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Edited Transcript of MRW.L earnings conference call or presentation 18-Mar-20 9:00am GMT

Full Year 2020 WM Morrison Supermarkets PLC Earnings Call

London Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of WM Morrison Supermarkets PLC earnings conference call or presentation Wednesday, March 18, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Thomas Higginson

Wm Morrison Supermarkets PLC - Independent Chairman

* David T. Potts

Wm Morrison Supermarkets PLC - Chief Executive & Executive Director

* Michael Gleeson

Wm Morrison Supermarkets PLC - Executive Director & CFO

* Trevor Strain

Wm Morrison Supermarkets PLC - COO & 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

* Clive W. Black

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

* Maria-Laura R Adurno

Morgan Stanley, Research Division - Equity Analyst

* Nick Coulter

Citigroup Inc, Research Division - Director

* Robert Joyce

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Victoria Petrova

Crédit Suisse AG, Research Division - Research Analyst

* Xavier Le Mené

BofA Merrill Lynch, Research Division - Head of European Food Retail Equity Research and Director

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Presentation

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [1]

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Andy, go.

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Andrew Thomas Higginson, Wm Morrison Supermarkets PLC - Independent Chairman [2]

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Well, good morning, everybody. I'm here with David Potts, Trevor Strain and Michael Gleeson and the Morrisons team.

I just want to say a few opening remarks, if that's okay, to say thank you to David, Trevor and Michael and the entire Morrisons team for the work that's going on in what are, by any definition, extraordinary times. I think the team have tried throughout to try and do the right thing by suppliers, customers, all our stakeholders, and in very difficult circumstances, I think they're doing an exceptional job. I'd like to pay particular thanks to the hard-working teams in our stores. The safety and health of our staff is obviously foremost to us because we know that they're the ones who are serving the customers. But whilst you and we are able to dial in and work from home, our teams are out there every day serving customers in stores. Those customers are sometimes frenzied and anxious, not always polite or as thankful as they might be in other circumstances, and I think our teams are doing a really fantastic job in very difficult circumstances. So my thanks go to them.

And I now hand over to David to start the presentation around the year-end results. Thanks.

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [3]

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Thank you, Chairman, and good morning to everyone from me, and thank you very much for joining our call today. We're also joined by Andrew Clappen, the Head of our Business Continuity team in command of our corona response.

This is a results call, and in a moment, we'll give you a business update, which will be slightly shorter than usual. But this is a time of unprecedented challenge for the country with the COVID-19 pandemic, in some way, affecting almost everyone in the U.K. So I will take a few moments to outline what we're doing to steer the company through this important period. Food supply and confidence in food supply is one of the key stabilizing elements of a public health crisis, and we're determined to play our full part in feeding the nation during this very difficult time. I also want to take you through what we're doing to help customers and how we're looking after our colleagues and supporting our suppliers. We will be there for all stakeholders, and we will go the extra mile for as long as it takes.

So let's start with colleagues. At our heart, we're a British family business. I believe the well-being and protection of our 96,637 colleagues is paramount. Those who are sick with coronavirus will receive sick pay, whether or not they would normally be eligible. Colleagues who are affected either because of self isolation or by playing their part in looking after close family members or the vulnerable in their local community will also be eligible for sick pay, alternative shifts or holiday. So Morrisons will be there for our colleagues during this period because they've always been there for Morrisons. We've also set up a colleague hardship fund for those finding themselves in temporary need. And we're looking at other ways of protecting colleagues. For example, we've increased cleaning processes in store, and we've just employed 83 fitting teams to install protective screens at every single checkout. And our colleagues have been exceptional in their flexibility, in their professionalism and in their resourcefulness and cheerfulness under this unrelenting and continuing pressure, and I want to take this opportunity to recognize and thank them for their resilience and for their commitment to the customers they serve and to their fellow colleagues.

Turning to customers. Customers are clearly worried, and that has translated in the past 2 weeks into some very exceptional buying patterns. Our response is threefold. First, we put the whole business on a crisis footing. This industry and its supply chain can deal with very large surges in demand. We do that several times a year. The muscle memory is good, the reflexes are there. And for Morrisons, we're also Britain's biggest single food maker, and so many of the key decisions in meat, vegetables bakery and fish are, in fact, in our own hands. We know what to do, but there's no question this time is different. We haven't had the time to plan for it nor do we know when it will end.

As I said earlier, it is relentless, and demand is still rising. So our colleagues are working very hard through the supply chain to get stock onto our shelves, to elevate hygiene standards further and to serve our customers as well as we possibly can. And if we can do that, then I'm sure that the public will treat our colleagues with the respect they deserve and have earned. I would also add, our customers have been magnificent. The news bulletins might be full of the great British toilet paper war, but in reality, we are seeing the very best of Britain in our stores. Young people shopping for their elderly neighbors, increased donations to charities and the homeless, caring for the isolated, a community spirit, making sure no one in their area gets left behind or overlooked. We might not see it, but it's happening everywhere.

Second, we're communicating hard with our customers. Alongside every other grocery retailer, we're reminding customers that we need to shop responsibly, work together, look after each other. If we just buy what we need, then there will be enough, enough of what counts, enough for everybody.

