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Edited Transcript of BME.L earnings conference call or presentation 12-Nov-19 8:30am GMT

Half Year 2020 B&M European Value Retail SA Earnings Call

LUXEMBOURG Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of B&M European Value Retail SA earnings conference call or presentation Tuesday, November 12, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Paul Andrew McDonald

B&M European Value Retail S.A. - CFO & Executive Director

* Sundeep Arora

B&M European Value Retail S.A. - CEO & Executive Director

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Conference Call Participants

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* Adam Gareth Cochrane

Citigroup Inc, Research Division - Director

* Alexander Richard Edward Okines

Exane BNP Paribas, Research Division - Research Analyst

* Andrew Ian Porteous

HSBC, Research Division - Analyst, European Retail

* Geoffrey Frith Ruddell

Morgan Stanley, Research Division - MD

* Jonathan Pritchard

Peel Hunt LLP, Research Division - Retail Analyst

* Simon Bowler

Numis Securities Limited, Research Division - Analyst

* Tony Shiret

Whitman Howard Limited, Research Division - UK General Retail Analyst

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Presentation

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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [1]

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Good morning, everyone. Thank you for joining me this morning. With me, of course, is Paul McDonald, our CFO. And as per usual, if I may, I'll start off with some introductory remarks.

So you see the headlines on Slide 2 of our presentation. The group revenues increased by 21%, and that's obviously a combination of organic growth and then the impact of the acquisition of Babou. Our U.K. business is, over the 6-month period, best described as firing on all cylinders. We've been delighted with the ongoing trading at B&M in the U.K., and as you see, we report this morning a market beating like-for-like of plus 3.7%, which you'll see later in the presentation is actually remarkably consistent performance over the half year.

Our new store program is going particularly well. Those who've read the detail of the announcement, will see a proud boast that over the 30-year history of B&M, our top 5 new store opening days have taken place in the last 12 months, which really speaks to the popularity and appeal of the model as we continue to open new stores in new parts of the country. We remain very happy with the Heron performance, you'll see the numbers, and that business is similarly doing a steady rollout program outside of its core Heartland. At Babou, we generated GBP 144 million of revenues. And the interesting fact to share with you is that there are now, in fact, 4 stores, 3 stores during the half year and 1 store since then that are now trading as B&M in France.

We don't shy away from the fact that the German business has not performed over the 6-month period. It's been disappointing. And as of this morning, we are launching a strategic review to better understand why and to land upon solutions going forward. That strategic review has only been launched this morning. So you'll forgive us for not going into too much detail on that given the number of stakeholders involved. But of course, we do update the markets in January, and of course, we will update you at that point with our thinking and the initial conclusions from that review.

As a consequence of the strong performance of the U.K. business, its EBITDA grew by 14%, the B&M U.K. fascia. But of course, the GBP 12 million of losses in the German business meant that the group underlying EBITDA was a more modest growth number. The figures to have in mind is that the U.K. generated GBP 150 million of EBITDA, but unfortunately, the German business generated a loss of that line of GBP 12 million. You see the rest of the metrics there. I won't bore you with those details. I'll pass straight over to Paul, who will run through the numbers in more detail for you.

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Paul Andrew McDonald, B&M European Value Retail S.A. - CFO & Executive Director [2]

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Thanks, Simon, and good morning, everybody. Just to run through -- moving on to the P&L. We prepared the P&L on both a pre and post-IFRS 16 basis, given this is the first period that we have obviously introduced IFRS 16, I think probably just an important point to note that just in terms of IFRS 16, the impact on our P&L is around about GBP 9 million in the half, which equally for a kind of retail business is pretty -- is kind of pretty average in terms of where you would see and particularly for a growth retailer like ourselves.

The other kind of number to immediately pick out is in relation to impairments. Given the performance of the German business, Jawoll, we have written down the value of certain assets in Germany including the brand, the goodwill and some certain stores to -- fixed assets as well. But crucially, just to really -- just to say -- just to add, the next few slides, we'll take you through the EBITDA, how we get to that nearly 6% EBITDA at an adjusted level, which others say is all pre-IFRS 16.

If we take you through the revenue bridge, yet again, still consistently the main drivers of growth. So if we look at the B&M business, yet again, you have the growth from the FY '19 -- the stores we opened in FY '19, plus the net 25 stores that we opened in fiscal -- in FY '20 to date. Obviously, we've had the LFL sales growth, we've seen at kind of GBP 44 million. And equally, we're still generating some additional revenues from -- I think we mentioned at the half year, we have this Irish retail business that we're selling to on a wholesale basis, which has continued to perform well.

Just moving on to Heron yet again, some growth in kind of the Heron numbers of -- in terms of the Heron numbers, we've achieved basically the impact of the stores we've opened in FY '19. Plus, we've opened a further net 9 new stores in the year. And probably one of the really encouraging things around kind of Heron is last year, we had a -- in the half last year, we had 7% like-for-like sales growth, when we've introduced our kind of new -- a lot of our kind of ambient products. And the business also benefited in 2018 from the fact it was a great summer, and soft drinks, alcohol sold really well. And actually, we still managed to generate some positive LFL sales growth in the half as well, actually. So the Heron business continues to perform very well.

In terms of Germany, we've a small increase in like-for-like, a small increase in overall revenues, and we have the GBP 144 million coming from the non-comparable tariff from Babou.

