Edited Transcript of VALN.S earnings conference call or presentation 22-Jul-20 9:00am GMT

On Page 5, the key financial metrics of the first half 2020 that has been heavily impacted by the COVID-19 crisis. On a group level, external sales reduced by 18%, 1-8 percent. GP margin, fairly stable at 43.6%, negatively impacted by a change in the mix of Retail and Food Service business. On a positive note, EBITDA of almost CHF 22 million, CHF 21.7 million, significantly lower than in the previous half year, but still in positive territory. The EBIT with negative CHF 10.9 million, again, significant reduction compared to the last half year and documents the severance of the impact the crisis had specifically during the lockdown, on our business.

Again, on a positive note, the free cash flow only deteriorated CHF 4.1 million compared to previous half year to CHF 11.5 million, documenting the quality of the cash generation across our businesses, which leads then to a leverage ratio of 2.9x, which, in our view, is a clear indication of the strength of our balance sheet even during this very — in that very challenging market environment.

On the right-hand side, the breakdown into the 2 divisions, especially on an external sales level, you see the clear difference between Retail and Food Service. Retail sales declined by 13% in the first half year whereas Food Service is negative 36%. So quite a stronger impact on the Food Service business. On an EBITDA level, Retail at CHF 19 million; Food Service, EUR 2.1 million. And on an EBIT level, Retail maintained a positive number, whereas Food Service is in the negative with CHF 11.3 million.

I turn to Page #6. During the COVID-19, especially the lockdown but also post-lockdown, footfall and sales collapsed, where significantly the recovery post-lockdown was significantly lower. As a result of that, we closed stores, and we adjusted the opening hours. And on that page, you see on the left-hand side, the Retail external sales on the bottom part of the chart, has been impacted specifically in April, but already in March, were negative 15% compared to half year 2019. Slightly recovered and stabilized in May and June, but no further significant recovery. As a result of that, on the top part of the chart, on the left-hand side, you see shaded in gray, only roughly half of our stores operated under normal condition, between 36% in April and 30% in June, as our stores had adjusted opening hours, which again has an impact on the sales in these stores. And at the peak in April, 11% of the stores were actually closed.

On the Food Service side, you see a far more severe pattern. We started with plus 4% and plus 3% quite strong into the year. And then as of March, with the peak in April, sales collapsed to negative 47% in margin, and then almost negative 80%, 8-0, in April and slightly recovered now to negative 40% in June. As a result of that, you see, again, on the top part of the chart, that we had to adjust opening hours throughout the crisis far more significantly. And in April, we had to close almost half of our stores. This is also a result because in the Netherlands, Austria and partly in Switzerland, we had to close the shops based on government orders.

I turn to Page #7, where we break down the sales development in the 4 different clusters that we shared with you in the past. You see the transportation hubs, which includes the airports, so all the public transportation hubs, railway station, airports, city centers, shopping malls and other. Other being stores in the agglomeration and gas stations. We shared with you in the past that half of our sales are generated at transportation hubs. And you see here that these locations have been impacted the most severely in terms of external sales development on the Retail at negative 28% throughout March to June and in Food Service at negative almost 60%. These documents part of the differences you see in the sales development overall of these 2 divisions.

Then city center, slightly better, but far lower exposure with 10% on the Retail side, far bigger exposure on Food Service, specifically based on the stores we operate under the brand or the banner of BackWerk, with negative 53%, again, explained by stay home orders during lockdown and slower recovery.

Shopping malls have been almost on previous year’s level on the Retail side, with 30% exposure, sales exposure in that segment, which definitely supported the Retail business and the sales development but not compensated fully what we lost at the transportation hubs. And agglomeration, gas stations, if you compare it to transportation hubs, for example, you see with negative 11% in Retail and 10% exposure were rather in relative terms, performing stronger. Food Service has hardly any exposure to the market so far.

On Page #8, the sales development resulted ultimately — or the unprecedented crisis resulted in the drop of sales of 18% and net revenues of 18.8%. So you also see that the foodvenience categories slightly reduced the share of the overall sales. This ultimately has been also an impact on the margin development. Press, tobacco and books increased the shares overall on an external sales level from 56% to 61%.

I turn to Page #9. In terms of the net revenue, I will not talk you through all the details, but what you can see quite clearly here is that the Retail overall has been holding up stronger than the Food Service division. Specifically, if you look at the Swiss numbers, Retail Switzerland, negative 9.8% compares to Food Service Switzerland, which is mostly Brezelkönig and Caffè Spettacolo, which had to close with negative 39.3%.

On Page #10, the drop in sales resulted also in quite a significant reduction of our gross profit with negative 21.2%. And on a positive note, you see that also, we were able, in a very short time frame, to adjust our costs, reduce the cost base by 10.3% which then results in an almost 50% mitigation of the losses on the GP, gross profit level.

On Page #11, further details on gross profit. Here you can see that across the group, profit margin was, given the severance of this crisis, widely maintained. It is overall affected by higher share of Retail with lower margins than the Food Service business. But you can also see that the most significant impact we’ve seen, again, on Food Service, given the far higher sales decline with negative 33.5% GP reduction in local currency, whereas Retail managed to maintain more or less the margin, both in Switzerland and in Germany.

On Page #12, in terms of operating costs and operating costs in our reporting always include also the D&A. We were able, as a management team and as a group, to reduce our costs compared to what we budgeted to the — in the half year result by almost 15%. Bear in mind, the crisis started in March. This is the full half year. I think this indicates how much focus and emphasis we put on the cost management. All the units have been affected, including to significantly extend administration and corporate functions. If you look at the numbers, specifically Retail Switzerland, they indicate that you have a lower reduction in cost. This is explained by the fact that we have a transition from franchise stores to own stores, which then ultimately results in a higher cost space. But also in Retail Switzerland, the cost reduction was in a very similar order of magnitude than in the other units.

