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Edited Transcript of SMWH.L earnings conference call or presentation 14-May-20 7:30am GMT

Half Year 2020 WH Smith PLC Earnings Presentation

London May 14, 2020 (Thomson StreetEvents) -- Edited Transcript of WH Smith PLC earnings conference call or presentation Thursday, May 14, 2020 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Carl D. Cowling

WH Smith PLC - Group Chief Executive & Director

* Robert James Moorhead

WH Smith PLC - CFO, COO & Executive Director

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Conference Call Participants

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* Alexander Mees

JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research

* Jonathan Pritchard

Peel Hunt LLP, Research Division - Retail Analyst

* Kate Calvert

Investec Bank plc, Research Division - Retail Analyst

* Lorenzo Margiotta

BofA Merrill Lynch, Research Division - Research Analyst

* Matthew C. Garland

Citigroup Inc, Research Division - Assistant VP & Senior Associate

* Paul Rossington

HSBC, Research Division - Analyst

* Richard B. Chamberlain

RBC Capital Markets, Research Division - MD of Consumer Retail

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Presentation

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Operator [1]

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Welcome to the WH Smith Interim Results Announcement 2020 Presentation. My name is Ava, and I will be coordinating your call this morning. (Operator Instructions)

I will now hand over to your host, Carl Cowling, to begin. Carl, please go ahead.

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [2]

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Good morning, everyone. Carl Cowling here, group CEO, and I'm joined by Robert Moorhead, our Group CFO and COO, although he's in his own house.

Thank you for joining this morning's call. I hope you're all well. This is certainly a difficult time for our colleagues and for everyone around us, and I hope you and your families are all safe and well.

On this morning's call, we will give a quick update on our results for the 6 months ending 29th of February 2020, which seems quite some time ago now, and an update on our response to COVID-19. Robert will take you through the numbers, and I will then take you through a quick business update on both Travel and the High Street for the first half. It's a bit shorter than usual, as I'm also going to run through our response to the challenges imposed by COVID-19. And as usual, we will take your questions at the end.

So before handing over to Robert, a quick intro on the current situation for me and turning to Slide 3. And as some of you may be aware, the vast majority of our store estate has been closed since the third week of March following the lockdown restrictions across the world. As you would expect, the initial impact on the group was in our international markets. However, this quickly affected our U.K. Travel and High Street businesses. I'm pleased to say that we went into this crisis from a position of strength, following a good first half, and we'll come on to the detail of this in a moment.

We also acted quickly to secure new financing arrangements by the 6th of April as well as raising GBP 162 million from an equity placing. So a very pleasing result, which puts the group in a good position, and Robert will discuss this in more detail shortly.

In addition, we continue to manage the business very tightly to protect profitability, and we have taken a number of mitigating actions, which I will come on to.

Our business in the U.S. also acted fast to minimize costs, renegotiate rents and furlough the majority of store and head office staff. As you would expect, we are now working on our reopening plans. How we protect our colleagues going forward is our key priority, and I'll come on to this later in the presentation.

So before we move on to the numbers, I think it's important to acknowledge that we are a resilient and versatile group. And with the new refinancing in place, we're in a good position to benefit from the recovery in our markets going forward.

We have a strong and experienced management team. And as many of you know, we have consistently demonstrated that we can adapt and respond quickly to changing market conditions.

I'll now hand over to Robert to take you through the numbers.

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Robert James Moorhead, WH Smith PLC - CFO, COO & Executive Director [3]

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Thank you, Carl, and good morning, everybody. So let's start off on Slide 5 with the group financial summary. Whilst it all seems a very long time ago, what I'm going to go through this morning mainly relate to our first half. I'll also give you an update on our implementation of IFRS 16.

The world has obviously changed beyond all recognition since the end of February. But up until then, we had, had a good half, and we're on track to deliver expectations for the year. It's also worth saying that the first half was unusual for the group in a number of ways. First, we had the acquisition of MRG in the half. Second, the shape of High Street's profit were continuing to change towards the second half, reflecting a greater mix of stationary and the phasing of cost savings, which were going to be greater in the second half. This is continuing the trend that we've seen over the last few years. And thirdly, we have a number of non-underlying items relating to the MRG acquisition and subsequent integration. And I'll touch on all of these as I go through the numbers.

So as I said, we have today delivered a good performance with our first half in line with expectations, and we finished the half in very good shape. Total group revenue was GBP 747 million, up 7%, with group like-for-likes down 1%. Profit from trading operations at GBP 93 million was up GBP 1 million, with Headline Group profit before tax at GBP 80 million. Headline earnings per share was 56.1p, down 7% versus last year, mainly as a result of the higher weighted average number of shares in issue this half at GBP 114 million, following our share placing in October to partly fund the MRG acquisition. This compares to GBP 109 million last year.

Free cash flow generated in the period was GBP 1 million compared to GBP 27 million last year, and I'll come on and talk about the cash flow in more detail later, but it does include some one-off items in the half, including GBP 14 million of additional tax payments and GBP 10 million higher CapEx. And as we've already announced, in light of the current uncertainty around COVID-19, the Board has decided there will not be an interim dividend.

So turning first to the analysis of revenue on Slide 6. Overall group revenue was GBP 747 million, up 7% from last year, with like-for-like sales down 1%. It was another strong performance from Travel. Total revenue was GBP 432 million, up 19%, including GBP 27 million from MRG. Excluding MRG, Travel sales are up 11% with like-for-like sales up 2%. U.K. air, rail and hospitals all performed well in the half, reflecting our initiatives and passenger numbers.

In International, excluding MRG, sales were up 29%, and that includes the annualization of InMotion. Including MRG, international sales were up 55%.

And in the High Street, like-for-like revenue was down 4% with total revenue down 5%, reflecting footfall on our U.K. High Street over the Christmas period, when you will remember, we also had the election. It's worth nothing, sales had improved in the early weeks of 2020.

