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Edited Transcript of GCC.I earnings conference call or presentation 24-Oct-19 7:15am GMT

Half Year 2020 C&C Group PLC Earnings Call

Dublin 12 Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of C&C Group PLC earnings conference call or presentation Thursday, October 24, 2019 at 7:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jonathan Frederick Solesbury

C&C Group plc - Group CFO & Director

* Stephen Glancey

C&C Group plc - Group CEO & Executive Director

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Conference Call Participants

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* Alexander Piers Smith

Shore Capital Group Ltd., Research Division - Research Analyst

* Alicia Ann Forry

Investec Bank plc, Research Division - Consumer Analyst

* Christopher Wickham

Equity Development Limited - Analyst

* Patrick Higgins

Goodbody Stockbrokers, Research Division - Analyst

* Roland French

Davy, Research Division - Food Analyst

* Thomas Davies

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

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Presentation

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Operator [1]

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Hello, and welcome to the C&C Group Plc FY 2020 Half Year Results Conference Call. (Operator Instructions) Today, I'm pleased to present Stephen Glancey, CEO; and Jonathan Solesbury, CFO.

Please begin the meeting.

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Stephen Glancey, C&C Group plc - Group CEO & Executive Director [2]

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Good morning, ladies and gentlemen. Thank you for joining our first half results conference call. This is Stephen Glancey. And I'm joined by our Financial Officer, Jonathan Solesbury; and our IR team of Patrick McMahon and Jonny Catto.

I'll take you through our key financial and operational highlights before handing back to Jonathan to go through our financial performance in some more detail.

Before kicking off, I'd like to draw your attention to the disclaimer on Slide 2 of our presentation, which, of course, applies to our discussion today.

If you can turn to Slide 3 and the highlights for the first half. Performance is very strong, with group revenues, net revenues, of course, up 13.5%; operating profit, up 9.2%; and cash conversion of over 112%. Our net debt/EBITDA reduced to 2.04x at the half year. We proposed an interim dividend payment of EUR 0.055, and that's a 3.2% increase on last year.

Operationally, despite challenging market conditions and, of course, tough comparatives of last year, Magners recorded market share gain in Great Britain, in both the on and off-trade channels. Matthew Clark and Bibendum customer service metrics remain strong, and this performance is reflected in independent customer service surveys. Again, tough comparatives, Tennent's and Bulmers were both resilient in the local markets and our craft and super-premium portfolio achieved revenue growth of 21%.

Strategically, we announced the relocation of our primary listing to London, and we are currently awaiting inclusion in the FTSE UK index series. We expect that to conclude some time in December. We sold Canadian craft beer investment for a profit of EUR 2.6 million. As part of our EUR 16 million investment into the Tennent's life is Bigger than Beer sustainability program, we have invested EUR 3.5 million in the first half of this fiscal, and this includes the commissioning of an anaerobic digestion plant and the building of the CO2 recovery plant at the Wellpark Brewery in Glasgow.

Finally, post the half year, Admiral Taverns group's estate through the acquisition of 150 additional units from the Star Pub Company. This was entirely funded by bank debt and cash, and the business is well positioned to exploit other opportunities as they arise.

Turning to Slide 4. This fiscal, we have applied IFRS 16 within a reported numbers. And this has a material impact on these numbers. Consequently, we are disclosing both pre and post-IFRS 16 data, and this is for ease of review. However, in our presentation and throughout this commentary, we will refer to year-on-year movements, pre-application of the standard. So as discussed, revenues of EUR 874.9 million represents a 13.5% increase on the prior year. Operating profit of EUR 63.8 million increased 9.2% year-on-year and represents an operating margin of 7.3%, marginally during last year. Adjusted diluted EPS of EUR 0.163 increased by 5.8%, which is well on track for our double-digit growth target for this year. As highlighted, the cash generation for the first half has been excellent. Our net debt position at the end of August was EUR 255.4 million, 2.04x EBITDA. This is good progress against our full year target of 2x.

Turning to Slide 5 on segment highlights, Matthew Clark's operating margin was 2.7%, and this was diluted by Bibendum's margin of negative 0.8%. So the blended operating margin for these businesses is, therefore, 2%, again, in line with our full year guidance. Our customer service metrics are strong across both businesses, On Time in Full and Matthew Clark has consistently exceeded 96% versus around 64% on acquisition. This is a key service metric. The near-term focus is on maintaining this robust customer service level as well as driving further optimization of our logistics platform. We are also investing EUR 2.5 million in digital and systems capability to further enhance our customer offering.

In Scotland, Tennent's achieved a record brand health scores, boasting its position as Scotland's #1 beer. The brand increased revenues in Scotland by 2.5% despite volumes being down 4.9% as we lapse the distortions of minimum unit pricing, the World Cup and, of course, the warm weather.

To further capitalize the opportunities presented by MEP and the shift in consumer dynamics, we have, this year, launched our convenience proposition, offering a direct store solution to around 5,000 stores in Scotland, which spend an estimated EUR 386 million on beers and wine annually. The cider market in GB fell 9.2%, with the off-trade cider decline of 12.3%, accounting for 85% of the volume drop.

