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

Half Year 2020 WM Morrison Supermarkets PLC Earnings Call

London Oct 8, 2019 (Thomson StreetEvents) -- Edited Transcript of WM Morrison Supermarkets PLC earnings conference call or presentation Thursday, September 12, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Kasoulis

Wm Morrison Supermarkets PLC - IR Director

* Andrew Thomas Higginson

Wm Morrison Supermarkets PLC - Chairman

* David T. Potts

Wm Morrison Supermarkets PLC - Chief Executive & Executive Director

* Trevor Strain

Wm Morrison Supermarkets PLC - Group Chief Finance & Commercial Officer and Executive Director

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Conference Call Participants

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* Andrew Ian Porteous

HSBC, Research Division - Analyst, European Retail

* Andrew Philip Gwynn

Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail

* Bruno Monteyne

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* James Robert Anstead

Barclays Bank PLC, Research Division - Director

* Nick Coulter

Citigroup Inc, Research Division - Director

* Robert Joyce

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Andrew Thomas Higginson, Wm Morrison Supermarkets PLC - Chairman [1]

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Well, good morning, everyone, and welcome to the Morrisons half year results. We had another good period of growth. You will remember this time last year we had the best like-for-likes in nearly a decade. So to get some decent like-for-likes and profit growth on top of that -- an exceptionally strong base from last year is pleasing. I'm confident we're on the right path to keep growing.

We're in really good shape, obviously, mindful of everything going on in the economy and politics and so on. But with a strong balance sheet, strong cash flow, the determination to keep doing what's right for all of our stakeholders, we're looking forward to serving our customers better over the busiest time of the year over the next few months.

So again, we're announcing today both ordinary and special dividends for our shareholders, 3.93p in total, up over 2% on last year. And I'll hand over now to David and Trevor to talk you through the details.

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [2]

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Thank you, Andy, and good morning, everyone. Thank you for joining the Chairman, Trevor and myself here today. As usual as far as competitive pressures allow, I'm going to describe our first half progress.

The first half of the year was perhaps the most important of the 4.5 years of turnaround so far. It was a more testing time. Last year's long, hot, sunny summer was very favorable to sales. This year's weather, especially May and June, was unfavorable. So a double whammy for us year-on-year, last year's positive effect followed by this year's negative.

Events like -- last summer, like England's long run in the World Cup and the royal wedding were one-offs providing a boost to sales last year that was not repeated this year.

And perhaps most importantly of all, consumer confidence remains low, as it has been since last autumn, as the Brexit process continues to be prolonged and unresolved. Customers are concerned and uncertain, affecting the way they plan and the way they shop.

I say most important and a testing time because this period of relative adversity put our Fix, Rebuild, Grow strategy and our 6, 5, 4 framework for running the business to the test. I am pleased to say that we and our team of food makers and shopkeepers have so far passed that test.

We've done so whilst continuing to listen, learn and adapt. It would've been easy to be distracted by the tough environment, politics and Brexit, the competition process around the failed Sainsbury-Asda merger, or be influenced by tactical promotions in the market, which as often happens were more common in tough trading conditions over the summer. But we stuck by our 3 convictions that we have a relative catch-up opportunity, we keep improving for customers and that execution is key.

Three things stood out in the first half. First, we remained focused on improving the shopping trip for customers. Despite the tougher times, we invested in price and made strong relative improvements in our price competitiveness.

Second, we maintained the momentum of the turnaround, continued to build a consistent track record of meaningful and sustainable growth, growing first half like-for-like, profit and ROCE whilst delivering strong cash flow and once again proposing a special dividend. And while retail like-for-like was negative in quarter 2 against those very strong comps, on a 3-year view it was up 2.2%, so still in that modest, sustainable, 2- to 3-year range I've previously described.

Third, we made good progress on building a broader, stronger Morrisons. Today, we're announcing several new or extended wholesale supply initiatives with Amazon, LuLu in the Middle East and Harvest Energy and Rontec in the U.K. So it's that wholesale news I'll talk about first.

Wholesale is an important part of the meaningful and sustainable growth opportunity at Morrisons. As food maker, shopkeeper and wholesaler, we're a unique British food business. We're becoming a product company, innovating, developing, making and providing Morrisons food and branded food with a strengthening own brand and Safeway brand for supermarkets, online and for many wholesale partners.

For example, the high-quality, low-priced crumpets and pita bread from the Morrisons owned Rathbones bakery are best-in-class. We've already passed our initial target of GBP 700 million of annualized wholesale sales just 2 years after setting it, and we're now well on our way to our GBP 1 billion target.

With Amazon, we've signed an agreement to be partners over a number of years rather than just a rolling contract. And we've agreed to work together across other important opportunities. That's in addition to the announcement we made in June that Morrisons' store on Prime Now, previously called Morrisons at Amazon, would be extending the ultrafast, same-day grocery service to many more cities across the U.K., including a 1-hour option from order being placed to delivery.

We're also announcing a new overseas partner. We'll soon start supplying LuLu stores in Qatar, including our brands such as Best and Free From. With over 150 stores across the Middle East and Asia, there's plenty more potential there.