On Page #13, EBIT drop of 11-point — or 11 — CHF 10.9 million, excuse me, almost CHF 11 million. But probably even more striking as a number, the reduction of almost CHF 54 million compared to previous last year, I think documents very well the significance of the crisis. Again, on a positive note, all units contributed with a positive EBITDA in the first half 2020 and show an increasing upward trend since the end of the lockdown.

If I go on Page #14, through the details of the EBIT. You see, again, clearly, that Retail division contributed positively in both geographies, Switzerland at breakeven, Germany with 1.5% positive contribution. Also a result of cost savings in Germany, the Retail business in Germany that we initiated already last year, that yielded a positive impact in the first half of this year.

On the Food Service side, again, as a result of the far weaker sales performance in that division, we see a clear negative EBIT. But this negative EBIT has also been impacted of — in relative terms, to Retail for higher D&A, which is the result of the higher capital allocation mostly coming from our manufacturing B2B pretzels business that had at these low EBIT numbers, over-proportional impact and therefore, pushes the Food Service division in the negative territory.

On Page #15, EBIT translates into net profit and EPS. Important to understand, we had negative foreign exchange and IFRS effects adding to the result. But we also, at the same time, benefit of probably offsetting incoming tax benefits and ultimately, the net profits results on a group level to negative CHF15.9 million.

On Page #16, the third important element in terms of an indication of how we performed along the cash and the cash generation, the CapEx. We continued to invest in the expansion and innovation. You see that very clearly, almost 90% of the investments we made have been in expansion and innovation during the first half year. Overall, roughly 17 — 70%, 7-0 percent of the CapEx has been spent compared to last year. So there is only a roughly 30% CapEx reduction compared to the first half year in 2019, which indicates that we continue to invest, and we invested mostly along 2 dimensions. First, the SBB refurbishments, where we completed until March 22, POS before we then temporarily stopped due to the crisis, the rollout.

And secondly, and very importantly, the B2B capacity expansions that we managed to complete in Q1 2020 already in a phase or in the midst of the beginning of the crisis, and I’m very pleased that we ultimately managed to complete these expansion investments at roughly CHF 10 million. That’s why the share of the Food Service CapEx is also quite higher than the Retail in the first half year.

Now turning to free cash flow. I think the number that stands out here documents, in my view, quite well that even during quite a severe crisis, we are able to generate significant demand of cash is the reduction of the free cash flow compared to half year ’19 of “only” 27% to 11.5%. It’s important to understand that we benefited from extraordinary networking capital management measures that are also, in my view, a clear indication of the strength of the partnerships we have with our key suppliers.

And with that, I hand over to Beat to go talk you through the balance sheet and the outlook 2020.

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Beat Fellmann, Valora Holding AG – CFO & Member of Executive Board [3]

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Thank you, Michael. First of all, I’m particularly happy that I have the chance to guide you on my 22nd day through balance sheet and outlook. And there may be, as another introduction remark, I’d like to stress out that I’m really impressed about the cost savings achieved in such a short time frame and how quickly and consistently the management has reacted and how important the positive impact out of these measures are and which can be present today.

And one consequence out of this, I think, is that in the balance sheet, unlike as the P&L, where the impacts are dramatic, it’s like a tsunami, the balance sheet stands solid here without any major impact. So the total assets or total balance sheet amounts to CHF 2.35 billion, almost unchanged. In the year, I think, a very important figure in general, but in particular, during such a crisis is the amount of cash which is available, freely available, which stands at CHF 127 million. This pile of cash is a kind of a safety cushion, which I think is a very nice achievement.

This leads then to net debt, almost unchanged, slightly above CHF 300 million. Here as well, I think a very positive outcome. If we then bring P&L figures in relation to balance sheet to net debt then, and Michael has talked about this important covenant figure as well, the net — the leverage ratio, where we see an increase from 2x to 2.9x. And certainly a figure which will go further up, further north, so to say, but still — is still in the time frame of our — or in the frame of our covenant. And the headroom here is still pretty big.

On Page 19 then. Another important discussion and that’s maybe linked as well to the equity ratio. I forgot to mention that before, the equity ratio is at 45%. But overall, we have heard and seen discussions about the solidity of the financial profile of the Valora Group. And here, I think it’s very impressive that first of all, important to mention the syndicated credit facility, CFA, had been successfully renegotiated during the crisis, by the way, an increase from CHF 50 million to CHF 150 million committed credit line unused, entirely unused at the moment. Well, I think that gives flexibility and this credit facility allows us the refinancing due in ’21, the EUR 72 million to be made, as I said, on this credit facility. So basically, no maturity refinancing need until 2023.

That brings me then to the outlook. And of course, unfortunately, our crystal ball is maybe as gray as yours, but there are some positive signs, and that is depicted on the left-hand side, the mobility trend, a clear steep recovery trend on mobility. Since the lockdown, and based on this trend, we expect a further recovery as well in the second half of 2020.

There are some very important trends regarding mobility, which have to be seen in which direction they’re going to develop. And certainly, one might have kind of a lasting impact, that’s the entire situation about home-office, schooling as well. I just received some information that Target has now launched a new program, [Target at Home]. So these kind of things, they might have a very lasting negative impact on mobility overall.

The other ones, which is the shift from public transportation to individual transportation, the safety and protective measures, but as well, concerns about unemployment and the economical environment, they might be more of a temporary nature. So here, we are optimistic that over time — being in a dynamic environment, of course, but over time, we will see further recovery.

On Page 20 then. For me, this is kind of the mother of all slides, so to say. You see the tremendous negative impact on EBIT and on sales indices as well. On a very short term, steep decline, lowest point in April where we had seen a sales indices of only 67%. But — and that’s the good thing since — since then, a clear, steady recovery with breakeven overall for the operations within Valora. And so here, we assume a further positive development. It’s going to be most probably not the levels we have seen before the COVID-19 crisis, but still, sales indices is to be expected above 90%, which is then, as we said before, a further recovery of the overall situation.