In terms of the kind of the key elements of growth, in terms of the core B&M fascia, actually, EBITDA margins have been consistent year-on-year. And if you think back to last half year, we did actually see an expansion in our kind of EBITDA margins. So we've actually managed to maintain those EBITDA margins at the same level. Yet again, in terms of the key building blocks and in terms of -- probably Simon mentioned earlier, in terms of our FY, very important in terms of our FY '20 new store openings, the -- we actually generated GBP 5.2 million of EBITDA from them, which is actually a higher contribution margin. Then if you look back over previous years in this particular half, the contribution margin from those stores has been very strong. And as Simon mentioned, we've had some of our best new store openings in the last 6 months. Obviously, we're generating from the upsell performance -- generating some additional EBITDA margin and contribution from the LFL performance and then, equally, a little bit of additional investments in kind of central cost in B&M.

Moving on to Germany. Clearly, in the half, we -- and in terms of the half, we actually lost GBP 12.2 million EBITDA in Germany, against the -- we had a contribution of GBP 1.1 million last year, hence, the GBP 13 million delta. I think it's some of the key factors behind that. In terms of Germany itself, the rate of sale on products that we -- that in the business just haven't been good enough in our business. And equally, I think we called out at the end of the full year results, and also in the kind of Q1 trading statement, we've had this higher level of third-party logistics costs which is still a major factor and the reason why we've ended up with being GBP 13 million worse than last year. Yet again, nice EBITDA growth from kind of Heron, just over GBP 2 million and equally a marginal -- bit of growth in terms of our kind of Babou business.

Moving back to the U.K. and just calling in terms of the commentary around the kind of our LFL sales growth. I think one of the nice things around that kind of the LFL sales growth we've seen actually, is that we continue to see, and this kind of resonates -- the fact, actually, the B&M is still very compelling is that actually in terms of LFL sales growth, around about 40% of that is coming from actually increased footfall so it isn't just ATV actually driving that growth. It's a nice mixture between ATV and footfall. I think the other kind of important thing is -- to kind of mention, is actually -- it both -- I mean, clearly, in terms of the kind of high street, sometimes you hear noise are up the high street not working, but equally, we've seen LFL sales growth in both our high street locations and our town center locations -- at our asset town locations as well. So there's a nice mix of growth both in terms of footfall increases and actually in terms of store locations.

Importantly, we've also had our -- I think we kind of -- we sort of shout it out last year, the fact that our homewares ranges haven't performed, and equally, we've seen that continued improved performance in homewares. Grocery and FMCG continues to remain very strong. The fact is that the customers are continuing to look to kind of value and continuing to shop in terms of B&M -- with B&M. And equally, that price gap against the big -- supermarket, et cetera, has remained remarkably kind of stable.

In terms of moving on to kind of how we started Q3. We've seen a solid start to Q3, clearly, we're kind of well placed in terms of the kind of golden quarter. Stock's all there. So kind of -- we're kind of well set at Christmas.

In terms of the gross margin performance, broadly, in terms of the B&M fascia broadly in line with last year. I've mentioned the fact that grocery and FMCG continues to be -- we've seen this pattern over the last 2, 2.5 years, where grocery and FMCG have continued to be relatively stronger, which has certainly been a bit of a headwind for the business, although equally, the strength of the fact that our homewares range is now back on track has delivered some improvements in the -- in terms of the general merchandise margins.

Heron, broadly in line with last year. Yes. Well, yet again, we've seen some reduction in margins compared to last year. The fact is some of the issues around kind of third party logistics, I meant the availability and product -- availability of products in store were sort of later than we were expecting. And therefore, in terms of clearing up that seasonal product, we incurred additional markdowns in clearing that product through, which has impacted their margins.

And probably last point around Babou, just traded under 41% margin. And I think just to -- which is structure, and hence, the overall margin for the business is higher really down to this Babou margin, which is -- if you think of -- Babou as a business basically has around only 10% of the mix is grocery and FMCG. Yes. The vast -- the 25% of the mix is clothing, which is higher margin, and then the rest of it is kind of being in sort of general merchandise. So structurally, it has a higher margin percentage.

So you move on to the cost base. In terms of the B&M fascia, relatively stable in terms of costs relative to last year. We've largely managed to mitigate the impact of the 4%, 5% increase in the living wage. So a bit of improvement in transport and distribution costs and a little bit of operating leverage on stores. Again, Heron as a business is starting to benefit from the new store program and actually been able to leverage its operating cost as we're increasing new stores within the actual infrastructure after Heron.

And I kind of mentioned earlier in terms of Germany, GBP 50 million increase -- sorry, increase in operating costs of GBP 50 million. One of the large factor behind that as well as the new stores is really the additional costs we spent on third-party logistics.

Big picture -- one bigger picture on kind of IFRS 16 here, I mean, these numbers are all pre-IFRS 16. But in terms of rental cost, if IFRS 16 is applied, you're basically reducing those operating costs by GBP 97 million. So it's a big change in terms of that operation charge. If you look back to the back of the deck, there's an appendix on this that explains it. I think in terms of kind of, really, obviously, depreciation pre-IFRS is about 1.6%. And for the full year in terms of guidance, we'll be around about 1.5% to 1.55% of revenues in terms of depreciation.

