Half Year 2016 B&M European Value Retail SA Earnings Call

Nov 15, 2016 AM GMT
Thomson Reuters StreetEvents Event Transcript
E D I T E D   V E R S I O N

BME.L - B&M European Value Retail SA
Half Year 2016 B&M European Value Retail SA Earnings Call
Nov 15, 2016 / 08:30AM GMT 

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Corporate Participants
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   *  Simon Arora
      B&M European Value Retail SA - CEO
   *  Paul McDonald
      B&M European Value Retail SA - CFO

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Conference Call Participants
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   *  Caroline Gulliver
      Jefferies - Analyst
   *  Pradeep Pratti
      Credit Suisse - Analyst
   *  Jonathan Pritchard
      Peel Hunt Limited - Analyst
   *  Matthew Taylor
      Numis Securities - Analyst
   *  Adam Cochrane
      UBS - Analyst
   *  Warwick Okines
      Deutsche Bank Equity Research - Analyst
   *  Richard Chamberlain
      RBC Capital Markets - Analyst
   *  Yon Kerner
      Presidio - Analyst
   *  Abhilash Mohapatra
      Goldman Sachs - Analyst
   *  Assad Malic
      Citi - Analyst

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Presentation
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 Simon Arora,  B&M European Value Retail SA - CEO   [1]
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 I'll as usual start by just summarizing a few of the headlines for our interim results to September of our current financial year, ended March 2017. So the bullet points are as you see them on the page, a healthy increase in total group revenues of just shy of 19% and that is, of course, largely driven by our store opening program and behind that we had UK unadjusted like-for-like revenues of plus 0.2%. But on an underlying basis when you strip out the deliberate impact of our record store opening last year a much more healthy plus 1.9% like-for-like. As a consequence of that top-line growth our pretax profits increased by a similar number, 17.2% and that obviously flows through to the earnings per share.

 You are all with that of growth is being driven by our expansion across the UK. And we confirmed this morning that in the six months under review we opened 29 new stores of which six were relocations but also in that six-month period we closed three stores. Those three stores being very much smaller than our typical store size, some of our legacy stores from the days before we had a home store model.

 So on a net basis, 20 net new stores but actually I am pleased to confirm that for the full year we are absolutely on track in terms of our new space. And it's entirely appropriate for you to continue to model 50 net new stores. Broadly speaking that's where we're going to be, although it might be a little bit of movement around moving parts around pure new stores versus relocations.

 Our German business is similarly on track in terms of its store rollout. It has opened 10 new stores and is on track to deliver the 19 stores that we guided when we hosted the Investor Day in Germany itself.

 I think on the store opening program I'd bring your minds back to the bigger picture. In the UK at the year-end, at the half year-end we had 519 stores trading, 519, and that is in the context of the UK store target of 850. So plenty of growth yet ahead of us in terms of our UK home market.

 Another feature of this business is it's very strong cash flow profile. You will see that our cash flow has increased by a very strong 76% year on year. I think that speaks to the capital-light nature of our store rollout and it also speaks to the tight control of our working capital that is driven by our limited assortments' SKU discipline.

 Please remember that the heart of our model is our limited assortments, 5,500 live SKUs at any one time. And that discipline allows us to keep our working capital and check and therefore delivers very strong surplus cash flows.

 The point is best illustrated by our leverage ratios that you see on the penultimate bullet point. Even though we paid GBP100 million special dividend this summer we are actually at a lower EBITDA to net debt ratio of 2.1 than the corresponding moment in time the previous year when it was at 2.2.

 Finally, because of the increase in profits of the business and in line with our dividend policy we increased our interim dividend by just shy of 19% to 1.9p per share which is, of course, at the upper end of our 30% to 40% of net profit policy.

 So let me pass over to Paul who will talk you through some of the detail behind those headlines.

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 Paul McDonald,  B&M European Value Retail SA - CFO   [2]
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 Good morning, thanks Simon. Yes, just like to switch on, to take you through, walk you through some of these financials in a bit more detail over the next few pages. I'd say Simon has already picked up some of the highlights but clearly we've seen our adjusted EBITDA grow by 14.6% on our adjusted EBT by 17.2%.

 One thing I would like to just mention slightly dual point but first in this accounting period we actually adopted hedge accounting. We decided to adopt hedge accounting rather than have some of the -- we believe the movements in sterling versus dollar, we decided to adopt hedge accounting. It takes some of the volatility that might otherwise happen through your P&L account if you didn't adopt hedge accounting. But effectively in terms of the adjusted EBITDA and just the profit figures you see there it has no impact, the adoption of that policy has no impact on those numbers whatsoever.