So good reasons to be optimistic. So that brings us then to the guidance. I’ve talked about the recovery. I have said that of course, the dynamic and kind of uncertainty remains high, but assuming the recovery we are talking about which is based as well on a higher percentage of food business. And food business, as you know, has a better margin, we see a — we assume a clear positive effect out of the mix of our business. And that is particularly driven through an optimistic assumption that in our B2B business, the volume increase will have a significant leverage impact on profitability.

Cost savings, they are painful, but they have to go on. We have ideas to even accelerate them. And here, we have heard some concerns on analyst side, we might be faced with further support needs of our partners’ agency or franchise partners. I think here, we can say that we have assumed a further increase in these forecasted figures already. So that is reflected in our assumption, which leads us then to kind of a positive view that the full year 2020 EBIT is going to be positive. That is, I think, a strong statement. Nevertheless, we have decided not to guide beyond 2020 yet, not yet, but we will invite you for a trading update end of October, where we try then to use our crystal ball for the outlook of ’21 and beyond.

With these remarks, back to you, Michael.

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Michael Mueller, Valora Holding AG – CEO [4]

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Thank you very much, Beat. In the following section, I will talk you through the COVID-19-related measures and our investments along the strategic priorities.

I turn to Page #25. The main focus of our efforts to cope with the crisis, we structured along 3 dimensions. First, the health and safety measures; second, the supply chain and operations measures; and thirdly, the protection of the liquidity and the profitability.

On the first dimension, health and safety, the main goal was to protect our employees and our customers. We also financially support employees and partners already since the beginning of the crisis.

In terms of operations, I’m very pleased that we were able to contribute with our network to securing of the basic supply. Definitely important role we played in a number of locations, specifically in agglomerations at gas stations, where we saw increases in footfall. I’m very pleased that we secured ultimately, all the operations without major challenges and ultimately, guarantee that the supply chain ran smoothly throughout the crisis. We also continue to invest in our digital initiatives, an element that I will talk you through later.

In terms of liquidity and profitability protection, we mentioned already a couple of times the cost cutting initiatives, the delay and termination of a couple of investment projects. And then ultimately, the renegotiation of the credit facility that is currently unused, but creates additional flexibility going forward given the quite still, quite dynamic market environment.

On Page #26, I mentioned that I see it as a significant achievement in terms of the cost reductions that we realized and that we were able to mitigate almost 50% of the sales driven GP decline within only a few weeks. If we break down these initiatives, you see that 60% of these cost reductions come from personnel initiatives, which include short-time work, optimized working hours and includes also, on a net basis, temporary partner support that we provided. 20% of the CHF 42 million cost reduction are related to other operating expenses. This includes multiple variable operating expenses, but also a significant reduction of our administration costs. And also 20% contributed reductions in rent. First of all, a lower variable rent, ultimately, resulting from lower sales. However, significant part of that has been compensated by, ultimately, a high rent that we started to pay at SBB after the tender process. But we also got rent concessions, especially for the lockdown phase from a number of landlords. However, rent will remain a focus for the second half of the year and further adjustments are here, targeted.

I turn to Page #27 to provide you some further details on personnel and other expenses. In terms of short-term work, I think the striking number is that 50%, 5-0 percent, of the Valora employees were affected by the short-time work. This includes the POS administration, overhead functions, but also the significant part of production and logistics. We optimized working hours, which reduces, ultimately, capacity — personnel capacity requirements. And in terms of temporary financial support, we invested in selected agency and franchise partner to support the economic viability of their business. And on top of that, help them to benefit from government aid programs that were fairly diverse along the different geographies we operate our stores in. and to certain extent, also fairly complicated for our agency and franchise partners to understand. So we supported them to benefit also from these programs. But on top of that, we supported them out of our own pocket.

In terms of other operating expenses, main contributor has been variable shipping and freight costs, but also improved contractual relationships we established for shipping and freight in the past that started to yield here first results. And on top of that, the reduction of administration costs.

On Page #28, some further information on the rent situation. As you know, the rent is a significant part of our cost. And so far, during the lockdown, obviously, all the rent negotiations have been focused on the lockdown phase. The most rent agreements have no adjustments implemented post-lockdown so far, also as a result of a slightly weaker recovery than anticipated both by landlords and the tenants. And thirdly, the main challenge we see here is that given the significance of the sales deterioration, we have no adequate variability of the rent due to the true minimum rents guaranteed just by the fact that minimum rents are at a level where they cannot absorb sales declines as we have seen it during the crisis.

So the target going forward is, ultimately, to adjust rent-to-sales and customer frequency, where we see that the frequency reductions prevail and are sustainable and where we can anticipate that we have to expect or where we have to expect that these sustained lower footfalls remain. And ultimately, in these situations, we seek further rent reductions to reflect then the change basis of the initial rent agreements in these locations.

There will be a different discussion under different situation with almost each of the landlords. This requires quite some time and effort that we put in already since the beginning of the crisis, but more and more, we move now these discussions, and I must say very open discussions with almost all landlords that reflect the quality of the partnerships we have with these key landlords. This will be the main topic of these discussions going forward, and we expect that when the crisis sustains in terms of lower footfall that we can, ultimately, adjust some of the rent agreements, important in the outlook that payout has given you.

We do not anticipate, we only included in our statements already tangible results from these discussions, obviously, already in our actual results as well. But also in the outlook, we build in only the tangible expectations towards adjustment and not exclusively our view of the situation here.

If I turn now to Page #30, I, towards the end of the presentation, turn your attention to our strategic priorities. Despite COVID-19, we confirm our strategy that we communicated earlier this year, and we will continue to invest along all the strategic priorities. I think it’s quite understandable that the main focus of the discussion, be it internal, be it external, it has been on how we cope with the crisis but we also invested during the crisis already and continue to invest along these priorities.

And ultimately, going forward, it will be even more important that we deliver against our own expectations in terms of focus and investments, mainly in the B2B space, where we increased capacity, now significantly, where we are extremely well positioned in terms of market position, technology available to benefit from the current market situation where quite a few of our competitors are in a — as we see it, a little bit more challenged situation.