In the U.K., we've agreed with Harvest Energy to start converting a number of their forecourt convenience stores to Morrisons Daily over the next year. With Rontec, we're trialing a Morrisons Select format and Morrisons inserts in some of its small convenience stores.

And with McColl's, we've converted 10 stores to Morrisons Daily in the first half. Customer reaction so far has been positive. And as previously announced, we expect to start supplying McColl's 300 ex-co-op stores from the end of the year. So still in its infancy but exciting times for wholesale.

And now an update on our 6 priorities. Customers tell us they remain uncertain about Brexit and what it could mean for them, that it's affecting the way they plan their daily lives and they trust and rely on Morrisons for great value. So in the first half, our commercial team led by Trevor stepped up our investment in the Morrisons price list by cutting the prices of hundreds more customer favorites, those everyday items we know our customers value most especially around own brands.

This had a deflationary impact for us relative to the market. It's the right time and the right thing to do for customers and the response has been good. For example, we invested in own brand eggs and saw volume uplifts on those items of 13%. We reduced the price of canned fish and saw volume increases of 68% and the same in cleaning cloths, up 17%.

Even at the lowest prices, provenance and authenticity are very important for customers. Morrisons has a food manufacturing heritage, owning fresh food businesses and brands such as International Seafoods Ltd, based in Grimsby; and Woodhead Bros, our fresh meat business.

During the first half, we introduce some exclusive, great-value items under these brands: International Seafoods' salmon and prawns and Woodhead Bros' pork loin, rump and sirloin steaks. We further expanded our vegan range with new products such as Market Street vegan jackfruit pizza, vegan pasty and vegan rolls. And we've launched a range of low-calorie, high-protein ice cream in 3 flavors.

Being more competitive is about good quality as well as great prices and our food makers and shopkeepers were once again recognized during the first half. Amongst other awards, our meat was widely recognized, winning Best Bacon Product; several awards at the World Steak Challenge, including golds for our fillet and ribeye steaks. The British -- the Best British Beef Burgers enriched with Bone Marrow won the BBC Good Food Summer Taste Awards.

We also won 115 awards at the Decanter World Wine Awards, including platinum for our Best Chablis 1er Cru. And we were named Deli Retailer of the Year, Artisan Retailer of the Year, and for the second year running, won Supreme Retailer of the Year in the International Cheese Awards.

Being more competitive means listening and responding to what customers and stakeholders tell us, and their concerns about the environment are increasing. We have a team dedicated to listening and responding on all ESG issues.

On packaging, we launched a policy in 2018 aimed at making all brand -- all own brand plastic packaging reusable, recyclable or compostable by 2025, setting ourselves ambitious targets around removing and reducing problem plastics. I'm pleased to say this policy was recognized in the Business in the Community Responsible Business Awards for all companies in the U.K., winning the Environmental Sustainability Award.

Customer satisfaction is our key measure of how we're serving customers better. For the fifth year, our overall customer satisfaction score is up, increasing from an already high base by another percentage point during the first half with improvements in availability and colleague friendliness.

We're also working on how the Morrisons team of food makers and shopkeepers can become outstanding in serving customers better and how we become more demanding on ourselves in tightening and measuring our improvements. And that's something we'll talk about later on in the future.

A word, too, on how we're serving more customers digitally. You'll remember in May, we deferred our ramp up into the new Erith CFC until January 2021, allowing Ocado the extra capacity following its unfortunate fire at its new Andover CFC. This saves us some cost. However, all our existing Morrisons.com customers will still be offered the same online home delivery service. And Morrisons.com is still growing for new customers, both through new store-pick capacity and new catchments, and more orders through Dordon.

During the first half, we extended our online catchment to include areas such as Falkirk and Dundee, and some more areas of Devon and Cornwall. Online results so far have been good with a strong increase in Morrisons.com sales during the first half.

The new agreement with Ocado also means they are no longer our exclusive digital partner. This allows us to work with other potential digital partners and gives us more strategic flexibility. The new relationship with Amazon for the Morrisons store on Prime Now is a good example of how we can now develop new digital offers.

Local food and local food makers are very important for our customers. They're part of what makes Morrisons different. We've now launched 775 items in our stores from 165 local suppliers since we started our local food maker events in 2017.

Examples in the first half included Norfolk asparagus, picked each morning and sold in 5 local Morrisons stores on the same day. And many of these local suppliers are now growing with us. Dartmoor Lamb, supplied by the Dartmoor Farmers Association, was first launched in 5 stores in 2018 and is now available in 42 stores in South West England. Warner's Rhubarb Gin was originally launched in our new St Ives store and is now in 34 stores across the region.

Our Fresh Look program also continues to provide local opportunities. The Fresh Look at Lake, Isle of Wight store is our most integrated local store so far. We now sell locally supplied milk, cheese, cream, coffee, eggs, meat, tomatoes, biscuits and garlic. And the Briddlesford Lodge Farm & Dairy, just 7 miles from our store, supplies the top-selling cream.

And by tailoring our offer to local demographics, events did well, too. For example, Ramadan was up 25% on the year; and Passover, up 7% on the year.