In the group interest expenses slightly higher than last year, and equally, we'd expect the full year interest charge of GBP 24 million. Just a point to note, the IFRS 16 impact on interest is about GBP 32 million in the half.

In terms of kind of moving on to kind of cash flow. Yet, again, business has continued to -- the cash flow has been preferred on a pre-IFRS 16 basis. Yet again, a reconciliation at the back. I think some of the key factors, obviously, the EBITDA growth -- the working capital is slightly lower than last year. The other probably standout thing is probably in relation to CapEx, where this year, we spent GBP 80 million compared to GBP 40 million last year. The big numbers there are the infrastructure CapEx, which all relates to the -- both the building and the start of the Fifth -- in terms of a new warehouse. The other sort of standout numbers is also maintenance CapEx where we spent roughly GBP 10 million more. We basically -- in terms of B&M business, we replaced a lot of our kind of material handling equipment in our warehouses, and equally, Babou hasn't incurred some expenditure on actually changing the shelving in stores to a B&M style of -- and aisles as opposed to what they had previously.

We have spent a little bit more on kind of freeholds. We have been acquiring some stores in terms of freehold. It's not -- in terms of our kind of capital-light model, the plan with those is to actually stay on a leaseback in those stores, but it has allowed us to get access to those sites. It's certainly -- I'd say a couple of allocation policies, so we're going to retain our capital-light model.

In terms of general sort of guidance for the year, in terms of CapEx, we'd expect to have CapEx of about GBP 110 million for the year. Equally, if you're thinking about future years CapEx maintenance, given the way the infrastructure in the warehouse will have been completed this year, we're thinking about 0.7% of revenues as maintenance CapEx plus the additional CapEx in terms of new stores.

So key things. If you just -- key points of difference. Our net debt-to-EBITDA is just under 2.2x at the -- on an LTM basis at the end of September. But excluding what we spent, the GBP 88 million we spent to date, the GBP 89 million we spent on Bedford and also the store freehold, that reduced the underlying adjusted net debt-to-EBITDA is just over 1.8x. But yet again, the business continues to generate cash. Okay. Simon?

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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [3]

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So I'd like to start, if I may, with our core B&M fascia, which, of course, generates 86% of our group sales. And I just thought it'd be useful, particularly for those investors outside of the U.K. to put that into perspective relative to the U.K. retail sector more broadly, and we show here the British Retail consortiums, LFL data over the course of this calendar year, and you'll see how B&M has been materially outperforming those numbers, notwithstanding the fact actually that 40% of what we sell is grocery, is in a very mature market, cleaning products, toiletries, cereals, biscuit soups, soft drinks, et cetera. So we remain very pleased with the robust performance of the core business on an LFL basis.

Turning the page. I thought we'd share you some shopper surveys that we commissioned ourselves using an agency to understand what the consumer today thinks about stores like our own discount retailers. So this is a survey of 2,000 discount shoppers in the U.K. It was conducted only recently in the last couple of months, and you'll see here some really interesting feedback as to how consumers are thinking. First of all, half of the shoppers are confirming that they are using discount stores more often, but also, of course, they are less loyal to one particular fascia and are shopping around. That absolutely plays to our strengths. It keeps us on our toes, but it tells you that the days of a loyal shopper doing a weekly shop with the 1 fascia and not shopping elsewhere are increasingly a thing of the past.

The other shout-out here is the -- forgive me, it's almost a double negative, the comment about the price gap between discount stores like ourselves and the mainstream supermarkets. Only 15% thought there's no price difference. In other words, 85% didn't feel that there was no price difference. So the vast majority of shoppers, and that's what matters, recognize, understand and perceive the genuine savings that are available if you shop at B&M rather than going to your traditional supermarket.

We then drill down into -- well, thank you for coming to as shoppers, but what do you think about our stores? And what we have here is a peer group. I'll spare my fellow retailers blushes by not identifying them. They've been anonymized, but I can assure you that it's the correct peer group. Each one of these discount variety retailers, a, b and c are GBP 1 billion-plus revenue businesses that have been established many years and are genuine multi-price retailers like ourselves rather than, for example, pound shops. And what you see is that we score well on pretty much every metric, on the things that matter. The things that matter the most, of course, are prices for us and our model, the ability to generate impulse purchases. That effectively is the statement around buying things that you didn't plan to buy. But in terms of clean and tidy, ease of shopping, locations, staff, we're performing well. So that's a health check on what our shoppers think about our store experience, and we found it extremely reassuring. And no doubt, this all ties in with what you're seeing on the financial numbers, plus 3.7% like for like and a store opening program that is generating best in history store opening days.

So let's drill down into the 3.7% like-for-like. And albeit on an anonymized basis, we demonstrate on Slide 16 that it's a broad-based positive performance. Now those of you that like myself are "glass half empty" kind of people, will be thinking, "Well, what's Department 7 -- sorry, N here". So let me, first of all, tell you that Department N comprises 1.3% of our business. So please don't be alarmed. And within that department, some of that is deliberate, exiting certain subcategories within that department because we don't feel they work in our stores. But the big message here, of course, is just how broadly spread across both grocery and nongrocery our LFL performance has been, but also take a look at what we call the LFL cash margin percentage.