Magners volumes were down 2.9% in GB, outperforming the overall cider category and gaining share across both the on and off-trade channels. Draught Magners original volume growth of 8.7% outperformed the draught apple category by 11.7 percentage points. This outperformance was driven by a 10.2% increase in distribution with Matthew Clark, distribution is up 87% since the start of the financial year. This year, we also kicked off our multiyear sponsorship of the Cheltenham Gold Cup for Magners and the Bulmers. This provides brand exposure, one of the highest profile U.K. and Ireland's sporting and social events across the Irish Sea.

In the Republic of Ireland, the long alcoholic drink or LAD market was negative 3.8% in the first half as cooler and wetter summer impacted on demand.

The off-trade was negative 5.2%, and the on-trade was negative 2.3%. Cider's share of LAD fell by 0.8 percentage points to 13% compared to last year.

Competition remains intense with significant new product launches by major international brewers across both beer and cider. Despite this increased competition, our volume share of cider held firm at 65%.

Bulmers largely performed as expected, with market share returning to fiscal '18 levels following last year's exceptional comparators. Revenues for Bulmers were down 4% driven by channel mix. Our latest brand health scores confirm Bulmers is consistently ranked the #1 cider brand in Ireland across all measures and the #3 brand in LAD. To maintain this position, we continually invest in innovation behind the brand, and this half saw the launch of Bulmers Dark Fruit, Bulmers Rose and Bulmers 0%.

Capitalizing on the excellent growth of Five Lamps craft beer, we've invested in new brewery pub within the up and coming Camden's Street, area Dublin. And this investment is testament to the belief in the long-term prospects of the brand, and indeed our commitment to Dublin.

In the first half of the year, we made significant investments in our operational infrastructure, underpinning our sustainability and environmental commitment. We rely on the land and water for our core raw ingredients and the sustainability of our commercial activity is dependent on successful longer -- long-term stewardship of the land and water table.

We have recently announced a EUR 16 million multi-investment for our Tennent's Life is Bigger than Beer campaign. And we are committed to eradicating single-use plastic by 2021 and being carbon neutral at the Glasgow facility by 2025. This year, we are investing EUR 3 million in CO2 capture capability and our new EUR 4 million water treatment plant is now fully operational. In Ireland, our manufacturing business is already carbon neutral and 40% of energy is generated from renewable sources.

Turning now to Slide 6, we reiterate our targets for the group as outlined at the Capital Markets Day back in May. With the firm foundations into the first 6 months of this financial year, we remain on track to deliver double-digit EPS growth for fiscal '20, and we reaffirm our steady-state forward EPS targets of mid- to high single digit growth. We have significant balance sheet strength to support our targeted growth range, and we remain committed to effective capital allocation and a progressive capital returns philosophy.

Matthew Clark and Bibendum performance in the first half of this year is in line with the full year targets, and we anticipate concluding this year within the communicated range, with trading stabilized and benefits that have been derived from our simplification and optimization stages of the program, we remain fully committed to a future operating margin range of 3 percentage points.

Turning to Slide 7 and our reaffirmation of the inherent strength of the group's model as outlined in May. Following the acquisition of Matthew Clark and Bibendum, C&C is now the largest final mile distributor in the British Isles on-trade, accessing over 36,000 customers across all geographies as well as offering market distribution for our brands, this model positions us well to capitalize on evolving market existing of dynamics. The trend towards craft and premium as well as fragmentation of the supplier and customer base, redistributes the balanced approach was route to market operations who are bridging supplier offerings with consumer needs.

Turning to Slide 8 on Matthew Clark and Bibendum, we have largely completed our stabilization program, with tremendous progress in our customer service metrics since acquisition. We have restored net promoter scores to long-term historic levels, On Time in Full deliveries exceeded 96%, stock availability of 98% at the end of August. On financial control, we continue with the rigorous program and reviews, reconciliations, with the cash forecasting to maintain the robust control environment established since acquisition. We've improved working capital efficiencies and delivered a negative working capital cycle at Matthew Clark for the half year. That's well ahead of medium-term guidance, given that the Capital Markets Day.

So look now to Slide 9. Operating profits of EUR 11 million of Matthew Clark and Bibendum is EUR 4.9 million higher than last year and represents a blended operating margin of 2%, that's up from 1.6% at the end of the last fiscal year. On the optimization phase of our Tennent's program, we made pretty good progress in the first half in identifying revenue and cost synergies across the combined group. C&C total owned cider volumes through Matthew Clark and Bibendum was increased to 76% against last year, though draught cider volumes increasing 142% year-on-year. C&C cider brands now represent 25% of the total cider sold by the business versus 10% last September.

Slide 10, overviews our craft and super-premium portfolio where we've delivered strong growth with significant gains in both volume and value mainly from our core business, total revenues grew 21% year-on-year, and compound annual growth over the last 3 years now stands at 28%. The portfolio now represents 8.5% of our total branded revenues. With consumers increasingly seeking differentiated local brands heritage and province, we will continue to invest angled distribution for a super-premium and craft wine which will drive unsustained long-term values.

Turning to Slide 11. We reiterate the strength of our culture at C&C and the platform that provides to enhance the best of returns. With our decentralized model, we foster the entrepreneurism required to constantly evolve and meet the demands of our ever-changing industry. Our future targets underpin the reward mechanism at C&C to ensure investors that's remained a central focus of (inaudible) of the business.

