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Edited Transcript of MKS.L earnings conference call or presentation 20-May-20 8:30am GMT

Full Year 2020 Marks and Spencer Group PLC Earnings Call (Q&A Session)

London Jul 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Marks and Spencer Group PLC earnings conference call or presentation Wednesday, May 20, 2020 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Archie J. Norman

Marks and Spencer Group plc - Non-Executive Chairman

* David Surdeau;Interim Chief Financial Officer

* Steve Rowe

Marks and Spencer Group plc - CEO & Executive Director

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Conference Call Participants

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* Adam Gareth Cochrane

Citigroup Inc, Research Division - Director

* Anne Critchlow

Societe Generale Cross Asset Research - Equity Analyst

* Charlie Muir-Sands

Exane BNP Paribas, Research Division - Research Analyst

* Clive W. Black

Shore Capital Group Ltd., Research Division - Head of Research

* Geoff Lowery

Redburn (Europe) Limited, Research Division - Partner of Non-Food Retail, Luxury & Sporting Goods Research

* Geoffrey Frith Ruddell

Morgan Stanley, Research Division - MD

* Georgina Sarah Johanan

JP Morgan Chase & Co, Research Division - Analyst

* Richard B. Chamberlain

RBC Capital Markets, Research Division - MD of Consumer Retail

* Simon Bowler

Numis Securities Limited, Research Division - Analyst

* Simon William George Irwin

Crédit Suisse AG, Research Division - Director

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Presentation

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Operator [1]

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Hello, and welcome to the M&S full year results and its Q&A. I will pass you over to Archie Norman, our Chairman. Please begin.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [2]

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Good morning, everybody. It's Archie here. I'm very sorry as I can't see you all, of course. I did suggest we should do this as a team's presentation, but I was told it wasn't technically reliable. So we'll have to -- you'll have to settle for the sound of our voices.

I'm here with Steve Rowe, Chief Executive; and David Surdeau, who's our acting Finance Director prior to Eoin Tonge's arrival. I did just want to say a word. David has very kindly agreed to join us a few months back. I think he was looking forward to a reasonably tranquil interim role prior to his next assignment, and it hasn't quite turned out that way. So we're extremely grateful to David to seeing us through this turbulent period.

Look, we're going to go to Q&A. All I've got to say is that, obviously, this is financially a bit of a loss year for us, but we're very confident about our underlying position. And from a business and a management point of view, it will be one of our most exciting years ever. And I know it's difficult for everybody. But this is an opportunity to deliver dramatic change in our business. And we're very, very positive about seizing that opportunity.

Now we're going to come on to questions. In the new way of doing things, we're going to be quite brisk. So please, can you be brisk. Ask one question at a time. You might be entitled to come back if you're reasonably sharp. We'll probably go for about 30 minutes post format judgment. So not everybody will get in a question. But Fraser and the whole team are available throughout the day. And I know you've been -- some of you have been talking to him already. So just procedurally, if you want to ask a question, you have to press star 2, and then ask your question. Please could you -- although I can see who you are, the rest of the world can't necessarily. So please could you, I know you want to anyway, tell us who you are and who you work for and then we'll fire away.

Okay. So should we get started? Let's take the first question.

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Questions and Answers

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Operator [1]

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The first question is from the line of Clive Black at Shore Capital Markets.

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Clive W. Black, Shore Capital Group Ltd., Research Division - Head of Research [2]

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Archie, can you say why you're confident about the underlying position and where you're excited about the future? And then just as a quick supplementary, how many working groups and committees have been disbanded in recent times following up from Steve's presentation?

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [3]

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Well, I'll get Steve and David, you can say why we're confident and talk a bit about the changes. On working groups and committees, part of the Never Same Again program is we are not allowed to use those expressions anymore. So obviously, there are meetings of people, you can call them committees you like. But committees, reviews, work streams, we've learned in the last 8 weeks that we can manage without those, we can decentralize decision-making that people can make decisions very fast and capably on their own and very visibly so as well. So perforce, M&S is working in a way that's dramatically different from in previous eras. And we want to capture this moment. So the changes we're making on the Never Same Again, as you allude to, Clive, there are partly changes in structure, there are changes in investment pace, but there are very substantial changes in culture as well. I mean, Steve, you may want to add to that. Then let's come to why we're confident.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [4]

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Yes. The smaller executive group that's been running the business in the last 7 weeks is now formalized as an ExCo, Clive. And we have, as a part of that process, removed 4 formal committees, which will actually sit, where a decision will be taken in the smaller group. So things like a separate investment committee now done by that group. And where it was held once a month is now happening every week, so we make quick and live decisions. But there are plenty of examples throughout the business.