And thirdly, we're asking ourselves, who do we need to be there for, who needs us most in this crisis? The elderly, the infirm, carers, those self-isolating, the homeless and so on, knowing who they are, reaching out to them and figuring out ways we can help. One example of this is morrisons.com. We started the process by which a number of new home delivery options are available nationwide to ensure that as many people as possible will have easier access to food over the coming months. From the 23rd of March, we'll have a new range of simple-to-order food parcels, including options for vegetarians. And we're making more delivery slots available to customers, both through morrisons.com and the Morrisons store on Amazon Prime Now. And in the coming weeks, Morrisons will use an extra 100 stores to pick customers' shopping. We're also launching a customer called Center for orders to be taken over the phone so that citizens who do not shop online can still order food.

In light of advice from Public Health England, Morrisons wants to give vulnerable people an opportunity for them to shop more easily should they wish to. Morrisons will introduce an hour between 9 and 10 every day where vulnerable customers, such as the elderly, will be given more help in the store, and they will go home with a hot cuppa on Morrisons. The shop will still be open, of course, as normal for everyone. And we're encouraging all our stores to think locally who in their area might need some extra help during this period and how can local colleagues help local people. We're supporting suppliers, too. They're a big part of any solution as we move to a crisis footing. Last week, we moved small suppliers to immediate payment terms to support their cash flow. And we've reclassified a small supplier from a business doing GBP 100,000 of turnover with Morrisons to GBP 1 million, which will mean that thousands more suppliers will benefit from immediate payment.

Steering the business well through the crisis, getting on the front foot, doing our best work, building our resilience, becoming central to the communities we serve will, in the end, benefit all stakeholders as new Morrisons continues to take shape. This is clearly a rapidly developing situation, and there'll be more challenges and difficulties ahead for everybody as we fight this virus together.

So to recap, I'm confident in our team, in our resilience and in our plans both for today and for the likely next stages. We're putting the assets of the company at the disposal of the country. Morrisons is facing squarely into the crisis, and we will play our full part in feeding the nation during this important period.

So now turning to the results. Last year was another year of growth in profit, free cash flow and ordinary dividends, showing that our improving performance now entering its fifth year is consistent and sustainable. Sustain is part of the fix, rebuild and grow strategy. It's aimed at maintaining business momentum. And it's part of our broader societal and the environmental responsibility is even more important, given the current situation. So you'll hear us talk about fix, rebuild, grow and sustain from now on.

We continue to make good progress in becoming a product business, developing our brands, Morrisons Makes It, Naturally Wonky and Best, all going from strength to strength with Free From and our vegan V Taste range growing by 56% and 117%, respectively. We're also adding new products from our unique fresh food businesses, food we make ourselves and brands we own. And in Nutmeg -- and in nonfood, Nutmeg clothing is growing rapidly as, too, is our Home & Leisure range.

And there's a lot to be proud of, especially the colleagues and talent coming through the business, building new Morrisons. As well as Michael and Trevor in their new roles, we've made some key appointments to the Executive Committee with Andy Atkinson taking over commercial and David Lepley in retail. Across Morrisons, there's a new generation coming through the ranks in the shops, the offices, manufacturing and depots. I'm now delighted with our bench strength as colleagues develop, step up and show what they can do, which bodes very well indeed for the future of the company.

But first, a reminder of what last year didn't go quite so well. Like-for-like sales were negative for the year. And as I said after Christmas, we've taken learnings and opportunities forward into this new year with important work already underway, for example, in price and service. And whatever the current situation throws at us, these will continue to be at the heart of Morrisons.

Morrisons, above all, is a great value brand. We've done good groundwork with the Morrisons price list, involving hundreds of products, including those from our own food manufacturing businesses. We did some of this important work last year, especially in half 1, cutting prices across our customers' favorites, backed by a strong all-round marketing plan, communicating Morrisons' great value and good quality. We're introducing authentic brands from our fresh food businesses: Woodhead in meat; International Seafoods from Grimsby, GREENSIDE DELI; Stephenson's Bakery in bread cake and morning goods; Chippindale eggs. All these brands are owned by us, all joining our popular entry price point brands, such as Naturally Wonky in fruit and veg, Savers in grocery and essentials in Home & Leisure.

We recently announced the recruitment of 7,000 new colleagues to serve customers better on the shop floor and on our Market Street counters. Net of 3,000 in-store management roles that we're removing, we've created around 4,000 new jobs. And for shrink, we've got a better handle on this. Just recently, more colleagues on the shop floor, plus some IT technology and security initiatives mean our teams can now focus on selling more as well as the controlling of stock.

Meanwhile, in local, the numbers again show we continue to make very good progress. We've now sourced well over 1,000 new local items from more than 200 local suppliers at 37 local food maker events held across Britain during the last 3 years. But aside from the numbers, for Morrisons, local has a wider societal and strategic importance. We intend that Morrisons becomes a locally integrated business so we become an integral part of the communities we serve, helping them thrive in a sustainable way. Local is symbiotic with the sustained component of our strategy, supporting local suppliers, businesses and jobs, volunteering being there where most needed by the very communities we serve, all stakeholders valuing Morrisons in its place in their community.

During the past year, we completed another 44 Fresh Look store improvements, bringing the total to almost 350 since the start of the program. These refits continue to drive our modular rollout of new learnings and innovation across the estate. Innovation is also coming from our new stores. Four new stores opened during the year, including Canning Town, which is our first store with a Market Kitchen food-to-go offer and Bolsover, which at just 15,000 square feet, is our first smaller community store.