We will continue to expand our foodvenience initiatives and foodvenience network. Most importantly, with the refurbishment of SBB, POS, that will continue. And we continue to invest in our digital innovation already during the crisis, and will continue to do so going forward.

If I turn to Page #31, some further details on the B2B capacity expansion that is now ready to be leveraged. I’m very proud, as I see that the major achievement of our team, our B2B team, that they were able to complete all the planned capacity expansions in Q1. Some of the final implementations of this expansion has been completed already in crisis mode. We managed to increase the capacity in Germany by 20%. We doubled on a very low level, the capacity in the U.S. from 1 to 2 production lines.

And more or less, with the completion of this expansion, especially in Germany, we experienced a significant downturn in the sale, especially — or mainly because we operate with our product out-of-home market, and to a certain extent, also in the Retail, mostly grocery channel. And the grocery channel has not been able to compensate what we lost in the out-of-home market, where we were exposed to similar market trends than what you see in our own Food Service division.

On a positive note, the U.S. team managed to remain EBIT positive with their business, mostly because they were able to shift their client portfolio quicker, also given the smaller size of the business towards new channel, for example, direct delivery channels, and maintained actually a very positive trajectory here in terms of benefiting from the increasing capacity that we put in place.

Going forward, we will expand, not only further our product portfolio that we offer to the market, but we will also start to establish new distribution channels based on the new capacity that is now available in Germany. And as we speak, staff starts to return increasingly to the production, and I’m quite optimistic that we see further improvements over the coming weeks in that part of the business.

If I turn to Page 32, we covered the SBB rollout of the refurbishment of the SBB locations. We completed already 48 refurbishment, mostly k kiosk formats as of now. I mentioned earlier that in January-February, I was very pleased with the development we saw at these locations. We were definitely on track with the refurbishment, not only in terms of number of rollouts, but also in terms of the expectations, in terms of change of the assortment mix and sales development.

Now as a result of the COVID-19 crisis, we had to postpone and delay the refurbishment of 50, 5-0, locations. This is quite a substantial number but put it into perspective of the overall refurbishment program, this reflects only 20% of the overall refurbishment and affects mostly k kiosk formats.

Now going forward, we started already to — or continued with the rollout already, with the conversion of 8 former Migrolino POS at excellent locations. These refurbishments and new store openings for us will be completed in July and August. And we expect that in Q4, we are back to full swing in terms of the refurbishment and trying to catch up also some of the delay that resulted from the crisis.

If the rollout plan is as it is presented right now, on track, we still expect that we can largely complete the refurbishment as of the end of 2021. But obviously, this depends still, first of all, on some of the detailed — details in terms of the planning that is required with SBB, but also, obviously, in terms of the broader market environment, including potential additional lockdown related to a second wave or other elements that could affect that. But in general, we’re still optimistic that we can largely deliver against the initial plan and catch up a substantial part of the delays that resulted now in the last couple of months.

On Page #33, we document what we completed so far in terms of digital initiatives. And internally, it was very important for us that we continue to push ahead with these initiatives. We continue to hire and strengthen our team. We’re up now to 20 employees, and employees who are here mostly engineers that work on these initiatives. We didn’t reduce the effort throughout the crisis, which documents the importance and the strategic priority for us. We focused on — or continue to focus on the automated stores. So the avec box, we got some very positive and strong customer feedback and response on, for example, the avec box at ETH Hönggerberg where we extended the term there already 2x, especially during the crisis. I think it’s obvious, these kind of formats where you can shop fully automated and independent have been received both by landlords and the customers very well.

We’re also very proud that we’ve been awarded last week by a global innovation award from one of our partners, SAP, for — as they said in their quote, “Creating the Convenience Store of the Future with SAP Cloud Platform.” I think another confirmation that as I see it, we are definitely working on the right topic, and we have to put now even more emphasis on these efforts or in these initiatives to get even sooner to a level where we can start to roll out or move from a concept, from a pilot to a store that we can actually start to roll out.

On top of that, we launched a new Caffè Spettacolo pre-ordering app. We also worked on other loyalty initiatives, trying to improve customer engagement and registration in our stores. And a very small project, avec now, in the delivery space that had no significant sales impact did not help to compensate what we lost in the store. But it was very important for the team and for the group in terms that we managed within a very short time frame, roughly 2 weeks, to launch and pilot a delivery service out of a selected number of stores and test this new promising platform to potentially going forward, not only during crisis mode, but also post-crisis, even engage more closer and even more direct with our consumers.

And with that, I turn to the last Page, 34, in terms of key takeaways as we see it in the first half year 2020. I mentioned we had a very good start into the year of all business units until February. So it’s made it only more painful than as of March, the COVID-19 crisis hit us quite severely in terms of the financial. The net revenue decreased by 18.8%. But we are also very proud that we managed within very short time frame to compensate almost 50% of the gross profit decrease with our cost reduction efforts, resulting in a positive EBITDA of CHF 21.7 million for the period and the free cash flow positive, again, of CHF 11.5 million and the EBITDA at CHF 10.9 million. The renewal of the syndicated credit facility, we see definitely as a very positive result that creates and maintains financial flexibility and stability going forward. Since that credit facility is currently unused and has been increased by CHF 100 million to CHF 150 million in the midst of the crisis in April. Sales and earnings recovery started post lockdown. It has been slightly slower than probably also some of you expected, but then the market environment is still quite fairly dynamic that already in June, on an operating business level, we managed to break even.

Further cost mitigation is in process, with a focus on these rent adjustments. I commented on earlier, mainly for the post-lockdown period at locations with a sustained negative COVID-19 impact on the footfall.

And based on that, on the current development that we see and the expectations toward the sale, we see a positive full year 2020 EBIT. And for us, most importantly, we confirm our strategy, we confirm and reiterate the attractiveness of our out-of-home consumption market and the outlook for the foodvenience market remains, in our view, unchanged, and we will continue to invest along all the strategic priorities that we shared earlier this year with you.

And with that, we can start the Q&A. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Jon Cox from Kepler Cheuvreux.