On Slide 12, we reaffirm our commitment to the capital allocation program conveyed back in May at the Capital Markets Day. With the strong cash flow generation of the business, we are committed to effective capital allocation and a progressive returns philosophy. Also the existing business capabilities and competitive advantage, we will always prioritize investments in our current infrastructure. And this ensures that we are well positioned to deliver the current business plan into the sustainable future. Beyond this, we remain opportunistic in our approach to any bolt-on acquisitions that reinforces our core businesses. So momentum in the existing business, we will participate in these bolt-on acquisitions when this fits within the parameters of our current strategy and only an optimal valuation.

Following this, our capital allocation strategy will be to manage debt around 2x net debt/EBITDA. And at this level, we feel we have the appropriate balance sheet flexibility to capitalize on emerging opportunities. Beyond this, we commit to returning capital to shareholders, either by way of dividend or share buyback. So in the first 6 months of this fiscal year, we have bought back 3 million shares at an average price of EUR 3.71, and we are proposing an interim dividend of EUR 0.055 for this period. A progressive return of 3.2% versus last year.

So I'm going to hand over to Jonathan to go through the financial performance.

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Jonathan Frederick Solesbury, C&C Group plc - Group CFO & Director [3]

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Thank you, Stephen. I'll now take you through the consolidated financial performance of the group, which includes an additional trading month for Matthew Clark and Bibendum as compared to the prior period.

We have adopted IFRS 16 leases from the 1st of March 2019. And I've separately pulled out the impact of this change in the ensuing slides.

Turning first to net revenue on Slide 14. We've adjusted the prior year number in Matthew Clark and Bibendum to align to C&C's accounting treatment for duty paid. This has no impact on operating profit. Organic net revenue growth is up 2.9%, reflecting a resilient performance from our branded business, together with the growth from Matthew Clark and Bibendum. Including the additional trading month of March 2019, net revenue growth increased to 13.5%, as noted by Stephen. Despite the decline in volume in cycling a strong 2018 summer, the performance of our core brands of Tennent's, Bulmers and Magners was resilient. Together with improved pricing and mix, net revenue grew 1%. I'll get into more detail on the core brand performance on the next slide. Superpremium Craft volumes grew by 10%, with revenue up 21%. Revenue growth reflects the underlying volume performance, higher price points and on-trade bias of this portfolio. This category now represents 8.5% of branded revenue. Our international division remains challenging. Total volumes were down 5%, but a large proportion of this was across low-margin products. This positive mix actually improves the net rate by 3%. Improvement in U.S. brands revenue has been driven by innovation in Woodchuck.

Slide 15 shows the revenue performance of our 3 core brands across GB and Ireland. Tennent's volumes are down 5%, with declines across both channels, but importantly Tennent is performing in line with the prior year in the independent free trade in Scotland. We're reporting against an exceptionally strong summer in 2018 as well as seeing the reduction in pack size through MUP implementation. The price/mix was positive 7% as a result of MUP related price increases and beneficial mix as consumption shifts to higher value, small and mid-sized packs. Bulmers volumes are down 9% and again have been impacted by strong comparatives. The price/mix was up 5%, reflecting the channel mix performance and annualization of prior year pricing. Bulmers share has returned to normalized levels when compared to 2 years ago, this against the backdrop of heightened competitor activity in the category. Magners volumes are down 4%. In GB, the volume declined outperformed the overall cider category and gain share across both on and off-trade. The price mix impact was consistent with last year, with pricing offset by pack and brand mix.

Moving on to our operating profit performance across the business units. Organically, operating profit grew by EUR 5.5 million, with operating margin up 50 basis points. Matthew Clark and Bibendum generated an additional EUR 4.9 million in operating profit over the period. The business has moved into the simplification and optimization phases, which, together with enhanced pricing, improved yields has lifted aggregate operating margins to 2% within our targeted range. GB generated an additional EUR 0.7 million, with pricing and mix benefits in Scotland, offsetting declines in volume across beer and cider. This pricing and mix, together with improved yield contributed to an operating margin improvement of 10 basis points. Ireland is marginally down on the prior year, a good result considering trading comparatives and competitor activity. Revenue management and good cost control helped to offset the volume decline, with operating margins improving 50 basis points. Operating profit for the international division were flat versus the same period last year, with reduced cost infrastructure across both the North America and export businesses, offsetting softer volumes. It is worth noting that there were approximately EUR 0.8 million of input cost inflation in the first half of the year, principally relating to glass and cereals. This has been partly mitigated by lower cost of energy and aluminum. We expect input cost prices to soften in the second half, with the full year outturn to be approximately a 1% increase. The IFRS 16 leases impact increased the reporting operating profit by EUR 1.1 million for the period.

Slide 17 looks about earnings per share. Our earnings growth is in line with expectations, and we are still confident of delivering on our full year double-digit growth target. Finance charges have had an adverse impact year-on-year due to the timing of the refinancing in July last year, the funding margin being slightly higher under the new facility together with amortization of the new issuance costs. The effective tax rate for the period is 12.2%, which is below our medium-term target due to the release of a tax provision no longer required. The incremental finance costs associated with IFRS 16, leases reduces the diluted EPS by EUR 0.003.

Moving on to group free cash flow on Slide 18. The half year reflects continued robust cash generation, with free cash flow conversion before exceptional items reported at 113.1% and pre-IFRS 16 at 112.7%. This has been underpinned by working capital improvements of EUR 24.1 million. Tax paid is lower than the prior year due to Matthew Clark being at an income tax refund position. The increase in net finance costs have been covered in the previous slide, with the expected full year charge in line with the targets given at our recent Capital Markets Day. Net capital expenditure of EUR 7.4 million for the period is within our target of EUR 15 million for the full year.