And today, I'm introducing our new seventh priority, naturally digital. By that, I mean digital solutions, so we better organize colleagues and processes so we keep improving the shopping trip whilst continuing to simplify all aspects of Morrisons, making those increasingly relevant and cost-effective. As we progress across many fronts, digitizing all aspects of our business is increasingly important. We recently set up a small team to identify opportunities and act at pace to create value for all stakeholders by building digital solutions. Most often, this will involve working with existing teams and infrastructure to improve or accelerate what we have rather than reinvest or invest significant new capital. We'll talk to you more about some of the specific initiatives in due course.

And last, but not least, a word on wholesale and online. We're pleased to have grown sales with all our major wholesale partners during the year. At the interims, we announced a new multiyear partnership with Amazon to explore new opportunities to serve more and more customers together. In addition, the Morrisons store on Amazon Prime Now, the ultrafast, same-day, online grocery home delivery service is now available for customers in 8 cities with Liverpool, Glasgow, Newcastle and Sheffield all recently added. Sales in the first 10 McColl's to Morrisons Daily conversions have been strong and customer feedback positive. And since the year-end, we've converted another 20 to further test the format, meaning there are now 30x McColl's Morrisons daily stores on the high street and in housing developments. And McColl's remaining 240-plus ex Co-op stores will transition to the Morrisons wholesale supply during 2020.

Morrisons.com sales again grew strongly as well as the Dordon CFC. We now store pick our customer online orders from almost 40 Morrison supermarkets and have extended our coverage area to cover 90% of British households. We've also started a click-and-collect trial for customers in 6 stores. And as I said earlier, we're working to significantly increase the number of home delivery slots available.

So to sum up, as I said, last year wasn't our best for sales, but momentum in like-for-like has been improving since the turn of the year and before the scale of the current stocking-up period. In other words, we were on the right track with a great team even before the sales impact of the coronavirus. There will be challenges ahead for everybody. There will be loads to do together as we fight off this virus and its effects. We at Morrisons are food makers and shopkeepers. So we're well placed to fight, well placed to do our bit, and we promise to do everything we can.

Thank you. And now, Michael, over to you.

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Michael Gleeson, Wm Morrison Supermarkets PLC - Executive Director & CFO [4]

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Thanks, David, and good morning, everyone. I'm pleased to be joining the call today for my first results. I have met many of you already, and I'm looking forward to getting to know all of you over the coming months, hopefully, in less difficult times for the country. As David said, I'm going to keep it to the key points.

But let me say it straight upfront that Morrisons continues to operate from a very robust financial position. We have a strong balance sheet with low debt and a strong maturity profile. Cash flow and liquidity are very strong. Morrisons is a highly cash-generative business. EBITDA before exceptionals for the year was GBP 1,039 million, and gross cash flow after interest and tax, GBP 849 million. As at the end of '19/'20, we had cash and cash equivalents of GBP 305 million and access to undrawn RCFs of GBP 1.45 billion. Our store portfolio is 87% freehold, and our pensions are in surplus.

So now on to the numbers. Total revenue, excluding fuel, was down 0.8% for the year. Profit before tax, exceptional items and net pension interest was GBP 408 million for the year, up GBP 12 million or 3% on last year's GBP 396 million. Return on capital employed has increased again to 7%, up 10 basis points from the 6.9% last year. Net debt, including the impact of IFRS 16, is GBP 2,458 million. The Board is proposing a final ordinary dividend of 4.84p per share, taking the total dividend to 8.77p. With sales on an improving trend, a fourth year of profit growth and strong free cash flow, we had anticipated announcing another special dividend today. On this occasion, though, we have decided it prudent to defer a decision given the unprecedented nature of the current situation around COVID-19. This allows us maximum flexibility around how we prioritize future uses of our strong free cash flow and surplus capital.

Moving to sales. Total revenue, including fuel, was down 1.1% for the year to GBP 17.5 billion. With the new store contribution for the year being flat, group like-for-like sales, excluding fuel, were also lower at minus 0.8%, including a 1.4% negative contribution from retail and a 0.6% positive contribution from wholesale for the year. We saw positive sales growth with all our wholesale customers, although recent wholesale growth was affected by the lower sales at McColl's as reported by McColl's themselves. Fuel sales were lower by 2.5% driven by a highly promotional market.

Exceptional items are a net positive GBP 27 million for the year, broken out on the slide. Property profits were GBP 66 million, most of which relates to the sale of Camden. There is a restructuring cost of GBP 51 million, primarily relating to the announcement in January that we are investing in creating more frontline jobs and reducing some team manager roles within stores. As usual, we report net pension interest outside of underlying profit. In the year, this was an income of GBP 19 million and GBP 9 million of other exceptional costs, mostly relating to fix.

Statutory profit was up 44% to GBP 435 million. Before exceptional items, operating profit was GBP 513 million, up GBP 3 million, with margin at 2.9%, 5 basis points higher year-on-year. EBITDA margin was 5.9%, up 22 points. And as I said, profit before exceptionals was up GBP 12 million to GBP 408 million.

We managed costs well throughout the year, particularly in the second half, offsetting some of the operating leverage impact of the lower sales. We continue to identify and work through some still significant cost opportunities: the productivity benefits of a recent move to create 4,000 net new roles, the ongoing cost opportunity in shrink and availability, work around COGS and closer relationships with suppliers and the role of naturally digital in helping us simplify all aspects of Morrisons. I'm confident there are these and other rich themes in the future.