So let's look now at the group profit before tax, and turning to Slide 7. Travel delivered a profit of GBP 49 million, up 11% on last year. In U.K. Travel, profit increased by 5% to GBP 40 million, reflecting higher sales, increased margin of around 60 basis points mainly due to mix, and additional stake. Profits in international were GBP 9 million, up GBP 3 million on last year. InMotion delivered profits of GBP 4 million, and we completed the acquisition of MRG on the 20th of December, which contributed as expected, GBP 1 million in the first half. High Street delivered profits of GBP 44 million, also as expected, with sales down 5%, an increase in gross margin of around 100 basis points and cost savings of GBP 5 million in the half. We continue to see substantial rent savings in High Street and have around 400 stores with lease end in the next 3 years. So that leaves profit from trading operations at GBP 93 million.

Central costs are in line with last year, leaving Headline Group operating profit up GBP 1 million on last year at GBP 84 million. Finance costs are higher than last year due to the additional borrowings used for the acquisition of MRG and InMotion. And that means Headline profit before tax is GBP 80 million, in line with our expectations.

We had some non-underlying items in the half. So let me take you through those now, and turning to Slide 8. So the non-underlying items in the half mainly relate to the MRG acquisition being transaction and integration costs of GBP 13 million. We expect full year non-underlying items relating to MRG to be around GBP 19 million with the addition being further integration costs and the second half amortization charge. The other non-underlying items, the item relates to the noncash impairment of fixed assets in our Asian business in Singapore, where we have a relatively short contract and reflects the impact of COVID-19 in the region. The total cash cost of all non-underlying items in the half was GBP 16 million.

So turning to the free cash flow on Slide 9. We delivered a free cash flow of GBP 1 million in the period, which is lower than last year due to phasing of tax payments, higher investment CapEx and working capital investments and is net of a GBP 5 million increase in EBITDA. As you know, HMRC has changed the required phasing of tax payments, meaning that we paid 4 payments in the first half of the year compared to only 2 in the prior year. This reduced free cash flow by GBP 14 million in the first half. All GBP 24 million of tax money paid in the first half have now been repaid by HMRC.

CapEx spend was, as expected, GBP 41 million, GBP 10 million higher than the previous year, mainly as a result of our continued investment in stores. We expect CapEx for the full year to be around GBP 70 million, approximately GBP 30 million lower than we had anticipated following the MRG acquisition. We continue to spend CapEx on health and safety and a number of key projects, which will leave us well placed as the recovery commences. The increase in the working capital outflow reflects the timing and includes MRG. There will be a large outflow in working capital in the second half as we unwind our credit position following the shutdown. Noncash items primarily include share-based payment charges.

So looking now at the group net debt on Slide 10. The group's debt position changed materially in the half with the acquisition of MRG, which we funded with a GBP 200 million term loan and GBP 152 million share placing. As a result, the group's net debt at the end of February was GBP 411 million. We suspended the buyback but made dividend payments in January of GBP 47 million being last year's final dividend.

Our debt position has subsequently changed again, as you know, and I'll comment on to that shortly. But first, IFRS 16, and turning to Slide 11. I know you are all well versed in IFRS 16, but it is worth reiterating once again. This piece of accounting has no impact on our cash flows or the intrinsic value of the business. And to be clear, the results presented in the previous slides are pre-IFRS 16. We will continue to report you under the IAS 17 approach to leasing. As we all know, IFRS 16 has a material impact on the balance sheet and presentation of cash flow and income statement line. This slide shows the balance sheet impact. There are further slides in the appendix showing the income statement and cash flow presentational impact and much more detail in the press release. But let me just mention the material changes to the balance sheet, which are the GBP 554 million grossing up in assets with the right-of-use assets and the creation of a GBP 566 million of lease licenses, which are now included in net debt. As I said, much more detail in the press release.

And finally, an update on our liquidity position and turning to Slide 12. Since the COVID-19 outbreak, we have taken decisive actions to strengthen our balance sheet and improve our liquidity. The group already had a GBP 200 million RCF. And on the 6th of April, we raised GBP 162 million via an equity placing and secured an additional GBP 120 million of bank funding referred to as the liquidity loan on this slide. That left us on the 7th of April with liquidity of around GBP 445 million. This is net of our cash position immediately prior to that point of GBP 37 million drawn. You can see the impact of all this in the left-hand bar on this slide.

Since the 7th of April, we've seen a net outflow of around GBP 41 million, which includes working capital and CapEx outflow as we unwind the creditor position created prior to lockdown. It's better than we expected at this point due to our working capital management. And that left us, on Tuesday morning, with net cash reserve of around GBP 400 million.

We have also taken further steps to improve our position. First, we now have waivers in place for all covenant test until August 2021. And second, we have secured eligibility for the government CCFF scheme. We expect to be able to draw down a maximum of GBP 300 million, albeit the liquidity loan falls away if we draw on the CC effort.

So with our cash burn at approximately GBP 25 million to GBP 30 million per month and an extended lockdown, we are well placed to absorb a prolonged period of disruption.

Now let me hand back to Carl to talk about the rest of the group.

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [4]

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Thank you, Robert. Before I run through the operational performance of the business in the first half, I just want to acknowledge the impact of this situation has had on all our colleagues and customers across the world. Their health and well being is of paramount importance, and I feel very proud of our teams and the way they have stepped forward in this crisis. I'll bring you up-to-date on how COVID-19 has more specifically impacted the business shortly, also what actions we've taken and what we're doing to plan for the future. But before that, a quick update on the first half.

While it may seem some time ago and not be as relevant today, these results do demonstrate that our business was in good shape prior to the outbreak. So turning to Slide 15, and starting with U.K. Travel.

In U.K. Air, total sales were up 3%, with like-for-likes up 2%. This is another good performance in there despite the economic uncertainty in the first half. And this also reflects the success of our new large airport format.

In our hospital channel, total sales were up 13%, with like-for-likes up 6%. This growth reflects our format development initiatives and new store openings including M&S Simply Food stores. The hospital channel is our second-biggest channel in the U.K. by revenue, and there is plenty of opportunity to continue to grow our state here.

In rail, total sales were up 2%, with like-for-like sales also up 2%.

In our international business, total sales including innovation and MRG were up 55%, with like-for-like sales down 1%, and I'll come on to that shortly.