 Just to let's pick up the first in terms of revenues. Obviously, we are seeing nearly a 19% revenue growth in the year, yet again principally driven by the GBP153 million in terms of our new store growth. So 17.7% of our growth actually arose from the new stores, both the annualization of the 79 stores that we had opened in FY16 and also the 29 new stores that we had opened in FY17.

 Just on those relocations, probably worth us reiterating that actually although there is I would say six new stores, six were relocations, effectively all that we have been doing there is actually replacing some of those, all the legacy small contribution stores with some larger newer stores in those particular locations.

 I will touch a little bit more on the LFLs on the next slide. But yet again you get a nice uptick from Germany and probably the first time we are starting to see a little bit more material growth in Germany as we've started to accelerate the new store opening program. And clearly we had a nice benefit just from the fact that obviously sterling/euro has obviously moved compared to 12 months ago.

 But if you look at the underlying Jawoll business it's actually grown just over 14% in terms of euro revenues. Yet again same dynamics as the UK business. Annualization of the stores, the six new stores we opened last year, the seven new stores we opened this year plus we converted three of the stores that we actually acquired in the year as well, so 10 net new openings in Germany and actually we've also had some relatively modest LFL growth in Germany, so essentially all on track.

 In terms of just moving on to EBITDA, yet again some of the key features, yet again referring back to yet again net new stores. As you see there GBP15 million of EBITDA growth is coming from the new stores. And clearly that execution of that new store rollout program continues to remain the main driver of growth.

 Moving on, in terms of our LFL stores we just for the first time just split out just to see if you break it into two segments, obviously we have this deliberate impact in terms of cannibalization. But if you look at the underlying LFL stores excluding those cannibalization stores the core business is growing. We've seen some, we continue to see some growth in that core business excluding the deliberate impact we've had.

 A little bit further investments in central cost, predominantly coming from the opening of the -- we opened two new warehouses last year if you remember that were open in June and September last year. So you didn't get the full year of fixed operating cost, the rent, the rates from those stores. These started to see a little bit of additional cost coming through from them and, obviously, we are getting a slight uptick in terms of the German business figures. Overall we've seen our EBITDA grow from GBP87 million to GBP99 million.

 Just touch a little bit more on in terms of LFL sales, obviously if you look at big picture in the half, obviously, you've seen reported LFL is 0.2%, a slight improvement in the reported figures in the second quarter year rising to 0.3%. But I think if you go look at it on an underlying basis which actually strips out the impact of the deliberate impact of cannibalization you'd say actually our sales actually over the last six quarters have remained pretty consistent over that period of time. And certainly I think probably one of the other key things to mention is just this impact of cannibalization, but I'd say in the first half year it's 1.7%.

 If you looked at Q2 itself it's now down to 1.6%. One of the key features as we move into Q3 and Q4 is just actually that cannibalization is going to become less of a drag on the LFLs.

 If you at the start of the financial year we had about 64 stores which were being impacted by cannibalization. At the end of the half inch down to 46 and if you move there onto the end of Q3 that's down to 34 stores.

 So as we start to annualize those opens that we did last year, that record number of openings we did last year, you do start to see the fact actually and just the pure math of the reduced number of store that cannibalization impact where it has been 1.7% in the half is going to start to diminish as you move into Q3. And, obviously, further it will be less of a drag as we move into Q4 as more of those stores start to annualize.

 Moving on to gross margin, obviously, we had a really good performance in terms of gross margin. And the overall business has improved by 21 basis points despite what might have been what the theoretical impact of what's happened in terms of the pound versus the US dollar. And similarly some of these that impact has been offset by a number of areas, although our seasonal areas had a very good season, although April started off very slowly in terms of relatively cool and wet in the UK the rest of the summer was pretty good.

 So we ended up in -- we sold through all our gardening, our outdoor seasonal and gardening sold through very well, slightly enhanced the margin. We'd also -- we predicted in the past, we slightly enlarged our range of DIY products, firstly by, I'd say firstly enlarged the range but secondly we've also directly sourced some of those products as well. So this is the first season we have really started to see that come through. I think if you go back to one of the earlier presentations you might have seen Simon talk about expanding that DIY range and we started to see here's some margin benefits coming through from that decision to do that.

 And the other key factor within our margin improvement is the fact that we have been opening these larger stores. So yet again you get a nice mix benefit because the larger stores has more of the general merchandise relative to the grocery FMCG offer and typically the margins on those stores are 70 to 80 basis points higher than the core estate just because of that and, therefore, you get a nice mix benefit coming through from those new store locations.

 Some slight improvements in the Jawoll margins, a little bit of the benefits of some of the things we've done around direct sourcing. So certainly moving in the right direction.