We once again made progress towards our target of GBP 75 million to GBP 125 million of incremental profit from interest, online, wholesale and services, adding a further GBP 14 million in the year and bringing the total so far to GBP 68 million. With net interest now at a low level and most of our bonds at or near benchmark after the successful tender offers of recent years, we expect the majority of the remaining GBP 75 million to GBP 125 million incremental profit growth to come from online, wholesale and services. As David said, we continue to make good progress on these. Online sales are being helped by the store pick rollouts and online profitability by the delayed entry into Erith CFC. For wholesale, we expect further sales progress in 2021. The remaining 240-plus McColl's stores will convert to Morrisons wholesale supply during 2020, which we expect will more than offset the impact of any further store closures already announced by McColl's. And popular and useful services, another of our priorities, is driving growth, too.

Now turning to cash and debt. Group net debt was GBP 2,458 million compared to GBP 2,394 million at the end of '18 -- '19, up GBP 64 million, of which GBP 57 million was noncash. Free cash flow before dividend was GBP 238 million, which again includes the GBP 57 million noncash, so GBP 295 million before noncash movements. The total dividend payout was GBP 302 million.

As we guided at the interims, there was the usual working capital outflow in the second half and the first half operational improvements have been sustained. Cash CapEx was GBP 511 million, lower than guidance due to less capital projects during the second half. Onerous payments were GBP 58 million, including onerous capital of GBP 41 million and onerous leases of GBP 17 million.

Our strong balance sheet continues to be the foundation of the company. The absolute level of non-lease debt to EBITDA is around 1x. The triennial pension review was recently completed with a funding surplus of GBP 682 million, up from GBP 111 million last time. The year-end net pension accounting surplus was up again at GBP 944 million. Capital expenditure has halved since peak and is at a sustainably lower level. ROCE was again higher at 7%.

Before I run through the usual elements of guidance, you'll see for reasons explained at the release that Q1 will move out by a week and will be reported on the 12th of May.

Turning to other elements of guidance. As I'm sure you are aware, there is a change in corporation tax this coming year. All payments will now be made in the year to which they relate. We will make 6 rather than 4 tax payments in 2021, which we estimate will have a cash impact of around GBP 50 million. The other components of guidance are broken out on the slide. We are opening 5 stores this year, and net sales contribution of 0.3%. We expect depreciation to notch up again and CapEx of around GBP 525 million. Onerous capital payments will fall to less than GBP 10 million. And despite the McColl's store closures I referred to, we are on track for our target of GBP 1 billion of wholesale sales in due course.

So in summary, our balance sheet is very strong. Our capital discipline principles around low debt, pension surplus and our overwhelmingly freehold store portfolio are fundamental. And our strong track record in all of these makes us distinct. Our capital allocation framework and prudent capital discipline continues to serve the company and its stakeholders well and remains unchanged. Free cash flow generation is significant and sustainable. Over the last 6 years, we have generated over GBP 3.2 billion of free cash flow and paid or declared 64.7p per share in dividends, including 4 special dividends. We are, for the moment, giving ourselves some extra flexibility around how we prioritize the use of our strong cash flow. And as David said, we will be facing into this current crisis we are on with the price. Thank you.

So we now hand over to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Andrew Gwynn.

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Andrew Philip Gwynn, Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail [2]

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Well, first off, congratulations and all sort of good community initiatives you're doing. It's encouraging to hear.

I have 3 questions, if I can. So first is just on supply landscape. I mean what sort of time frame do you think it will be before the supply chain catches up with this sort of big exceptional step-up in demand?

The second question is you commented that demand is still rising. So I'm just wondering if you could just comment a little bit there.

And then the third question is just slightly longer term. Obviously, the pension is huge surplus now. I appreciate that's on accounting basis but also on an actuarial basis. Is there any way that you can perhaps get some of that surplus capital back into the business?

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Trevor Strain, Wm Morrison Supermarkets PLC - COO & Executive Director [3]

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Andrew, it's Trevor. I think -- if I take them in a slightly random order. I think second one first. Demand still rising kind of means yesterday's like-for-like's higher than Mondays, that's higher than Sundays, that's higher than Fridays, roughly, roughly. And week to date like-for-like's higher than last week's like-for-like, which was higher than the week before's like-for-like. And I think that hopefully gives you some color over and above the additional disclosure we've tried to give this morning around both the 6-week like-for-like and also the first 4 weeks, and that sort of covers the period in advance of -- before the real stocking up started to happen.

I think in terms of the supply chain, I think the food industry has a very sophisticated, well-invested, well-developed supply chain. And the level of demand step-up has been unprecedented, really. I think when I think about it, what do suppliers have on their mind. And I think if I'm a small supplier, I think my primary concern really is around liquidity, which is why we move to a medium payment terms really for all the small suppliers, the local suppliers and across agriculture, given the mix of our business and all of the work we've done in those areas over the last 3 or 4 years.

I think bigger suppliers are really looking to us to make it easy to work with. And what does make it easy to work with look like? I think that feels like order what they have and work very closely together to enable the shortest order lead time and the most responsive supply chain. I think it means edit the range so it's easier to fill and edit a range so that you can get full pallets full loads. And I think it's those measures that are enabling the supply chain to keep up.

In terms of the third question, which was around pensions. I think we have questions on this in the past, and Michael might want to add a bit in a moment. But I think in the past, what we've said is that -- is we are blessed as a company to have a strong balance sheet. And within that strong balance sheet, to have a very strong pension position. And that -- as a strong company, it's our responsibility to act to support the trustees and their responsibility as guardians of that pension. And I don't think we foresee any circumstances where that surplus crystallizes into capital for the company. We continue to pay our agreed payments. We don't have any additional payments as required by the pensions regulator, and I think, especially in these times, that's definitely the right outlook.