One of the departments that I will call out is the homewares department. It's a very large department for us and that is Department L. So 5% to 6% positive like-for-like for the homewares department. But actually, on a cash margin basis, LFL basis at store around the 10% mark. So what that's telling you is we're growing like-for-like sales, but we're also growing margin even faster because this time last year, we were having to do some discounting in order to get the products into the shoppers' baskets.

So what is it that we did on home that generated that sharp rebound in performance year-on-year? Well, the first point we did was to invest in people at the support center to make sure that our product was on trend and coordinated the right colors. And alongside that, in March of this year, we changed how we presented that product in our stores. As you see from the top left photograph, we've gone to color blocking, where the cushion, the throw, the bed linen in that particular color are all merchandised together, whereas those of you who visited our stores over the years will have known that, previously, all the cushions in all the different colors were in one aisle. All the bed linen in all the different colors were in a different aisle. And so it was harder for the shopper to be able to create or buy the look that our buying teams have put together for them. And that saw a huge amount of work, which ultimately has paid off.

I think the final thing I'd say about our home department is that whether it's the nature of the product, how it's visually merchandised or how on-trend it is and the quality we deliver, we absolutely believe that we are narrowing the gap between ourselves and the department stores and category specialists so that we are well placed to take advantage of the withdrawal of those players from some markets as they rightsize or downsize their store states, which brings me to the new store program.

So in the core B&M fascia, we opened 30 stores. I've already reflected on the fact that they are a crop of fantastic stores. There's no other way to put it. But the other point of detail is that if you look at where the stores are opening, 1/3 of them have opened in the south, and this is before, of course, we have the benefit of Bedford and the reach that, that gives us in terms of transport and logistics to stores that currently would otherwise be served from the northwest of the U.K. Just to be clear, at the moment, before Bedford goes live, all of our logistics and distribution is picked and serviced out of the Northwest. Bedford radically changes that.

But the point remains that there are large parts of the country, if you look at the right-hand side, which is the postcode map, the zip code map of the U.K., the shading of the postcode demonstrates the level of store penetration by B&M. And even within our Heartland as well as the South, there's lots to go at. And so whilst we don't change the numbers today in terms of the U.K. store target of 950 stores, I think if you think about the recent press release from Lidl, where they're talking about accelerating their program and talking about 1,000 stores in the U.K., it feels intuitively like that 950 store number is potentially conservative.

There has been concern from those people who aren't familiar with our business that perhaps the model doesn't work as well in the South. When we talk about the South, we need to reiterate that the South does not mean Greater London. The South, just to turn back the page, in our language means that part of the country which is South of that line between the 7 and The Wash. And what you see here is that stores that are firmly in the South, Wiltshire and West Sussex, generate fantastic margins. The numbers here, just to point this out, these are just half year numbers. So this store in Wiltshire generated GBP 1 million, GBP 1.2 million of EBITDA only in 6 months, and that's not the benefit of the Christmas golden quarter. So that store is a GBP 2 million a year store. The store in Sussex is a GBP 2 million a year store. Now if one of our competitors are listening in, these aren't the photographs of those stores. So please don't send your troops out trying to find out where they are. But I think the point is well made. You can't make generalizations around the geography of the U.K. You're just as likely to hit a gold mine in the South as you are in the North because we show here the company average for that metric.

A few of you have queried or wondered why do we close stores, why do we relocate stores. And so on Slide 20, we illustrate the maths and the financial reasons for doing so. So let me walk you through the chronology of this market town in Central England. 10 years ago, we opened a bargain store, 10 years ago, that was pretty much only the format we had, and it was a small store of only 5,000 square foot sales area in the town center. More recently, a couple of years ago, we opened a B&M home store with Garden Centre, only 1 mile away from that old store. Effectively, that was a relocation, albeit the old stores stayed there for a while because we still had some couple of years left on the lease. You'll see that the new store over the last financial year generated GBP 1.1 million of store contribution. And so as we closed the old store, now that it has reached the end of its lease, subject of course to staff and colleague consultation, the financial impact of the closure is marginal, GBP 50,000. Frankly, that GBP 50,000 is less than the cost of servicing the store and finding indirect services to the store. So this opportunity to relocate our first-generation small stores to stores where we're able to better display our broad product range and it benefits from car parking and the bull tickets that we sell within our range is extremely compelling and another part of our armory as we think about continued store rollouts and growth over the years to come.

I'd like to then talk about marketing because one of the proud boasts in terms of the financial performance this last 6 months in B&M fascia is that there's been no TV advertising. There's been no lead switching -- no couponing, no radio advertising. Frankly, our business is built on word-of-mouth and new ways of communicating with our shoppers. That new way of communicating is, of course, digitally, and that might be our website. It might be our digital newsletters, but most importantly, right now, it's social media. Anyone can verify these numbers. Just go on to the Instagram pages of these retailers and take a look at the numbers.

The B&M team that's generating, in many cases, 2, 3 times the levels of engagement of a competitor that is 10x our size. It's 4 people. This is a smart way to communicate to your shoppers at very low cost but in a highly engaging way. So some of these images here are not images that we've created. These are our shoppers' imagers, sharing with the community what a great product you can buy in B&M right now. So we will continue to invest in social media. We'll continue to invest in digital marketing because I think we've demonstrated that we can market our products online but then transact very profitably off-line in our stores.