In terms of the second part of that question, why are we confident? I think the first thing and the most important thing is that we work very hard and very quickly to make sure that we had, under those scenarios which we showed, and we want to remind you it's a scenario, not a forecast, good liquidity and substantial headroom for the business, which allowed us to continue to invest in programs which will help the transformation such as the increased food capability through the Vangarde trial and an additional ambient warehouse. So that's the first thing.

The second thing is that before we went in, we were seeing a good trajectory as the transformation did during the course of last year. The Food business has outperformed the market pretty consistently throughout last year. We are still looking forward to the transformative joint venture with Ocado, which will see us join the fastest growth channel in U.K. food retailing as we take about 6,000 M&S products online. Our Clothing & Home business, we were starting to see green shoots, indeed. Until the end of February, we're showing like-for-like growth in Clothing & Home and a second consecutive series of growth in womenswear, lingerie and kidswear. And then on top of that, where we have seen the movement to 1/3 online, we've tested Donington's capability at Christmas, but that's proved substantial. And we have continued to outperform last year through online channels and Donington is holding up well.

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Clive W. Black, Shore Capital Group Ltd., Research Division - Head of Research [5]

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Financial security.

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David Surdeau;Interim Chief Financial Officer, [6]

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Yes, we're comfortable with the scenario. We formulated it in the early days of the crisis. We believe it to be prudent. We used it as the opportunity to go in early with a series of measures to conserve cash and to reduce costs. They total over GBP 1 billion. So that gives us important resilience for the year ahead. And as you know, we've also arranged a waiver and an adjustment of our covenants associated with our RCF, which is helpful. And we also are eligible as an issuer under the government CCFF scheme. So we have substantial liquidity. And on that scenario, which we're following, we also have significant headroom. So that gives us some confidence about our financial resilience over the weeks and months ahead.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [7]

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And we've been running ahead of the scenarios so far.

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David Surdeau;Interim Chief Financial Officer, [8]

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It's also important to note, as Archie mentions, that so far, 6 weeks in, we're comfortably within that scenario, actually GBP 150 million better so far.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [9]

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Okay. We're going to go to Geoff Lowery from Redburn and then Simon Irwin from Crédit Suisse. Geoff?

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Geoff Lowery, Redburn (Europe) Limited, Research Division - Partner of Non-Food Retail, Luxury & Sporting Goods Research [10]

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Yes. Great. Thank you for the enhanced disclosure around profitability by channel. On the Food EBIT margin of approximately 4%, what do you think that number should be in time given the synergies waste but also market forces? And second, on Clothing & Home, is your online Clothing & Home margin higher or lower than the 7% or so you've disclosed for the entire channel?

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [11]

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All right. I think in terms of the margins on food, what we have said in the past is that we will continue to work on improving the high -- the higher cost base that we have within our logistics, and that's part of the Vangarde program. And indeed, as part of -- as we said in this, we will start to deal with the problematic contract we have with Gist. At the same time, we are seeing a shift in the product, which we're selling. Some of the higher-margin prepared lines that we have high market shares in have been substituted for more scratch cooking under this scenario. So there are some swings in there and some balances in that. We would say there are opportunities around that margin in food.

In Clothing & Home, I would say that the opportunity to have less promotions still stands, and we would want to see more of a trusted value position and better values continue to be brought to our Clothing & Home business. And indeed, in the sort of 3 years in one step that Archie alluded to, by the time we get towards the winter, we will have reduced the number of options in Clothing & Home by 30% over 2 years. So substantial changes there, we should be margin accretive. Again, there, we have a fairly expensive logistics setup, which we are starting to -- we've got to the end of the single-tier network program, and we're now starting to look for efficiency in that area, too.

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Geoff Lowery, Redburn (Europe) Limited, Research Division - Partner of Non-Food Retail, Luxury & Sporting Goods Research [12]

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Is your 7% -- is your online margin in Clothing & Home higher or lower than the 7% for Clothing & Home in total?

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [13]

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It's currently lower, as you would expect, yes, but that's partly a function of the issues we've had at Donington in the evolving way in which we're fulfilling online and the increasing scale we're seeing. So you touched on a really important point. It's the faster-growing part of Clothing & Home, Steve and David. And so there's a huge amount of work going into how we engineer, not just faster growth, but also better profitability out of online. And that's part of the Never The Same Again program (inaudible) coming into bring all that together. Because in the last few weeks, of course, what we found is in Clothing & Home, we are an online business. The rest is a trickle. So when you are an online business, you're a pure play, so you might still behave like a pure play. And when you have like a pure play, you find that the world is rather different. So yes, there's work to be done there.