It's been another busy year for services. We got off to a good start with our plans to install electric vehicle chargers at our stores. We're installing the highest-spec rapid chargers, which will allow customers to fully recharge their electric vehicle in as a little as 20 minutes. We're on track for around 100 stores this year, which will mean we'll have Britain's biggest supermarket network of rapid electric vehicle chargers.

And in the first half, Doddle went into almost 90 stores, bringing the total to over 375 stores. Over 20 Travel Money kiosks opened, we now have over 30 manual car wash facilities and we're introducing more high-street offers into our car parks, including barbers and launderettes. And during the second half, we expect to develop our gift card service with the launch of both Morrisons and Nutmeg gift cards in time for Christmas.

If we keep simplifying and speeding up, we've got years of productivity and cost saving opportunities still to come, much of it remains in our own hands. During the first half, as we invested in the shopping trip and improved competitiveness for our customers, we also stocked more items customers want to buy and improved our on-shelf stock levels. We also improved in-store systems for waste and markdown, which is improving availability.

Important work continues in our supply chain, introducing forecasting tools for better order planning, both short and long term and for promotions. We've also completed the introduction of the fresh management warehouse system into 2 depots. And we've outsourced transportation planning and operations at 3 of our distribution centers and vehicle maintenance at 5 sites, which means greater simplicity and flexibility. We've still got a lot more to do. Areas such as distribution and loss remain key productivity and cost saving opportunities.

All three of last year's openings at St Ives, Cambridgeshire, Abergavenny and Acocks Green in Birmingham continue to trade very well. In the second half, we'll open 2 new stars in Canning Town and Bolsover, and 2 replacement stores in Folkestone and Oswestry. 20 Fresh Looks were completed in the first half, with around 45 in total planned for the year. We continue to test and learn in both new stores and in Fresh Look.

During the first half, we introduced 25 more Nutmeg womenswear departments, taking the total to nearly 300, with improved styles, ranging and placement at front of store. The Nutmeg brand goes from strength to strength with good growth in back to school and the new ranges within children and baby, whilst diversifying into areas such as toothpaste, mouthwash and skin care.

We had over 60 more Garden Centres for the summer season, 20 more Home & Leisure departments with improving sell-through of full-priced products, particularly for events. And we now have nearly 80 barista bars.

We've also started to increase investment in our Market Street service counters. Customers tell us that our Market Street fresh offer and our skilled colleagues are highly valued and are part of what makes Morrisons different.

So as I said, the first half was testing. Morrisons colleagues passed the test. But we're not complacent. There's still a lot to do better and a lot to get after. And of course, we're restless. Negative quarter 2 like-for-likes, even with the strong comps and this year's tough conditions, is not where we want to be. We'll keep listening to customers and responding. That's what's guided our investments in price in a tough market in the first half and improved our relative competitiveness.

The plan itself is unchanged: a broader, stronger Morrisons. We're pleased with our wholesale partnerships and developments with the likes of McColl's and Amazon, driven by capital-light growth and modest sustainable 2- to 3-year like-for-likes.

And as I said at the prelims, we'll continue to be different. Our differences make us distinct: a product business, innovative food, British products, many of them local; our specialist manufacturing businesses, Morrisons Makes It, the Morrisons price list; Market Street counters and highly skilled butchers, bakers and fishmongers, they're not a dying breed at Morrisons. We're building new Morrisons on well-established principles.

I'd like to thank all our colleagues across the whole business, our shops, food manufacturing sites, depots and offices for knuckling down during more testing times and delivering for all stakeholders.

Thank you, and now over to Trevor. Thank you very much.

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Trevor Strain, Wm Morrison Supermarkets PLC - Group Chief Finance & Commercial Officer and Executive Director [3]

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Thanks, David, and good morning, everyone. As usual, I will start with an overview of the key financial measures and then I'll take a few moments to describe some of the components in more detail.

As you know, this is our first set of results reported under IFRS 16. So unless stated otherwise, all the numbers will be on the new basis, with growth rates against the restated prior year numbers which we published and talked through with you back in early July.

For the half, total turnover excluding fuel was up 0.3%. Profit before tax, exceptional items and net pension interest was GBP 198 million for the half, up 5.3% on last year's GBP 188 million. Return on capital employed has increased again to 7.1%, up 20 basis points from year-end and up from the 7% last year.

We shared pro forma net debt when we restated our numbers to comply with IFRS 16 back in July and this showed '18/'19 full year net debt of GBP 997 million, plus the lease adjustment of GBP 1.4 billion, taking net debt on the new basis to GBP 2.4 billion and net debt-to-EBITDA of 2.4x.

On a pre-IFRS 16 basis, net debt for the half was down GBP 22 million from year-end to GBP 975 million, GBP 2.4 billion on a post-IFRS 16 basis, which is 2.3x EBITDA down 0.1x from year-end and in line with the year ago. Going forward, we will refer only to net debt on a post-IFRS 16 basis, and we maintain our guidance that net debt will remain low.

We have a sustainable ordinary dividend policy and a capital allocation framework which we use to assess the uses of free cash flow. Once again, adhering to this capital allocation framework, the Board is proposing to return surplus capital to our shareholders by paying a fourth special dividend of 2p, in addition to the ordinary dividend of 1.93p.