Turning now to Heron Foods, Slide 22 of the deck. Not much to say. We're delighted with how the business is performing. And as Paul mentioned, even though they had these knock out the park 7% like-for-likes this time last year, they still generated a positive like-for-like performance. The new store program is progressing well, and it's on track to open 20 stores for this financial year, 10 of which have already opened.

You'll recall that at the time of the acquisition, one of the synergies sought through the acquisition was the opportunity to plug and play the Heron, frozen and chilled food proposition into B&M. To remind everyone, there are 80 stores at B&M that have benefited from that plug-and-play deployments. We will announce in January reviewing the numbers at that time as to the pace of any rollouts of that initiative, but of course, I would just add as a side. If you think back to that slide I showed you with the departmental positive like-for-like performances, you'll see there are very few departments that are not firing on all cylinders. So the math around taking one department out to put frozen and chilled in is perhaps not as clear-cut as it was 2 years ago, but let's not prejudge the issue. Simply put, we'll make the decision based on the math, based on the math of how frozen food is performing versus other departments. And of course, the right time to do that is after the benefit of the current golden quarter peak trading period.

Let me give you an update on Bedford. There's the facility, 1 million square feet. It's for those who can't visualize 1 million square feet, it's the equivalent of 16 premiership football pitches. It's all on one floor. It's a huge facility, one of the largest in the U.K., and I'm pleased to share with you that the construction is now complete. The fit-out is progressing absolutely as planned, and currently, we're in a sort of soft launch training process with a view to going to full launch gradually over the early months of 2020.

As a final point of detail on the Bedford facility, those of you who are close to the real estate market will be aware that we have put out fillers and marketing materials for a proposed sale and leaseback of the assets in which we hold this building, and there's been strong and vested demand for it.

Moving on to France. So I mentioned that there are now 4 stores trading in France under the B&M banner, 3 that were opened prior to the half year and 1 more recently. The stores look great. Very pleased with how the team have worked really hard to recreate the magic of the B&M in the U.K., and we've done the things that we said we would do. We've reduced the reliance in that business on clothing and footwear from what was 40% of the mix down to 25%, 25% of the mix. We've deployed some food in FMCG to help the basket and to drive frequency of visit. And most importantly, in terms of the autumn/winter ranges, that product has been successfully deployed at stores.

So the Babou team have navigated the challenges of peak intake, peak intake of full containers of product arriving from Asia, hitting the distribution center in September and October. They've navigated that. The products deployed in stores, good product availability, and we are well set up for the golden quarter. There is some legacy stock still in the business, but we are clear in our minds that the strategy is to have moved out of that product by the end of the current financial year.

As we sit here today, final bullet point worth reflecting on, it will be next spring/summer that the Babou business first benefits from B&M's seasonal spring/summer range. We bought the business in October 2018, which was too late to place orders for B&M-sourced gardening product. We traded through the summer with inherited orders for gardening products. It's spring/summer '20 -- February 2020 that we'll be launching the B&M product in stores. And it's at that time that the transformation of the supply chain will be complete, albeit, obviously, you continue to test and learn and tweak the product range as every season goes by.

I then move on to capital structure in Slide 25. So Paul has already pointed out that on an underlying basis, if you adjust for the sort of one-off expenditure on the Bedford DC and the ad hoc purchases of store freeholds, where we bought the freehold only because we had to in order to secure the site, if you adjust for that, our leverage -- our net debt-to-EBITDA ratio is down at 1.83, which is at the lower end of the range that, as a Board, we said we're comfortable with. That clearly raises some questions around the potential for a return of surplus cash to shareholders. We share with you here that if and when we conclude the sale and leaseback of the company that holds the distribution center, that in of itself would release GBP 150 million of surplus cash. But that's a separate exercise and opportunity from the ongoing opportunity around release of surplus cost to shareholders based on a target net debt-to-EBITDA ratio of 2.25 or so. So obviously, we will update on that further in January and, of course, then at the full year, as we deliver the EBITDA that we internally budget.

So what are we saying about the remainder of this financial year? Slide 26. So the B&M core business is in rude health. We're not oblivious to the fact that our political masters have called a general election in what is the third busiest week of the year. Thank you for that. And of course, that's difficult to predict how that pans out. At first, what I would say is that having been in this industry for 25 years now, no one's ever canceled Christmas. So in that respect, we are cautiously optimistic. But of course, at the margin, timing of elections, political uncertainty can impact consumer confidence and, in the short term, provide some noise. Very happy to hold Heron's trading. And despite effectively a flat market in grocery and not really getting a tailwind from price inflation the way that it did 1 year or 2 ago, it's performing in line with our expectations. We reconfirm here on the third bullet point the new store opening targets for the remainder of this current financial year. So it's 53 gross openings at B&M and 20 gross openings at Heron over the course of the full financial year.

The comments on Germany is succinct and deliberately so. I'm sure you'll forgive me, but we've only just launched this review as of this morning, and it would be entirely inappropriate of me to start second-guessing or speculating on the outcome of that review ahead of the important engagement with other stakeholders in the business, not to mention the 2,000 colleagues who work there.