So let's now look at our U.K. business in a bit more detail, starting with Air on Slide 16. In U.K. Travel, you'll know that airports have been an area of significant investment for us, and we worked hard in the half to drive our spend per passenger. Given our ATV is so low in contrast to many airport retailers at around GBP 7, there is much more we can do to increase this with extended product categories and ranges, and even a small increase to drive a big sales improvement. And we saw some good success in the half. We also continue to work -- we also continue the work we've been doing on a large store format. All of this will position us well for the future. I'm pleased to say that we delivered some particularly good results. Our experience continues to show that we can deliver much higher sales capacity from these large stores through improved layouts and increased capacity.

Despite the current environment, we have committed to launch a new flagship format pharmacy store at Heathrow terminal 2 this summer, and I'll come on to the detail of this in a moment. And we expect to open more stores, including the new terminal at Manchester Airport, as the current situation begins to improve. As we have said before, we believe these new formats will be of interest to more landlords as they reconfigure their space going forward.

Turning now to Slide 17. So as I just mentioned, we are on track to launch a new flagship store at Heathrow Terminal 2 this summer. And you can see a renter on the screen of how the store will look. This store is over 5,000 square foot and includes our traditional WH Smith news, books and convenience proposition combined with a pharmacy. The store will feature a world-class health and well-being department with expert staff on hand, plus a comprehensive range of over 3,000 products curated through our partnership with market leading brands. Our pharmacy codes will offer reliable health care advice alongside a wide range of medicines.

Turning now to our hospital and rail channels on Slide 18. As you know, the hospital channel is an important business for us. And during the half, we opened a further 3 new stores. It's a great example of how we continue to innovate. And it's this innovation over the years that has enabled us to grow this channel further, making it our second-biggest channel behind air. As a result of our ongoing investments, we have developed a strong customer offer, well aligned to the NHS strategy on healthy eating as well as a strong store format proposition, including a broad suite of brands that we can adapt to meet the needs of each hospital and trust. This continues to be well received, providing us with additional opportunity to improve the retail offer across hospitals in the U.K. And of course, these stores provide a key service for NHS workers, particularly at the current time, and I'll come on to this.

In terms of rail, during the half, we opened 3 new units, and we continue to invest in format development. I'm pleased to report that following the refurbishments of our store at Paddington Station at the beginning of the half, we received great feedback from both our landlord and our customers. The performance of the refitted store leads us to believe there are opportunities in the future to apply this large store format across our rail channel. We have also continued to develop our Tech Express format, and we opened a new unit in Birmingham New Street station in December.

Turning now to our International business on Slide 20. at International, WH Smith is still a small player in a very big market, and there is great long-term potential for us to continue to grow. Our experience to date is that our brand, customer offer and ability to drive sales per passenger are attractive to overseas landlords. We've had a really good half winning new business with 38 new units won in total across North America, Australia, Europe and Southeast Asia. In addition, our acquisition of MRG has continued to deliver good results, and it continues to demonstrate the potential and attractiveness of the U.S. travel market. And we continue to invest for long-term growth.

In terms of our performance, profit for the half, including InMotion and MRG, was GBP 9 million, GBP 3 million ahead of last year. Total sales for the half, including InMotion and MRG, were GBP 161 million. Like-for-like sales were up 3%, excluding InMotion, and down 1%, including InMotion, which was expected as we annualized tough comparables from the prior year.

So turning now to Slide 21 on North America and a quick update on our business there. So looking at our presence in North America, we now operate over 280 stores across 23 of the top 25 airports. During the half, we also won a further 12 units in the U.S., including a major MRG win in a west coast airport of a 10,000 square foot store. We also opened 6 further InMotion units. We have been very reassured to see the strong win rate from MRG continuing the half since acquisition, cementing our view that the U.S. travel market is very attractive and profitable. We believe that we are well placed to continue to grow when the U.S. market reopens. It's also important to remember that in this market, over 80% of passengers are domestic.

In addition, we continue to work on the synergies between MRG and InMotion. And finally, our focus on exporting the InMotion brand and format outside of the U.S. continues to be successful with a new unit planned in Berlin Brandenberg Airport. We believe there are additional opportunities around the world where we operate the WH Smith brand.

Turning now to our High Street business on Slide 23. In terms of our performance, I'm pleased to tell you that we have delivered another good performance in our High Street business for the half despite the challenges facing the U.K. High Street. Like-for-like sales were down 4% with profits of GBP 44 million. Gross margin was well managed at 100 bps in the half, and our cost savings were on track. We delivered GBP 5 million of savings in the half. As usual, these segments come from right across the business with the biggest contributor coming from rent savings, with an average rent reduction of over 40%. We have a rolling program of lease renewals with around 400 store leases due to expire over the next 3 years, but we have an average lease length of 3.5 years across the entire portfolio. We, therefore, have further opportunities to renegotiate our occupation costs and expect rent reductions to remain a key component of our future cost reduction strategy.

So turning to a quick look at our Digital businesses on Slide 24. And I'm pleased to say that our online businesses have delivered good performances in the half. funkypigeon delivered some strong sales over the key trading periods, and our online WH Smith offering has also delivered some very positive results since we launched the new website just before Christmas. Our specialist pen site, Cult Pens, continues to deliver good growth. Throughout the current COVID-19 pandemic, our key websites have all performed strongly, and our robust infrastructure has enabled continuity of supply. A particular note is our online books performance, which, over the past few weeks, have seen sales increased by 400%. So that's it for the High street.

Moving on now to Slide 26 in our response to the current COVID-19 pandemic, a bit of tongue turner there. And as I've already said, the health and well-being of our colleagues has been our key priority, and I'm immensely proud of our entire team. We have witnessed some fantastic camaraderie across our store teams, with colleagues volunteering to move across to work in our hospital stores whilst their airport or station store is temporarily closed. So in terms of our stores, we have kept our stores open in the communities that most need our services at this critical time, and these include our stores across our hospital estate and our High Street stores that host post office.