So moving on to sales. Total sales were up 0.4% for the half to GBP 8.8 billion. Group like-for-like sales, excluding fuel, were up 0.2%. This is made up of a 1.1% negative contribution from retail and a 1.3% positive contribution from wholesale. We have not opened any new stores so far this year and have now annualized the new stores we opened last year. So net new stores sales contribution, excluding fuel, was 0.1% in the half.

As David said, Q2 was more of a test. We, of course, don't regret last year's strong performance. We traded well in 2018 in a strong environment and it's been tougher so far in 2019. But we knew those tougher comps were coming and then we have traded through them. We've made choices around becoming more competitive and improving the shopping trip for customers. And we've been pleased so far with the customer response. Growth has remained in that modest and sustainable 2- to 3-year range that David has referred to.

For wholesale, as we expected, growth slowed in the second quarter, primarily because we annualized the rollout of McColl's last year. And as McColl's have announced, it closed over 40 stores during the first half, which impacted our wholesale sales growth slightly.

For the half, exceptional items are a net positive GBP 4 million broken out on the slide. Within this, there was a GBP 10 million net pension interest income as a function of the pension surplus and GBP 6 million of other exceptional costs, mostly relating to Fix. Before these exceptional items, operating profit was GBP 252 million, up GBP 6 million. And margin was 2.9%, 6 basis points higher year-on-year.

EBITDA margin before exceptionals was 5.8%, up 20 basis points. And profit before exceptionals was up 5.3% to GBP 198 million. We're now in the fourth year of our target to deliver GBP 75 million to GBP 125 million of incremental profit from wholesale, services, interest and online.

For the half, the net incremental profit from these areas was a further GBP 7 million, bringing the total so far to GBP 61 million. And for clarity, the interest element of this incremental profit target excludes any impact from IFRS 16. And we remain confident in delivering our medium-term GBP 75 million to GBP 125 million target.

Our balance sheet continues to be the foundation of the turnaround. The balance sheet has got stronger. Our property estate is predominantly freehold. On pensions, the pension has moved from a deficit to a surplus of GBP 751 million. And in prior periods, we have completed 2 buy-ins.

CapEx is halved from a peak of over GBP 1 billion and has more recently been consistently around GBP 500 million. On returns, lease-adjusted returns are rebuilding. And on debt, debt is low. And on a pre-IFRS 16 basis, it has reduced from its peak by over GBP 1.8 billion. And on financing, the maturity profile of our facilities is strong. In the period, we extended the term of our revolving credit facility by 1 year to 2024, and the residual of the eurobond falls due in June 2020.

In the context of the balance sheet, free cash flow is significant, sustainable and visible. Underlying free cash flow is up GBP 30 million year-on-year in the half, and that's cash flow before capital returns, before disposal proceeds, before operating working capital improvement, before onerous payments and also now excluding noncash movements, most of which relate to IFRS 16.

Looking back over the last 5.5 years, we've delivered on our cash improvement programs and generated just over GBP 3.1 billion of cash and with today's announcement, have paid and declared over 59p per share in dividends since '14, '15, which will be cash of GBP 1.4 billion.

In the first half, there was a strong working capital inflow of GBP 81 million. Stock was GBP 130 million better than year-end and GBP 63 million better year-on-year, with some seasonal and timing benefits at both the start and end of the period plus some underlying operational benefits contributing to the improvement. While we would expect the usual working capital outflow in the second half, we expect the first half operational improvements to be sustainable.

The usual elements of guidance are on the slide. Most of the items remain unchanged since the prelims, but there are a few lines that I wanted to pull out. We recently announced a proposed closure of 4 stores in the second half of this year, so net new space sales contribution guidance will now be flat for the full year.

Following the adoption of IFRS 16, depreciation for the year will be in the range of GBP 530 million to GBP 540 million, and interest will be in the range of GBP 105 million to GBP 110 million. And for both lines, the guidance is as it was, the only adjustment being the impact of IFRS 16.

So in summary, quarter 2 was a challenging quarter for the economy, the sector and with customers continuing to feel uncertain. In the half, we have generated both profit growth and strong free cash flow.

Looking forward, we have a meaningful growth opportunity. We are rebuilding profitability and returns on capital. We are a business that generates significant and sustainable levels of free cash flow. The principles and convictions we have regarding capital discipline cash and costs have served the company and its stakeholders well and remained unchanged.

We remain confident in our plan, building a broader and stronger Morrisons, confident that we can and will deliver strong total shareholder returns that are meaningful and sustainable.

And thank you. Now let's move to Q&A.

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Questions and Answers

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Andrew Kasoulis, Wm Morrison Supermarkets PLC - IR Director [1]

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Bruno?

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Bruno Monteyne, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [2]

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Bruno Monteyne from Bernstein. My first question is you've referred several times to the improved competitiveness. Now when I look at some of the other market data out there, it doesn't look like you're inflating below the market but you keep saying that. So could you be specific and say what market food price inflation you've seen and how you compare to that? Could you share those numbers with us?

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Trevor Strain, Wm Morrison Supermarkets PLC - Group Chief Finance & Commercial Officer and Executive Director [3]

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Well, if we look at the market data for the last 12 weeks of quarter 2 and the 12 weeks of quarter 1, our Fisher inflation, which you'll know we measure quite carefully, is below that.

