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Edited Transcript of SSPG.L earnings conference call or presentation 20-Nov-19 9:30am GMT

Full Year 2019 SSP Group PLC Earnings Presentation

London Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of SSP Group PLC earnings conference call or presentation Wednesday, November 20, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jonathan Davies

SSP Group plc - CFO & Executive Director

* Simon Smith

SSP Group plc - CEO & Director

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Conference Call Participants

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* Ali Hamza Naqvi

HSBC, Research Division - Analyst

* Anna Elizabeth Barnfather

Liberum Capital Limited, Research Division - Research Analyst

* Jaafar Mestari

Exane BNP Paribas, Research Division - Analyst

* James Rowland Clark

Barclays Bank PLC, Research Division - Research Analyst

* James Robert Garforth Ainley

Citigroup Inc, Research Division - Director and European Hotels and Leisure Analyst

* Jamie David William Rollo

Morgan Stanley, Research Division - MD

* Mark Paul Irvine-Fortescue

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Timothy William Barrett

Numis Securities Limited, Research Division - Leisure Analyst

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Presentation

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Simon Smith, SSP Group plc - CEO & Director [1]

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Good morning, and welcome to our Full Year Results for the period ending the 30th of September, 2019. I'm Simon Smith, CEO of SSP. And joining me today is Jonathan Davies, our Group CFO; and Vagn Sørensen, our Chairman.

So I'll start with some opening comments and the group highlights, and Jonathan will take you through the financials, and I'll finish by giving you an update on the business, the progress we've made and our clear brands to build on that progress. And there'll be plenty of time for questions after that.

So let's get going. SSP has had a very good year. Despite some external headwinds in a number of regions, we have delivered a strong set of numbers, which is a testament to the flexibility and resilience of the model and the really hard work from all of our teams.

Building off a strong base, we've had another year of significant expansion, opening business in new locations and into new geographies.

This year, we've delivered sales growth of 7.8% at constant currency; with very strong net gains of 5.6%; like-for-like sales growth of 1.9%; and acquisitions of 0.3%. At actual rates, sales were up 9%. Operating profit increased by 12.1% at constant currency and 13.3% at actual exchange rates, with the operating margin up a further 30 basis points.

EPS grew by 15.9%, and we are proposing a final dividend of 11.8p, up 15.7% year-on-year. And following the return of GBP 250 million to shareholders in special dividends over the past 2 years, we are today announcing a further return of GBP 100 million through a share buyback. This reflects the confidence we have in the business, the opportunity to invest and our intention to keep an efficient balance sheet.

Looking forward, the medium-term pipeline looks strong, underpinned by another really good year of contract wins. So I now hand over to Jonathan to take you through the financials.

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Jonathan Davies, SSP Group plc - CFO & Executive Director [2]

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Good morning. As Simon's just shown you, we've delivered a very good set of full year results. Overall, sales increased by 7.8% on a constant currency basis, and reported sales were up 9% as the weakness of sterling against most of our currencies resulted in a positive translation impact of 1.2%. However, if the current FX rates were to continue throughout 2020, we would expect a negative currency impact on revenue of around 2% for the full year.

Operating profit was up 12.1% on a constant currency basis to GBP 221 million and 13.3% at actual FX rates. This was driven by the good sales growth and further operating efficiencies, with particularly strong performances in North America and the U.K.

Profit before tax was up 10% and EPS up 16%, benefiting, of course, from the share consolidation, along with the special dividend.

Net debt was GBP 483 million at the year-end. The increase from last year largely reflects the special dividend payment of GBP 150 million in April and leverage at 1.5x EBITDA remains at the low end of our target range.

So turning to sales. Like-for-like sales for the full year was 1.9%, broadly consistent across both halves. Sales were really driven by increasing passenger numbers again, with growth in the air sector continuing to be stronger than in the rail sector.

As you know, we faced an unusual number of headwinds during the year, many of which will continue into the first half next year. Hence, we continue to plan cautiously, anticipating like-for-like sales growth at a similar level to this year, so just below 2%.

Now turning to our regional performance. Like-for-like sales in the U.K. were a little stronger than last year at about 2.5%, as we benefited from a slightly lower level of disruption in the rail network.

Like-for-like in the air sector remained fairly robust, albeit is likely to be impacted as we look forward due to airline capacity reductions, particularly in the U.K.

In Continental Europe, like-for-like sales were broadly flat, mainly due to the Gilets Jaunes protest in France, although across the Nordic countries and in Spain, we saw slower passenger growth and the impact of some major airport redevelopments.

Like-for-like sales growth in North America was pretty solid at 3.5%, driven by continued good passenger growth, although we were impacted in the second half by the grounding of the Boeing 737 MAX aircraft.

Like-for-like growth in the Rest of the World was 4.5%, with good performances some -- in some regions, notably Egypt in the Middle East, but lower growth in the Asia Pacific region as a consequence of weakening economic activity in China, the protests that we've all seen with Hong Kong and, of course, the failure of Jet Airways in India in the second half.

Now overall, gains remained strong at 4.5%, as Simon said. Net gains in Continental Europe were particularly high at 6.5%, driven by the mobilization of some very substantial new contracts, including at Charleroi Airport in Belgium, Montparnasse Railway Station in Paris, our new German motorway service areas and the Starbucks outlets that we've opened in railway stations in the Netherlands.

North America had another outstanding year with net gains of 13% and driven by new business opening in places like Seattle, Los Angeles, Oakland and LaGuardia Airports.

In the Rest of the World, we saw strong net gains in India, in the Philippines and in Thailand. However, this was offset by our decision to exit from some units in both Shanghai and Hong Kong airports.

Now looking into 2020, the pipeline looks strong, and our expectation is for net gains to be between 4% and 5% next year, including the proposed acquisition of Red Rock in Australia, which we've announced today.