I don't know, Mike, if you've got anything to add on the pension.

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Michael Gleeson, Wm Morrison Supermarkets PLC - Executive Director & CFO [4]

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No, I think that does cover it.

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Operator [5]

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The next question comes from the line of Andrew Porteous.

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Andrew Ian Porteous, HSBC, Research Division - Analyst, European Retail [6]

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I say, well done on the results again and obviously all the initiatives you're doing to support your stakeholders. A few from me, if I may. Appreciate -- there's obviously a lot of uncertainty around at the moment. But just trying to get a handle on how you're thinking about working capital movement in the year ahead, given what you're doing around payment terms, just to help us sort of think about how that impacts things.

And second one related to sort of COVID. In terms of -- have you seen any issues around movement of goods across borders from Europe in the non-listed? So obviously, we import quite a lot of what we eat here in the U.K.

And then a last one, really, on the underlying business. You talked about an improving trend to like-for-likes. You've clearly been doing a lot of work around your own pricing. Where is that sort of self-inflicted deflation number at in terms of your top line? And what areas do you think you're doing particularly well on that's really driven that improvement in the underlying trend recently?

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Trevor Strain, Wm Morrison Supermarkets PLC - COO & Executive Director [7]

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Andrew, it's Trevor. I think in terms of borders, it -- I think the most important point is it is hard to predict the future. But there's a bit of color. David and I were chatting to the chief executive of one of our big suppliers in Italy on a Monday, and they're obviously in lockdown. But we buy multiple products from the supplier, and they've got a big business in the south. That business is on 24/7, 3 shifts, 7 days a week. And we have chosen to go to deliveries by boat rather than lorry. And we've chosen to simplify the range and the way the product is packed so that we can maximize the volume, throughput and, ultimately, availability and speed to shelf.

And then in the products that come from the north, those factories can only work 5 days a week, and they're just about keeping up with demand. Same transport, but those products are also dependent on imports, content, really, from the U.S. And so in that anecdote, I think it tells you 3 things really. One, everything that's going on to keep your product flowing; the complexity and the nuance in that; and third, actually, some of the dependencies, you can't predict how they're going to play out. And then you come back to the principles of doing the best possible job to serve consumers, and that may require an edited range. And that is what we'll be on with.

In terms of underlying performance in like-for-likes, I think I'd probably make a couple of comments. And I think the first one is I think we're currently running with deflation of just around minus 1, and that will give you a read on the scale of investment we've put into the competitiveness improvement. And it is in that context, I think, when we talk about improving the shopping trip in the first 4 weeks of the year, that will give you a flavor for it. If we look back at last year, I think you can never divorce a like-for-like from the previous period. And we look back on the 4.8% in 2018 with pride. And we've taken some lessons. We talked about that in Christmas, and we're on with improving the shopping trip. And at this specific time, in essence, we're focused on doing the right thing so that we can play our full part in feeding the nation really. But hopefully, that gives you a feel for -- I don't know, Michael, if you want to add a few comments on working cap.

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Michael Gleeson, Wm Morrison Supermarkets PLC - Executive Director & CFO [8]

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Yes. Thanks, Andrew. Clearly, at this difficult time, our first priority is doing the best job we can for all of our stakeholders, colleagues, customers and suppliers. And we did make that announcement to pay some of our smaller suppliers earlier or immediately last week. And we envisage that, that will have a impact on -- a temporary impact on working capital of somewhere around GBP 50 million.

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Trevor Strain, Wm Morrison Supermarkets PLC - COO & Executive Director [9]

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And then, Andrew, I think sort of knitting those points together, understanding the strength and the robustness of the business and this principle around being flexible about how we use our asset base in the broadest sense to enable us to fulfill demand, I think, is going to be helpful. But have you got any follow-up questions, Andrew? If not, we'll move on to the next question, please, moderator.

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Operator [10]

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Your next question comes from the line of Bruno Monteyne.

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Bruno Monteyne, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [11]

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A few for me. I'm confused on the special dividend, why decide to defer it or delay it. Because in food retail, you're probably best place in the economy. If you can say so, your customers will keep wanting to eat food (technical difficulty)

the big one. So are you deferring the special dividend because you just want to budget for you never know what's going to happen or the reverse, you try -- you think there might be some amazing opportunity to deploy capital and do something you otherwise wouldn't have been able to do? So is there an abundance of caution? Or is it the reverse of that?

The second question is if I sort of look at your like-for-like for the current year, I mean, it sort of implies 15% like-for-like for the last few weeks, and it's still ramping up. Am I right that, obviously, the marginal contribution on all of exit amount must be well above your usual rate of profitability? Or do you have to take on material extra costs that don't make the extra trade as profitable as usual?

And third question is -- I mean I know you talk a lot about Amazon Prime. To be honest, it is very hard to detect it in your numbers or any external numbers that it's anywhere significant. So can you really try to help us scale how material this Amazon Prime business is for Morrisons?

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Michael Gleeson, Wm Morrison Supermarkets PLC - Executive Director & CFO [12]

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Bruno, maybe if I take the first question on the special dividend and Trevor takes the other 2. As we said in the announcement, sales have been on an improving trend since the start of 2020. Profit grew for the fourth consecutive year. Cash flow was strong. So we had anticipated announcing another special dividend. But in reviewing capital allocation, we decided it was prudent to defer announcing a special dividend, given the unprecedented events. I think we look at it as coming from a position of strength. We have a very strong balance sheet, pension surplus, low-debt facilities and good maturity profile. We view the decision as further strengthening that balance sheet and maximizes our flexibility for whatever may come in the future.

