Coronavirus - Delicate new growth
2 July 2020
The US economy created jobs at a record rate in June as more businesses re-opened, giving fresh hopes of a recovery. The job gains added to other positive US data in consumer spending, which showed a sharp rebound in activity. However, cases have since increased in large parts of the country, including the populous California, Florida and Texas. Whilst another nationwide lockdown was ruled out, some states are reversing their re-opening plans. However, with funds in the Paycheck Protection Program, which gives business loans that can be partially written-off if used to meet wages running out, a new pause could be far more damaging.
Below, we show the number of cases and deaths, and as a proportion of population. We also show the daily trend in infections vs a three-day moving average and show where lockdowns are being eased. We will be updating this chart daily.
Company news Food & Household
• Associated British Foods – “Grocery benefited in the third quarter from increased sales volumes through the retail channel which more than offset weaker foodservice demand. Sugar revenues were held back by lower Illovo export volumes in the quarter due to Covid-19-related logistical constraints at borders and ports in Africa. Primark stores were closed for most of the third quarter. Primark revenues for this quarter relate to the short period of trading before the stores closed in mid-March and the sales at the end of this quarter as stores have progressively reopened.
Operating profit for each of Grocery, Agriculture and Ingredients in the quarter were well ahead of last year and ahead of our expectation. As expected, Sugar delivered a material improvement in profit in the quarter driven by our European businesses.
The net cash outflow for Primark for the 12 week period from 1 March to 23 May, when trading across the estate was either non -existent or minimal, was some £800m. This mainly comprised payments to Primark suppliers and operating expenses in Retail, net of mitigation. Grocery, Agriculture, Ingredients and Sugar delivered a net cash inflow of £300m in the quarter. References to changes in revenue in the following segmental commentary are based on constant currency.
Full year outlook – For the full year we continue to expect strong progress in the aggregate adjusted operating profit of our Sugar, Grocery, Agriculture and Ingredients businesses. This will be mainly driven by a material increase in profit at AB Sugar and another year of good margin and profit growth in Grocery.
Nearly all Primark stores are now trading again and we estimate that, absent a significant number of further store closures, adjusted operating profit for Primark, excluding exceptional charges, will be in the range £300 -350m for the full year compared to £913m reported for the last financial year.
The full year effective tax rate for the group is expected to be in the region of 30%, higher than the 22.6% reported for the half year due to much lower taxable profits in the UK and Ireland this year.
After the cash outflow in the third quarter, we expect the group to return to cash generation in the final quarter. With Primark trading again, our current expectation is that the year end net cash balance, before lease liabilities, will be in excess of £750m.
As a result of the rapid spread of Covid -19 in our markets, all of our 375 Primark stores closed in a 12 -day period to 22 March. This resulted in a loss of sales of some £650m per month. Primark has paid, or has committed to pay for, all goods which were either in production or were finished goods in transit at the time of the store closures, on standard terms and without discount. To reduce the cash outflow resulting from this loss of sales, Primark cancelled orders for goods where the handover date from the supplier was after 17 April. It reduced its operating expenses by over 50 percent and this limited the cash outflow to some £100m per month while the stores remained closed.
As European governments have eased restrictions on retail we have reopened stores, starting in Austria on 4 May. We prioritised measures to safeguard the health and wellbeing of everyone in store and to instil confidence in our store environment. These included social distancing protocols, hand sanitiser stations, perspex screens at tills and additional cleaning of high frequency touch points. Personal protection, including masks and gloves, has been made available to all employees. Customers have been free to move through our stores, exploring the merchandise on display with little hindrance, and are able to maintain social distancing.
Since our last trading update on 1 June, stores have reopened more quickly than expected, particularly in Ireland. On 15 June we reopened 179 stores, representing nearly half of our estate, across four markets along with the new store in Trafford Centre. This was a major achievement by our store operations teams. As of today, 367 stores have reopened with the remaining eight expected to follow in the near future. ”
• Mitchells & Butler – “On 12 June we announced that we had extended our unsecured financing facilities by £100m to total £250m, and that temporary terms have been agreed with bondholders to avoid technical breaches which would have occurred due to forced closure. These arrangements provide stability and flexibility for the group to navigate these uncertain times and provide sufficient liquidity to survive a delay in re-opening beyond our current expectation of early July.
BUSINESS REVIEW – The first half of the financial year has been dominated by the enforced closure of the estate in response to the Covid-19 outbreak.
On 16 March the government advised the public to not attend busy places, including pubs and restaurants, in order to limit the spread of the virus. This led to a sharp and immediate reduction of like-for-like sales. Then, on 20 March, the government announced a directive to close all pubs and restaurants with immediate effect as measures to slow the spread of the virus increased. The first half therefore includes four weeks of either mandated closure or government guidance not to visit pubs and restaurants.
Before Covid-19 we had enjoyed a strong start to the year. Like-for-like sales growth of 2.6% in the first quarter had been followed by a period of softer sales due to the stormy weather, but we remained c.1% ahead of the market and continued to see the beneficial impact of our Ignite programme of work. Stronger margins, better labour control and tighter cost management had resulted in operating profit growth and we had just started to refresh the range of Ignite initiatives, such that we were confident of a strong finish to the year.
We closed all our businesses immediately on the evening that lockdown was announced to protect our team and our guests. Established communication channels were set in motion to ensure that we could keep the whole team updated during what was a period of confusion and concern for everyone. In keeping with our values, we maintained an honest and open style to all communication and carefully considered our options in the light of the developing situation, including emerging details on government support.