The EUR 82.8 million of cash inflow noted on the previous slide feeds into our net debt position on Slide 19. During the period, we disposed of an equity investment in the craft brew in Canada, with proceeds of EUR 6.1 million, realizing a substantial return on our investment. Share buybacks were undertaken to nullify the dilution of the F '19 final and F '20 interim scrip dividends, which, together with cash dividends of EUR 18.3 million returned EUR 29.6 million to shareholders during the period. The closing net liability associated with the IFRS 16 leases of EUR 88.2 million takes the pro forma net debt/EBITDA to 2.38x. However, the comparable net debt/EBITDA at the half year was 2.04x, down from 2.51x at year-end and underpinned by a relentless focus on working capital and cash management.

Thank you. I will now hand you back to Stephen to conclude on our outlook.

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Stephen Glancey, C&C Group plc - Group CEO & Executive Director [4]

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Thanks, Jonathan. Finally, turning to Slide 20 on our concluding and outlook. Changes to our commercial strategy and continued investment behind of core brands have had a positive impact on performance, and we have maintained momentum in the first half. This underpins our expectation of double-digit earnings growth for this year, and EBIT margin for Matthew Clark and Bibendum of between 2% and 2.5%. At Matthew Clark and Bibendum, we are steadily rebuilding towards long-term value we know each business can deliver. We are confident that we've got a team and platform to deliver strong return on our investment over time, but we will be patient with the turnaround. And we also believe that we have the platform to support the growth of our wider portfolio longer term. In terms of capital allocation strategy, we are cash generative, and we expect to generate a cash flow between 60% and 70% of EBITDA annually for the medium term. This ensures that we have a broad range of strategic and financial options open to us to save long-term value.

In terms of our listing arrangements and the inclusion in the FTSE UK index series, the National [Audit] Committee, which determines eligibility is scheduled to meet the 6th of November in advance of the quarterly review of the 4th of December, and we are confident that we'll be included in the FTSE onshore index and the FTSE 250 from (inaudible) Christmas 2019.

We're very pleased with the progress of the business in the first half. Encouragingly, the performance of branded business again can demonstrate the strength and resilience of our portfolio and its relevance with increasingly preserving consumers. Autumn trading is in line with our expectations, with the optimization of Matthew Clark and Bibendum continuing to drive margin improvement. So despite macroeconomic and geopolitical uncertainty, we remain firmly on track to deliver on our forward earnings targets and retain significant balance sheet flexibility to deliver on our strategic objectives. So thank you all for your attention this morning, and we're now happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Patrick Higgins from Goodbody.

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Patrick Higgins, Goodbody Stockbrokers, Research Division - Analyst [2]

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Just a couple of questions on my end. So firstly, just on Matthew Clark and Bibendum. Could you talk maybe about some of the seasonality in the respective businesses between H1 and H2? And then I suppose, the target range of 2% to 2.5%. What kind of gets you to the top or the bottom end of that range? And second question, just on the Irish business. Obviously, a strong margin performance there. Could you maybe just talk in a little bit more detail around the building blocks for that? Is it mix? Is there a specific cost management or cost issue that worth calling out? And then finally, just on Magners, and I suppose the sell-through and Matthew Clark. Could you just give us an idea of how much cider is now as a percentage of overall Matthew Clark volumes and of the overall portfolio? And what can that 25% share of cider brands within that get to over the longer term?

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Stephen Glancey, C&C Group plc - Group CEO & Executive Director [3]

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Classic. That was 3 questions. You said it was 2. I'll give the guidance to the Matthew Clark probably and Jon has been doing all the work down there. But in terms of Ireland, there hasn't been any really any price inflation this year in Ireland. So as you know, I would always say that we would follow the venture Diageo and Heineken and so there hasn't been any pricing in the on-trade. And that's probably rational given the MVPs are in the corner. So there's a bit of -- they probably played a bit of a long game here and saying, well, let's not (inaudible) in the on-trade because you get -- sync with growth rate. So there's not been any pricing. So the delivery is about cost savings, but it's about mix. So the mix being -- vehicle portfolio, so that's 5 months in Corona, get a wholesale in there and with a little bit of innovation, so that's just business performance, which is good.

In terms of the Matthew Clark stuff, Jon, do you want to take us through where we are with Magners and probably -- you maybe give us a view on where we are with the margins, Matthew Clark and Bibendum?

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Jonathan Frederick Solesbury, C&C Group plc - Group CFO & Director [4]

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Pleased with the progress in Matthew Clark, especially in Magners. The draft side volumes are up 142%, which is incredible. More so pleased about the share portfolio now represents within the cider portfolio in Matthew Clark. So we're going from 10% up to 25%. So we're certainly pleased with the progress there. And that's part of the element that will help us with the margins at Matthew Clark and we are prepared for the 2.5%.