Just to add to what Steve said on Food, look at -- we're not doing margin forecasts here or at any time, but you can add up the numbers. We are ambitious for the Food business. I mean we've come through a period where we were anxious for the food business. And obviously, we've been anxious in the last few weeks, but going forward, we are ambitious for it. We were seeing outperformance like-for-like. We're seeing great opportunities to reduce waste to improve operating efficiency. And the supply chain thing isn't just to do with sheds and trucks. It's also to do with the way the products rise in the store. We've -- so we've had good like-for-like growth. We've got the new format stores, which are experimental, but we can see real possibilities there. And Stuart Machin is very keen to see further physical expansion in the store base, as you would imagine. And then we've got a Ricardio coming in on top of that, and we've talked about the numbers there. So there are real possibilities, and you can go run your own numbers on the exact margin.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [14]

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David, anything to that?

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David Surdeau;Interim Chief Financial Officer, [15]

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Just to say that in terms of the Food performance that we did call out some opportunities around -- based around supply chain efficiencies, which obviously will be beneficial towards margin, but as Archie says, the big story, where are the opportunities in sales and the opportunities to grow quantum profit.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [16]

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Okay. We're going to Simon Irwin from Crédit Suisse and then Charlie Muir-Sands at Exane. Simon?

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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [17]

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Can you just talk about your vision for what the story of the future actually looks like? The percentage of Food versus Clothing & Home? And particularly, how you're going to get there? You've closed just 54 out of 110 outlined. Clothing & Home space fell just 2% last year. Maybe you can outline where we are with leases on larger stores? And just how long it's going to take you to get stuck into the rump of the estate?

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [18]

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Okay, Steve.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [19]

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Yes. Okay. The story of the future conversation is not as straightforward as perhaps you would like it to be because we have different mixes of Food and Clothing & Home depending on the format. So where we have large out-of-town stores, such as Camberley or Hedge End, now they tend to be clothing dominant both in footprint and revenue and profit. Of course, at the other end of the extreme, our semi foods are 100% food. So we have a mixed estate. What I think it's fair to say is that we are in a program of reducing clothing footprints either through the store closure program or through remodeling of the existing stores. And as you will have seen in Hedge End, we actually gave more footage to Food within Hedge End, and that's something that we'll carry on doing during the course of this year.

In terms of the closure program, we are on schedule with where we wanted to be. We've got to balance this quite carefully on a site-by-site basis because some of the leases we're dealing with are complicated and onerous. But we are on track, and we will continue to close down stores within the program. We're also taking this moment to renegotiate leases and having what I would describe as constructive conversations with landlords, and those are ongoing. We expect to have some acceleration of the reshape during the course of the summer and the autumn.

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David Surdeau;Interim Chief Financial Officer, [20]

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We don't know this, but we think there's never been a better time to reshape the portfolio because there are real property opportunities for us out there, partly with the demise of other retailers but also because there are not many people looking for good new space. So we do want to move faster, as Steve has said. And that applies both ends of the rotation of the portfolio.

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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [21]

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But the other one is -- (inaudible) has been a worst time for exiting large space if you've got long leases.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [22]

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Yes and no. It is -- I know what you're saying, that landlords are not easily going to replace us if we leave the space. So that's a negotiation. And we know that we need to change the space. So Will Smith, who has just arrived at our new property director, is going to get into this. And a lot of these older stores we have, we are in active discussion with landlords about the future of that site. So I think we don't have the luxury that other companies have, collection, short leases. So it is slow with M&S, and it is more expensive, as you've seen. But I would be very surprised if we're not moving a lot faster in the next 6 months.

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David Surdeau;Interim Chief Financial Officer, [23]

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And I'll just -- on this. I would say that the conversations we're having outlined are being very pragmatic about this. And in many cases, better to have a renegotiated lease conversation than an empty store. And we should remember that. Secondly, the other thing I'd say is our very larger stores actually are most profitable. So the larger (inaudible). And the closure program has been largely focused on the high street stores that we have over the last couple of years, and that will continue. In addition, it's not just a closure program. It's a reshaping program but in terms of footprint, but also in terms of the state. And we actually have opened 25 new stores, including 2 new full range stores, one in the west country and one in (inaudible).

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [24]

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Thank you, Simon. Charlie?