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Trevor Strain, Wm Morrison Supermarkets PLC - COO & Executive Director [13]

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Bruno, it's Trevor. Just pick up -- I'll pick up that marginal contribution question. I understand the context of the question, and intuitively, your assumption would be directionally right. But I think it is hard to predict events in the context of the year we're now in. And I don't think it would be right for us to predict or speculate around how it may play out. As you can tell from the disclosure we've made on like-for-like this morning, the last 2 weeks, like-for-like would've been higher.

I think if I come back around to our principles, big picture, we've talked consistently for 5 years around having a shopping trip that resonates on millions of customers and wrap the P&L and the balance sheet around it. And so that is why we made the investment in price and in service over the first 4 weeks of the current year we're now in because that are right things for us to do. And in the context of this current period in this crisis, I think David said in his opening comments, we will do whatever it takes to protect and help our colleagues and support our customers. And do what it takes may mean that in the period ahead, we incur some higher cost to operate.

I think the key bit is that if we work to do the right thing for the long term for all of our shareholders and play our full part in feeding the nation, it will be a good thing for our suppliers, colleagues, customers and shareholders. And in the end, in the end, on the marginal contribution, the profit is going to be an output. Mix will be a big part of that. How home -- eating out of home impacts that is going to be a variable. As will, Bruno, in -- if you went into store, you would've seen where we put that price investment. It's on the very items that are most important to consumers, as we have talked about today and back in September last year at the interims.

So I think all of those are variables, and I think it's the principles that are important. David, do you want to pick up on Amazon?

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [14]

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So just turning to Amazon, yes, it's wrapped up in the end in the GBP 75 million, GBP million. I'm happy with progress with Amazon. And we committed together that we would work on innovative fulfillment solutions for consumers in the years ahead, and that's precisely what we are doing.

In the near term, getting up to those 17 stores, 8 cities, even since the end of the year, has been important. And looking ahead, we've got a plan for another 6, 23. And then in light of corona, we're looking at how we expand that by more than the addition, so more than a further 23. And so we find them a good partner to work with in that sense, and wholesale into some of their other channels will continue to be important, I'm sure, during 2020.

So -- and of course, I think as we said before, it's a smaller basket with the Amazon store pick. And therefore, I think I've always seen it as a complementary home shopping service to the traditional bigger basket from either the sort of Dordon type facility or the Morrison store pick function. And I've always thought those 2 things can prosper quite nicely alongside each other in the same asset, in the same store, along with the bricks-and-mortar customers.

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Trevor Strain, Wm Morrison Supermarkets PLC - COO & Executive Director [15]

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(Operator Instructions)

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Operator [16]

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Currently waiting for Bruno to join the Q&A session. Would you like the next question?

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Trevor Strain, Wm Morrison Supermarkets PLC - COO & Executive Director [17]

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We'll take the next question.

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Operator [18]

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The next question comes from the line of Rob Joyce.

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Robert Joyce, Goldman Sachs Group Inc., Research Division - Equity Analyst [19]

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I got 3 of them. So I appreciate the color on the recent demand there, Trevor. In terms of just working out how this can go, we're talking, I think -- can you confirm that's roughly 15% like-for-like in the first 2 weeks of March? And are we talking sort of 10% to 20% in the 2 weeks there? Or is it sort of 12.5% to 17.5% in terms of that trajectory over those 2 weeks?

Second one, just on the online business. Again, really great to get the same numbers you gave for retail in terms of how your online business has progressed, that 0 to 5, and how the equivalent for that for the online business. And just an indication whether you've topped out capacity-wise and how much more online demand do you think there was that you couldn't quite address.

And then final one, given all the commentary, I think, helpful around the price investments you're making. Would it have been sensible, I mean, outside of and -- I know slightly just a theoretical now. But outside of this event, I think consensus have profit growth accelerating year-over-year FY '20 to '21. Given those price investments, is that still achievable? Or would that still have been achievable, sorry?

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Trevor Strain, Wm Morrison Supermarkets PLC - COO & Executive Director [20]

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Robert, it's Trevor here. I think roughly, roughly, on the first bit of the calculation, it's going to be mid-teens week 5 and 6. And is it 0.25 this or -- we're not just not going to get into that. But as I said earlier, 6 was higher than 5, and the average is roughly, roughly, you're not far off on 15% kind of thing.

In terms of online, we've tried to really provide extra disclosure really around that retail like-for-like over the 6 weeks. And I think the key point in the measures that were in our communication to customers in the press release yesterday and that David talked about earlier, the capacity around orders is going to go up by around 60% in very, very short order.

And then in terms of our plans around price investment, we had a well-thought-through plan. We have a plan that you would've expected us to be executing. And in all these things, as in previous years, we'd be working hard on the cost side of the equation, exploiting and accessing those cost opportunities that Michael talked about and investing in the shopping trip in price and service. And consensus is where it is, and it is where -- it was where it was. And you know that if we'd have had anything to say about that, either today or any point in the past, we would've executed on that. If you want to star 1, we'll...