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Unidentified Company Representative, [5]

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Yes. In terms -- Patrick, in terms of the H1-H2 split, I think we can expect further operating profit margin improvement into H2. So historically, in both businesses, Matthew Clark and Bibendum, the margin is better in the second half of the year, and that's a lot about Christmas, and it's a lot about wine and spirits being higher margin. We spoke previously about the Bibendum, and Bibendum was loss-making in the first half of the year. For the full year, we expect it to be breakeven. So that implies profit in the second half. So it will continue -- the operating profit margin will continue to improve into H2. What gets us there? Well, it's a little bit of seasonality around Christmas, like I said, but also we continue to lap the cost savings that we've taken out of the business and the procurement synergies that we've realized. So that gets us in position for the steady state, 3%.

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Operator [6]

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Our next question comes from the line of Alicia Forry from Investec.

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Alicia Ann Forry, Investec Bank plc, Research Division - Consumer Analyst [7]

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I was wondering on Ireland. I don't think you've mentioned any impact from the new drunk driving, a law that came at the end of last year. Just wondering if that had any impact on performance? And if so, how significant that might have been as well, will now be cycling it? And then secondly, curious about how some of your innovations over the summer like the Rose and 0 alcohol introductions have performed? Perhaps you could discuss what the competitive landscape is in the sort of cider innovations? And do you expect these products to be margin accretive over time, assuming they'll remain in the portfolio.

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Stephen Glancey, C&C Group plc - Group CEO & Executive Director [8]

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Yes. I mean if we do the drink-driving legislation, it's obviously we're about to cycle it. I mean it's difficult to actually say. It is much more impactful in rural Ireland and not Dublin. And Dublin's 40% of total alcohol in the Republic of Ireland. So the drink-driving issue is really being most felt in rural Ireland. I think it was in Scotland -- pretty similar in Scotland. If you're trying to put a number, obviously, difficult to do that, you'd probably go for mid- to kind of high single-digit decline in those pubs and much less the morning after (inaudible) Ireland.

In terms of the competition in Ireland, we held share in Bulmers over a 2- year horizon. So if you got a really good summer, you would always anticipate an uplift. We had a really good summer last year. Obviously, we've done this uplift of 7%, 8%, 9% and World Cup does that. We've got it working it back to where we are. There are different international businesses, there'll get different sizes in there. But I don't like talking about necessarily the competition. It is good for the category. So the category could have grown a bit of share. Some of them that were largely in 3, 4 years ago now losing share. So they've come backwards. We don't feel particularly threatened by the more mainstream ones have occurred. And to get to the distribution point we've got to, these guys had to just get a lot of money and also to give a lot of free stock of it. The bigger dynamics in Ireland are really the #1, which is Diageo, is losing share, the #2 which is Heineken. Heineken is very focused on growing their beer portfolio. So there's lot of pressure on to Diageo and we're quite happy with their position. Just on innovation, Heineken has done a great job with 0 in Ireland and elsewhere. So there's certainly interest in the 0 category. We're just launching Bulmers 0. So it's a Christmas initiatives. So we've got good distribution today. Dark Fruit and Rose -- I mean if I take Dark Fruit across all geographies, I'm pretty pleased with progress. A lot of the development of Matthew Clark as well as in Dark Fruit. So we've done well with the Dark Fruit in the U.K. and it's doing reasonably well in Dublin. So we're happy with that.

Rose, it's a bit mix at this stage. And actually, because launching the Rose side [with tequila] wet, damp summer is always challenging, but we'll stick with it. Because we see the developments on the markets, particularly in the U.S., and that moved to lighter mixture of contented product. So it's mixed, but we stick with it.

Do you want to do -- [Claudia] any other questions?

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Operator [9]

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Yes. The next question comes from the line of Chris Wickham from Equity Investment.

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Christopher Wickham, Equity Development Limited - Analyst [10]

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Equity Development. Just 3 things. First of all, looking at Matthew Clark, and I realize it's complicated because you're using the platform increasingly to your own brands. But while it's a relatively low-margin business across the whole sort of consumer spectrum, what I'm wondering is what the route is to much higher returns on invested capital. I mean, clearly, you've given us an indication because you're talking about taking working capital out of the system. But I was just wondering what sort of ROIC business Matthew Clark could be, going forward? And the second one is really just looking at the underlying cash. I mean, clearly, you're converting well and as a portion of EBITDA, but at the same time, for obvious reasons, with the leases that net debt did go up in the first half. I'm just wondering what really your long-term sort of prognosis is in terms of cash as a portion, maybe slight net debt reduction as a portion of net income. And then finally, I was wondering, really just if you can model the EPS buildup or the sustainable growth in EPS going forward, where it comes from. I mean how much is coming -- going to come from revenue, how much is going to come from margin accretion? And then how much is going to come from debt pay down or lower interest costs?

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Stephen Glancey, C&C Group plc - Group CEO & Executive Director [11]

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Jon, do you want to comment on financial questions?

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Jonathan Frederick Solesbury, C&C Group plc - Group CFO & Director [12]

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Yes. So in terms of underlying -- Chris, Hi. Jonathan, here. In terms of underlying cash, yes, we've always guided to 60% to 70% cash conversion, that's free cash per percentage of EBITDA. We have been higher than that in recent times as we've taken. As you said, working capital out of the business. We've also guided to net debt/EBITDA of 2x. We're almost there. And as Stephen mentioned in his presentation, beyond that, we'll commit to returning cash to shareholders via dividends and share buybacks. In terms of EPS, in terms of the makeup for the current year and essentially it's coming from -- it's basically coming from operating profit and small bit from revenue. The finance costs will come down going forward. So some of that will flow through into the mid- to high in the following years. And tax will creep up. So that will be partly offset by an increase in ETR from current levels.