Across our hospital stores, our colleagues are continuing to serve frontline NHS workers with food, drinks and daily essentials every day. A few weeks ago, we were pleased to extend our groceries range to around 90 essential products in these stores to support these frontline workers, and we have doubled our staff discount to 20% to further support them. Since doing this, we have triggered over 0.5 million discounts. In our High Street business, our stores at post offices remained open to serve their local communities with vital postal and banking services.

In terms of protecting our colleagues and customers, we have introduced a number of robust safety measures across our stores and distribution centers, including plastic screens at tills, social distancing measures, hand sanitizer for both customers and colleagues and personal protective equipment such as visors, masks and gloves.

In terms of our supply chain, we have worked hard to manage our stock requirements, and we have seen little impact on our forward orders ensuring we are well positioned for future trading events such as back-to-school at the end of the summer.

So moving on to Slide 27 and a quick update on current trading. And it will be no surprise to hear that we continue to see a significant impact across the whole group. In Travel, passenger numbers in April continued to be down by around 90%, and we expect this to continue in the near term.

Internationally, we have seen broadly the same trends of the U.K. However, we do anticipate some territories, such as Australia starting to open up more quickly. And on the High Street, we continue to see very low footfall. However, we would expect High Street footfall to see a gradual recovery ahead of passenger numbers in travel over the coming months.

In terms of impact on the group in April, total group revenue was down 85% with Travel revenue down 91% and High Street down 74%. But despite all of this, as we have highlighted with the new financing arrangements we have in place, the group is well positioned into the next calendar year. So our main focus now is on the reopening of our stores and focusing on areas within our control.

Turning now to the next slide, Slide 28, and the mitigating actions we have implemented over the past few weeks. So as we've alluded to already, we have acted quickly since the outbreak. As you would expect, we are also taking a variety of mitigating actions to manage our cost base and cash flow. The major actions include, but aren't limited to, stopping all discretionary expenditure, reducing corporate overheads to a minimum; delaying all nonessential and noncontractual capital expenditure; reducing or removing all rent payments, including the removal of minimum guarantees from virtually all our travel rental contracts; and reducing our stock purchases to reflect ongoing demand and negotiating extended payment zones. We have welcomed government support measures, including the U.K. Job Retention Scheme, deferring tax payments and the suspension of business rates. The group has also been in discussion with governments in other countries to access support of their local schemes. And as Robert has talked through, we have refinanced to strengthen the balance sheet and cash liquidity position of the group. We have also secured eligibility for the government's CCFF scheme.

So finally, turning to Slide 29 and looking ahead. Looking ahead in view of the current uncertainty from the impact of COVID-19, we, like many others, cannot forecast with any certainty the timing of any reopening of our Travel and High Street businesses nor can we provide any certainty on passenger numbers returning to 2019 levels. In the immediate term, we are planning on a phased store reopening schedule across our High Street business, U.K. travel channels and our international territories. Given we have continued to operate some stores, we are advanced in our plans to protect both our colleagues and our customers, so we are confident in our reopening plan.

In Air, we expect a gradual improvement in passenger numbers from autumn 2020 and initially led by an increase in domestic travelers, particularly in the U.S., where 80% of passengers are domestic, followed by regional, international and intercontinental passengers.

In our hospital channel, although our stores have remained open to serve NHS staff, we have seen a fall in sales as a result of a significant reduction in visitors, which we do expect to improve. In rail, we expect a gradual improvement to passenger numbers through autumn 2020.

In the High Street, we see a Phase 3 opening through the summer, but footfall is expected to be significantly down. What we are more confident about, however, is that the group is well placed for the future with a clear strategy that will serve us well in the longer term. And we believe there will be opportunities post this period that will further strengthen the group going forward. We are financially strong. And as I said at the beginning, we went into this crisis in good shape. We are an important retail partner for our travel landlords. As a result, we are well positioned to benefit from more space becoming available in travel locations and also extending our user clauses to drive spend per passenger.

In addition, we continue to invest in new stores and new store formats. During the second half, we are planning to launch a flagship store at Heathrow Terminal 2 and MRG has also continued to perform well since completion, maintaining its momentum with further contract wins at major U.S. airports.

In our High Street business, we are well placed to benefit from the end of summer back-to-school period and also peak Christmas trading. We will also further develop our partnership with M&S Simply Food in the High Street over the coming months by installing 2 more implants, so lots to be moving forward with.

And finally, while we will remain cautious in our approach, we are a resilient and versatile business, and we're good at adapting to changing market dynamics.

And this, together with the operational actions we have taken, including managing costs and the new financing arrangements puts us in a strong position to navigate through this time of uncertainty and benefit in due course from the normalization and growth of our key market.

Thank you, and we'll now take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Alexander Mees.

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Alexander Mees, JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research [2]

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Three questions, please. Just firstly, I wonder if you could run through the decision-making process that you will follow when you're determining when to reopen a store.

Secondly, in terms of the negotiations you're having with landlords on the High Street, I wonder, are you talking about canceling rent during the period of crisis or deferring it to a payment at later date?

And finally, Robert, I think you mentioned booking and impairment to the business in Singapore. I just wondered if we should expect further asset impairments as a result of COVID-19 in the second half.

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [3]

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Thanks, Alexander. I'll take the first question. And Robert, I suggest you take 2 and 3, if you like. So in terms of reopening stores, we spent a lot of time working through our plans here. We do have a big advantage over other retailers in that we've got our hospital stores open and we've got 200 stores open in the High Street. We also have a number of Travel stores that are still open. Taking very little money, but our Heathrow stores are still open. We do have some international stores open. So we know what we need to do when it comes to social distancing, changing the flow that customers might take in the store. And we know everything that we need to do around the equipment and hand sanitizer, all of those things. Many retailers are struggling to get their heads round, but we've at least got the advantage that we've been trading through this period.

So when it comes to looking at the opening plans, say, the High Street, the key thing for us is when do they start releasing nonessential retail to open and when do people start coming back for the High Street. And what we've done is we've segmented our stores and looked at the first different tranches that we'd open the stores that even if they're down by quite a significant amount, it would still be profitable to open, and stores where it's kind of easy to open and it's easy to get the teams back. So we'll open in phases -- we'll reopen in phases in the High Street, and we'll probably open 20 stores and then another 100 stores, but all of that is dependent on when the government do release restrictions and other retailers start opening as well.