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Charlie Muir-Sands, Exane BNP Paribas, Research Division - Research Analyst [25]

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Yes. It's Charlie Muir-Sands from Exane. I want to focus on Food, please. Firstly, you've alluded to sort of a negative margin mix around demand. But you've highlighted that you are going to tackle the Gist contract, which I think you talked about a number of times in the past. Do you think there's actually a good chance that you could resolve that this year?

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [26]

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Okay. I've just commented on that. Gist isn't -- the Gist contract, we could have this -- have had this conversation with Steve, I think any time in the last 25 years, yes. This is a long, long-running thing. It's not anybody's fault. It's just that many moons ago, M&S entered into the sector. In effect, the distribution and transport arm of the business was outsourced on a long-term contract and Gist built up a network to serve M&S. I mean, in some way, it's typically the type of supply relationships M&S does. And as a result, we've developed an interdependence. In this day and age, it doesn't work that well because it's a sort of disincentive on both parties to invest and modernize. And we've had very good discussions with them about it. They're under new ownership. I'm sure this will be an ongoing rumbling thing. And I honestly couldn't tell you when it's going to resolve, but we're having a constructive relationship. Steve, is that a...

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [27]

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I don't think there's actually -- I mean, just to remind you, I mean, in the way the relationship is structured, that essentially Gist have the IT, the physical locations and the people, and we pay for the capital that goes into that open basis, and that's not quite right in terms of structure. But there -- and there is more to do, and we're working on that as part of the Vangarde rollout. And in terms of the margin, I should also point out that, as Archie said earlier, whilst there might be some margin mix in terms of the type of product, we're saying there are upsides in terms of both the changes to the availability and the waste and indeed the high cost base here.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [28]

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Yes, Charlie, back you probably know this, but there's 7 years to run on that contract. So every year, that evolves is another sort of ticking by for both sides. So there's some pressure to engage. Okay. We'll move on. Charlie, do you want to come back on that?

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Charlie Muir-Sands, Exane BNP Paribas, Research Division - Research Analyst [29]

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No, that was very clear. I just did wonder, though, you haven't revised your second half Food budget. I mean, I realize that hopefully, we're going to be out of the hard lock down by then. But as many people are beginning to acknowledge, we're going to be facing a very negative recessionary scenario. You guys have historically been pretty procyclical. I just wondered whether -- what gave you the confidence to not be a bit more cautious on your second half Food sales?

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [30]

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Sure. Just to be clear, we haven't published a budget -- published a scenario. David, I think the question is why haven't we revised the second half scenario?

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David Surdeau;Interim Chief Financial Officer, [31]

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Well, our scenario was established in the early days of the crisis. It served us very well so far. We are expecting a decline against our original expectations throughout the year. But during that time, we expect some beginning to return of more normal shopping patterns. But right throughout this financial year, we are assuming a decline against our expectations.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [32]

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We should be clear, this isn't a scenario. We could have written. And nobody has a crystal ball here. It's quite a difficult time for people to put actually a forecast. And we need to make sure we had something to base our plans on. And I think in the sort of plan for war and for the peace scenarios, we've done that to ensure we've got the right look into the business and we're taking the right action.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [33]

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But Charlie, I remember too -- I mean, there isn't a point about why we haven't revised the scenario. But our Food business has been disadvantaged in the crisis because of the swivel away from Food for now and sandwiches sales are well down and all that sort of thing. And the people are going to have a queue to go shopping, they're going to go shop once and they're going to go to big stores. So just structurally, we're disadvantaged than some others. But that will ease from now. So we see, if anything, improvement from here. Our good simply food stores, the stand-alone ones with car parking, et cetera, have been performing well up, in a really good shape. The difficulty here is with travel locations closed, office locations wherever you would normally be sitting are also not buying your sandwiches. And...

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [34]

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Like the shopping center.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [35]

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Yes. What I would say is the exit rate, if you like, of the period of the sales that we've put in front of you is substantially different to the sale, i.e. there was almost a shock to the system, whether it be in Food or Clothing & Home or online in the first week after we locked down. Every single one of those divisions has accelerated its performance, as things have normalized. And if I took out things like hospitality, which actually affect the Food business, all the franchises which are in those travel locations. And I can tell you, our like-for-like performance in Food incorporates high single digits, which we are pleased with and accelerating, as I said.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [36]

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Yes, hospitality is a good point because we closed all (inaudible) Sorry, how much?