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Jon Cox, Kepler Cheuvreux, Research Division – Head of Swiss Equities and Head of European Consumer Equities [2]

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Thanks very much for the presentation. Lots of detail there. Probably the most granular presentation I’ve seen so far during this crisis, so much appreciated. You seem to be doing a really good job on that. But obviously, we’re trying to tease out what is structural cost declines and what is maybe government support efforts. If I look at that, you mentioned the CHF 40-odd million operating — lower operating costs in H1, 60% of which was staff. Can you give us the breakdown on that staff, how much did the government contribute to either in Switzerland and Germany on that? So that’s the first question.

Second question, just you mentioned rent deferrals and maybe rents not being paid. Can you give us some sort of granularity on that? Because typically, your H1 rent bucket, if I include right of use, other rental, rent charges, H1 would be around CHF 100 million. It’s around CHF 200 million, I think, for the year as a whole. How much of that actually did landlords just say you don’t have to pay? And how much is deferred? And do we have to be worried about that coming into either the cash flow statement in H2? Or anything else we need to worry about there. So really, yes, just what is — what have you removed cost-wise? And then what have you got from the government?

And just to continue along that line, the government support schemes, as far as I’m aware, they all run out after 6 months, so that will be September. Obviously, we can see you were profitable in June even with lower sales, but I guess that’s because of the government support schemes rather than underlying profitability. So again, if you can give us any sort of thoughts on that. And then just on the cash flow statement, again, should we be thinking about any rents or anything coming in from H1, which is being deferred, as you mentioned? And then you seem to be saying that there’s a lot of work going on in the working capital. I wonder what your best guess is for free cash flow for this year now that you’re predicting an operating profit.

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Michael Mueller, Valora Holding AG – CEO [3]

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Thank you very much, Jon, for your questions. And I probably start with question number one in terms of how much government support contributed personnel expenses.

I mean first of all, obviously, government support contributed significantly. And on those levels, in our own stores, in our own administration staff and also on the level of our agency and franchise partners, which indirectly, you would have to include in that number. But having said that, I think part of the rationale of the government support is also to basically bridge a crisis in a way that you use these funds, first of all, very responsibly as a company. And secondly, you help our employees to bridge a quite challenging situation for them. Having said that, I think, bear in mind, ultimately, personnel costs are very variable for us. If we would consider to close stores and reduce the network or adjust other cost, structural costs related, which then result in personnel expenses that we have not completed yet. So bear that in mind.

Secondly, you cannot look at the personnel costs on a completely isolated level because what we have provided you is basically on a net level. We supported also our agents. So there is already a fair amount included of cash out on our side to support our agents and franchise partners. And on top of that, we topped up the short-time benefits that our employees received from the government, initially in March to a 100% level; in May, to a 90% level; and in June, in Germany, to an 80% level. Switzerland is already at the 80% level. So with the decreasing scale, we topped up.

So you would have to factor all these elements into all — the overall personnel cost reduction contribution. And I appreciated your comment regarding transparency, but it would go a little bit too far if I will talk you through all the different elements, how they contributed here. I think just to give you an indication in terms of short-time work, I mean it’s — and I’m a little hesitant because there are so many elements factored in, again, indirect support. But let’s assume you’re at that 25% level of the overall savings. But again, I think it will be too simple now to assume you can just expect this to expire going forward at a certain point of time, be it in 12 months, 18 months, whenever since there are a lot of other offsetting elements. But at the same time, I think quite clearly, government support was a very effective instrument that helped us already to keep a lot of stores open that, without that support, would have not been economically viable to keep the stores open. And I think the best way to look at that number is if you look at the retail store closures, where we marked mostly for 50% of the network with adjusted opening hours. I think there you see quite clearly that we agreed with quite a lot of partners that we keep the stores open, and this was possible based on these short-time work contributions.

If they expire, we have to adjust the variable cost base. That’s what we indicated will continue to happen anyway. So market stays dynamic, our cost base stays variable. We will have to work along all the cost elements, and this can then potentially also result in portfolio adjustments. And again, there, bear in mind, this does potentially lead to sales decline and margin decline, but not necessarily, especially at locations where we have a very high density in terms of store.

If you, for example, look at the main station in Zurich, where we have quite a few store in a very short distance. So that will be my answer on your first question.

Second question, I understand you ask what’s the cash impact of deferred rents on H2. I mean first of all, there has been an impact in H1 by rent deferrals that you see in the net working capital development. That’s correct. Many of them were of shorter nature, meaning not affecting H1 fully, some of them did. So you will see a deferral in H — or an impact, the cash impact. But I think I go as far as saying that the impact from other net working capital management initiatives have been far more contributing than these rent deferrals, where we basically defer payments with some of our partners or renegotiate the payment terms with some of our long-term suppliers.

So this impact has been far bigger, but it’s also important to pay out and to make sales, that you understand there has been quite a substantial extraordinary element in the cash generation included. And I hope with that, I answer your second question. These are the 2 questions I could answer. Maybe just…

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Jon Cox, Kepler Cheuvreux, Research Division – Head of Swiss Equities and Head of European Consumer Equities [4]

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Maybe I’ll just — maybe I’ll come back on the — because what we’re trying to work out is like, let’s just say, structurally, footfall is down 10%, 15% for the next couple of years on some of the — on a lot of that public transport locations. Are you confident you can get your rents down by 10%, 15% and your staff cost down by 10%, 15% within the winter time? Maybe there’s going to be some dislocation temporarily where for a while you’ve got the higher cost, but are you generally confident that your model is flexible enough to really — if there is a rebasing on convenience retail in public transport hubs and a rebasing in terms of food service, people reluctant to go into these places because there’s lots of people around, et cetera, et cetera, that you can get your cost base in terms of the rents and the staff costs down to reflect that.

And how long will the transition be? And would there be pain? Would we see this pain in Q3, 4, when the governments fall off, for example, these supports? Or are you pretty comfortable you can manage this? Because I think you’ve done a fantastic job in the sort of the acute part of this crisis. But obviously, now we go into the sort of chronic long-term repercussions we don’t know ourselves, what will the structural repercussions are. We just want to gain confidence that you think you have the flexibility to bring your cost down to match whatever happens to your revenues in a post-COVID world.