In Travel, it's a bit more difficult. And really, we need to have further guidelines from network rail in terms of how railway stations are going to operate. And it's the same with airports, where there's still social distancing restrictions. We need to get all of those guidelines through first and then understand how and when we open the stores. But what I would say is that we're very ready. We've got all of our PPE in line. We've got all of our stores mapped out in terms of how we'd operate them. So we're ready to go when it comes to store opening plans. Robert, I'll hand over to you.

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Robert James Moorhead, WH Smith PLC - CFO, COO & Executive Director [4]

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Alex, so in terms of the landlords and High Street, we didn't pay our rent in the March quarter, and we are in negotiation and contact with all our landlords. I'll say that the vast majority of them are being incredibly supportive. And I think it will be a combination of deferment and some wavers, and some will end up paying. I think it was going to be a combination of all 3. But it's worth saying that we've got 400 stores that are up for lease renewal in the next 3 years. So we're already in dialogue with many landlords, and I think we're very well placed in those discussions.

And in terms of any more impairments it become, I think it's just too early to tell. We'll be working through that in the second half, and we'll be updating further in October.

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Operator [5]

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Your next question comes from [Tony Shreat] from Whitman Health.

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Unidentified Analyst, [6]

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Just wanted to discuss the rent negotiations on the airports and particularly the sort of -- how the sort of fixed element of rent, minimum guarantees and stuff like that is playing out with clearly no revenues, not potentially a good scenario, but are the minimums waived? What are the -- are you likely to end up with a new form of structure of rent in the airports, both maybe the comments could be made for the U.S. and the rest?

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [7]

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Okay. Thanks, Tony. As you know, you know our business well. A lot of airports have minimum rent guarantees, but actually, quite a few do have pax deflators with them. So when passengers go down, so does the minimum rent guarantee. So with a number of our large contracts, everything was in place to protect us.

With other airports where there's minimum guarantees in place, we've been pretty successful at negotiating our way out of those. And getting them to just a turnover-based rents. We've got really good relationships with the vast majority of our travel landlords. They've been really supportive. That's not to say there aren't a few outliers. But in terms of airports that I would say are kind of being difficult and we're not being able to move with it, I could count them on 1 hand. Broadly, our landlords have been very, very supportive, which gives us a lot of optimism for the future. And say, hopefully, when we start reopening, everything will be in line there. So pretty comfortable position. There's still lots of work to do. But in terms of our big main contracts, I think we're in a good place. Does that answer your question?

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Unidentified Analyst, [8]

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Yes. I just wondered if you felt the -- in addition, if you felt the structure of these agreements might change in some way once things get up and running again or where do you think it would just be sort of exactly the same with the pax deflators reversed, so to speak.

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [9]

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I mean it's difficult to say, Tony, but the pax deflators do give us a lot of protection. I mean a lot -- those contracts, passenger numbers take a while to recover, then our minimum rent will also be lower than it previously was. So I think we're well protected. And where there's a bit more grainers, we're working very closely with our landlords. And actually -- because we're -- because we sell a lot of essential categories, news, we do health and beauty and a lot of our shops, it really is in our landlord's interest to have us kind of open and ready and kind of helping to support them. So we're working very closely with them on opening plans. And I don't really see us being in a difficult position with the vast, vast majority of our landlords. (inaudible) difficult to say.

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Operator [10]

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Your next question comes from Jonathan Pritchard from Peel Hunt.

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Jonathan Pritchard, Peel Hunt LLP, Research Division - Retail Analyst [11]

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Three for me, two in the state. First, could you tell me a little bit about management structure out there and synergies and sort of combined thinking out there. How does that work? Obviously, the crisis has made that a little bit difficult early doors. But how is that all going to pan out? Could you give us a bit more granularity on InMotion? You alluded to negative like-for-like there in tough comps, but perhaps a little bit more color there.

And then just to follow up on the first question on social distancing, et cetera. Obviously, you have very, very large peaks in Russia through railway stations and obviously very high footfall through airports. Could you just give us a little bit more on your thinking when volumes do return in terms of passenger numbers, how are you going to cope with this and 2-meter rules? And what percentage of volume you think you'll be able to deal with relative to a non-social distancing world?

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [12]

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Thanks, Jonathan. So in terms of U.S. and management structure, we've got a very experienced management team out and Michael Wilkins, who runs Marshall retail group has been running that business for over 20 years. And he's very enthusiastic about the future. We think there's a lot of space opportunities that could come up in the U.S. over the next few years as all of this pans out. And MRG have done really well at winning tenders, and they're sort of the go-to retailer for landlords.

I think in working our way through this crisis, we've seen that there are opportunities for our U.S. businesses to work together in areas like business development, how we approach things operationally. So we're looking at kind of what are the synergies and how do we get those 2 businesses working together. And it's very early days. But I think out of that will come kind of a better business, but probably a leaner business as well.

In terms of InMotion, we are anniversarying a very, very tough comparable from last year. What was happening this time last year was that InMotion had good stock of airport pros -- of airports where lots of other retailers didn't have that airport stock. And it was quite a new thing back then, and the airports had launched the previous year, but stock has started to really free up. They had very good like-for-like. This year, we're anniversarying that. And on top of that, the AirPods Pro had just launched. As with a lot of things, Apple, it had launched, but without the stock behind it. So we had this great big hype of a new product launch, but without the stock. So we had a double whammy of anniversarying a period where we had a lot of Apple stock with this year having new technology without the Apple stock. So in a nutshell, that's where we are. We don't see it being a problem at all. And any of you familiar with kind of technology trends, now that kind of -- it goes up and down in waves. And we were quite looking forward to this period of time that we're in now because the stock of AirPods Pro would have kind of freed up, and there was quite a few other headphone launches coming. But we are where we are.