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [21]

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Well, just before you star 1, if you do -- Rob, David. On online, of course, people are grabbing the slots, and we're booking ahead. And this -- see, Tim's got a queuing system on his, fair enough. But we're not really looking at it like that. We're looking at how we Morrisons contribute to this effort by providing traditional methods to communicate remote orders to supermarkets, which I think, given we're a nation of shopkeepers, has been on the go for a couple of hundred years. And of course, the technology will play its part. But in this moment, that isn't our focus.

I think what has happened, it's been a catalyst for a significant step-up in our ambition with regard click and collect and also the number of stores, a sheer number of stores involved in store pick in some way or other, and that's really the numbers that Trevor refers to.

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Operator [22]

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Your next question comes from the line of Nick Coulter.

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Nick Coulter, Citigroup Inc, Research Division - Director [23]

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Three, if I may. Firstly, coming back on the online capacity, is it possible to get a figure in terms of your annualized run rate for sales or orders per week for the morrisons.com business, given the 60% that you quote in terms of capacity expansion or potential capacity expansion?

Then secondly, on the cost saves and noting your comments around still significant opportunities and, I guess, Trevor's inference that it's playing a draw with investment over and above the SG&A inflation that you have within the business. Can you just confirm that that's the case and then talk to what seems to be quite a significant step-up in the run rate of efficiencies that you're delivering?

And then lastly, if I may, on business continuity and contingency planning around staffing and the potential for staff shortages in the coming weeks and months, if it comes to that. Could you talk about your planning and how you might be engaging with employment agencies or thinking about how you source staff from the hospitality or restaurants or how you might cope with what might be coming down the track?

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [24]

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Thank you, Nate. David. I'll take the last one about our people and people who are having quite a tough time in the consumer industry right now. I think our going-in position always is everyone's welcome at Morrisons. Our core purpose is adjusted to play our full part in feeding the nation, and this is much more than our jobs. This is real stuff.

And so yes, I think we've let it be known that we have vacancies for drivers, for pickers and for customer assistance as we move through that structuring project in addition to the current crisis. And so we, of course, got our own contacts. We've got the British Retail Consortium, the Institute of Grocers and Distribution (sic) [Institute of Grocery Distribution], all of who are leaning in so that people who can provide -- we can provide a fair day's pay for a fair day's work to know that Morrisons has got work.

And so if we look at our own people in our scenario planning, clearly, we think about step-ups in absence and what that would mean as we go through this period. I mean -- I guess the other way of looking at that is self-service supermarkets is what we have. The clue is in the name. Customers are involved in that process. And as long as we start to get stock on the shelves consistently as an industry, then customers can do some shopping. We've got self-scan checkouts, and we've got counters that may be a lower priority as time progresses, although I have to say there's no sign of that right now. So I feel -- whilst we don't know what we don't know, we're open to people contacting us to look for this work, and we are working with the grain of the issue with our own colleagues.

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Trevor Strain, Wm Morrison Supermarkets PLC - COO & Executive Director [25]

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Nick, on the inference, it's playing a draw in terms of cost saves and the price investment. I wouldn't want you to infer that. I don't think we would. Because in the end, in the end, we are making choices around how the opportunities around COGS or in productivity are achieved and how those benefits and how much of those benefits are reinvested in the shopping trip and operational gearing volumes. And all of those attributes are right in the mix in that discussion as we balance the improvement across the long-term for all stakeholders, which is what we've tried to do across the last 5 years.

And then obviously, in a period of crisis where, frankly, we're focused simply on supplying food to serve customers, it's all hands to the pump working on that noble cause, really, so that we're playing our full part in feeding the nation and doing our bit for the communities we serve. And when that levels out, we'll be back around to recovery and then accessing those improvements. Yes. Okay.

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Operator [26]

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The next question comes from the line of Xavier Le Mené.

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Xavier Le Mené, BofA Merrill Lynch, Research Division - Head of European Food Retail Equity Research and Director [27]

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Two questions, if I may, actually. First one, just on net debt, what should we expect in terms of trajectory potentially for full year '21? Do you have also any target in terms of net debt on EBITDA that you have in mind and you believe is the right number?

Second one, just on the fact that you're vertically integrated. So how much do you think it's a competitive advantage in the current environment or not? Actually, I just want to hear your comment on that.

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Michael Gleeson, Wm Morrison Supermarkets PLC - Executive Director & CFO [28]

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So if I take the first one and David will take the second one. On net debt, we've guided that we'll keep net debt low. We continue to, as I've said earlier, continue to have a very strong balance sheet with good cash flow, good free cash flow. And the guidance we've given is that in our context, we're confident that net debt will continue to stay low through 2020.

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [29]

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I think in terms of vertical integration and the fact we are a food maker then. Whilst on the one hand, we don't see our role in society at the moment in somehow leveraging a competitive advantage, the truth is, if you are Britain's biggest single food maker, then here's the time to go and make some food. And so for example, we normally do about 850,000 loaves a week, and last week, we did 1.4 million loaves. We normally pack 7.5 million eggs. And last week, we packed and sold 10 million eggs.

And how we can control our contribution is to say, look, there can be a bit less choice, but there needs to be more volume. There may have been downtime within a cycle of manufacturer, there needs to be no downtime and 24/7 on these kind of things. So we will play our part, play our full part in feeding the nation. And I think the extra energy there is that the stores themselves produce food, they make food and 25% of -- or half of what we sell as fresh food, and half of that fresh food we actually make ourselves as well. So whilst we will -- we'll, of course, work with the supply base, we are in command of some of the decision-making to keep the thing moving.