So turning to profit. Overall, group operating profit increased by 12% to GBP 221 million, as I've said. In the U.K., operating profit was up almost 14%, a reflection of the good like-for-like sales I've mentioned and further operating efficiencies.

In Continental Europe, operating profit was broadly flat, held back by the weaker like-for-like and the preopening costs associated with mobilizing a large number of new contracts, as I've discussed.

In North America, operating profit was up 45%, reflecting the strength of the top line growth, our increasing focus on operating efficiencies and also benefiting from a lower level of depreciation in the year.

Operating profit in the Rest of the World was down very slightly, reflecting the weaker like-for-like in some territories and the cost of entry into brand-new markets, notably the Philippines and Brazil.

Now if you look at the overall group P&L, you can see operating margin increased by 30 basis points to 7.9%. This was a very strong performance given the ongoing cost inflation, particularly in labor and the rising concession fees as well as the scale of our growth program. Simon will talk in more detail about our ongoing efficiency initiatives. But as you can see, we've had another very strong year of progress, particularly in the areas of gross margin, which was up 80 basis points.

Labor ratios increased by 20 basis points, really reflecting the scale and complexity of our opening program as well as some of the ongoing inflationary pressures.

Concession fees rose by 60 basis points, very much in line with the recent trends and, of course, were impacted by the stronger like-for-like sales in the air sector, which typically have higher concession fees as well as higher gross margins compared to the rail sector.

We've also seen a good improvement in overheads of 30 basis points, including actually a big contribution from our energy efficiency initiatives.

Now looking forward to 2020. We expect to make further good progress on our operating efficiency initiatives, which will more than offset the impact of the ongoing cost inflation and rent increases.

With another year of significant expansion planned, we expect overall operating margins to remain at a similar level to last year, as we anticipate higher preopening costs and start-up costs arising from the strong net gains, the entry into new markets and the integration of the Red Rock operations. And we also expect the rate of depreciation to increase slightly as a result of the timing of our investment program.

If we look further down the P&L. Net profit was up 11% to GBP 131.5 million. Net financing costs were up over GBP 6 million to GBP 22 million, a reflection of the increased net debt. And with the full year effect of last year's special dividend and a further GBP 100 million buyback planned, we expect interest costs to rise to around GBP 25 million this coming year.

Our share of profits from associates was GBP 4.1 million down year-on-year, principally due to some one-off costs in joint venture operations in France. But in 2020, we expect the share of profit from associates to increase again to around GBP 7 million.

The tax charge represented an effective tax rate of 22.2%, and we expect it to remain at around 22% for the coming year.

The noncontrolling interest cost was only up GBP 1 million year-on-year, and that was mainly because we benefited from increasing our stake in TFS in India from 33% to 49% during the year.

Next year, we expect our minority interests to rise to around GBP 30 million, reflecting the growth in our joint ventures in North America and the Rest of the World, which would be broadly in line with historical trends.

Underlying EPS was 29.1p, up 16% year-on-year, enhanced by the share consolidation, and we're proposing a full year dividend of 11.8p per share, also up 16%, representing a 40% payout ratio.

Now turning to cash flow. Over the year, we generated GBP 51 million of free cash flow, GBP 26 million below last year, but that was after investing an additional GBP 41 million in capital projects and the further GBP 26 million on acquisitions, principally the purchase of the remaining stake in TFS in India.

The CapEx of GBP 185 million reflected the strong net gains in the year as well as the cost of rebranding units opened in previous years, notably in the U.S. at Chicago Midway, JFK, Terminal 7 and LaGuardia Airports. You may remember here that we took over competitors' units at all of those airports, and so we saw the net gains coming from -- through from those earlier years, but have only started to invest in them over the last couple of years.

Importantly, the capital intensity of our business measured in terms of sales per pound of capital investment in new units remains unchanged in recent years.

Looking forward to next year, our expectation is for CapEx of around GBP 160 million to GBP 170 million, excluding the acquisition of Red Rock, again, very consistent with the planned net gains.

So turning to net debt. As I've already said, net debt was GBP 483 million at the end of the year, representing leverage of 1.5x, and that compares to 1.1x at the end of last year. The higher net debt is essentially a reflection of the payment of the ordinary and special dividends. And so with leverage remaining at the bottom end of our target range, we've taken the opportunity once again to review our balance sheet efficiency.

As we've said before, our priorities for the use of cash are to invest in organic growth, selective M&A and ordinary dividends. However, this is all in the context of our financial strategy, which is to keep leverage in the medium term at between 1.5x and 2x EBITDA.

So having reviewed our medium-term capital requirements, and with the expectation that leverage would, therefore, fall below our target range by the end of this coming year, we're now planning to return up to GBP 100 million to shareholders in the form of a share buyback.

Now before I summarize, a quick word on IFRS 16. As you will undoubtedly be aware, IFRS 16 is the new lease accounting standard, which comes into effect from our new financial year. Worth reinforcing, this standard has no economic impact on the group. It has no effect on our cash flow and no impact on how we run the business.

We'll continue to pay variable concession fees in the vast majority of our business and the capitalized rent that goes on the balance sheet represents only the minimum guarantees, the minimum annual guarantees, which are a part of many of our contracts, but, of course, we are generally not paying.

However, it does, of course, represent a material change in the way the assets, liabilities and income statement are presented going forwards. The headline impacts are that we expect to recognize a right-of-use asset and liability of about GBP 1.6 billion on the balance sheet. And in the income statement, we expect to see an estimated increase of about GBP 10 million in full year operating profit, that is the lower net rent offset by the higher depreciation charge; and about a GBP 25 million reduction in PBT, which is a consequence of the unwind of the discount, which goes through the interest line.