In terms of social distancing, yes, it's a hard one, Jonathan, because we're going to have to see how it operates as passengers come back. I mean what -- the big thing that I -- I mean, clearly, we know that for some time to come, there are going to be the volume of customers all packs in the store than there was. And does that mean that you have to think of WH Smith very differently. I don't think so because I think the thing that's really exciting about my business is that our ATV is just so low. And we have so many different essential categories. So what the teams are doing at the moment is working out how we might reimagine and relay out the stores such that customers that do come into our stores are able to see and experience other categories. And therefore, we get a much higher average basket value. And if you think that our ATV is GBP 7. If you add 20% to that, that's only GBP 1.40. And if we're widening our user categories, we're selling health and beauty, we're selling kind of low-end electronics. And when people are coming in and grabbing a newspaper or magazine, they're seeing all of those categories in an inviting way. That's where I think we could benefit. Customers tend to spend very little time in the WH Smith. They move in and out quickly. So as long as we manage our flows correctly, as long as we marshal our stores correctly, we should be able to allow a good flow of customers through. And you know what, if they spend a little bit longer because they're putting more stuff in their basket, that's pretty good as well. So it's hard to give a really accurate forecast to how it might be, but I think we're really well set up. And one of our big modeling exercises has been on our Kings Cross store, which is a very intense railway store. We worked out exactly how many customers we can have at any 1 point, what the flow will be, how do we need to reorganize products, and all of that is pretty scientific and looking at the different profitability of each categories and the different adjacencies. But I think we're pretty well set up for that. We've seen some of the signs from that because of how we operate our hospital stores. We've changed around the layout of our hospital stores over the course of the last month. And we've got a lot of learnings from our High Street stores as well. So I think we'll hit the ground running pretty hard, but I imagine that we'll have to innovate and change as we go. Does that answer your question, Jonathan?

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Jonathan Pritchard, Peel Hunt LLP, Research Division - Retail Analyst [13]

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It does. I think it's going to be an incredibly difficult situation with people running through for a paper, et cetera, and having to marshal them, et cetera, but that's probably a longer discussion, and we'll do that off-line, if that's okay.

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Robert James Moorhead, WH Smith PLC - CFO, COO & Executive Director [14]

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Yes. There, we've got a lot of contactless points as well. And actually, our tilling kind of area is kind of quite well set up for this current period if you think about it. And a lot of our rail and airport stores, we will have, in some cases, upwards of 10 kind of self-scanning tills where you can just go up and pay for yourself and move out. So tilling-wise, we're pretty well set up for this crisis. We haven't planned it that way, obviously, but...

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Jonathan Pritchard, Peel Hunt LLP, Research Division - Retail Analyst [15]

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Yes, without turning this to one of those tills, it's not a big place what you have instead of shut the average margin of 1 in between each one.

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Robert James Moorhead, WH Smith PLC - CFO, COO & Executive Director [16]

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But we've got quite a few, haven't we? So we were talking through one of our big Gatwick stores where we've got 18 self-scanning tills. So we'd have to shut off every other one on each side. So we'd still have 9 fully operational tills, and that makes life a lot easier because when you're dealing, if you're a retailer with a man till, you've got a bit of a struggle there as you have to manage the queues and have team meets the part. If we have kind of 2 runs of customers queuing, going into a self-scanning area, as long as you have different outflows coming out, we can set ourselves up quite well there, I think. It's all going to take careful rejigging. And the important thing we found quickly is we're not going to have a 1 size fits all, it's a case of actually really detailed work in sitting down with every single store plan and replanning it. But we do have some very high volume in 10 stores, and it's worth doing that. And we're really well advanced with that work, but it's something we can take off-line, Jonathan.

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Operator [17]

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Your next question comes from Richard Chamberlain from RBC.

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Richard B. Chamberlain, RBC Capital Markets, Research Division - MD of Consumer Retail [18]

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So yes, a couple for me, please. I wondered, first of all, how we should think about the cash burn in the light of the furlough job retention scheme. I mean, I guess, that could be wound down or the burden put more on employers while our passenger footfall is still very weak. And then on the travel side, Carl, I wondered if maybe you could talk about the key reason for the new contract wins, particularly by MRG. I think you mentioned there was a big one on the west coast. Is that still very much the sort of center place, localized approach that those guys are taking?

And then again, on Travel, the usage clauses and potential to widen those maybe in areas like health and beauty. I mean how receptive do you think landlords will be, I guess, particularly when we already have a sort of category specialists in many travel locations, the airports and so on?

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [19]

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Robert, do you want to take the cash burn question?

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Robert James Moorhead, WH Smith PLC - CFO, COO & Executive Director [20]

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Sure. In terms of the cash burn and the number, the GBP 25 million to GBP 30 million, that does not include any benefits from furlough. And so there are still actions that we can take from that. The -- sort of the monthly benefit of furlough is around GBP 6 million, so for the group as a whole. So any extension of that clearly helps that number. And in an extended lockdown scenario, there are clearly other things that we would do in relation to our store teams if all our stores were shut. So there is still more work we can do to bring that cash burn down.

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [21]

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So Richard, in terms of MRG, I mean, we're really pleased the win rate has continued. And I think it is all -- you're right, it's all about the potential place. And MRG gives something different to the landlords in the U.S. And with the likes of Hudson and [Lagardere], they've got a known format of store, whereas MRG are kind of designing something that's bespoke kind of a -- they can make local branding for the stores, for the airports and for the city, but actually with the same back end of ranges. And the landlords are loving that. And the technology that MRG have got in terms of their retailing allows them to bring together a lot of different categories, and some of their designs for stores really are truly superb. And I haven't seen anything around the world like that. And landlords think it's great. I think there's a lot we can learn from them for some of our other businesses around the world, but they're in the thick of quite a few tenders at the moment. I mean, obviously, everything's a little slower at the moment. But actually, they're still taking part in the kind of virtual tender presentations. So we're very positive.