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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [37]

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4.5% to 5%.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [38]

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4.5% of the sales have just gone on that alone and some of that

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [39]

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Anyway, Charlie, I'm not answering your original question when we're hitting on. So I think we'll -- we may move on. And we're going to go to Anne Critchlow and then the great Geoff Ruddell from Morgan Stanley.

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Anne Critchlow, Societe Generale Cross Asset Research - Equity Analyst [40]

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Okay. The GBP 500 million OpEx savings based on your COVID-19 scenario, but you're trading better than that scenario at the moment. So should we be assuming that quite a bit of those cost savings wouldn't be achieved? I mean how dependent are they on your trading scenario?

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [41]

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So where we have got increases in volumes through the Food business, they're already baked into our scenarios. What we did is immediately stop a large chunk of discretionary spending in areas like Clothing & Home marketing, et cetera, and we don't see that coming back into the scenario even as things move on. And the Never the Same Again moment that Archie talked about, we are reexamining every aspect of the business in terms of its operating costs and expenditure and those we are embedding through the program.

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David Surdeau;Interim Chief Financial Officer, [42]

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Yes, we've been through our discretionary costs. We've canceled or deferred them as far as possible, and we're continuing to work on our cost reduction program. It's very important to reengineer our P&L going forward. But to your point about where we're performing better against the scenario, which is sales related, clearly there will be some volume-related costs, but they'll be more than compensated by variable margin.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [43]

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Yes. I mean, look, we're in the world of the unknown, aren't we? If things improve dramatically, then clearly we'll bring some costs back rather than astute the sales. So -- and just on the capital as well. We took the capital originally down -- we started off down at $80 million. And then we've built back up to $140 million. We're here to create a profitable growing business in the future. And if things are strong enough, we will selectively make the right investments. So -- but the scenario test is showing the first priority was to demonstrate total resilience, and I mean total resilience, not just for the next few months, for the next 12 months and beyond, and that was the Board's priority.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [44]

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Thanks, Anne. Geoff?

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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [45]

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Just a very general question for me, which is that you refer in the statement to the plan to introduce guest third-party brands into the Clothing business. Could you just talk to us a little bit more about the logic behind that and how you envisage that unfolding?

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [46]

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Yes, certainly, Geoff. I mean, what we have seen is a number of things. First of all, there are opportunities to expand the repertoire of M&S in 2 ways. In areas where we don't have expertise but are highly relevant to the customer and also in areas where we already have market dominance and by adding some complementary brands to our repertoire could really push that home in markets where other competitors may be weakened. We're in live discussions with a number of brands as we speak, and you will expect to see some of those appear on our website in the next few weeks and months, and they range from online pure plays to well-established brands. What I will say to you is we're not trying to become some kind of online department store. That's not what we expect. This is about complementary branded office.

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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [47]

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And if I could just have a supplemental question as well. You currently have a pension deficit -- pension surplus is bigger than your market cap. I realize it's an IAS 19 onetime-only thing. But is there any scope over the next few years you think to sort of effectively claw some of that back somehow? I'm thinking particularly of the Scottish partnership in terms of the property.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [48]

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Anyone who wants to have a go at that.

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David Surdeau;Interim Chief Financial Officer, [49]

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A very good observation about the volatilities of the 2 numbers. It is a surplus, and we're happy about that. Clearly, as you pointed out, these measurements can change from time to time, but we're in a good position in terms of our pensioners and our future pensioners. So we're just happy that's a strong part of our balance sheet and our business.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [50]

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And Geoff, before we get too happy about it, Geoff, as you know, it's a surplus that we are funding. So through the artifice of the Scottish Limited partnership, really, we've made a deficit rather than a surplus, which is -- and it's all fine, but we are currently funding it to the tune of GBP 130 million a year. That is a cash contribution to pension fund each year. That's dropped to around EUR 68 million in 2023. So in 3 years' time, we come down a peg, and then it sits on that peg for quite a while. But -- so there's no near-term possibility of saying, can we have our money back. It actually works the other way. We're still contributing to it.

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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [51]

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But there's no ability to lower that number, the contributions?

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David Surdeau;Interim Chief Financial Officer, [52]

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I think it's extremely unlikely. I mean, we -- obviously, the pension trustees have been extremely supportive in the current scenario and working with us. But I think it's pretty unlikely. And we need to have, with the pension fund, good cooperation on the Scottish Limited partnership and security they have over stores as well.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [53]

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And the COVID-19 scenario is working. And we haven't seen any changes to our pension contributions.