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Bruno Monteyne, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [4]

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The second one is that you talked a few times about like-for-likes improving in the second half. Would it be right to say that you're expecting to be back into positive like-for-like territory? And the second part to that is, you're going to stop quoting the contribution of online or Dordon to your like-for-like, but now you're including Amazon into your retail like-for-like. Will you be disclosing the contribution of Amazon to your like-for-like contribution given that you're stopping to disclose the Dordon one?

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Trevor Strain, Wm Morrison Supermarkets PLC - Group Chief Finance & Commercial Officer and Executive Director [5]

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Well, a few bits in that. As you know, we don't guide on like-for-like. What I would say is Q2 last year was the best like-for-like performance the company had delivered for 9 years. I think the group like-for-like was over 6%. As we approached autumn, we'll annualize the comps, in terms of the weather, the royal wedding and the World Cup were obviously in Q2. And so that's one factor.

Secondly, I think we'll be doing our best work with regard to the trade plan and the shopping trip in this very important trading period, and we're looking forward to it. In terms of the online contribution, simply, Bruno, Dordon's full and we're not in Erith. So that's the logic behind that. And then in terms of Amazon, just specifically, we are a wholesaler to Amazon.

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Bruno Monteyne, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [6]

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Anymore in the [future, right]?

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Trevor Strain, Wm Morrison Supermarkets PLC - Group Chief Finance & Commercial Officer and Executive Director [7]

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Hold on let me get to the second sentence first. The -- and we'll continue to wholesale to Amazon into a number of channels. But we're -- with Morrisons on Prime Now, we become the seller of record. We won't be the wholesaler anymore. We'll be picking the products in our stores, like we do in dot.com, and the customer will be buying the product from Morrisons in Q4. And in that specific channel of supply to Morrisons, that's the equivalent of retail like-for-like. So we'll be reporting that in retail.

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Bruno Monteyne, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [8]

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But will you highlight the contribution of that like you used to do to Dordon before it was sold?

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Trevor Strain, Wm Morrison Supermarkets PLC - Group Chief Finance & Commercial Officer and Executive Director [9]

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Probably not.

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Bruno Monteyne, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [10]

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Okay. Last one. You still have a lot of white space on the map for your store-based picking solution. Is there any reason why you wouldn't want to cover more of your stores with the store-based picking solution of Ocado? It seems like you're quite gradual rather than offering it in many new stores around the U.K.

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [11]

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Yes. It's building up that number. I think we'll be like 28 by the year-end or something like that. So the store-pick through, if you like, Ocado technology, Morrisons process.

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Bruno Monteyne, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [12]

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And will your ambition to be to cover all the stores where you don't have the Ocado centralized solution?

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [13]

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Well, we're on the lookout for profitable growth. We need to be able to see the [sten] mileage, the basket size, the usual list, frankly. But yes, we -- I think we're up towards 80% of the U.K. by the end of this year. It's very possible that the Morrisons store at Amazon, now called store pick, essentially both brands working together, their wheels, their platform, our assets, our brand, our product, that that can operate at a sort of slightly lower basket size. It's a slightly more immediate delivery in many cases.

We're going to be up at, I think, 23 stores for that by the end of the year. And then the store-pick with sort of Morrisons/Ocado is a much bigger basket anyway. And that essentially is a bit more complementary to Dordon/Erith.

So I feel with that roll of the dice, I think we've made sort of sensible use of the assets. We're going to be making good progress. And then as consumers change their requirements of how they consume food, at what notice, we have to be mindful of that. And I genuinely feel the refreshed contract with Ocado, post Andover/Erith, allows us to work with more than sort of one digital partner now, and that's an area that we would continue to look at.

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Robert Joyce, Goldman Sachs Group Inc., Research Division - Equity Analyst [14]

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Rob Joyce, Goldman Sachs. So just looking at the cost savings, which I think you referenced in the prelims. If we look at the annual report, over the last sort of 3, 4 years, the cost savings number you've said you achieved has fallen by over GBP 100 million, I think, a year. But against this backdrop, you're still investing in price, you say, and expanding margins.

So 3 questions on the back of that, really. Firstly, has that cost savings number now bottomed out and you can potentially re-accelerate or at least keep it flat from here? Second one is can you just say whether year-over-year you've actually accelerated your price investments versus the market? And thirdly, is wholesale now in profit?

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Trevor Strain, Wm Morrison Supermarkets PLC - Group Chief Finance & Commercial Officer and Executive Director [15]

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I'm just going to write all of them down. Well, I think first thing, just a technical point. I think the cost savings you're referring to are the ones disclosed in the REM report, which is obviously a subset of the cost base of the whole company, and I think that's important. And if I just compare 2 metrics, the cost of goods that we sell is obviously many multiples of the cost to serve. When I think about cost savings, we think about all of the costs in the business. And so it's in that context, we don't think we're -- that we think the productivity opportunity is still very significant and ahead of us right across the business.

Have we accelerated our price investment? Yes, we have. Have we accelerated it vis-à-vis the market? I can't really comment on what others have or haven't invested. And I think the nub of that question, I think, how have you sort of grown EBITDA margins 20 bps and invested in price? I think the sort of rub there is, well, that is the job. And we're confident that we can continue to invest in the price list and achieve that improvement in competitiveness, improve the offer for customers and grow the margin. Margins and output rather than -- we've discussed that many times. But that is what we're trying to do.