In terms of user clauses, we've always been pretty good at kind of extending user clauses. And the big reason for that is we have such a high volume of footfall coming through our stores that people will pick up and go some of those categories, and they wouldn't necessarily have gone into the specialist retail. A good example of that has been low end kind of headphones, where when we say to a landlord, let us operate this category, it's not going to have any detrimental effects on the specialists that you might have in the airport. We've seen a lot of good success there because people who weren't otherwise in the market kind of see these categories and then they've kind of pick them up and kind of stick them in their basket. And that's what kind of gives me some optimism about the future in terms of how we might operate. We've got the benefits that we've got so many different categories. And probably quite a few of our customers don't realize that we sell some of those products. And our skill needs to be, over the next months and year, making sure that we get all of those categories in front of our customers and we show them those kind of cross-category promotional offers and really drive our ATV forward. So we've got a lot case studies that we go to with landlords where we say, well, look, this is where we've extended and used clauses in other airports. And this is what's happened as a consequence for other retail and for those landlords. And we're able to present some pretty good cases there. So I'm pretty optimistic. It's always -- sometimes it could be slow with some landlords, but I think the benefit we have is a lot of good examples.

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Operator [22]

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Your next question comes from the line of Lorenzo Margiotta from Bank of America.

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Lorenzo Margiotta, BofA Merrill Lynch, Research Division - Research Analyst [23]

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Just 2 for me. First one is on the 45% drop-through you spoke of previously. Now that you have -- you talked about rent measures and furlough has been extending, do you think that comes lower? Or are you still standing by that as a sort of conservative estimate?

And then secondarily, within the sort of $25 million to $30 million cash burn. Can you give us an idea of the sort of inventory and payables move going on in there?

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [24]

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Robert, are you going to take those questions?

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Robert James Moorhead, WH Smith PLC - CFO, COO & Executive Director [25]

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Yes, let me take those, Lorenzo. Yes, the 45% drop-through still stand by that from what we know today from when we first talked about that a month ago. And in terms of the cash burn, that really relates to an extended lockdown. So that would assume that we're not buying a lot of stock, if any stock, and we will have unwound our working capital position. So we -- as you've seen the outflow we had in April around GBP 40 million, that's a large chunk of that with working capital and paying off the creditors that we had in play as we went into the lockdown. So most of those, if not all of them, will be paid off over the next couple of months. So in an extended period, we just wouldn't be having those kind of flows.

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Operator [26]

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Your next question comes from Paul Rossington from HSBC.

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Paul Rossington, HSBC, Research Division - Analyst [27]

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Just to go back to the cash burn question again, and sorry to labor the point. If the cash burn calculation doesn't include the benefit of furlough, does that exclude any other benefits? For example, are you including the business rates holiday, for example, in that number? Or is that not in the number? Just trying to understand what other costs may or may not be included in that calculation? That's my first question.

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Robert James Moorhead, WH Smith PLC - CFO, COO & Executive Director [28]

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So that is a run rate in an extended lockdown period. So that takes into account all the costs that we've incurred for running the business around the world in a situation that's worse than today, i.e., in a full knockdown. So it is coming out with a kind of worst-case scenario of how we think the cash flow would be. But it doesn't take into account furloughing in the U.K., should it be extended. And it looks like it's going to be extended to some point through to October in some way, it doesn't include that. And it doesn't include any other significant changes to our cost base, which we would obviously be making if there was an extended lockdown where nothing was open for, say, the next 9 months. Clearly, we would be making some other decisions there. And so there is further opportunity in that number should we get into an extended lockdown scenario.

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Paul Rossington, HSBC, Research Division - Analyst [29]

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Okay. And Is it -- is that -- is the GBP 25 million to GBP 30 million is a worst-case cash burn scenario? Do you have a best case cash burn scenario?

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Robert James Moorhead, WH Smith PLC - CFO, COO & Executive Director [30]

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At the moment, where I think about the managing liquidity and looking at what's going to happen to our cash flows going forward over an extended period, I tend to look on a worst-case and take a prudent view of it and take a conservative view, and that's what we've been focusing on. Furloughing alone in the U.K. each month is worth GBP 6 million to us. So if that is extended for another 3 months, either 100% or 50%, that's the kind of scale of opportunity. It could be there. And we get that line can be a lot lower because of the operational gearing of the business. And so we -- it's a range, I guess, from the minus 25 to 30, to again, getting up to flat, the sales get back to around 40% to 50% down.

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Paul Rossington, HSBC, Research Division - Analyst [31]

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Okay. And also another one on the numbers. Just looking at the lease expiry profile, which you've discussed or mentioned, have you got any idea as of today what potential cost savings that could yield into outer years?

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Robert James Moorhead, WH Smith PLC - CFO, COO & Executive Director [32]

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Well, our rent roll in the High Street is around [GBP 70 million]. We achieved rent savings of around 40% -- over 40% in the first half. I think we all acknowledge the ERV on the High Street is somewhere below what people are paying. So our track record of making savings prior to this -- prior to the COVID-19 was 30% to 40%. And I think going forward, then there is significant savings there in our rent roll. That's the 400 stores over the next 3 years. There's no real peak in that, it's fairly evenly spread. So quite substantial saving opportunities, I think.

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Paul Rossington, HSBC, Research Division - Analyst [33]

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Okay. And the last question I have, can you just give us or remind us exactly what the rough split between U.K. air, hospital and rail revenues are, please as of the first half?

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [34]

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Robert, do you want to take that?

Well, I think we're going to have to get back to you with that.

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Paul Rossington, HSBC, Research Division - Analyst [35]

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Okay. Understood.

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [36]

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I'm just scrapping around for a bit of paper for myself to find out. I don't want to take an educated guess at such an important time.

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Paul Rossington, HSBC, Research Division - Analyst [37]

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Not at all. Not at all.

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Operator [38]

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Your next question comes from Kate Calvert from Investec.

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Kate Calvert, Investec Bank plc, Research Division - Retail Analyst [39]

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Two questions for me. First question is, could you talk about the pipeline of new opportunities in the U.K. Have things sort of ground to halt or conversations ongoing?

And the second question is on your Australian business. Can you talk about where Australia is at the moment in terms of opening up? And perhaps give an indication on how domestic Australia is and I suppose for domestic. Can you also include New Zealand because it seems that they will probably get together?