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David Surdeau;Interim Chief Financial Officer, [54]

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I mean, in an extreme world, maybe that's something one could look at, but we're not -- we're not in that world.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [55]

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Okay. Thanks, Geoff. We'll go to Richard Chamberlain, and Georgina Johanan from JPMorgan. Richard?

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Richard B. Chamberlain, RBC Capital Markets, Research Division - MD of Consumer Retail [56]

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I just got one question, please, on Food. It does look like the performance so far in Q1 is on an improving trend and is causing your cash flow to outperform your internal scenario. So just wondering if you can touch on what's going on in terms of the food dynamics at the moment, frequency or basket size or whatever. How maybe the food trading patterns are evolving? What you're seeing there recently?

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [57]

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Okay. You're absolutely right. Just to read, there is an improving trend in Q1. And particularly when I look at the businesses Archie said earlier without hospitality and without the travel locations in franchise. What I would say to you is that, like many others, we are seeing a substantial decrease in the quantity of footfall to all our food stores as customers do a much bigger shoppers. We are seeing new customers. But it's more of our existing customers with bigger baskets. We're also seeing that shift into scratch categories and more ambient. And in fact, some things like our frozen business, which we've been focusing on as part of the future development to make our Food business more relevant, has been growing by around 70%. So new categories, less customers, bigger baskets. It's particularly pronounced for us because we have a huge number of food on the move customers in the business. So in the figures which we quote, we will have a substantial lunch time trade, which is pretty much dried up in the way that it used to. And again, the only stores we've closed so far are actually 5 that are in -- 4 in a city and one in Glasgow, which are City Center stores.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [58]

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Thank you, Richard. Okay. We're making good progress here. So we're going to go to Vicki Gedge and then to Simon Bowler from Numis. So Vicki from PIMCO. So I'm sorry.

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Operator [59]

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Vicki's line may be muted. Vicki, could you please unmute your line? Well, okay. In that case, we'll go to Georgina.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [60]

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Sorry, we'll go back to Georgina. Sorry, Georgina.

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Georgina Sarah Johanan, JP Morgan Chase & Co, Research Division - Analyst [61]

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I have one question and then just a very brief clarification, if that's okay, please. My question is, I mean, I appreciate very much that the focus is on cash this year. But just in a scenario analysis, can you give a ballpark of what PBT that would have actually implied in that analysis? I mean, on my sort of back of the envelope, it would be a broadly breakeven PBT. So if you could just let me know if I'm in the right ballpark, please. And then the clarification was just on the branded that you're introducing for Clothing & Home, is that on a wholesale basis or is it more of a marketplace model, please?

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [62]

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Okay. So I think, Archie said at the start of the call, this is broadly a sort of loss year in terms of how we think about it. But we just don't know how we're going to see the scenarios unfold later in the year. So I think that's all the guidance I can give you. In terms of the brands, there are different models being deployed with different brands at this stage. But they're in commercial negotiation, I can't give you any more detail at this stage.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [63]

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And David, do you want to comment on?

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David Surdeau;Interim Chief Financial Officer, [64]

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Yes. I mean, the scenario is what it is. It's to help us manage our cash and liquidity in a very difficult environment. It served us well so far. It was also extremely useful in the preparation of the year-end accounts. And we've managed our headroom, and we've managed our cost reduction and cash conservation measures in the context of that scenario. But it isn't a forecast, and it most certainly isn't guidance.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [65]

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Thanks, Georgina. Now we're going to take 2 more. And then we'll wind up and obviously available all day for any further questions. So we're going to go to Simon Bowler and then Adam Cochrane from Citi. Simon?

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Simon Bowler, Numis Securities Limited, Research Division - Analyst [66]

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A couple of quick questions kind of coming back to the property side of things, where, I guess, you talked quite a bit about property in particular lease, but does this change anything about your way of thinking of your own property of state? And then secondly, if we're thinking about accelerated channel shift in the Food part of the market. Obviously, you've got exposure to that now through Ocado. But how does that make you think about the composition of your food space as well?

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [67]

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Interesting point.