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Stephen Glancey, C&C Group plc - Group CEO & Executive Director [13]

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Does that answer your question, Chris?

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Christopher Wickham, Equity Development Limited - Analyst [14]

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Well, I just -- really thinking move along a year or 2, and sort of think where you're richly imagine the future is. I mean we have to sort of think, what kind of growth are we getting bottom line for this company. If we have been a shareholder, what kind of EPS should I be thinking of getting? And how do I reassure myself of the sustainability of that EPS growth, in terms of what comes from sales revenue, what comes from margin accretion and what comes from debt pay down?

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Jonathan Frederick Solesbury, C&C Group plc - Group CFO & Director [15]

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Yes. I mean it's largely within the operating side of the business as opposed to the balance sheet. So yes, coming through from revenue, on the revenue side, there's probably a little bit of pricing, but more through mix. And then on the cost side, continue to focus on costs. If you look at the 2 pieces of the business. So in terms of the core business, we're probably looking there to low mid earnings growth. And then on top of that, then you're going to get the growth coming through from Matthew Clark and Bibendum, as we get to that 3% plus margin.

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Stephen Glancey, C&C Group plc - Group CEO & Executive Director [16]

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Chris, if you go back to our Capital Markets Day, we explained back [in the history.] And in Scotland and Ireland, these are pretty small countries with reasonably high per capita consumption. And it's difficult to get growth rate of them all through population expansion and there is population expansion in Ireland and GDP growth. So where we go [being kind] to say, it's more about pricing and premiumization in those markets, which is why heavily Menabrea, Tsingtao brands that are really important in Scotland. And also in Ireland, we've done a fantastic job with Corona. We've seen (inaudible) years in Ireland. And so we overplay those positions.

In terms of the growth in the other parts of the business, our cider portfolio engrossed in U.K. and growth rate 85% of total cider (inaudible) with AB InBev and the margins are huge, but they're the one's biggest brewer, they get 32% share of growth rate and they sell our products alongside Pabst, Stella, Corona and Budweiser, et cetera. So we're very well positioned to develop market share there. Equally at Matthew Clark, if you read yesterday volume going to the report on the alcohol industry in the U.K., it grew, huge fragmentation, there's lots of new innovation coming through, lots of small producers turning big due to market. We're pretty agnostic to that. Although, it's important we sell our ciders to Matthew Clark. Let's not lose sight of the fact as quite a small portion of what Matthew Clark does. We have also -- we have small production differentiating the consumer. That business is quite well positioned for growth and actually margin enhancement because the consumer is prepared to pay a little bit more for authentic handcrafted local premium products. So those are the areas we need growth for the entire business. On top of that, you've got Bibendum, and that move plays into your working capital point. So Bibendum was more damaged than Matthew Clark. It will take longer to recover. That uses quite a lot of working capital because of the customers they deals with. But we see that gently moving forward. And we'll pickup a lot of new businesses there through Bibendum because the stabilization started. The credit markets in U.K. are really tough. And they enjoy the benefit of C&C and the balance sheet. So I think returns on capital employed, we haven't paid very much for these businesses. We're probably, if you did look at it at the half year and worked through the months, it should be diluted EUR 25 million to EUR 30 million. So it's about working capital in terms of ROCE. And we think that will improve because (inaudible) other assets in that business -- in either business, Matthew Clark or Bibendum. So while the all the brand point that you made at the start is important, it's not essential aside a small part of the total U.K. alcohol market and it's maybe 15% of beer aside of LAD, [official of the growth rate], that is more into the platform. It gives us more the specialty dealers like Tsingtao, which have picked up, it was a unique position.

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Christopher Wickham, Equity Development Limited - Analyst [17]

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Yes. I mean -- so if I'm an investor and I look at Matthew Clark, when you get to the point when you're making the 3% margin across the Matthew Clark and Bibendum, then I would just say to myself, well, actually, as a portion of the total amount of capital tied up in that business, that's significantly more than the 3%.

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Operator [18]

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Our next question comes from Roland French from Davy.

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Roland French, Davy, Research Division - Food Analyst [19]

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I have 3 questions from me, all around Matthew Clark and Bibendum. So maybe just one for you, Stephen, firstly, stepping back a little just. You're 18 months through the Matthew Clark journey. You've executed well on the stabilization program clearly on cash delivery. When you look out over the next 18 months, what do you identify as key opportunities and milestones for both businesses?

And Secondly, you've called out an investment in digital for H2 of Matthew Clark. So maybe you can expand on the plans there? And maybe talk to the wider opportunities around leveraging that digital and insights, which you've previously spoken of? And then thirdly, the outlook for Bibendum is clearly more positive. You've spoken just there on some business wins and stabilization in costs, but maybe provide some more color in terms of how you can turn a profit in H2? And maybe how you're leveraging that business in Ireland? And then if I can kind of tack on the third one. How the working capital performance in H1, how much of that might have been from Bibendum?