Our first financial statements under this basis will be our 2019/'20 interims in May. We intend to report those results both pre and post the impact of IFRS 16. And just for the avoidance of doubt, all the earlier guidance that I've given is on a like-for-like basis, i.e., before the impact of IFRS 16.

So to summarize. We've delivered a good set of results for the year with robust like-for-like sales, particularly in the face of a number of headwinds and very strong net gains. We delivered 12% operating profit growth, driven by a good top line, further margin enhancement of 30 basis points, and that has converted through to EPS growth of 16% year-on-year.

Cash generation continues to be healthy, funding increased investment, and we've announced a 16% increase in the ordinary dividend as well as the share buyback of GBP 100 million. Both of these moves reflect our confidence in the future growth and cash generation of the business.

And with that, I will pass back to Simon for the business review. Thank you.

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Simon Smith, SSP Group plc - CEO & Director [3]

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Thank you, Jonathan. So before getting into the detail, I wanted to take a moment to give you a sense of how I see our business. Over the past 5 years, we have created a great business. Our scale, know-how and momentum have given us a real competitive advantage. We are in growth markets. Our customers are increasingly eating on-the-go, and our clients are dedicating more and more space to food and beverage. But we are not complacent, we are all ambitious for SSP, and we want to do more.

So as an organization, we need to continue to evolve. We've done a great job in many areas, but in the next phase of our growth, we need to do more across all of our stakeholder groups: our customers, clients, brand partners, investors and, importantly, our colleagues.

For me, it's the cumulative effect of getting it right across all of these groups that will, I believe, propel us to the next level of performance at SSP. And importantly, we need to do that within an environment of strong corporate governance and do more to address our environmental and social responsibilities.

We're a big company. We have access to a vast cohort of people, and we can make a difference, whether that's reducing waste, cutting single-use plastics, reducing our energy usage or any one of the very many initiatives that we have underway.

As I said, we have a great business, but there are areas that I'm going to want to go faster: evolving our business model to position us for long-term sustainable growth. So let me start by recapping on our model.

As I've already said, we operate in large and growing markets, and our share is still small. Our primary focus remains on organic growth. And our proven model, which combines international scale with local expertise, is successful, and we have a lot of momentum.

Cost efficiency is deeply embedded into our culture, and we are constantly identifying and driving efficiencies. And automation and technology will help us access the next layer of those efficiencies. And M&A can be a useful addition to our growth, and we have a track record of delivering good returns.

Cash flow will continue to support our organic growth and with our surplus cash being returned to shareholders to keep our balance sheet efficient. This is an important part of our financial model.

We are also making good progress diversifying our business, and we are increasingly weighted to high-growth regions and high-growth channels. We have strong market positions in the U.K. and Continental Europe. North America and Rest of World are fast-growing and together are now almost 1/3 of our business. We've capitalized on the strong growth in air passenger travel globally. And as you can see, the business is now around 2/3 air versus 1/2, 5 years ago. And I'd expect these long-term trends to continue as we grow the business in North America and the Rest of World.

So I've talked about our ambition, so let's talk about some of the actions I've taken in my first 6 months. We've done a good job in driving like-for-like sales, but there is much more opportunity. By analyzing our customer and our client data, we can do a better job at delivering against their expectations. And I'll give you some examples of this in a minute.

I want to go faster in growing the Rest of World business. And to that end, I've brought in a new CEO for Asia and invested in additional business development resource.

In North America, I want to better support our expansion and drive greater commercial optimization. So again, we've invested in a bigger and better commercial team there. Having spent the last 5 years driving commercial excellence in the U.K., I feel well-placed to do the same right across the group. And so to make progress on this, I've launched a targeted program, which is aimed at fast-tracking all of our best commercial practices globally.

As I've said, automation and technology can help drive further performance for us, whether that's in kitchen production, data analytics or to support the customer journey and the customer experience. And we have started to move faster on this, but we have a lot more to do, and there is plenty of opportunity.

And as we've already said, M&A can be a useful addition to our growth. Aside from acquiring the Jamie's units at Gatwick this summer, we have today announced the acquisition of the package of units in Red Rock. Building on our presence in 4 airports in Australia, the Red Rock units will take us into Perth Airport for the very first time and will significantly grow our business in Melbourne Airport.

And finally, on CSR, we need more focus. So I've brought a dedicated team of senior leaders together to drive this, and we will be clearer on where we can make the most impact and drive those initiatives harder.

Importantly, we will continue to use the 5-lever approach to deliver on these priorities. It's a framework that has served us really well since the IPO in 2014.

So let's start by looking at our first lever, which is optimizing our offer and driving profitable like-for-like sales. This is, as I said, a key priority for us. We have done a good job over the past few years, focusing on range, pricing, promotion, up-selling and how we use our space. I now want to better align our offer to the changing needs of our customer, client and brand expectations.

So let me give you a couple of examples of how this relates to our customers. Across our business, we have a terrific access to customer information. We're increasingly capturing this data and can see 3 important trends. We've already made some progress, but our aim is to capitalize on these trends and further improve our customers' experience.

Our customer profiles are changing, as we see the emergence of the millennials and the Gen-Z demographic. These customers seek out value and brand provenance when making choices about where and what to eat. Their diets are more diverse and include more plant-based, locally sourced and artisan options. In North America, for example, we are including more locally sourced products and are badging these with branding to distinguish their local provenance. Meat-free, gluten- and dairy-free items are increasingly appearing on our menus.

In the U.K., we are introducing vegan ranges and right across many of our brands, including the vegan pasty, which is now the second best pasty after steak. At Upper Crust, the recently launched vegan festive baguette is selling the same volume as the meat version. And in the Nordics, we've introduced a healthy food brand called Haven, where nearly 1/4 of all the food items on offer are vegan.