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Michael Mueller, Valora Holding AG – CEO [5]

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Yes. The way I would answer that question is, Jon, a significant amount of our costs are variable. I mean there are certain limitations where you have only 1 person at the store, so you cannot operate the store with less than 1 person, for example. But in general, our staff costs are very variable, and they have proven to be extremely variable throughout the crisis.

I think the only difference is that if government programs expire, the measure will be different. As of now, the main measure has been short-time work to basically bridge the pain, as you call it. And going forward, potentially, this is more related towards staff reductions. Then ultimately, potentially, can also lead to store closures or more store closures. But typically, and we shared that with you, I think in the past, you see that a substantial amount of our profitability sits in on the proportional part of our network. So I mean there will be a point where the store closures have also a significant impact. But in the order of magnitude, what we anticipate in terms of sales development for the next 6 months, but also 18 months, this — I mean there is enough variability and flexibility to adjust definitely on a staff level, both on a store level and in a central function administration level.

How much pain will be required? That’s something that we adjust quite dynamically, on one hand related to government support, but also on the other hand, related to sales development. And further detail of these programs and potential programs, we then definitely share with you in October as well when we have some more visibility, both on the programs, but also on sales development.

I think if it comes to rent, in terms of what’s our read and of the likelihood that we can adjust rents, that’s how I understand your question and what’s the transition cycle. So my concern is rather the transition cycle than the ultimate adjustment because there is a market for these rents. And we are very important partners. And we strongly believe that you will see a recovery. I think we have documented quite well in terms of both on the sales level and profitability level, how steep the decline was and how strong also the trajectory, the recovery was now. And there will be a market for these rents. And so you will see potentially in locations where you have sustained low footfall. All I anticipate is that over time, you will see adjustment.

The concern is the time. I agree with that. And I don’t have a good answer for that. All I can tell you is basically 2 things. First, we’re on very close discussions with all the major landlords. And all the major landlords start day by day, understand better and in more detail the impact the crisis has both for themselves and for, not only us, but all their tenants and, therefore, start to come up with new solutions. It’s not only the rent reduction or minimum rent reduction, but it’s also flexibility in terms of opening hours, portfolio adjustments and these kind of measures that are extremely relevant and that we use quite extensively in the retail space, for example, if you look at the numbers we documented in the presentation in terms of opening hour adjustments.

So we are in very close discussions. I think even I can understand that they’re also in a difficult situation, most of these landlords, and they have certain incentives to delay these discussions towards a point where we know that some of the footfall declines will sustain. And the far easier discussion is basically looking backwards and discussing what we have seen since post lockdown, and that is reflected in most of these discussions.

And secondly, and probably more importantly, we have not built in high expectations, or the way I would call it or I called it is, we build intangible expectations based on the current discussions in our plan going forward for both rent but also, they have mentioned that on the personnel expenses side in terms of support for our partner. So the positive EBIT is not the result of a wishful thinking what we can achieve with both rent and government support, but based on what we see is tangible and realistic, and this includes the partner support, which will be more significant in H2 than in H1.

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Jon Cox, Kepler Cheuvreux, Research Division – Head of Swiss Equities and Head of European Consumer Equities [6]

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Okay. Just on the rents, is it right to assume that the minimum annual guarantee at the moment is effectively like 80%, 90% of your rent bill? Just in general, I know it’ll be different everywhere. And then just a follow-up on that cash question. Do you think there’ll be free cash flow this year then based on what you know today?

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Michael Mueller, Valora Holding AG – CEO [7]

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So in terms of the free cash flow, you can expect that we generate similar amount, maybe even slightly higher in the second half year than what we generated in the first half year. I mean that’s as far as I will go for cash guidance for the year. This is, again, the result of a very detailed exercise, where we not only forecasted operating performance of our business, but we included all the net working capital measures, again, and as always, on a realistic — with realistic expectations. And so I’m quite comfortable that you see similar, potentially higher cash generation in H2 than in H1. That’s on — as far as I go in cash flow guidance.

In terms of the more specific question, rent adjustments, as you say, it’s in every location, it’s different. Every contract is different. And every situation is different because with Deutsche Bahn, we have a multiple number of contracts for each single location. Whereas with SBB, we work rather with frame agreement. But to generalize that, I think the 90% is too high. It’s rather — if I would have to consolidate it across, and this is not weighted by number of contracts or the rent we pay, but it’s rather between at the lower end at 60% and at the upper end, 80% for the different business units with the exception of Retail Switzerland, where we are closer to the 90% since we renewed the contract with SBB for the retail business fairly recently.

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Operator [8]

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The next question comes from Volker Bosse from Baader Bank.

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Volker Bosse, Baader-Helvea Equity Research – Co-Head of Equity Research [9]

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Thanks for all the provided information so far, and welcome, Beat, at Valora’s management board. All the best.

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Beat Fellmann, Valora Holding AG – CFO & Member of Executive Board [10]

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Thank you.

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Volker Bosse, Baader-Helvea Equity Research – Co-Head of Equity Research [11]

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Coming to my questions, we’re delighted by the Page 21 in special, and you show there that, on average, it’s with train stations, footfall is currently down by minus 10%. I’m asking about more granularity, how much is the footfall down at inner city locations or at shopping malls? And how, for example, also Zurich central station should compare to this average figure provided? I mean I guess, international tourists are missing and that could be a significant part in Zurich as well, but would be interested to get your view on the footfall by location, so to say.

Second would be on the Pretzel production. I suppose, production is not running under full steam in the moment. So where do we stand in cutback of production output at the moment in Germany and in the U.S.? And finally, a last question would be also on the Kurzarbeit program or this fiscal shortened working scheme. So how much — or how many of your group employees have been included in the scheme, in percentage of total employees? And where do we stand as of end of June, so to say?