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Stephen Glancey, C&C Group plc - Group CEO & Executive Director [20]

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That's 4 questions, Roland. I think I can answer the last financial question. I don't think any of the working capital improvement was from Bibendum. I'll let the finance guys do that. I mean, since we had the Capital Markets Day and if I look at the year just gone by, it's probably one of the most incredible years in the U.K. drinks industry. Because of the drinking taken private, even the enterprise has been taken private by Stonehenge, subject to competition clearance. And the fillers have been taken away by Asahi. So it's been pretty transformational. I think next year, it'll be a repeat of quite a lot of that. And so the kind of independent route to market, the Matthew Clark represents, I think, an incredibly powerful proposition. We've been working really hard on Steve Thomson. The team is working really hard in getting the business back to stabilization, and in particular cost back to where they are -- or where they should have been, sorry, where there were in 2015, so that's great. We need to get momentum -- top line momentum, which is about mainly why we call the independent future of the IFT business, [the lost] key. So we've not got customer attrition. We'll stabilize that in the next 12 to 18 months, actually with new wins. And I would recite the fact that in the space that we compete in, there are other wholesalers, but actually we compete against regional brewers like Greene King and Mars and something like that. And we see opportunity there. And we have a business probably move slightly towards beer. The wine is under a bit of pressure. The value is not so much in wine. But we are decent route to market for beer suppliers, big guys and small craft and international peoples will be a bit of a movement towards that. So I mean, I think, 14 months and we're more optimistic about the Matthew Clark proposition than we were before.

Bibendum, it's the same. I mean, Bibendum's, we're making an investment in digital, but that's partly systems. So we're putting Bibendum on a new platform, which will be independent of Matthew Clark, which is some point next year. And we're also investing in digital and Matthew Clark to make their customer connection easier. But we're doing that also in tandem. So by January of next year, we'll have a much better digital proposition for the Scottish business and the Matthew Clark business. And that's about making the customer journey much easier straightforward.

So in terms of the profits in the first half in Ireland, probably, Jon, do you want to pick up on that?

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Jonathan Frederick Solesbury, C&C Group plc - Group CFO & Director [21]

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Sorry, what was the question?

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Roland French, Davy, Research Division - Food Analyst [22]

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Sorry, the third one missing, was more around, I think you had [800] loss in Bibendum H1. So clearly, H2 needs equivalent. Just a color around that, whether it's on the cost side, new business. Just generally, how you're going to improve Bibendum performance through H2?

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Jonathan Frederick Solesbury, C&C Group plc - Group CFO & Director [23]

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Yes, I'll take that one, Roland. Yes, it's predominantly new business and getting the top line back up to cover the overheads. The profile of that business has always been weighted towards Christmas on the back end of H2. So it's no big surprise, actually, that, that continues to be the profile. But really it's about continuing to winning new business in Bibendum and getting that scale back up. That's what's going to get us to breakeven and then beyond that back into the black. You asked a question about Bibendum and how we're leveraging that in Ireland, and I think we're already beginning to see the benefits of the Bibendum import and insight into what was the Gilbey's business in Ireland Gilbey's by Bibendum. So the on-trade is growing, and that's helpful in terms of margin because that's where the margin lives clearly for wine in Ireland. It's in the on-trade. So that relationship and association, it's been ongoing in a few months now. It's still only early days, but it's positive, very positive for us.

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Operator [24]

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Our next question comes from Tom Davies from Berenberg.

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Thomas Davies, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [25]

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Three questions from me. Firstly, the strong volume growth at Magners going through the on-trade channel. Does this reflect like initial sell-in to Matthew Clark and Bibendum, given that 25% of C&C cider now going through MCB. How does this thing compare to your depletions? And also, just by pushing your own brands, does this damage the independence of Matthew Clark? Second question is on the, in terms of the EUR 4.3 million exceptional apple contract termination. Can you provide a bit of color on this? Is this actually reflecting the fact that you have too many apple inventories and you've put inventory markdown for? And then third question is your effective tax rate pre-exceptional in the half was 11.5%. You previously guided to 14.5% to 16.5% tax rate. Is there any change in guidance here for the full year tax rate? And is this reflected in hitting your double-digit EPS growth target?

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Stephen Glancey, C&C Group plc - Group CEO & Executive Director [26]

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Jon, do you want to talk about tax?

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Jonathan Frederick Solesbury, C&C Group plc - Group CFO & Director [27]

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Yes, I'll do the exceptional in tax. So yes, Tom, in apples, this is not certainly -- this is not another inventory markdown is, as you referenced. This is a structural change in the industry that move from original apple ciders to Dark Fruits, and we have long-term growing contracts and this is a one-off rightsizing of those growing contracts. Certainly, it's a matter that was discussed and certainly approved by the Audit Committee, and it's very much aligned and consistent with our accounting policies. That was largely offset by an exceptional gain, as we noted, the profit on disposal of our investment in Canada. So in terms of exceptional items and impact on the half, the net impact after tax was a charge of EUR 2 million. So we're very comfortable with the treatment of that. In terms of ETR, yes, we had 12.2% for the half year, and as we noted, that was reduced slightly by a reversal of -- a part reversal of a provision, which was no longer acquired. In terms of full year guidance, yes, at Capital Markets Day, we guided 14% to 16%. It's likely, Tom, to come out towards lower end of that guidance, but the guidance still stands.

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Stephen Glancey, C&C Group plc - Group CEO & Executive Director [28]

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In terms of Magners on-trade, looking at Perry?