Moving on to France. As mentioned, the stores are well set up for Golden Quarter trading. If you're in France over the Christmas period, do go in. You'll see a fantastic range of Christmas decorations, and we look forward to nearing the completion of that migration to the B&M supply chain over the next 3 to 4 months. There is one more store planned for the remainder of this financial year in France, but it's taking place very late in March 2020. So in terms of modeling, it won't move your numbers. Well, that store will be branded B&M as indeed the previous -- as the existing store openings of the financial year have been. So with that, I will invite questions. And in the usual way, if you could just introduce yourself and there's a colleague at the back of the room who will give you a microphone. So if we go to the front of the room, perhaps, we'll start there.

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Questions and Answers

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Jonathan Pritchard, Peel Hunt LLP, Research Division - Retail Analyst [1]

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It's Jonathan Pritchard, Peel Hunt. Three for me. Firstly, the strong portfolio you're saying, is that existing shoppers coming in more often? Or is it new customers who've discovered B&M? Staying in the U.K., another level perhaps of granularity on the latest stores. Is it -- you said they're exceptionally strong. Is that location, adjacencies, garden centers? Just what's the secret sauce there? And then France, you've gone from some variation of 40% clothing to 1/4 of sales. Does that number ultimately get to 0?

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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [2]

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Good questions, and thank you for them. So in terms of the shoppers, we think it's as much new shoppers coming in rather than just increased frequency. Another way to validate that is to point to new stores where we opened in a town where they frankly have never heard of B&M. Don't forget that we don't advertise before we open. The most we do is put an arch of balloons around the front door and invite the local mayor to come and cut the ribbon. So we don't advertise. They may not have heard the brand, but you know what, within a week or 2, they're flying. So I think what it's saying is that shoppers are firmly drawn to value today.

On your question of new stores and what's driving that performance, I think what's different today relative to the position, say, 5 years ago is that many more of them have been built for us and are therefore the correct size, the correct parking, the correct visibility to the passing traffic, and therefore, they hit their numbers so much more predictably and they're quite often better than predicted.

On your question on the Babou business, we are happy with 25% of the offer being clothing. We have no plans to take that down any further because at 25%, it's a -- our initial analysis is that the clothing sales and clothing margin justify the space allocation relative to the other departments in the store. We had a question just behind the first one.

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Adam Gareth Cochrane, Citigroup Inc, Research Division - Director [3]

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It's Adam Cochrane from Citi. First question, on the capital structure, you had new stores and then ordinary dividend as #2 and surplus capital is #4. In the first half, you didn't increase the dividend, but your earnings per share was up slightly. Can you just sort of explain how the Board is thinking about not increasing the dividend in the first half in relation to your overall expectations for the year? Secondly, would you be able to hazard a guess at any closure costs for Germany if we were to try and put in a downside scenario in terms of what it might cost? And then thirdly, can you reconfirm why France is different to Germany for your operations space?

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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [4]

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Sure so I'll take those 3 questions in turn. So in terms of the dividend, I really wouldn't read anything into that. And if you did the math, it's a fraction of GBP 0.01 if you were to change the dividend. So there really isn't anything to read into that around the health of the business or our view of the future. In terms of the -- your second question, which was the -- can you remind me? It was the closure costs of -- it's entirely an inappropriate question. It'd be wrong for me to answer it. I mean we've only just started the street review this morning. I'm not going to speculate what the outcome of it is. So second-guessing that just isn't the right thing to do.

On your other question around France, I think there are a couple of observations that I can make. When you look at the physical configuration and nature of the distribution center in France, it's a large modern box that is well suited to multiple containers of product coming in from Asia and getting to the stores. The Babou business has always handled large volumes of containers coming from Asia and going to the stores. Unfortunately, the German distribution center is somewhat differently configured and that the German business comes from a background where so much more of the product was delivered directly to stores by a domestic supplier base. So that's just a physical characteristic. Other than that, I think the other observation I'd make is that the Babou customer has always been used to product made for Babou that's sold at a compelling price but at normal prices, whereas if you look at the German business, a significant part of its historical product offer has been what they call Sonderposten, Sonderposten being closed out or clearance product. And that is one of the historical differences between the 2 businesses. But other than that, just much too early to speculate on the differences between the 2 customer bases, and we are just now starting to work.

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Adam Gareth Cochrane, Citigroup Inc, Research Division - Director [5]

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And staying on that...

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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [6]

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That's not right. There's question up front.

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Unidentified Analyst, [7]

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Yes, a couple of questions. Starting with the U.K. can you just give a sense of how much -- how's the competition within the discount sector is going? One of your key competitors is growing quite fast. Is it impacting your growth in the U.K.? Second thing on France. Can you just give us a view of how the 4 ramps -- store ramps are happening in France are following the same pattern that we see in the U.K., You get a spike and they're kind of coming down. And finally, on Jawoll, sorry, just following on that. I mean can you give us a little bit of what color -- how much is self-inflicted problem versus consumer not wanting to shop on these kind of formats?

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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [8]

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Sure. So to your first question around the U.K. competitive environment, I would describe it as being extremely stable. Not entirely sure which retailer you're saying is growing very fast. And Aldi, Lidl, we don't see as being a direct competitor. And in fact, we like being next door to them because they sell what we don't sell, and we sell what they don't sell. And so we actually see that as being a positive for our industry. In terms of the more immediate competitor base of obviously, other discount variety of retailers, my understanding is that we're growing the fastest both in terms of number of stores or absolutely revenue growth. So I can generally assure you, we're just seeing it being a very stable market.