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Michael Mueller, Valora Holding AG – CEO [12]

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Thank you very much for your questions. In terms of footfall by location, I will guide you to the same source we used here, which is Google. You can go to their web page, and they offer that service across multiple geographies. You can drill down exactly in the locations you mentioned. You can drill down to city center, you can drill down to airports. Basically, as far as I understand, they track our phones and have, therefore, a very good indication of changes in footfall. I do not have the numbers in front of me now that for all the locations you asked, but go to the Google page and you get all the details. And I must say it was quite helpful for us to look at some of these numbers, compare different cities within Switzerland, Germany and so on. So quite an interesting read.

Unfortunately, Google doesn’t make any prediction for the future. This will also be standard. [But they haven’t gotten] that their AI shouldn’t have not predicted anything so far or at least they don’t share it with us. So that’s your first question. Maybe the other thing I would add is that the most interesting shift in footfall we have seen is towards agglomeration and gas stations. You see that also on the page you mentioned or on the previous page. This created a situation where some of our stores that have been rather less important, I would not call it overlooked in the past in our portfolio, became actually quite interesting contributors mainly at very small train stations. And this pattern sustained throughout Switzerland and Germany. And in our view, it is explained by the fact that people stayed home and then when shopping at their local kiosks in the suburbs, that they far less heavily frequent on to normal conditions.

And then secondly, at the gas station, I think I mentioned that gas stations, some of them, especially with the new avec format, performed very strongly here in Switzerland. But that’s my answer for your first question.

Second question, in terms of output, we do not answer these questions. We always try to be transparent as possible, but it will go too far, and it will be too helpful for potential other people listening into the call if we will share all the details in terms of capacity planning and current capacity.

I think I mentioned in one sentence that now staff is returning almost significantly to work. And staff in our context is not only own staff, but temporary staff as well, which also explains the variable nature of some of these costs related to the B2B business and the production. But I would not go further than that. But you can assume, we are extremely well positioned, in my view, now to benefit from a market environment that has weakened some of our competitors.

And the last question in terms of short-time work. We documented that it was — it has been roughly 50% of staff has been affected by short-time work. It’s lower now, and — but it will remain dynamic. And I think this refers to the answer I have given to Jon’s question earlier. As long as sales and market environment stays dynamic, cost management stays dynamic, and it will also, going forward, be a trade-off between ultimately using the short-time work or applying other measures related to personnel expense [intrinsic layout service there].

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Operator [13]

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The next question comes from Gian Marco Werro from MainFirst.

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Gian Marco Werro, MainFirst Bank AG, Research Division – Analyst [14]

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Three questions from my side, please. So the first one is on the SBB refurbishment. As I understood so far, I mean, originally, you planned to refurbish 100 stores this year. So, so far, you achieved 22, if I’m correct? And then do we now achieve your target to still fully refurbish everything until the end of next year? What can we assume? What is your target now for H2? Is it reasonable to assume around 70 stores to be refurbished by the second half and then over 130 stores in the second year, so in 2021? And can you also give some more details on CapEx perspective in relation to that? As I understand correctly, you once guided for 100 stores, costing you around CHF 30 million this whole refurbishment.

Then the second question is in relation to, let’s say, the support payment also to your agency and franchise stores. Can you also quantify about how big the share of all your agency and franchise partners is, which really requires those support payments at the moment? And then just also on the last question is the expansion of your BackWerk and cigo plans in Germany, Switzerland and the Benelux. So by how many months do we have to postpone also our expectation there in relation to the expansion of your retail network?

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Michael Mueller, Valora Holding AG – CEO [15]

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Thank you very much, Marco, for your questions. First of all, to frame all the answers I will give you now, is that we announced that as of October, we will come back to you with a trading update. All the guidance beyond 2020 will be given there. So I will be now a little hesitant in commenting on all the effects, including by how many months some of the initiatives will be postponed. But I think I can build on what we communicated in the past.

So starting with SBB. Your guess is not completely off. I think we mentioned already it’s 8 store, plus a couple of others currently under refurbishment, and this may lead to, let’s call it, order of magnitude, 60, 70 store towards the end of the year as the 48, roughly 50 we have already, leaves us with 100-plus for next year, put that into the perspective with the challenges we have to time-wise and hard-to-predict environment, including lockdowns, safety measures during the winter and so on. I would leave that a little bit open. We are currently in discussions also with SBB how to structure that. Because it takes two to tango here, including some of the government agencies to release these refurbishments and — but in general, it is possible that we fully catch it up or, to a very large extent, towards 2021. And secondly, it has been affecting so far, mostly the k kiosk, which also improved and increased shelf space in food, but obviously, the bigger move in terms of shelf allocation to those who comes with the avec refurbishment.

But your assumptions, that’s how I would leave it. You are not completely off. In terms of the CapEx, again, for H2, what you can expect that CapEx will be at similar levels comparable to H1 this year. I think we shared that already in previous calls that we expect that we will end up at the lower end of what we guided as a normalized CapEx in the past. If you add up the numbers, you get to similar, maybe slightly higher level, depends a little bit on the rollout plan. But I think this gives you a fair confirmation of what I said earlier with investors during the crisis, that you basically expect this kind — these kinds of levels.

I’m a little hesitant to go well beyond 2020. But quite obviously, if we increase rollout in ’21, you will have a shift from CapEx that has been planned this year. But at the same time, we always include in our midterm CapEx plan also projects that given the current situation, we not only postpone, but they all postpone not only by a couple of months, but postponed basically for longer. Secondly, you always have the effect that we do — in the current environment, we can also source some of the projects at more favorable rates. And so I think for ’21, to expect CapEx to increase compared to 2020, obviously, fair. Even bear in mind, Q1, we completed B2B. Potentially order of magnitude next year, CHF 100 million, not totally unrealistic, which I think would tie with the number you had in mind in terms of number of stores and what it takes to complete an accelerated rollout. But I went already now with that number a step further than what I framed initially. So please bear with us, something looks good where we have more visibility on the actual dynamics of the market and the planning.