Whilst also -- sorry, if I look at the EBITDA progression, I think it's 20 bps in the half. And in the preceding 3 years -- whilst you can't add it all up like this because of IFRS 16, in the preceding 3 years it's 70 bps. And as I look more into the cost of goods sold opportunities and how we can sell more and do that more profitably, I think that's going to be an important opportunity for us as we go forward.

Wholesale, it's loss-making today as we roll through those start-up costs and we'll be looking forward to -- it's in its early days. We're a start-up wholesaler and we're looking forward to that business contributing to the GBP 75 million to GBP 125 million and growing in profitability.

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Andrew Kasoulis, Wm Morrison Supermarkets PLC - IR Director [16]

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In the front row.

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Andrew Philip Gwynn, Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail [17]

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It's Andrew Gwynn from Exane. Following up a little bit on that. I guess the like-for-like performance in Q2, obviously, quite soft. I mean you did show the customer satisfaction data. To what extent is the business now managed a little bit more away from like-for-like and maybe thinking more about customer satisfaction, perhaps not chasing that dodgy last sale, if you will? Maybe in that context, just comment on the market. And obviously, in the market, we did see some -- I think you called it tactical promotions over Q2. As we got into Q3, it feels like they've died away. But I'm just wondering how you see the market at the moment.

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [18]

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I think it's obviously very competitive. It's the nature of the market. It's why it's a good market really in the end. And I guess going towards the autumn and Christmas, traditionally that doesn't kind of recede. I'm not expecting it to. I think Morrisons can be right there with that. I think we've got a good trade plan in quarter 2 led by Trevor and a big effort around our plans for Christmas. So yes, I think on the count-up there was quite a lot of activity over that period you describe.

I think on our sales line, like-for-like is just so important. It's -- in the end, it is the heartbeat of the business. So on a 2- and 3-year basis, we have to be pleased with that sort of modest and sustainable like-for-like picture. Now that's actually quite important we look at it like that, in order we don't spend what resources we've got, compensating for that record sort of 9 years -- best we've had for 9 or 10 years in the prior year. So yes, I'm looking forward to it, but I'm not planning for it to become less competitive.

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Andrew Philip Gwynn, Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail [19]

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And a quick follow-up. Just on consensus. I mean no Q&A is complete without it. But where is consensus in your view? And I think it's obviously being compiled, so are you happy with that? Obviously, subject to whatever may or may not happen with Brexit.

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Trevor Strain, Wm Morrison Supermarkets PLC - Group Chief Finance & Commercial Officer and Executive Director [20]

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Consensus, underlying PBT is GBP 415 million. There's still a few analysts that actually haven't gotten around to updating the -- for IFRS 16, who haven't got up-to-date models who are in there. I don't know if you're in that group or not actually, Andrew.

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Andrew Philip Gwynn, Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail [21]

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Guilty.

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Trevor Strain, Wm Morrison Supermarkets PLC - Group Chief Finance & Commercial Officer and Executive Director [22]

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I knew that, give you that label. So yes.

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Andrew Philip Gwynn, Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail [23]

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Are you happy?

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Trevor Strain, Wm Morrison Supermarkets PLC - Group Chief Finance & Commercial Officer and Executive Director [24]

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Well, it is what it is.

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Andrew Kasoulis, Wm Morrison Supermarkets PLC - IR Director [25]

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Can you pass it in the back?

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Nick Coulter, Citigroup Inc, Research Division - Director [26]

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Nick Coulter from Citi. 3 or 4, if I can. Firstly Trevor, you alluded to kind of a COGS opportunity. Could you give a little bit more color on that? And are we right in assuming that the 20 basis points EBITDA margin improvement was essentially gross margin-led on that basis? Secondly on inventory and working capital, is it possible to give us a sense of how much of that should stick for the full year, Brexit notwithstanding?

Thirdly on the Fresh Look remodels, is it possible to get a sense of how many you've done, how many are to go and how they're proceeding with regards to return and sales uplift? And then lastly on wholesale profitability, how quickly should we expect those start-up costs to fall away?

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Trevor Strain, Wm Morrison Supermarkets PLC - Group Chief Finance & Commercial Officer and Executive Director [27]

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Why don't I pick up all of them, and then David may comment in the end on Fresh Look maybe. Well, wholesale profit, we'll let you know how we get on. I think in terms of the overarching economics, at McColl's we've got those. We've put in -- we accelerated putting in a distribution network for the whole estate of McColl's, and we'll start supplying the bigger 300 stores hopefully towards the end of the year. And so that's quite a big variable in the overarching economics just on the distribution fixed costs and the absorption of those, I think, in that contract. So I'm hoping we'll make progress on that as we go through the next 12 months on that.

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Nick Coulter, Citigroup Inc, Research Division - Director [28]

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So is it right that, after 2 years, that should move through to where you expect it to be?