 And then moving back into the UK, a couple of things to say around in terms of our pricing, broadly our pricing on the grocery, our core food and grocery lines remains very competitive compared to the big four grocers, the grocery sector out there. And, secondly, I think if we looked at our underlying, if you look at our sales and our core food ranges they remain in positive LFL territory. So all very stable in relation to food.

 In terms of costs, probably just go back, I think if you go back to our full-year results we spoke around the fact that actually in terms of our FX costs for FY17 we broadly expect them to be at the same percentage as last year. But I think if you cast your mind back it was really a story of two halves actually. If you remember last year we had, we spent a lot more cost in terms of warehousing and transport costs in the second half of last year, which you would expect to recover some of them in H2 this year.

 So very much in line with our plan, although I'd say the split between H1 and H2 was always going to be slightly different just because of this impact. Although full-year guidance was around similar OpEx cost to last year, but I would say the split between H1 and H2 was always likely to be slightly different just because of the drag on H2 last year that came from the additional cost we spent on warehousing transport costs.

 Moving down to some of the more granular detail around these figures, if you look at our store cost 43 basis points higher than last year. The first element is worthy of mention and effectively given some of our cost basis it's rent rate service charge in essentially fixed. The (inaudible) impact on some of the record new store openings and cannibalization has worsened those statistics by about 17 basis points.

 And probably a real positive. We spoke at the year-end that clearly the living wage was introduced in April this year. Theoretically the living wage would have, if we hadn't been able to mitigate anything you'd have expected 15 to 20 basis points worse than your EBITDA margin as a result of that increase.

 But the store operations seem to do a fantastic job in terms of productivity improvements. And we've only seen a slight increase in our store wages as a result.

 And probably the other factor in terms of driving some of our cost actually, if you look at our rent as we've moved further down south we are paying slightly more in terms of rent in those stores. So if you take our stores which were open prior to FY16 in the half they actually the rent per square foot was around about GBP11.20. And if you look at the stores we had opened in FY16 and FY17, which is best part over 100 stores, the rent is slightly higher, about GBP12.50. But very much a deliberate impact of the geographies where we've been going, particularly as we moved down south and also the fact that actually we have been moving into one of the new store openings has been newbuilds.

 Transport and distribution costs, largely got pretty much where we had the issue in the second half of last year broadly on track, slightly higher than last year and particularly as a result of just slightly moving up with the stores being that much further away from our Northwest distribution centers. Yet again central cost in absolute terms just over GBP1 million higher which is predominantly driven by the additional cost we -- investment in our central in terms of our central warehousing.

 But actually it terms of actually you get this nice leveraging impact due to the fact that we had the annualization of the stores last year plus this year we've seen that effectively we've seen that leverage impact as we are starting to grow into that fixed warehouse goal. So we've seen a reduction there.

 And Jawoll cost, yet again seen an increase but yet again for those of you who were there at the German Investor Day in June very much planned. So this is yet again a business which is investing, you had a growth, so we've had the cost of coming through from the warehouse extension they've done. They've been investing in buying teams, investment again their import teams and also their property acquisition teams. So effectively it's all the investments you need to make ahead of that growth program.

 Interest, you probably, one particular comment we're going to make. We've seen interest come down by 15%. We had, there was a slight reduction in our interest margins which we got the full-year benefit of this year in terms of bank facility, so we have seen some reduction in our interest [bill].

 Probably the final thing to figure is just cash flow. And we've had a really strong cash flow in the half as Simon referred to it at the start. But, obviously, we've seen big picture we've seen our net debt to EBITDA reduce.

 So if you go back to last year on an LTM basis compared to September 2015, 2.2 times, that's now reduced to 2.1 times. And clearly we've paid off special dividends of GBP100 million in July of this year. So despite the fact that we have actually paid our special dividend, actually the metrics of the business and the quick payback on new stores still continues to generate cash.

 The key driver certainly in the half actually has just been our control of working capital. If you look at our stock that remain very much under control. I mentioned before the sell-through in seasonal has been very good, so no overhang of stock, etc., and effectively our working capital has helped driven that performance.

 The other thing that is probably worthy of mention, obviously our acquisition in Germany there was GBP2.3 million in terms of our acquisition. But, obviously, big picture the business continues to delever quite nicely and very much in line with our plans.

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 Simon Arora,  B&M European Value Retail SA - CEO   [3]
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 So what I'd like to do is share some thoughts on the bigger picture and particularly start with the market because I'm mindful that some of our shareholder base is across the pond in the US and may not be close to the detail of what B&M shoppers are saying, doing and behaving on a day-to-day basis.

