable transaction for us. I think before, we would normally have seen about 1 in 25 coffee customers buying water. And in some cases, that's down to as low as -- has risen to as high as 1 in 8 with that GBP 1 offer. So those types of initiatives have helped to drive the business forward and have added to the improved performance that we saw from the underlying pickup in consumer -- I won't say consumer sentiment because that's still on the floor, but consumers' willingness to spend.

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Joseph James Barrett, Applegreen plc - COO & Executive Director [21]

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I'd add, Darren, Joe here, in addition to Bob's comments, that we've invested significantly in our kiosk units, especially in Burger King and KFC. We've completed a rebrand investment and reimaging in our KFC outlets and they've driven the business both in terms of sales volume and efficiency in terms of labor costs. So there's, I think, stuff like that, that we're doing as part of that type of program.

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Darren Shirley, Shore Capital Group Ltd., Research Division - Research Analyst [22]

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Cheers to that, gentlemen. And I've got a few more. So maybe I'll just fire it over. In terms of Hopwood Park, can you just give us an idea of what sort of dynamics you see in there in terms of the forecourt, the store and whether you've seen any sort of uplift in the sort of the main building at all? Another one on oil. We've, obviously, seen a lot of volatility this week in terms of the oil price, a big spike earlier in this -- earlier in the week. How do you manage that level of volatility? Is that something that is a concern? And then finally, just on the synergies, I mean very helpful to have the sort of EUR 10 million provided. I mean, is there any sort of costs we should assume associated with delivery of that EUR 10 million? Anything we should be aware of?

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Robert Etchingham, Applegreen plc - CEO & Executive Director [23]

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Okay. Darren, maybe we'll share those 3 questions around. I'll handle the oil volatility issue and Joe will do Hopwood and Niall, I'm sure, will do synergies. In terms of oil and the volatility, yes, the incident in Saudi Arabia caused an immediate spike in oil prices, and they rose probably up to about 15%. What we see is and are now about I think 5% above where they were. So we will -- we did see an increase in our supply price in Ireland that came through yesterday. In the U.K., it won't come through until next Monday. And we, like the rest of the industry, will simply pass that on to the consumer at comp. So we don't see any significant material impact on our profitability as a result of that volatility. We do prefer to see large, rapid increases that are well publicized because it makes it a lot easier to persuade people to push their prices up. So not something that we're particularly concerned about frankly. Joe, Hopwood?

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Joseph James Barrett, Applegreen plc - COO & Executive Director [24]

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I think on Hopwood then, Darren, we've seen some significant changes there. So we've taken down the Shell brand on the retail forecourt and rebranded a good Welcome Break not till December till where we rebrand our Applegreen forecourt. We've used the terminology of lowering fuel prices. And we've seen some sort of great increase in transactions and volume in our retail sales. There has been a few sort of queries, a lament of customers about the ability to accept fuel cards. So that hasn't gone just as well. So we're now changing our signage and improving our signage, and it's all part of what we've seen before in Ireland, when your involvement takes time to evolve the final version of what you want to do. And so we see that's improving now as new signage on fuel card acceptance goes in place over the next week or 2.

In terms of insight on the shelf, we've made some significant changes. We have put in a seating area. We improved our bathrooms. And we have significantly improved our hot food-to-go offer. We called it The Great British Bakery, and we're giving very high-quality value, hot food-to-go offers to customers, and we're seeing a huge acceptance of that and not till December, price points that you'd see in Gregg's offer, we find our customer is delighted to see that and the offers that we've put in have been very well received. So overall, that is good. It's like everything in life, I would sort of give myself a C minus and say there's room for improvement, and we're in the middle of making those changes, and we see more tweaks and changes before we decide whether we'll roll it out further or not.

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Niall Gearoid Dolan, Applegreen plc - CFO, Company Secretary & Director [25]

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Just on the last part of your question then, Darren, on synergies. There's nothing I would call out as being material by way of an execution cost in delivering those. I think those costs will be in the hundreds of thousands as opposed to the millions. So I don't think there's anything, as I said, there's nothing I would call out as being a material execution cost.

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Darren Shirley, Shore Capital Group Ltd., Research Division - Research Analyst [26]

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That's very helpful, gents. Just one last more, if I may while I've got you now. In terms of a potential material benefits from the WB refinance. Are you able to put a number on that?

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Niall Gearoid Dolan, Applegreen plc - CFO, Company Secretary & Director [27]

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We're hopeful that something like this would deliver us -- deliver Welcome Break a savings in the region of GBP 1.5 million to GBP 2 million per annum in interest costs. So obviously, the minority interest will benefit from 50% of that saving, but it is a material benefit. So we expect to get that across the line at some point in Q4 or going to plan.

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Operator [28]

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There are no further questions at this time. I would like to return the conference back to the speaker for any additional or closing remarks.

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Robert Etchingham, Applegreen plc - CEO & Executive Director [29]

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Okay. Thank you very much. That's it from this end. And if there are no further questions, we bid you farewell, and thanks very much for coming on and listening to our H1 results. Thank you.

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Niall Gearoid Dolan, Applegreen plc - CFO, Company Secretary & Director [30]

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Thank you.

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Operator [31]

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This concludes today's call. Thank you for your participation. You may now disconnect.