On your question on France, I would love to answer the question around what's the shape of the first 12 months trading, but these stores have been opened a few weeks, so we just don't know and there's no point trying to guess. And most importantly, they've not yet traded their Golden Quarter. So it's much too early, but I can assure you that as soon as we have the data, when we've got a year's worth of data, of course, we'll share it, and we'll allow you to model that correctly.

And your question on Germany, I can understand it, but it's a similar situation to the other questions. There are colleagues in Germany who are being told about the strategic review this morning for the first time. It's just not appropriate for me to start speculating around it in this very public environment until we've consulted, we've engaged, and we started doing the work. Yes. Here in front.

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Tony Shiret, Whitman Howard Limited, Research Division - UK General Retail Analyst [9]

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Yes. Tony Shiret from Whitman Howard. Just on the sort of France, Germany and sort of general acquisition point. Can you give us some idea how you manage these individual non-B&M businesses, how much you actually control them, how much you leave to the local men or to the subsidiary management? And along those lines, and I know you're having a strategic view, why is it taking so long to -- you've had 2 managements in Germany now, as I recall. I just wonder why is it you haven't been able to control them a bit better. And on a completely different point, could you remind us how the U.K. logistics sort of cost profile is going to develop with Bedford opening?

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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [10]

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Okay. I'll take the first 2 questions and then Paul, I'll just hand it over myself. So both our German subsidiary and our French subsidiary have managing directors who are local nationals and are experienced in their markets in that sector. The key opportunity that those management teams have in those businesses is to access the B&M supply chain to the extent they wish to. So they have complete open access to all our product development, our supplier base, our cost prices, and they can choose from those ranges what they want for their markets. In terms of the question around strategic review, I think it's probably worth pausing to sort of take a step back and think about our ownership of the German business. So we acquired the German business actually before we were a listed business. We were a private company at the time, and it was about 5 or 6 years ago. I would point out that for the first 5 of those 6 years, the business has been profitable. And so when you say, "Why is it taking so long", I actually -- I'm not sure I'd agree with that analysis. The business has been loss-making for 12 months and we are launching an urgent strategic review today. I'm not sure that's spending too long to deal with an issue that we recognize needs dealing with. Paul, do you -- turn to logistics?

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Paul Andrew McDonald, B&M European Value Retail S.A. - CFO & Executive Director [11]

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Yes. In terms of the kind of intent, once the sale leaseback happens at Bedford, I mean basically, you'll have a full year operating -- the fixed costs of around about GBP 10 million, which is basically the rent and kind of business rates on the site. Equally, the other important thing, we are -- some of the actual cost in terms of actually the buildup. Obviously, you've seen that we've got 50 stores we're picking out of there now in terms of, obviously, we've made sure we've invested in the people and the training ahead of that. And equally, as we move into January, we will have to see some inefficiencies there as we're building -- as we start to ramp up from 50 stores up to the 250 stores. So we will see some additional kind of operating cost in this financial year of probably around about GBP 3 million from those inefficiencies. Just to make sure, as I say, the DCs are clearly one that we sat here in a few months' time, that the DC not working. So we're making sure we're fully invested.

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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [12]

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Geoff Ruddell from Morgan Stanley. Three completely unconnected questions, please. The first, which I appreciate your constraint on Germany. Could you just tell us whether you need to complete your view on Germany before you are in a position to return cash to shareholders? Or can you make this decision separately? Secondly, do you -- should we be disappointed you didn't get in the operating leverage with the 3.7% LFL in the U.K.? And thirdly, did I understand it correctly that you're planning to raise GBP 150 million from the sale and leaseback on the site you spent GBP 86 million on?

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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [13]

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I take the questions in turn. So in terms of the strategic review and potential return of cash to shareholders, they're 2 very separate topics. I take you back to sort of trying to put the losses in Germany in the context of the broader group. The B&M fascia is 86% of group revenues. On top of that, you've got the Heron fascia, and the GBP 12 million of EBITDA losses in Germany are in the context of GBP 150 million of EBITDA profits in the U.K. So we really see them as 2 separate issues and one does not preclude the other.

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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [14]

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Make a difference to having to not have enough cash?

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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [15]

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Never say never. I never rule anything out and never rule anything in. But as I sit here today, I don't see any connection between those 2 issues at Board level discussion.

And turning to your operating leverage question on our positive like-for-like growth. Clearly, our industry has the headwind of national living wage. Clearly, as we grow our number of stores, we need more costs at the center. And actually, we take the view that rather than sweating our assets too hard, as we grow our revenues, we should continue to invest in our stores and our processes and our people. So whether that's training, whether that's buying resources, whether it's the logistics and warehouse operation, as we grow our business, we grow our overhead base in order to make sure that we continue to deliver a great experience for our shoppers. And I think the slide we showed you on what discount shoppers think about a trip to B&M around queues, around cleanliness, ability to navigate, I think that validates the wisdom of continuing to invest in the store experience rather than trying to sweat the asset too hard and you end up with checkout queues and gaps on the shelves.

And on your third question around the GBP 150 million, not sure on the math around land cost, bill cost, but then there's also fit-out costs. And the market will tell what the building is worth. That's not for me to judge.

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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [16]

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I mean are you anticipating making quite a significant development profit on it?