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [40]

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Yes. So I guess -- thanks, Kate. In terms of pipeline of new opportunities, there's still quite a lot of that. I mean, things have slowed down completely in rail, but there's a lot of ongoing conversations with hospitals. And you'll remember that we did this, probably about 300 hospitals that could take kind of some sort of offering from us because we've got -- we operate WH Smith stores, we operate Marks & Spencer stores, we operate Costa Coffee franchises. And we can combine all of those into 1 store or we can have 3 separate stores. And we've got quite a bit of space to go after. And our reputation has only been high over the course of the last 2 months because in many hospitals, we're the only place open, beating kind of NHS staff. So I think we're pretty well placed coming up for some of those opportunities. And once we're through this crisis, I don't think there's going to be any kind of shortage of people wanting to kind of sort out the infrastructure of some of these hospitals. So I think there's quite a bit of opportunity there.

I think airports, although this feels really bad at the moment, airports will constantly be looking at how they can reimagine and kind of recalibrate their retail space to kind of increase their revenue. And I think we're a retailer who's got more solutions for them than others because we're very good at kind of mixing categories and managing our space in a way that I think other retailers struggle to do. So I think there will still be opportunities out of this for us to take space. And I imagine that there will be quite a few retailers whose proposition won't quite work over the course of the next year or 2 years if passenger numbers are lower because they're unable to kind of increase their average transaction value. They're not going to -- it's not going to be an economic model for them. And I think in a world where space becomes available, I think we'll be one of the retailers that's first in the queue with landlords.

So I feel quite optimistic about new opportunities, and we're going to make sure we're very well geared up for that. And we'll certainly talk to all landlords about that now in terms of helping them with any space that might come up.

In terms of Australia, you're right, kind of Australia seems to be coming out of lockdown sooner. The COVID-19 is very different over there. The death rate is a mere fraction of what it is over here. And we've seen the restrictions kind of easing already and the elective -- we've got -- again, a lot of you know that we've got shops in hospitals in Australia, the same as over here. And elective surgeries come back, visitors have come back. So that hospital channel is really starting to reopen. And there is now talk of domestic flight schedule, and they're being sort of like kind of sort of bringing New Zealand into that and allowing people to sort of fly backwards and forward and interstate. And so we think that market should open up sooner. The star reality though is that a lot of airport business is from international travel. So until that opens up, we're not going to see a dramatic recovery. But we do think it should ease for us in Australia. Would you have anything to add to that, Robert, in terms of Australia?

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Robert James Moorhead, WH Smith PLC - CFO, COO & Executive Director [41]

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Apologies, it's dropping out. So in terms of Australia, we're beginning to see a recovery there. There is some interstate travel, so between New South Wales and Victoria. The Tazman, sort of bubble that they've been -- they're talking about to New Zealand and Australia. It looks like it may come into play in the spring or autumn. And the New Zealand is the biggest single foreign international traveler into Australia. So that would be encouraging. And as Carl said, our fresh plus business has seen some big improvements as elective surgery is still off. And so Australia looks like it's coming out of lockdown the fastest of all our territories.

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [42]

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I'm really glad that Robert didn't dip out in the middle of the cash burn question.

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Operator [43]

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(Operator Instructions) We have no further questions on the phone lines. Apologies, there's one that come through from Matthew Garland from Citi.

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Matthew C. Garland, Citigroup Inc, Research Division - Assistant VP & Senior Associate [44]

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Sorry, I dropped off the line as well. So if my question has been answered, then apologies. I have two based around Travel. One of them was in terms of airport travel, how much flexibility do you have in terms of the openings, i.e. does the landlord -- is it a negotiation between you and the landlord, kind of landlord proportion rate and when you might not otherwise want to?

And then in terms of my second question, obviously, I know that you've talked about minus 80% to 85% down in the second half of this year, with obviously the U.K. talk of this to the quarantine periods for travelers, I was wondering -- and obviously, the other things that you talked about. Are you able to give any more information there around whether you're not that kind of level has changed or how your thinking has kind of evolved coming from that basis?

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [45]

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Okay. Well, in terms of opening and working with landlords, I mean we're in touch with all of our landlords. And when it is viable for retail to start opening in airports, we would naturally be one of the first retailers to open because we have all of those different essential categories and a lot of the staff also buy products from our shops in terms of the airport retail staff. So it's not a question of landlords kind of forcing us to open. I think as travel starts to come back, we would naturally be one of the first retailers to open. And if you kind of -- and everyone's been through Heathrow, we've got a number of shops in Heathrow. We've got lots of little satellite shops. So how we'd imagine kind of -- in terms of the bigger airports, in terms of reopening schedule is that we would open our large stores first. And then in terms of the satellite stores and payer stores, we keep those closed kind of initially until passengers start to come back. So that would be how our opening plan would work. And that would be kind of hand-in-hand with the landlord. So I think we're pretty clear at all of that. I mean, the big question, Matt, is when those air trouble start coming back into those airports. And that's something that I can't give any indication on it.

And I guess in terms of your second question, it's just not something that we can give any guidance on at the moment. I mean, you hear all of the different kind of noises coming from either airports or airlines, and it's -- there's just too much uncertainty at the moment to give any guidance whatsoever. All I can say is that we're ready for when we did information, when air traffic comes back, and we've got a really good plan in terms of how we'll open and how we'll run our stores. But as things stand at the moment, that's all I can say, I'm afraid.

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Operator [46]

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Thank you. There are no further questions on the phone lines. I'll hand back to you for some closing remarks.

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Carl D. Cowling, WH Smith PLC - Group Chief Executive & Director [47]

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Okay. Well, it just remains for me to thank everyone. Thanks for all your support. I know this has been -- everybody uses the word unprecedented. This is an unprecedented time for us all. We're a strong and resilient business, and we are very nimble and entrepreneurial. And whilst this is a very, very difficult time, we are spending a lot of our brainpower working out how we are going to reimagine our store layouts and operating our stores in the future so that we can minimize any downsides. And I'll point you back to kind of our very small average transaction value of GBP 7. And we've got a number of categories. That's where our energy is going to be over the course of the next couple of months, working at how do we safely open our stores, how do we get all of these categories in front of consumers, how do we do better promotions so that we can increase that basket value, and that's going to be our focus. But thank you to all of you, and I'm sure we'll speak soon.

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Operator [48]

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Ladies and gentlemen, this does conclude today's call. Thank you for joining. You may now disconnect your lines.