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Operator [30]

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The next question comes from the line of Clive Black.

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Clive W. Black, Shore Capital Group Ltd., Research Division - Head of Research [31]

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I just wanted to ask about any lessons coming through from the current batch of Fresh Look work that's been undertaken in the business, the Canning Town store in East London and indeed, the Bolsover store. So looking through the present crisis, whether there is work happening there that further prolongs and enhances the relevance of Morrisons as a grocer and food maker.

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

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Thank you, Clive. Well. I mean slightly ironically, there had been this merging of food consumption underway in the U.K. between the sort of eat-out and eat-in brigade. And we can see now that the eat-out brigade is closed, and the eat-in brigade are quite busy. And so I think our work on Market Kitchen has been very well timed. Consumers like it. Canning Town is ahead of its sales plan. And whilst there's plenty to learn there, we've seen enough to know it's part of the future. We've got plans for the year ahead to introduce Market Kitchen into a couple of more stores. And whilst we will learn from that, of course, we will be quite surefooted as we make those introductions. We'll open 5 further new stores this financial year, and Bolsover, which is our first 15 net community store, will be the model for a couple of those.

So I think the lessons learned is we can hit our sales targets of later years in year 1 so far between Abergavenny, St Ives, Canning Town, et cetera. And customers, without overdoing it, literally love the stores we've opened. And it's very important that we continue to listen hard to customers and respond quickly where we can within our opening program. Fresh Look to which you refer is the program of refits in Morrisons, and we're -- I think we're up to say circa 350. And they continue to play an important part as we improve the shopping trip in those locations. So yes, it's an important program and possibly the new addition for 2020, '21 is what we call resets, which is stores that don't quite warrant a Fresh Look refit. But we know the space allocation, the mix between hard lines, clothing, fresh food and ambient could be better organized, and we go in there and we do that work, have a quick look around anything else it needs doing. And that triggers a rebrand and so the number of rebrands we see ticking up as a result of the reset program.

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Operator [33]

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And the next question comes from the line of Victoria Petrova.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [34]

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I have 3 short questions. The first one is on your incremental like-for-likes, and thank you for sharing the 6 weeks' results. Do you think a part of this uplift is driven by your market share gains? Or do you think it's all just the market moves in the current environment?

My second question is related to additional costs, obviously related to personnel, supply chain, maybe something else. What level of those extra costs are you preparing yourselves for? And do you have any maybe anecdotal examples which could help us as well as if you are seeing any cost of goods sold inflation already?

And the last question is a clarification one on working capital. You mentioned GBP 50 million impact coming from immediate payment to small suppliers. Can you quantify the positive impact of inventory turns improvement maybe?

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David T. Potts, Wm Morrison Supermarkets PLC - Chief Executive & Executive Director [35]

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Sorry. Why don't Michael take the last one in a moment? Coming to the first couple. I have to say I'm not measuring this period by market share. And although Kantar, I'm sure, is helpful to some, it does remain a server and a sample. And I'm really concentrated on serving customers better in very important circumstances.

With regard to costs, of course, we'll write those down and we'll look at how we can be most effective. But where we think we need more security, where we think we need more cleaning, where we think we need more pickers and where we think we need more support for our people, then those decisions will be taken. And it's very important in this moment that we act in an agile fashion as a smaller business. And it's very important that we, in the center of the company, make decisions that amplify and maximize as they go through to the rest of the company. And that's the biggest contribution we can make. Michael?

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Michael Gleeson, Wm Morrison Supermarkets PLC - Executive Director & CFO [36]

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Thanks, David. Yes, Victoria, as I said earlier, the impact of the decision we made last week will be a temporary impact on working capital of GBP 50 million. I mean in terms of future inventory terms and extension of the terms, we'll have to see how it plays out. I'm not able to predict how that future might play out and probably not a big priority at this very moment in time.

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Operator [37]

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The next question comes from the line of Maria-Laura Adurno.

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Maria-Laura R Adurno, Morgan Stanley, Research Division - Equity Analyst [38]

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Two very short questions on my front. From your own slide -- standpoint, are you seeing any type of cost inflation coming through?

And the second question, you provided us a like-for-like growth of 5%. Just wondering, potentially, if you could split it between how much was physical store versus online.

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Trevor Strain, Wm Morrison Supermarkets PLC - COO & Executive Director [39]

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It's Trevor. And just building on David's point about the nature of additional costs, you may incur as you seek to fulfill this step-up in demand, whether they be in a service environment or in through fulfillment. I think the other unknown from shops like this is how commodities themselves play out. And again, history teaches us not to predict. But if you were to -- if I was to compare, just as an example, what I may have been expecting around inflation around pulp pricing, as I say, the start of quarter 4 compared to what we'd be experiencing now, the picture would have changed and reduced significantly. Those commodity movements get traded away, and it's not to open up a conversation around port per se but to demonstrate the fluidity. And if you look back to -- in the immediate aftermath of Brexit, my personal assumption or guess on the 24th of June after the referendum was that the first commodity market that would move will be fuel, and it was actually meat because of people dropping demand into British out of European. So we will focus on those overarching principles and then look for the profit outcome in the end to be -- will be an output.

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

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Thank you. So look, it's David. Thank you, everyone, for joining the call, and we hope that the conditions under which we've held the call have been helpful to you. But we are very appreciative of you taking the time out to make this call as well, and we look forward to seeing you as soon as possible. Thank you.