I think your next question was related to partner support. And there, again, not prepared to provide more transparency than saying that what we expect in terms of partner support, and this is a bottom-up, very detailed analysis that we ran based on store performance and quality of the partners. We have a pretty, I would say, a pretty good view on what it takes to support selected partners, and this view is fully reflected in the guidance that Beat has given you in terms of an EBIT positive result for 2020. If market recovers faster than what we anticipate, if franchise partners are stronger than what we build in and all we support less and close more of these stores, this number will be reduced. But I’m not willing to share that number with you right now.

In terms of how many partners are affected, I think, similar answer. We have a very detailed view on this. And it’s obviously not the majority to make that very clear. But I will not go into details how many partners are supported because I think this would only weaken also our position here as a company.

And last question, I have a hard time to read my own handwriting now, of course related to BackWerk expansion. This will definitely move into the trading update in October. Quite clearly, right now, we’re in a very challenging expansion environment, and the focus has been with BackWerk in securing the quality of the network rather than expanding the business right now.

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Operator [16]

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The next question comes from Ronald Wildmann from Research Partners.

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Ronald Wildmann, Research Partners AG – Partner, Head of Research, Financial Analyst, Portfolio Manager & Director [17]

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Most of the questions already asked, so only one remaining question, which is really for interest, I believe, I mean the IFRS 16 accounting makes it probably very complex to calculate what could be the impact if you get reductions on your rent side. Would you agree that, just as an example, if you get a reduction by, let’s say, CHF 10 million and if the rent is amortized in 10 years, then the impact — the real impact on P&L is only CHF 1 million. I mean of course, there is a full impact on cash flow statement, I understand that. But on the P&L, you don’t see the impact. Is that right? Or is that not right?

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Michael Mueller, Valora Holding AG – CEO [18]

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Thank you very much for your question. I definitely agree with what you said about IFRS 16 that it’s complicated and hard to understand and read them to anticipate all the effects. But in that case, actually, we got the relief for a simplification of the IFRS 16 accounting. This happened a couple of weeks ago, ahead of the H1 results preparation. So I think the way you described it, would it have been if this new IFRS rule would not have been released, which is applicable on top of my mind until next year, midyear for all the sort of extensions or adjustments that are applicable until mid next year, which based on what I said earlier of the dynamic of the rent discussion, you can assume affect all the discussions we have as of now. So there, you see a significant simplification and not that potentially far more severe impact on the P&L by rent reductions.

But you mentioned since we are already at 12:30, over 12:30, I suggest that if you have further detailed questions regarding the details on it, can provide you with the documentation of this new IFRS 16 rules.

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Operator [19]

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The next question comes from Jon Cox from Kepler Cheuvreux.

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Jon Cox, Kepler Cheuvreux, Research Division – Head of Swiss Equities and Head of European Consumer Equities [20]

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Sorry, I just thought I’d come back and have another go if it were. Basically, just on the B2B, a lot of granularity on everything else that’s going on. Just wondering how the B2B part of the bakery is going. And then also, do you have a split for your customer base or your estimates, just again, roughly a quarter is maybe hotels and restaurants or a hotel, a quarter of this, a quarter of that, and it ends up in retail, grocery retail, ultimately. That could just help us a little bit in trying to model how B2B might develop over the next couple of months and quarters.

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Michael Mueller, Valora Holding AG – CEO [21]

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Yes. Thank you, Jon. So B2B, this is fairly — I mean, a market where we benefit currently from a very strong position despite the heavy impact the crisis have specifically in the food service space. We also have significant partners in the grocery retail segment. But we have never broken it down further than what I think we have done in the presentation probably 2 years ago, where we showed that the majority of our business is related to small partners. So we are not significant — there’s no significant dependence on single partners. But again, Annette can provide you with the chart where we don’t comment that. And we could consider to update it since it’s slightly — I mean, not outdated, just old data, but the principle remains. And that’s one of the key strategic positions and decisions we have taken that we do not create dependency on single partners, especially since we’re building our business now on the new capacity in the U.S., it would have been fairly easy to leverage that capacity with not even a handful, but maybe a couple of partners. And we have not done that since I do not want to have that dependency.

So from an exposure point of view to further break it down into which pockets we deliver, I think I would not go that far. And the way I would answer it, you can assume, if you model what you see in food service with a slight time delay was also the impact on the B2B. And I think that makes it more difficult to model it because you see always the delay in terms of stocking, unstocking and so on.

I think one additional information I can provide you was that there was one surprise on our side, which was grocery retail. Grocery retail, we expected that we can benefit from this increased footfalls and quite positive sales trend that a lot of grocery retailers have seen during — especially during lockdown, but also post lockdown since more people stay home. We have not fully benefited from that. And this is mainly related to shift in assortment, which came a little bit surprising to us because the products, mostly frozen products we deliver to these grocery retailers actually are quite attractive products for these retailers.

But it seems like there were operational reasons, efforts to simplify the shelves on their side so that we did not fully benefit from that, and that was probably the most negative surprise outside of general decline in food service sales that I will comment in terms of split.

In general, B2B was also quite heavily affected. At the same time, and now based on the most recent developments in the last couple of days and weeks in terms of order intake, I’m fairly optimistic that you see quite maybe even overproportional compared to — relative to other units’ recovery in the B2B, which then also contributes fairly quickly positively because we have a significant operational leverage.

So we have — in terms of capacity, starting with the D&A, so the capital intensity, but also in terms of minimum required to operate the plants, you have a fairly fixed basis. As soon as sales increase, it levers quite nicely upward, so yes. And clearly, the development over the next couple of months now in B2B.

With that, I’m looking here at the overview of the webcast. There are no questions on the webcast. And I think there are no more questions remaining in the call. So with that, I thank you very much for participating in our half year results presentation, and thank you very much for your interest and your questions. I hope to hear all of you in — towards the end of October when we provide you with our trading update. And so far, I wish you a nice summer. Stay healthy. Thank you very much.

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Operator [22]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.