Premiumization is the second key trend that we see, where our customers want to trade up and are willing to pay more for fresh produce and a high-quality offer. Blended counter fruit and vegetable smoothies and premium choices like our chorizo sausage rolls are increasingly popular.

And of course, our customers are becoming more tech savvy. Many expect to be able to quickly order and pay through their mobiles. So we need, over time, to deliver this right across the business.

Indeed, we see wide application in technology to grow our profitable like-for-like sales. Following successful trials, we have already started rolling out self-order kiosks across our quick service restaurants globally. And this year, our new mobile ordering pilot began across some of our U.K. Bar estate. You simply hold the camera on your phone over the QR codes on the table and then you order and pay on your phone. Trials have delivered increases in both average transaction volumes and value, as customers have self-selected higher value items when they're presented with this option conveniently as a pop-up on their screen and enjoy the simplicity of ordering and paying.

Our trials at the Grain Loft Bar in Manchester, for example, have delivered a 5% increase in sales, by more orders being taken at peak times, customers ordering more items and customers trading up. We will go faster with the rollout of this technology.

So let's move to our second lever, growing profitable new space. We have had another very strong performance this year with net gains of 5.6%, and our renewal rate has remained consistently high. There has been a lot of development activity, both in existing and in new markets, and we continue to take a very disciplined approach to new business, being focused on generating high returns.

Again, before moving on, I wanted to take a moment to step back and look at how our top line has evolved over the last 5 years. As you can see from the chart, net gains have become an increasingly important part of our sales mix. In the last 3 years alone, we have added GBP 350 million of annualized sales through our net gains. Whilst we continue to expect net gains to be lumpy, which obviously reflects the type and timing of new contracts and our renewals, the strong pipeline and the momentum that we have is very encouraging. And our expectations for net gains, including acquisitions, is to be between 4% and 5% this year.

Indeed, we've seen really strong net gains in North America, where we have almost tripled in size. Our access to brands and our localized approach has worked well and is driving significant momentum. The market is really large, estimated at around GBP 6 billion, and it's growing. SSP's share is still very small at less than 10%. We only have a presence in 27 of the top 80 airports and the opportunity for growth is significant.

We're growing in existing and in new sites, winning more than 70 new units this year, and the pipeline is very encouraging.

Aside from the new wins in North America, we've also had a very strong year of wins across our other geographies and across both halves of the year. Recent wins in Continental Europe include Alicante Airport in Spain and at railway stations in Brussels, Stuttgart. In the Rest of World, building on new wins at Delhi and Mumbai in half 1, in half 2, we've added new business at Bangalore in India. And in China, we've recently won Shenzhen and Hongqiao airports. For the first time this year, we've won new contracts in Bermuda and Malaysia. And once we start operating in these markets, as well as Bahrain which is scheduled to open next year, our global footprint will have increased to 38 countries, and we see further expansion opportunities in these new markets.

So moving on to gross margin. Gross margin has been a significant driver of value for the group, delivering over 450 basis points of improvement over the past 5 years. Our focus has been getting the basics right, standardizing our menus, recipes, reducing product duplication and managing our waste and loss. I see much more opportunity here. And so let me tell you about some of the ways I think we can access that.

So I talked earlier about driving commercial excellence right across the group. Put simply, that means putting in place successful best practices that drive key areas of value for us. Headed by our U.K. Commercial Director in a new role, I've established a small central team to focus on this and start by working with our newly formed and larger North America commercial team. So the team forensically analyze and benchmark sales and gross margin and then develop a set of actions to capture value opportunities.

In our recent review of Tampa Airport in the States where we looked at Buddy Brew, a coffee-led unit, we found that food sales were low, and it was underperforming its benchmarks. By introducing 7 high gross margin breakfast lines, making them available as an all-day food offer and advertising them on new digital screens, food sales doubled, with 2/3 of customers now posting a food item. It's driven up ATV, food transactions and ultimately, profit, and is a good example of how a standardized approach can drive real value.

Moving on to our fourth lever, running an efficient and effective business. As we know, labor is a very significant cost in our business, and we're seeing cost inflation in the U.K. with the advent of National Living Wage and in North America, with minimum wage increases.

Our approach to managing this has focused on developing and implementing labor scheduling and productivity tools. We're partway through rolling these out. And as we do so, we find increasing opportunities to improve their effectiveness.

Automation and technology increasingly provides us with more opportunities to reduce our labor costs. There are examples everywhere, including in the kitchen, where we are putting in more automated food production equipment. So let me just give you a couple of examples.

So as you know, we have a huge range of kitchens across our business, from large central production units to very small spaces behind some of our trading units. We are currently auditing what we have and where the opportunities are. In some cases, that might be just a couple of pieces of equipment. In others, there may be more opportunities to improve our efficiency.

Simultaneously, we are seeing more and more automated equipment come on to the market from the pizza dough press you see here, which improves production speed by 70% with no wastage, to the Sushi machine, which cuts preparation time by 60% and makes a consistent and superior product. And as well as saving labor, most of this equipment also saves energy. The burger oven, for example, that cooks at low temperature over 6 hours, producing a juicy burger in bulk, actually consumes 40% less energy than a traditional grill. And as I said, more of this type of equipment is coming on to the market all the time. It's not costly. A lot of it is straight replacement, but it is important that we continue to invest in it, both to improve the customer experience and ultimately reduce our costs.

So let me wrap up. Looking back at the year just gone, we've had a really good year, delivering significant expansion again in the business and, at the same time, increasing our EPS by 16%. Indeed, our confidence in the business is reflected in the announcement of the GBP 100 million share buyback that adds to the GBP 250 million special dividends already returned to our shareholders.