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David Surdeau;Interim Chief Financial Officer, [68]

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I think what it shows is that the decision to partner with -- and have the JV with Ocado, we said it was transformative. And clearly, within the market, it is that trend to online shopping, which has been the fastest-growing part of the food sector for some time, is only going to continue. And we are well placed. The Food team have done a great job in making sure that we're ready to launch in September 6,000 M&S products, which will be ready to go live against circa 4,000 Waitrose, where the quality is either the same or better than the Waitrose products and the prices are either the same or lower than Waitrose. So we think we've made that shift at the right time. In terms of our existing offer, we will make some changes to it as we see trends develop in the marketplace in terms of the shape. But Stuart and the team are already making great progress in making the range more relevant to a broader range of customers and particularly, a family shopper. And things like the frozen that I alluded to earlier was part of that. So we already were pushing further into more ingredient lines, more grocery lines and a broader range for the family.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [69]

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We don't see, Steve, do we, the Ocado thing is substitutional for the -- no, sorry, I -- of course, there's some interaction. And of course, there's -- anybody can see that I'm sure there'll be some business would have come through the real estate will go through Ocado and vice versa. But overall, we think that both sides will benefit. And the possibilities, I mean, both in the new formats and what we can do in Food are exciting. But also the handover in September to Ocado, the 6,000 products is the beginning, we've been focused on that because that's enormous. And I'm sure there will be some bumps in the road, but basically we're geared up to do it. But that's just the beginning of the possibilities with Ocado. There are lots of other things on the food delivery and maybe one day click and collect, et cetera, which we can develop.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [70]

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If you remember from last year, Simon, we actually talked about this. Our customers are already shopping for food online prior to the COVID-19 outbreak. And so the GBP 3 billion worth of business was being done with others by our own customers. So again, it's complementary to what we do rather than substitutional.

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Simon Bowler, Numis Securities Limited, Research Division - Analyst [71]

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Okay. And then sorry, just going back to the owned property. Any comments on whether that's something that's being kind of reviewed at this point in time, you mentioned kind of broader property reviews.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [72]

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I didn't quite catch the first part of that question, Simon.

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Simon Bowler, Numis Securities Limited, Research Division - Analyst [73]

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Just with regard to the owned property, you've kind of spoken quite a lot around kind of conversations with landlords around kind of the lease profile of your state, but just if we should be thinking about anything with regards to that property that you own.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [74]

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Yes. I think 2 things as part of the closure program, obviously, we deal with that in a way and under our own state and we make sure we are getting the value that's appropriate to those properties. In terms of the larger store -- the larger property development piece, okay, we've caused that at this stage because of the environment. But we do have our building plans for those property assets that we do have. I mean, the one of the things, Will Smith who's just arrived, interesting time to arrive. One of the things he's going to be looking at is this aspect because we -- our property ownership is really historic. We own long leases that have some value or freeholds in stores that somebody bought 25 years ago or even longer, 100 years ago, and we've got vice versa, liabilities that relate back to that period. So there's a hell of a lot of work to be done, sorting out that and ask ourselves the question of what we own that freehold because somebody bought it, but is it where we want the shareholders' money to be or should it be elsewhere. So we certainly see, not spectacular, but we see opportunities there.

Okay. We're just going to take then one last question from Adam Cochrane, and then I think we'll draw a line. Adam?

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Adam Gareth Cochrane, Citigroup Inc, Research Division - Director [75]

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I better make it a good one, the last one. In terms of -- maybe I might squeeze in 2. Are there any challenges to accelerating the strategic measures that you're going to do anyway, given you're trying to manage the cash flow and the CapEx at the same time? It sounds really impressive that you're able to accelerate many of the changes at the same time as you're having to manage the cash flow given the scenario. And the second question was going to be, when you think about the sort of gross margin outlook for Clothing for next year, you've taken some provisioning this year, are you still expecting a very discount-driven competitive environment as you look forward for the next 6, maybe even 12 months?

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [76]

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Okay. The acceleration of some of the transformational plans we have in the business is driven by the fact that we had good plans in place for many of these as part of the overall program. And what we are doing is focusing the teams very clearly on those, which gives us the quickest returns and form the foundational pieces of the future. We've also made sure that we are focused very much on developing the food business, as Archie said earlier, how much we see the opportunity there, but also within the digital growth plans. And we talked about 1/3 online, that has never been truer. And we now have an aspiration to get more of the business online. So it's really about the focus within those transformation plans.

The second part, in terms of margin in Clothing, look, we think that you're likely to see a very, very discounted market through this summer. And that as people try to liquidate their positions on stocks, we are fortunate in that we have more merchandise, which we are able to flow into next year, and we work closely with our supply base to make sure that some of it is still offshore. But I think it will be more of a fire sale and then some normality later in the year. What we also are doing though is taking this opportunity to reset our values. We talked about improving our values in Clothing & Home, cutting a number of ways, removing discounts, going to trusted value. Again, we will accelerate that part of the program and where we already reduced the number of ways in the autumn just gone by 11%. We intend to reduce it by a further 20% in autumn/winter this year. So a 30% reduction in 2 years as opposed to over the 3 years we had planned.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [77]

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David, do you want to add anything?