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Trevor Strain, Wm Morrison Supermarkets PLC - Group Chief Finance & Commercial Officer and Executive Director [29]

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Well, I think it's going to be more driven by that rollout rather than the calendar. Yes. In terms of working capital, there's actually a couple of quite chunky headwinds in the half which we sort of took on the chin, so to speak, specifically around -- if you have a week 53 last year, it's sort of the gift that keeps on giving. And we end up with an extra payroll in the first half and an extra [PA way] payment in the first half, which just means you've got a smaller creditor at the half. So actually the underlying working capital performance, I think, is very strong.

On stock specifically, sort of 3 building blocks really. You always have a slightly lower level as you exit the end of the first half. In the end, August is a smaller month per Christmas, et cetera, and so that will unwind. I think when we were here in March, I talked about us having experienced a bit of a tick-up in the run-up to year-end last year, a little bit because of a Brexit contingency but more because Easter was really a lot further forward in the half.

So those 2 things -- the first one will fall away, the half year thing will repeat every year. And therefore, I think if you look at the sort of year-on-year number, it's somewhere between the 60-odd million improvement, year-on-year, and a third, which is the underlying operational improvement.

And then in terms of COGS, I think the business has made really strong progress on this over the last 3 or 4 years, really simplifying the margin structure with the leadership of the whole team across commercial. I wouldn't want you to think either that I'm underpinning 20 bps of EBITDA progression every year, I'm just highlighting it. And I wouldn't want you to think either that it was GCM led. We've made a significant amount of price investment in the half and I think that well-trodden path of buy better and sell more is the sort of circle we're trying to get at.

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Nick Coulter, Citigroup Inc, Research Division - Director [30]

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But you obviously feel there's a lot more to go for within that context? Are there any specific examples that you could pull out which aren't commercially sensitive?

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Trevor Strain, Wm Morrison Supermarkets PLC - Group Chief Finance & Commercial Officer and Executive Director [31]

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Good question. Well, I think all the elements of cost and I don't -- and by all elements I mean right away back through the supply chain. How we order, how we flow, how we take inbound space, huge opportunity. And the manufacturing business, a lot of the examples David talked to about price have come through our manufacturing business.

If you acquire an eggs business, you cut the price, you drive in the volume, you're securing the supply base. If you do the same on carrots, if you do the same in a fish business for Grimsby and you're driving a much improved overhead absorption and really getting at it within the mix, actually the operational gearing from the manufacturing business, and it will be all those things along with the most important one which will be growth. Hopefully, that gives you a bit of color.

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [32]

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Just on Fresh Look, I think it's an important program, Nick. And we're probably, I don't know, 60% through the estate by the end of this financial. That's quite a lot of stores. There's quite a lot still to do. Remember, when we kicked off, we said we'd have that sort of whole store Fresh Look, where we've managed to contain the disruption as a refit. And then the tick-up in sales afterwards, we're very happy with that in our returns. That continues -- at least continues, actually.

But a complementary program, which I believe is as important as the whole store Fresh Look, is kind of what we christened modular Fresh Look, where if we had a good idea that customers quite like, Nutmeg clothing, we would find a way of getting that dropped into the lion's share of the estate within a financial year. And so produce, café and Nutmeg clothing would be very good examples of that. They're very important, these programs, for our own colleagues because it refreshes Fresh Looks and brings out the best in facilities and staff rooms and all of these other things, which are really important.

And then during this year, we've looked at 1 or 2 stores where we can rebalance space to be a bit more demanding of counter cans and packets, allowing Home & Leisure clothing to breathe a bit more, health and beauty, some of these areas of growth, Free From, vegan, these things. And so looking ahead, we'll see if we can create a program where our rebranding efforts can be brought to life perhaps quicker, more cost-effectively than a whole store Fresh Look by leveraging the sort of recycling of space through this program with modular Fresh Look as well.

And so that -- as we often say in the industry, these programs can be a bit like the Forth Road Bridge. But in our case, the estate, I think, was touch under-invested. And when one of these lands in a catchment, I know it really does quite nicely so we're quite positive on Fresh Look. Lake, which I think we may have shown a picture of, was a small extension within that program. And that's a much, much better store for colleagues and customers now. Yes.

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Nick Coulter, Citigroup Inc, Research Division - Director [33]

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That last bit of example, is like quite a large extension obviously. From a visual perspective, it's almost transformational. Is that atypical of what you've done or...

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [34]

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No, that's an extension, and Fresh Look is really essentially a refit program. Yes.

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Andrew Ian Porteous, HSBC, Research Division - Analyst, European Retail [35]

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It's Andrew Porteous from HSBC. A few questions here. Firstly, on the wholesale side of the business. I mean you're at 10 contracts now. It seems from the commentary in the report that those seem to be progressing well and expanding where you do have agreements. Are you happy with where you are on that? Is there more to come and sort of what sort of capacity have you got to handle incremental contracts on the wholesale side of the business?

And then really one on vertical integration as well. You've added new categories to your vertical supply chain over recent years. Are there other opportunities there? I mean there's a lot of restructuring going on, obviously, in the U.K. supply chain. Are there any categories that are particularly sensitive to Brexit that you might look to add to that supply chain going forward?

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [36]

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Well, thank you, Andrew. I think I am happy, we are happy with each of the contracts. First of all, we're learning to be a good wholesaler, that's probably the most important thing. We are a start-up wholesaler despite the company being around since 1899. So that allows us to be a bit edgier in that channel.