The new financial year has started in line with our expectations. I've set up my priorities and I've taken you through some of our initial actions. We have made a good start, but there is loads to go for. And with the scale of our global opportunity and our pipeline of new business this year and next, the potential for growth is very attractive, and I'm confident that we will continue to deliver long-term sustainable value for our shareholders.

Thank you, and we'll now move to questions.

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Questions and Answers

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James Robert Garforth Ainley, Citigroup Inc, Research Division - Director and European Hotels and Leisure Analyst [1]

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Are you going to throw over the mic, please? Cheers.

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Simon Smith, SSP Group plc - CEO & Director [2]

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Shout and I'll hear you.

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James Robert Garforth Ainley, Citigroup Inc, Research Division - Director and European Hotels and Leisure Analyst [3]

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It's James Ainley from Citi. Three questions please. Can you talk about which airports have seen the most significant MAX issue? And can you quantify what you think that drag has been on North America [line]?

Secondly, why did you exit the units in Hong Kong and Shanghai?

And then third, can you just update us on what's happening at Midway where (inaudible) units at those sites where you have the (inaudible)?

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Simon Smith, SSP Group plc - CEO & Director [4]

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Yes. Sure. I don't know if everyone heard those questions, but they're all around impact in America and impact of -- and some exits from Hong Kong and Shanghai.

So if we just start with -- if we just start with the airports -- sorry, the impact from the airlines in -- the MAX impact in North America. So yes, it has been an impact, as we've outlined. It's principally affected Chicago Midway, which is a big business for us, but it's also had an impact in some of our other airports. Our view is that, that will continue well into next year, and that's built into our plans.

It's not the only impact. We've also, as we've said, seen some passenger moves away within some of our terminals, like in JFK, but the majority of the impact of that airline change is from Chicago Midway.

The reason why we exited the units in Hong Kong and Shanghai is because, as you know, we don't chase share and when those tenders came out, they were bid and won on what we believed to be an unsustainable rent. We are very disciplined in our approach to new business. And we felt that the economics were not attractive to continue there. It's as simple as that.

And then your last question was on the impact in Midway, specifically, was it or just….

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James Robert Garforth Ainley, Citigroup Inc, Research Division - Director and European Hotels and Leisure Analyst [5]

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Just -- well, the timing -- just update on the development program, presumably.

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Simon Smith, SSP Group plc - CEO & Director [6]

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Okay. So I actually visited Chicago Midway in July, and it really brings it alive because we've got a big business there. And at that point, we had about half of it was still to be changed. We were in refit with 2 or 3 units, and a few had already been rebranded. So we're about halfway through the work. We actually quite like dragging it out for obvious reasons. It's commercially attractive for us. And Pat Murray, our Business Development Director, the other day was telling us how he intends to drag some of those units out for a bit longer. But we're about halfway through as things stand.

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James Robert Garforth Ainley, Citigroup Inc, Research Division - Director and European Hotels and Leisure Analyst [7]

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And how many units have you got? Are they are all (inaudible)?

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Simon Smith, SSP Group plc - CEO & Director [8]

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Yes. So there's lots of moving parts in this. I think we've got over 20 units.

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Jonathan Davies, SSP Group plc - CFO & Executive Director [9]

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Yes. In overall terms, there were just over 30 units originally. But as Simon says, it'll be high 20s once we've given some to subtenants, if you remember that conversation, James. And clearly, for the rest of them, we are going through the program of closing, rebranding and reopening, as Simon's described, which we're only partway through. And in fact, we'll continue to invest in Midway significantly this year and next year, '21.

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James Robert Garforth Ainley, Citigroup Inc, Research Division - Director and European Hotels and Leisure Analyst [10]

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Can I just come back on the MAX? Can you quantify the impact that that had on like-for-likes?

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Jonathan Davies, SSP Group plc - CFO & Executive Director [11]

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Well, I think if you look at the like-for-likes in North America, which have dropped back by 2% or 3% from the first half to the second half, that will give you a pretty good flavor of the impact it's had. It's not -- I mean, it is principally that that's the big one because of Southwest Airlines, but it has also had impact on some of the other bigger operations like Phoenix, for example, some of the Canadian operations.

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Simon Smith, SSP Group plc - CEO & Director [12]

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Good. Jamie? She's got a roving mic, because it'll be easier that way. I'm not trying to listen to the questioner's end.

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Jamie David William Rollo, Morgan Stanley, Research Division - MD [13]

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Jamie Rollo from Morgan Stanley. Three questions, please. Just following on from James' on China. I mean, even disregarding that, it looks like net contract wins have still been quite weak in Rest of World. You were running at sort of 20% growth 2 years ago. So perhaps you can give us a figure for what that number would have been excluding Hong Kong, Shanghai? Or just a flavor for what the growth rate might be for 2020, given you must have some visibility on the pipeline?

Secondly, on margins in Europe, I think you were alluding to a few sort of one-off headwinds in Asia in airport redevelopment, very big contract wins. So how much could those margins come back in '20?

And finally, on M&A, is there a sort of pipeline there that you're sort of talking to? Could you sort of give us a feeling for how much more that might step up? Could that include the rest of TFS?

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Simon Smith, SSP Group plc - CEO & Director [14]

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Okay, good. Thank you. I hope everyone heard those ones this time. So if we start with China and actually, Rest of World. So you are right. The planned exit from Shanghai and Hong Kong was quite significant in the year, and will roll into next year. But let's also remember, we continue to win business, Jamie, in India, in the Philippines and open business in new markets like Brazil.

So our net gains, if you remember, in the first half in the Rest of World were around 4%. And then we saw the drag in the second half from the exit of those units specifically. If I look forward, I actually feel pretty good about the net gains in the Rest of World. So we have won Shenzhen and Hongqiao, in China. We've got the Red Rock acquisition that we've announced today and the pipeline actually looks quite encouraging. As I said in my presentation, we brought in a bigger and stronger team there, that are very focused on profitable net gains and I feel pretty good about our expansion in the Rest of World next year.