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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [17]

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We've put in print that the sale and leaseback could release about GBP 150 million of surplus cash. You wouldn't have done that likely.

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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [18]

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Right. And how long a lease are you likely to take on it?

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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [19]

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Consistent with our existing distribution centers and the industry norm, which is about 20 years. Because if you think about the fit-out costs of a distribution center like this, we'd want to have the certainty of knowing that you're there for 20 years.

Yes. Sorry. Just way behind.

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Alexander Richard Edward Okines, Exane BNP Paribas, Research Division - Research Analyst [20]

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It's Warwick Okines from Exane. I'm going to try one more on Germany if you'll forgive me and talk about the first half. I mean most of the challenges that you've talked about are actually operational in nature, but clearly, you're not satisfied with the sales performance. Could you maybe talk a little bit more about the performance of sales in the first half in Germany, maybe B&M versus non-B&M products or when you haven't -- in categories where perhaps you've not seen the availability issues have products performed?

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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [21]

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So what I can refer to is that the distribution and logistics challenges meant that the seasonal product, particularly gardening, arrived very late and a lot of it missed the key weekends when people go out and do their gardening purchases. I think if you look closer at the numbers, you'll see that whilst the store -- whilst the state had more stores than this time last year, there's a very small increase in sales. So the implication from that, of course, is a negative like-for-like. And I think we've also said that the rates of sale of the product has been disappointing. And so it's not so much about whether it's the right product. It's just a question of the quantity that was purchased. But outside of that, I am straying into the subject of the review. So please forgive me, you've seen this management team do this, I think, 10x. This is our fifth or sixth year of being a listed business. We'd like to be very open, but in the circumstances of this situation, please wait until January.

Back of the room.

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Andrew Ian Porteous, HSBC, Research Division - Analyst, European Retail [22]

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It's Andrew Porteous from HSBC. A couple, if I may. You gave us some interesting data on why discount shoppers like to come to your stores. And I'm just wondering if there's any thinking of customers that don't necessarily come to your stores, if there are any areas of opportunity that you think you could do better in communicating your offer to improve footfall a bit more that way and broaden your appeal. And then the second question was really around the sort of pushes and pulls on space within your stores. You talked a little bit about frozen. Can you tell us how you're thinking about that sort of category space allocations, et cetera, and the opportunities you've got within the business to improve?

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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [23]

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Sure. So there's -- on the footfall question, I suppose, one of the comments that comes to mind is, if it's not broken, don't fix it. 40% of the business is grocery, which is a flat market as a whole, and yet, the business has generated 3.7% over the half. And as Paul confirmed, that's both footfall and average basket. So it's an extremely rude health in that respect.

For us, in terms of the -- bringing new customers in that don't currently come to us. I think the challenge is all around awareness. Because we don't spend money on advertising, we need to find creative ways of making people aware of the existence of B&M 2 miles down the road that perhaps they don't physically see because their school run or their commute to work doesn't take them past that crossroads or that road. So building awareness is something we can do, and that's exactly what online social media targeted work around that can deliver.

And on your question of push and pull of space, frozen and chills versus other categories, for the 80 store trial, one of the departments that was cut back in order to facilitate that space was furniture. And what I can tell you is that if you think back to the slide that showed the anonymized performance of the different product categories, one of the best performances over the half was furniture. So in a sense, that's a positive because the furniture team have worked very hard to tweak the product that they offer away from large dining sets or beds, which are really quite difficult to sell in a B&M environment. There's no display area. There's no shop window, and they've moved more towards pickup and go smaller pieces of occasional furniture that fits in the back of any car. That's worked really well. And so if you had a choice between a certain sales density for furniture that are frozen and chilled, and it's the same, you would go with furniture because you don't have the CapEx costs of deploying all the freezers and chillers and you don't have the OpEx cost of a multi-temperature distribution fleet.

Good. I think this will be the last question because I'm mindful of time.

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Simon Bowler, Numis Securities Limited, Research Division - Analyst [24]

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Simon Bowler of Numis. Just a couple questions on France, if that's okay. You're now going to 12 months into running the business into the different employment structure under which it works. And really if you could share some details on how you find that in terms of your control, visibility of the business. And can you also confirm the kind of new stores that are being operated under that same structure? And given the rollout of new stores under the B&M banner, at what point in time may you be thinking about broader rebranding if that is the direction that those new stores encouraged you to go down?

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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [25]

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Thank you. Those questions are good ones. So I would remind everyone that our French business is different from our other businesses and that the stores are not operated by ourselves. It has what's called a mandated manager system, which is akin to a franchise system, whereby whilst Babou owns the stock and the equipment in the store, the responsibility for trading the store, cleaning, security, serving the shoppers, getting the product out is that of the franchisee, the quasi-franchisee. And so as a consequence, we actually don't employ store colleagues. They're employed by the local franchisee. The new stores we've opened have followed the same model, and as it stands, there've been no changes to that difference in the business versus the rest of the group.

On the question of rebranding, yes, part of our process of learning, test, exploring ways of developing that business is not only to open new stores branded as B&M but to rebrand some existing Babou stores as B&M to understand what that does. We've not started that yet but it's something that we're looking at over the months to come.

Very good. Bang on time, 9:30. So thank you all for your questions, and I'm sure we'll see you again soon. Thank you.