If we become a really good wholesaler, I think it will benefit the core supermarket business on things like availability, service, trade planning, working with other people within the industry. These are really quite important. I think we're up to 84 Morrisons Daily stores across the breadth of our wholesale partners, and that's really quite important as the brand becomes popular and accessible. Then I see Morrisons Daily, Morrisons Select as one of the routes to that goal. But in our case, it will be capital-light and accretive to ROCE because, in the end, it's going to be volume going through the business.

In terms of volume, I think manufacturing, we've often said we can apply shifts. We can do 7 days, these other things. So I'm confident enough we can continue to build our book of wholesale well served by our manufacturing arm. Trevor gave a great example of eggs, where for a relatively small CapEx we're really starting to control our egg supply chain. And of course, our wholesale customers will benefit from our speed to free range and our speed to competitiveness in our egg business in the market.

There may be opportunities to be broader as a wholesaler. I don't think we want to chase everything. We're not really an artisan manufacturer. We are quite an on-scale manufacturer. It's quite -- you have to make those choices a little bit. But yes, we keep our ear to the ground. We think about how the business might expand its credentials as a food maker. 2/3 of what we sell is British, I think that can go up. And yes, it's an important part of the business. Yes. Thank you.

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James Robert Anstead, Barclays Bank PLC, Research Division - Director [37]

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It's James Anstead from Barclays. Two topics. Firstly, obviously a sensitive topic, but you're proposing closing these 4 stores by the end of the year. In some ways, that seems odd given profitably is obviously improving. So I don't know if you can talk about the particular issues around those 4 stores. And associated with that, you've talked about that -- trimming the new store contribution by 10 bps this year, but presumably on a full year basis that would be quite a bit bigger.

I suppose a similar sort of topic, there's been a bit of chatter in the market about property support and freehold values. But it's been 4, 5 years, I think, since you've given us a number for your freehold property value. I don't know if you'd be prepared to give us what that number is today. And if not, does GBP 8 billion to GBP 9 billion sound the right sort of range?

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Trevor Strain, Wm Morrison Supermarkets PLC - Group Chief Finance & Commercial Officer and Executive Director [38]

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On the closures, we said back in 2015, we didn't have a program of closures but that we had instituted a process where we were continually reviewing the estate, which is what we do. Those we've worked quite hard, as we have on all of the estate-referenced previous comments about Fresh Look, to strive to get those stores to profitability, and we haven't managed to do that and we're currently consulting on whether we close them or not. Two of those stores are leaseholds and so we'll have to see how that consultation proceeds.

In terms of the net new stores impact, we've annualized out the impact in the half of the openings from last year. And so in half 2, you've got the stores opening this year and they'll annualize into next. Then you've got the closures should they proceed, closing this year, and they'll obviously continue into next year as an impact and that'll probably offset, and we'll guide on next year when we'll get to it.

Property valuation. Well, you're right. We haven't disclosed it since '14. I think since then, we have actioned quite a significant, very material impairment and the company hasn't disclosed it for a number of years.

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Andrew Philip Gwynn, Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail [39]

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It's Andrew Gwynn again, sorry, but no one has asked about Brexit. I mean, we'll see, as we head into the second half, presumably some contingency planning, maybe a little bit more inventory. But any thoughts? I guess it's just tons of unknowns and not many knowns, but anyway.

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [40]

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Thank you. Well, we of course plan for all eventualities to the extent that we can. The idea that we -- 2/3 of what we sell is British, the second biggest producer of British food in the world is, I think, germane to this position. We achieved authorized economic operator status, which should speed goods out of Mainland Europe into Britain, simplifies paperwork. We achieved that, I think, about -- we started that application about a year ago and we've got that status now.

I don't say it's a game-changer, but it's kind of the reverse speedy boarding if you sort of get what I mean. And then we are working with our hauliers and our suppliers and ourselves at least, to see if there are other ports that we can use, not just sort of Calais, into Dover or into Folkestone. And yes, where we need to, we would bring forward some purchasing the way we did in March, actually I think that's burned off. But we would do that again to the extent that it's sensible to do so at that time.

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Andrew Kasoulis, Wm Morrison Supermarkets PLC - IR Director [41]

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I think if there's no further questions, we'll draw that to a close then. It's 10:23. A couple of things I just wanted to say. First of all, you are probably all stunned to hear that after about 72 years on the beat, Dave McCarthy is moving on. And no one more shocked than I to see he's here today, hiding behind the pillar over there. So we've got investment bankers in the room. So, it's nice to see you, Dave.

And a special thank you, actually, to someone -- we're blessed in our industry, in the supermarket industry, with staff who often stay for a very, very long time and serve their careers with one company, and that's a great asset and great strength of our business. And Jim Ruffell is here today who, I hope he won't be too embarrassed if I say, is retiring from Barclays soon after 40 years with Barclays. And so I just wanted to say thank you, Jim. We've known each other for many years, both in my executive career and, of course, since I've been at Morrisons. And thank you for all you've done and good luck in the years ahead.

On that point, I think we should just call it a day. Thank you very much, everybody. Thanks.