In terms of the margin growth in Europe, can you pick that one up?

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Jonathan Davies, SSP Group plc - CFO & Executive Director [15]

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Yes. So as you said, the margin story was slightly disappointing in Continental Europe, albeit it was really a function of the strength of the net gains of 6.5%. A lot of those will roll into next year. Worth noting that the -- that was -- we saw a reduction in EBITDA margin as well in Continental Europe as a consequence of that. I think we'd expect that to flatten out or possibly be slightly positive next year. But I think as a consequence of the investment that's gone in this year and next year, I think we'll probably see a higher depreciation charge. So that will probably leave us still flattish in terms of margins in Continental Europe, but in broad terms.

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Simon Smith, SSP Group plc - CEO & Director [16]

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So -- and your last question was on M&A, future opportunities. So as I've said, we had the opportunity to acquire the Jamie's units in Gatwick over the summer. We have done the Red Rock announcement today. We're constantly, as you know, looking at opportunities where they are in line with our strategy and our channels and give us good returns.

Personally, I think the market being a bit tougher benefits SSP. We're a strong business. We're cash generative. And I think we've got a good reputation. Impossible to judge what happens and when it happens, but part of the reason why we've elected to do a share buyback is to keep that flexibility.

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Anna Elizabeth Barnfather, Liberum Capital Limited, Research Division - Research Analyst [17]

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Anna Barnfather from Liberum. Can I just pick up on the margin question again? And perhaps with reference to the Slide 9, I think is on margins. Clearly, a lot of moving parts and I think you spoke about the levers to pull up on gross profit. But could you perhaps give a little bit more color on that flat margin guidance with labor, with concessions and overheads and where the push and pull is?

And then also in relation to this and sorry for my ignorance, but how much of those concession fees are considered sort of rent under the -- if you're considering IFRS 16, so how much of that is the minimum payment particularly?

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Simon Smith, SSP Group plc - CEO & Director [18]

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Okay. So I'll pick up the margin question, and then I'll let my technical expert pick up IFRS 16. So let's take a step back. Our financial model assumes that we will continue to deliver margin growth. Nothing has changed.

We are in a slightly unusual situation in the year that we're going into or that we've just started, principally for 2 reasons. First of all, our like-for-likes, at the moment, we are predicting, cautiously, to be around 2%. Now historically, they've been closer to 3%, where, obviously, you gain from the operational leverage. That's the first headwind, if you like.

But much more positively than that, really what's going on is the amount of net gains that we're seeing in the year and the type of those. So we're opening lots of new countries like Malaysia, Bermuda, Bahrain. And we've only just started in Brazil. And clearly, all of that comes with start-up costs and investment. But what it does is it fuels the sales and profit growth in the long term. So it's a bit of an unusual year, and it's a bit of short-term noise in my view to what is absolutely the right long-term decision.

I think we've probably said for the last 2 years that we can slow down our net gains and prioritize our margin. I just don't think that's the right thing to do when we are in the strong position we're in and seeing really good quality new business come on to the market.

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Jonathan Davies, SSP Group plc - CFO & Executive Director [19]

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Okay. So IFRS 16. So again, perhaps just to elaborate on the numbers, which I think is what you're looking for, Anna, is, so if you think about our rent charge in the P&L, because we're clearly looking at last year's numbers in our assessment of the impact. So the rent roll was about GBP 550 million in total or just over that, which you see in the P&L. The adjustment to rent, so what will go through the rent line reduces by about GBP 345 million. So that gives you an estimate of the -- essentially, the fixed component of the rent, i.e., the minimum guarantees, which you capitalize up, discounted at about 3% and then depreciate over the lives of the assets of the contracts. And that will give you an increased depreciation charge. So effectively, the rent line goes down by something like GBP 345 million; the depreciation charge rises by about GBP 335 million based on our analysis, hence, a slight improvement in operating profit. And then the unwind of the discount is about -- it will be something like GBP 35 million, which will come through the interest line.

But again, if you think about it, I know we've had this conversation before, that -- the [MAG] as a proportion of the rent charge in the P&L is -- it's about 65% or thereabouts, which is very consistent with what you've seen, if you look back at the report and accounts for a number of years and looked at the accumulated minimum guarantees that you could see in the notes. So again, I think if you go back through that cycle, you can sort of work out these numbers.

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Simon Smith, SSP Group plc - CEO & Director [20]

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Thank you.

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Jaafar Mestari, Exane BNP Paribas, Research Division - Analyst [21]

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Jaafar Mestari from Exxon BNP Paribas. So just 2 questions for me, please. The first one is on the margin outlook. You seem to be saying that on an underlying basis, there is still strong potential for margin improvements, but then there's preopening costs. Are you able to quantify those preopening costs next year, just to give us a sense of the underlying potential there?

And secondly, your CapEx guidance. If you're in the range you're guiding at, you'd be lower year-on-year CapEx, which will be helpful for free cash flow. However, when we sat here a year ago, you were guiding at GBP 145 million for 2019 CapEx, you ended up at GBP 185 million. So what's the arbitrage there? What are your criteria? And what returns do you need in terms of extra revenue to go higher at the high end of your guidance range for CapEx or even end up higher than GBP 170 million again this year?

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Simon Smith, SSP Group plc - CEO & Director [22]

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Sure. Okay. I'll deal with the first question and Jonathan will pick up the second. So you are right, Jaafar, as I said a moment ago, in a usual year, our model absolutely assumes margin growth as we've seen for the last 10 years, and nothing has changed at all. We are in an unusual year, no doubt about it. But that's a good thing because it's unusual because of the amount of long-term growth that we're actually winning at the moment.