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Unidentified Company Representative, [29]

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Yes. I mean, on independence point, I mean, our ciders represent 1% of the total volume that goes through Matthew Clark. So I don't think there's any independent issue there. It's often a particularly low base, so it's really 1%. And all the intercompany stuff and how depletions compared to shipments, I mean, we have to strip that out all the intercompany sales, Tom. So what you're getting in these numbers is a straight read of sales out.

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Stephen Glancey, C&C Group plc - Group CEO & Executive Director [30]

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I think Tom also divides it. So if you go back to the Capital Markets presentation, we talked about this and Steve Thomson talked about it. Matthew Clark was owned by Constellation, which (inaudible) had a cider business. When they had a cider business, it was the #2 in the cider market in the U.K. Cider market in U.K. is different from the beer market. So there's a well-established pieces for selling the owner's products equally, pushed Constellation to 2015, (inaudible), it was owned by a wine company, actually pushed the wines through Matthew Clark, so we got 75% of total. So if you segment the different categories of products sold and there is still huge beer. It's quite a lot AB InBev, but we do Heineken and we do Karlsberg in wines. We will sell [in these] wines, but we've got a big contract with Accolade. So I don't see any issue too with cider. The #1 player in the U.K. with 45%, 46% share is Heineken. And what Matthew Clark is now doing is providing alternatives.

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Thomas Davies, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [31]

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Okay. Just one more question for me. In terms of Ireland then, you saw minus 3.1% organic sales growth decline, but your organic operating profit decline minus 0.8%. Can you like talk about the drivers of -- about this organic margin improvement? Have you been cutting your marketing spend here, what are the key drivers?

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Stephen Glancey, C&C Group plc - Group CEO & Executive Director [32]

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Well, we've -- if you think about it, we've actually invested in the brand in Ireland. So we've had the World Cup, big event this year. Some of the costs in the last year, some in this year. I think we touched on earlier, there's mix, so there's the performance of the beer portfolio, which is premiumization of Five Lamps, Corona, et cetera. There's growth coming through our wholesale business, and the main business, we probably talked about Bibendum. So Bibendum has made a huge difference to the Gilbey's wine business in Ireland. It's up a lot of new better accounts because of the quality. There's a bit of innovation coming through premiumization. And there's been cost reduction in the core business? Because do remember, we spent EUR 3.5 million a year -- sorry, on a new IT system 18 months ago in Ireland. So there's some efficiency has been driven through that. So it's -- and it will be equally invested EUR 0.5 million in the new Camden brewery in Central Dublin. So it's not about A&P, but all the other components.

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Operator [33]

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Our next question comes from the line of Alex Smith from Shore Capital.

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Alexander Piers Smith, Shore Capital Group Ltd., Research Division - Research Analyst [34]

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I just wanted to pick up on a couple of -- pick up on a couple of themes or points that you raised at your Capital Markets Day, both on Matthew Clark, Bibendum. The first one was on access to transactions data as potentially being a competitive advantage. I think you threw out a number, you had something like 35,000 transacting customers a month. Is this still pretty early days for you? Or have you had the opportunity to begin to utilize some of that data or any further thoughts on that since the CMD?

And then the second question is on this theme of fragmentation in the alcohol industry, whether it's consumer, taste, supply, consumption, occasions, and that potentially being a benefit for MCB, as you are sort of man in the middle positioning. I think you alluded to fragmentation is still a strong undercurrent. I don't know if you want to talk a little bit more about that. But again, are you beginning to see any benefits of that playing into your positioning as the large-scale player in that fragmented market?

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Stephen Glancey, C&C Group plc - Group CEO & Executive Director [35]

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On the digital stuff and the data, Alex, to your point, we've done some work. We've engaged with other parties on it. We've looked at what's going on in the U.S., and we kind of started. I think basically we started the journey. We probably -- we've got options just now to partner with other people that are in the space. I think our view is that we may just try and partner with some of them that have an extreme involvement rather than sell the data, so that our providers that would buy the data, and then they sell all and they're well-established and well known, and there's some big-sized business. But I think value creation is to do something where we can do digital development and sales and monetize it. So it's pretty early days. I think it's the best way to do it. But we have done some work in that direction.

On the fragmentation, yes, I mean, as we said, we've got 1,000 (inaudible), the consumer is compensating towards lots of local stuff including beer. I mean you look at some of the growth for beer, (inaudible) Heineken is doing very well (inaudible), there's a real premiumization, but smaller brands are taking off. So we are -- we've negotiated new arrangements with a number of the bigger suppliers. We have given dialogue with lots of smaller suppliers. To be honest, I think, to be quite frank, the focus last year was improvement of this year has been improving working capital rather than necessarily focus too much in pricing. Because the business run at a cash, and it run at a cash for reason, so we have been trying to clear it from our end and not push too hard on price because we can see cost opportunities to get the business back to the level of margins. So I think it's more -- that's more in the next 2 or 3 years, rather than we have achieved in the year gone by. Is that a fair, Patty?

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Unidentified Company Representative, [36]

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Yes, yes. Great.

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Operator [37]

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Thank you. And as there appears to be no further questions, I will turn the conference to you.

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Stephen Glancey, C&C Group plc - Group CEO & Executive Director [38]

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Yes. Well, thanks for joining this morning. And we're kind of doing all the investor, which was (inaudible) Jonny Catto and Patty are available. But thanks for taking time to join us. Have a good rest of your day. Cheers.

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Operator [39]

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Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.