We swiftly set up a closedown team to instigate a structured approach to closing the businesses and to minimise losses. Stock loss was an immediate issue and so as to reduce the impact, perishable items were sold directly from sites or donated through our established relationship with the charity Fareshare. In total we were able to donate 11.5 tonnes of food, equivalent to 27,500 meals, to vulnerable communities which would otherwise have gone to waste. Cash floats, including those in amusement machines were banked, full stock counts were taken, and each business was physically secured for a prolonged period of closure.
The rapid closure presented significant challenges in terms of managing and mitigating the profit and cash flow impact of lost revenue. A number of measures were taken from the outset of the crisis to protect the business including putting over 99% of our employees on furlough with basic pay for all employees including the Board reduced to between 60% to 80% of normal pay, depending on seniority. We quickly reduced operating costs to the minimum required to keep the estate secure, safe and in good condition and maintained strong control of working capital. All discretionary capital expenditure was halted, including our development programme, and all temporary contracts have been cancelled.
Throughout the closure period our central communications team have worked hard to keep team members connected and informed, including the launch of a new support portal which can be accessed from mobile devices, and which includes regularly updated FAQs, our Employee Assistance Programme, wellbeing resources and volunteering opportunities. Social media platforms have also been used to create inclusive groups across all of our team members, from sites and the head office, to share positive and engaging content and ideas. The welfare and mental health of our team has been a primary concern, particularly for those colleagues who have isolated alone, and we have been encouraged in the way the business has pulled together at this difficult time.
We have had a skeleton team working throughout lockdown, including a field-based team that have maintained the businesses, responding to break-ins and emergency call outs. A structured cadence of meetings throughout the week has helped to keep everyone informed, as Covid-19 policy and the industry response has developed. Mitchells & Butlers has played a full role in the UK Hospitality led forums that have helped to devise the Hospitality Sector Protocols Document that the government issued for the sector, and we continue to lobby government directly to ensure that we, and the sector, get the support we need to protect jobs once we re-open and then re-build.
We are working to an early July date for English sites to re-open, with Wales and Scotland following over the next two weeks and have developed a detailed re-opening plan for the business. Each site will have clear directional and spacing signage to explain and help maintain social distancing; sanitising stations; disposable menus; table spacing; capacity management where possible through our online booking engines; a cashless-first approach (and in some businesses cashless-only); and new brand specific Covid-19 safe service cycles such as vegetables being served in Toby Carvery, as opposed to the usual self-serve model. We have also worked hard to ensure that our team can both be and feel safe at work, including new protocols for deliveries, and where appropriate for take-away food collection. Key to these measures is the government guidance on the necessary distance between people, clearly a 1- metre distance will allow for significantly higher capacity and will impact the extent of adaptations to service cycles required.
Our German business, Alex, re-opened through mid to late May, affording us valuable insight into the challenges and opportunities ahead, and we are encouraged that sales levels have grown each week since re-opening. City centre sites have been the slowest to recover, but conversely some suburban businesses have generated days of year on year growth. From the 1st July, VAT on food in Germany will drop from 19% to 7% for a year, and on all other categories, from 19% to 16%, through the rest of the calendar year. We are therefore confident that the business will recover quickly, as the impact of Covid-19 subsides.”
• LondonMetric Property# – “In respect of advance rental payments due up to 24 June 2020, the Company reports that 95% has been collected or is being collected monthly, a further 3% is expected to be received imminently and the remaining 2% is in discussions, less than half of which is expected to be forgiven. The proportion of rental income that is received monthly in advance instead of quarterly is unchanged at 18%.
On the distribution portfolio, 97% of rent has been collected or is being collected monthly, alongside 95% of rent for the long income portfolio.
Increase in first quarter dividend – In light of the strong rent collection and in line with its progressive dividend policy, the Company intends to increase its first quarterly dividend for the financial year ending 31 March 2021. The first quarterly dividend will be announced at the end of August and paid in early October.”
• LXI REIT# – “Provides the following update on rent collected for the June to September 2020 quarter:
• 84% has been received to date;
• a further 6% was already subject to agreed deferral and repayment plans entered into following negotiations with tenants in respect of the previous quarter (of which the majority is due to be received within three months of the quarter);
• a further 4% is subject to ongoing negotiations with tenants; and
• a further 6% has been granted as temporary concessions (being predominantly the agreed terms of the Travelodge Hotels Limited ("Travelodge") CVA as announced on 19 June 2020).
In addition, the arrears in respect of the March quarter day have been settled in line with the agreed terms of the Travelodge CVA as announced on 19 June 2020.
The Company continues to seek to strike an appropriate balance between protecting the interests of its shareholders and providing proportionate support to a small number of its tenants which have been impacted temporarily by Covid-19.
These robust collection statistics reflect the diversification and resilience of our tenants and sectors, the importance of our assets to our tenants and the proactive approach adopted by the Company, our Investment Adviser and our tenants. The Company remains well capitalised, with a strong balance sheet, low leverage, significant liquidity and very long term debt facilities.”
• Serbia has re-imposed and tightened lockdown restrictions in certain parts of the country as infections rise.
• Arizona is closing bars, gyms and cinemas for a month.
• Between 18 June and 24 June, England’s NHS Test and Trace system received 6,183 referrals of people who tested positive for Covid-19 and reached 75% of them to ask for their contacts, the Department of Health and Social Care said. In total, they identified 23,028 contacts. Of these, 73% were reached by tracers and asked to self-isolate.
• Scotland’s first minister, Nicola Sturgeon, has announced that the Scottish Government will relax the two-metre rule for some businesses.
• The Eurozone’s jobless rate rose to 7.4% in May, up from 7.3% in April. In the wider EU, it rose from 6.6% to 6.7%.
• The US economy added 4.8m jobs in June. The unemployment rate also dropped to 11.1% from 13.3% in May, according to the Labor Department. Americans filed 1.4m new unemployment benefits claims.
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