If you look specifically at start-up costs, they're not materially different as we stand today this year versus last year. It's always a moving feast. So the difficult thing -- so I know we all like predictability, but the difficult thing is, it's very hard to call exactly when units we've won actually get built and open because, as you know, particularly when you're opening sites or units in new sites, new airports, new countries, trust me, every week, the dates move forward backwards and all over the place. And therefore, the start-up costs can change depending on the impact of those changes, those moves, and it can be quite significant. As I look at it today, it's the same sort of start-up costs for the year we're in versus the year that we've just had.

Jonathan, do you want to pick up the second one?

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Jonathan Davies, SSP Group plc - CFO & Executive Director [23]

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Yes. I think it's quite simple, Jaafar. As you say, last year, we would have been guiding to a lower CapEx number, but this is all about the strength of the net gains and the level of new contract wins. So we've said earlier on today that we think net gains are going to be between 4% and 5%. That includes Red Rock. Without that, that is still north of 4%. So if you compare that to our guidance last year, we're adding probably something in the region of GBP 60 million to the sales line, which will be GBP 20-odd million in capital. Hence, the higher guidance.

So I think the fundamental point that I made in the presentation as well, it's really important, is that particularly when you adjust for some of the timings on CapEx, notably the lag on investment in some of these big U.S. contracts, but you'll see the same in some of the European contracts as well, when you adjust for that, the capital intensity of the business, i.e., the relationship between sales and CapEx, is unchanged over the last few years.

It is all about the level of net gains. And look, it's very important to us to continue to monitor the level of capital intensity and, of course, to continue to monitor the returns on investment that we get, which, as we've discussed many times before, is something we do review very closely on an ongoing basis and have done for many years.

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Mark Paul Irvine-Fortescue, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [24]

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Mark Irvine-Fortescue from Stifel. Two questions, please. One on air traffic growth and one on technology. On the air traffic growth, the short-term relationship between growth and like-for-like sales seems pretty clear. But there are some signs that some of those short-term disruptive factors are maybe giving way to some more fundamental slowdown in the air traffic growth, particularly in Europe and North Africa -- North America.

So the question is if that is a cyclical turn over the next few years, does that affect your planning for net contract gains? Or do you make those investment decisions on a through-the-cycle basis?

And the second question on technology is just is there any scope to collaborate with airlines or train operators, train line and people like that, so that you become the preferred partner when customers are using travel apps in airports and train stations?

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Simon Smith, SSP Group plc - CEO & Director [25]

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Okay. So I'll take both those questions. Fundamentally, I see the traffic growth potential in the world slightly differently. So yes, there are a few bumps in the road at the moment. So if we take America, for example, we've talked about the impact of Boeing. Outside of that, so if you take the impact of Chicago Midway out of our numbers, our underlying business is performing exactly as it was beforehand. So it's quite an isolated incident. Passenger growth is still pretty significant globally.

Yes, there are a few bumps in the road in Sweden, for example, which is probably more to do with air taxes than anything. But overall, structurally, we are seeing long-term and exciting growth globally. There isn't a significant amount of short-term impacts. The impacts for us are far more isolated to specific events like the stuff that's going on in Hong Kong, for example. The structural position is exactly the same. We see a growth, and we see attractive growth.

Indeed, there are more new business opportunities coming on to the market all the time. So you've got a few moving parts there. Not only are you seeing growth in the sector, you are also seeing growth in food and beverage because our clients are putting more and more space to our brands, basically.

And then on top of that, we are expanding faster in faster-growing areas, faster-growing countries. So fundamentally, I think we've got a lot of tailwinds there. We just got 3 or 4 big sort of isolated incidents that happened in the second half. And therefore, we're just planning cautiously in the year ahead. It's no more than that. It's what I think is the right thing to do in the current market.

In terms of technology, there's plenty of scope for technology full stop, whether that's about potentially collaborating with others or whether that's about doing it ourselves. The way I'd look at technology and automation is we're going to be talking about this and making progress on this for the next 5 to 10 years because almost, if you look back 3 or 4 years to today, you're now frustrated if you can't use your tap and pay. It wasn't that long ago it didn't even exist. In 4 or 5 years' time, there'll be a lot more technology out there.

Do we plan to directly collaborate with airlines? It's not in the plan at the moment, actually, because we don't need to. There's plenty of pent-up demand actually in the units. Because you've got to remember, a lot of our customers, they make the purchasing decision for coffee or a bacon butty or a vegan baguette right at the end of their journey. They're not planning as much beforehand. So we think there is a huge amount of opportunity just to tap into customers in that last 100 yards. And as I outlined, we're only really at the beginning of it.

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Timothy William Barrett, Numis Securities Limited, Research Division - Leisure Analyst [26]

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Tim Barrett from Numis. I had 2 things, please. Firstly, around the concession fee increase to 60 basis points. Can you give us the usual steer on how that looks adjusted for mix, excluding the air piece?

And on the U.K. like-for-like, it looked like you had a really good acceleration in the second half to over 3%. Anything in particular to call out on that? And is it sustainable into this year?

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Simon Smith, SSP Group plc - CEO & Director [27]

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Do you want to pick the first one up?

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Jonathan Davies, SSP Group plc - CFO & Executive Director [28]

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Yes. Yes, so I think -- I mean it's a relatively modest impact in line with what we would have seen in the last couple of reporting periods. So it's sort of -- the like-for-like impact would be 10-or-so basis points. I think we've shown this in analyses, become a slightly less material number and we've just sort of elected to sort of move away from calling that out very directly. But that's the sort of impact that you would see both on GP and concession fees, with like-for-like sales in air at around about nearer 3% and in rail, nearer 1% in broad terms.