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David Surdeau;Interim Chief Financial Officer, [78]

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Yes. So I'd just add, really, we talked about our CapEx and the significant reductions versus our pre-COVID budget. But we have been careful to protect what's left to make sure that we do prioritize strategic initiatives and important trade initiatives. So like a second ambient, DC, like important data and digital investment to help our online business. So I think we've done a good job there to make sure that we've protected the sources of future growth. And as we've pointed out, we do have headroom and liquidity to see us through the next weeks and months and through the year. And we are trading well against that scenario should -- so we should be able to emerge as a strengthened business.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [79]

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Look, Adam, thank you for asking that question because it all brings me to my concluding remarks really. I'm sure you're no different. I mean, we've all found in the last 8 weeks that before we've had to start operating completely differently, and we've been rather amazed to find that we can, that whether it's sitting at home or whether we've got 50,000 people working in stores, we can make them work extremely well. We've had to redeploy people from Clothing into Food who never worked in Food before. We've had to multitask in a way that people never multitasked before, and there's real learning in that. And in the center, I mean, as Chairman, I -- my job is to move around from time to time. But I've been watching and talking with Steve and David about what's happening. We're at the moment in Waterside House, there's probably today in this building, 30 people, where normally will be over 2,000, but the business is running very well. We've got people who do things that currently they can't do. And the fact they're not doing them doesn't seem to have -- well, the sky hasn't fallen in. There are lessons in that.

I've been coming in here and Steve's here, maybe Sacha shouting at the screen all day, and making stuff happen, oh, sorry, talking calmly and in a measured way to the screen. I mean communication, we've seen dramatic exchanges in communications. All of a sudden, the leadership are talking directly to store managers as opposed to going through some cascade. And it's -- we learned to be extremely effective. And our new technology, incidentally, our store technology, largely teams based, but there's a lot that goes with that, that you won't see, which is retail-specific, has arrived just in time. It's been dramatically important to us. There are no work streams. There's no reviews going on. There's no consultants here, but the business is moving faster than ever. You take our sourcing offices. And obviously, they're in troubled locations around the world, too, but they're working with the sourcing office, has been dramatically effective because they've been dealing with suppliers, rescheduling stock and all those things. And it becomes quite obvious that we should be asking them to do some things that we currently do here. Steve gave me an example the other day that typically for the Clothing business for every garment we commission or design, we have supplied samples. Those samples have to be flown back and forward and come in the post and litter the office. That's a very slow process. Now that's a pre-digital process and pre-sourcing process. That process can happen substantially offshore now.

I was talking to Jill Stanton the other day, who is, obviously, working from home with our team, done a great job. Because now, we've had to cut back significantly (inaudible) buy, the choices we make about the number of options we have, I mean, you can't buy the same number of options on 40% or 60% of volume. That would make no sense. So we've had to dramatically restructure the range and focus on the winners. And she said, look, it's amazing. I've been able to make 3 years progress in 1, and we can make decisions faster, and we're doing it individually in the categories. And we would just make sure it never goes back to how it was. So that's why we're -- as you say, balancing, obviously, the crisis in the day-to-day, which is formidable. I mean, every day, there's new issues drop up often around safety. But that's why we're excited that we can pursue both together.

I should just say that we have had an amazing period, too, in terms of colleagues aboard across the business. You've seen we've done a huge amount of community contribution work for the NHS, et cetera. And some of that has been centrally driven, but a lot just been spontaneous, just dropped out. We're one of the players that has a very large number of colleagues working throughout. As far as we can tell, we don't have statistical evidence for this, we think that our level of COVID infection has been no higher than the national average, and it may be lower. And that demonstrates that we've been able to work safely in shops and that's the main without protective equipment with good social distancing, and our shops have been a safe place. We certainly hope that's been the case. Notwithstanding that have been the old tragedy, and we're very painfully aware of that.

So there it is. It's been like a big dipper. First stage was fasten seat belts and some white knuckles as we went down wondering how we were going to secure the business. Then we sort of climbed out of the abyss, did the scenarios, secured the bank facilities, et cetera, and we're now quite excited about the run ahead. And I'm talking not just for us, but I think the whole business is feeling a rush of adrenaline about what we can achieve.

Thank you all. Thanks for joining us. And as I said, Fraser and the team are available all day to answer any further questions. Thank you.

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Operator [80]

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This now concludes today's call. So thank you all very much for attending. And you can now disconnect your lines.