So yes, I mean, that's -- so you can see from that, that the underlying concession fees are increasing, probably 40 to 50 basis points. But again, not really much of a break from trend.

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Simon Smith, SSP Group plc - CEO & Director [29]

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Good. Thank you. So yes, you're absolutely right, we had a strong performance in the full year in the U.K. and particularly in the second half. I think there's a couple of things going on there. First and foremost, rail performed more strongly. And we partly benefited from some softer comparables in -- particularly in the last quarter, when there was a lot of disruption the prior year. But I also think a number of our initiatives that we're starting to test and learn, are beginning to give us some interesting signs of growing our sales. But those are the 2 big moving parts.

When I look forward, again, we're being quite cautious. We think our U.K. like-for-likes would be around 1% to 2%. Hard to call this early on, but it's in that sort of space. And I think the U.K. continues to be very resilient. So I'm pleased with the performance in the U.K. overall.

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Ali Hamza Naqvi, HSBC, Research Division - Analyst [30]

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Ali Naqvi from HSBC. Just on the U.S., have you seen any trends emerging from U.S. landlords in terms of contracting trends, are they asking you to bundle with other concepts such as retail? Or do anything similar with what you did with Midway and Vantage Group?

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Simon Smith, SSP Group plc - CEO & Director [31]

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Yes, yes. No material change, really. The U.S. market, as you know, is large, and we are, as I said earlier, very small. I mean, still under 10%. If I look about and think about all of the recent pipeline opportunities, it's very, very similar in its makeup to that that we've had before. So as we've said before, rent doesn't tend to be as important, actually, at all. It's more about local brands, it's about credibility, relationships. And a lot of it is about a pent-up frustration in the status quo, where our competitor has had very large share. So all of those things are exactly the same and the pipeline looks very encouraging.

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Ali Hamza Naqvi, HSBC, Research Division - Analyst [32]

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Other operators also buying the midscale food and beverage operators, is there a reason you think they're doing that to try and capture this pent-up frustration and the reason you're not participating maybe in the M&A in the U.S.?

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Simon Smith, SSP Group plc - CEO & Director [33]

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It's not that we're consciously not participating. As I said, we look at everything and assess it. And if we think it's good value for money, then we will obviously take action. I'll let you read into that what you think.

In terms of other competitors, it's not for me to specifically comment about other competitors, but the market's growing, the space available is growing. I think a bit of competition is good for the soul. It doesn't concern me at all, actually, in the slightest. Trust me, the amount of new business we are reviewing and our group investment committees for the U.S. is meaning I'm very unpopular with my wife at the moment because I'm not getting home when I should.

So it is not an issue whether another company buys F&B or not. The market is in growth and the opportunities, if anything, are gaining in momentum.

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James Rowland Clark, Barclays Bank PLC, Research Division - Research Analyst [34]

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James Rowland Clark from Barclays. Two questions, please. The first just on Red Rock. Could you just confirm that, that isn't included in your net gains guidance for next year and therefore, not in your CapEx line either? Just a point of clarification.

And then secondly, in the release, you point to a very strong pipeline for net gains for 2021 as well. Given next year's looking like an unusual year, and therefore, margins not moving forwards, what are the chances that 2021 could be an unusual year as well, and therefore, margins don't move forward then either?

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Simon Smith, SSP Group plc - CEO & Director [35]

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Okay. I'll do the sort of next-year pipeline margin question, if you want to do the Red Rock is it, isn't it and...

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Jonathan Davies, SSP Group plc - CFO & Executive Director [36]

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So just for the avoidance of doubt, so the 4% to 5% included Red Rock. If you look at the RNS, you'll see that we said that last year's annualized sales to Red Rock were about GBP 15 million, in that region. So given that we'll complete that, hopefully, early in the new calendar year, you can assume that's going to contribute, let's say, 30 basis points or so to the net gains. But the capital is not in the capital guidance of GBP 160 million to GBP 170 million. So that will come above that. That's not a number we've disclosed. But you could probably imagine it's going to be broadly in line with the sales number, if you sort of factor in a sensible multiple.

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Simon Smith, SSP Group plc - CEO & Director [37]

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Thank you. In terms of net gains and margins, so it's clearly difficult for me, 1 month into this year, to try and work out what the margin and net gains may be in 2 years' time. Our model, like I said earlier, assumes margin growth. And I see no reason why in 2 years' time, you shouldn't look at our model and assume it. Clearly, there's lots of moving parts in all of that. So if we win a huge new country, a new business, then that would have an impact. But as I sit here today, I don't see anything particularly unusual in 2 years' time. But it's 2 years' time.

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James Rowland Clark, Barclays Bank PLC, Research Division - Research Analyst [38]

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Could I just ask one more on IFRS 16? Any change to your banking covenant levels given the move to IFRS 16? And yes, I guess, when are you going to help us with the thinking about operating profit by region on a pre-IFRS -- post IFRS 16 basis?

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Jonathan Davies, SSP Group plc - CFO & Executive Director [39]

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I was going to hand this one to Simon. He's looking for -- he's been looking forward to this one through all our prayer. So the answer is that it's not -- it won't have an impact on our covenants because they're effectively on a frozen GAAP basis. And we will, in due course, but probably not until the interims, give you some guidance on what the impact is on a region-by-region basis.

Clearly, what we've been looking at is still very -- a retrospective view and there's more work we need to do as we adopt it properly from the start of this year.

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Simon Smith, SSP Group plc - CEO & Director [40]

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So if we've got time for just 1 or 2 more if there are any. If not, then we will rush off to our next appointment. Thank you very much.

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Jonathan Davies, SSP Group plc - CFO & Executive Director [41]

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Great. Thank you for joining us.