 So really the first thing I'd like to address is what was the impact if any on consumer behavior of the June referendum. And as you see from the top left quadrants of this page the answer is no discernible impact. Mr. and Mrs. Smith in Birmingham are behaving exactly today as they were a year ago, notwithstanding the outcome of that June referendum result. And what we are saying to you is that when you look at weekly trading over the half, actually the patterns are just the usual patterns of when do public holidays fall, what's the weather, when are the school holidays as opposed to any shift in consumer sentiment.

 Leaving aside the top line Company behavior in terms of sales, consumer behavior in terms of sales, I'm also happy to share with you that at a product category level we are not seeing any impact from the June 23 results. Other than some minor shifts in category participation that we ourselves have created through space allocation, slight tweaks to the numbers used number of SKUs within each category, we are seeing no impact from whether it's high ticket or low ticket or whether it's grocery versus non-grocery, everything is remarkably stable.

 When we talk about the markets, a nice benchmark is the British Retail Consortium like-for-like monitor. We share there for you for easy reference how that has been performing over the last few months. You will see broadly speaking over the last half year it's been flat and in that context underlying like-for-likes of just under 2% we say are extremely robust.

 But at the risk of sounding like a scratch record what we are very focused on is that journey of going from a regional retailer that has its heartland up here to a national retailer that allows almost the entirety of the UK easy access to a B&M. The half year saw the new store openings that I mentioned earlier, a very small number of closures.

 Just to give you some reassurance there isn't a closure program. These are literally three stores out of 500 stores that on a site-specific basis are on the wrong street, the wrong side and there was a better opportunity coming up around the corner.

 We had six relocations in the year, in the half year that were the right things to do. Similar themes, you've got a smaller legacy store, a larger store with a carpark comes available around the corner, it makes absolute sense to relocate those.

 And actually what I'd share with you is that six relocations had the same revenue implication of opening four net new stores. So really, really attractive opportunity for us.

 But the big picture is as I said you should think about 50 stores for this year. We are happy to reconfirm that for the next year FY18 we have a budget of another 50 stores. So our new store program continues at a brisk clip unabated and we reconfirm our UK store target of at least 850 stores. By way of detail, as you heard previously the new stores that we've opened are both infill locations, for example in the North and the Northeast, but also going into some of the territories down South where they have previously never heard of a B&M.

 One of the things I'd like to address is to give you some comfort and an update on our new store paybacks. Clearly this business since we IPOed has opened a lot of stores, and so what we took the opportunity to do is to give you an up-to-date look at the new store paybacks for the 72 openings that have now had a full year of actual trading up to the recent reporting period.

 So this is not budgeted performance, this is not modern performance actual takings over a 12-month period. And the headline, of course, is that the CapEx cost of opening a new store for B&M of those 72 organic openings is a market-leading eight months. You all know that our peer group quite often are delighted with a two- to three-year payback on the CapEx cost of opening our new stores. Ours is eight months and if you include the positive working capital that our business model requires it's still a very attractive 15 months.

 Just to put that into context, at the time of the IPO since when we've opened, I don't know, 150 stores or something, that number was 14 months. It's now 15 months. Part of that is a rounding error, but actually the other part of it, I'm happy to share, is that within the costs of fitting out our new stores it's just inched up a fraction deliberately because of two or three things that we wanted to do at a higher level.

 For example, we now use LED lighting rather than old-fashioned fluorescent tubes that have that higher upfront CapEx cost. But, of course, I'm sure you are aware, over a five-, 10-year period it reduces your energy bill. Similarly, point of sale signage, we've just upped our game slightly, modest GBP40,000, GBP50,000 per store, just as we opened those larger stores thinking this out we absolutely look the part.

 So moving on from our new store program I'm entirely aware, we as a management team are aware that there is a lot of concern around UK retail and specifically B&M retail on gross margin. We've shared with you that on a day-to-day basis in the five months now since the Brexit vote we've seen no change in underlying behavior. We've shared with you that when you look at the detail of the announcement that as we sit here today halfway into the golden quarter we are really pleased with the start it's had.

 It's a good, solid start. Stores are nicely stocked, the distribution center is humming like a dream.

 So as we sit here in terms of this financial year we feel really comfortable about the world. But we are absolutely cognizant of broader concerns about what happens next financial year in terms of the impact of weaker sterling to dollar exchange rate.

 I think the point we are trying to make here is that it's absolutely not case that you take a simple mathematical equation from where cable is, sterling-dollar exchange rate, and then calculate where you think B&M's gross margin is going to be. It just doesn't work that way.

 I wish I could give you a mathematical algorithm to be able to work it out, but the way it works is on a line-by-line basis what do we do to a product to make it highly competitive, how do we negotiate its price with the factory, how do we specify it, how do we brand it, how do we change it, develop it, bring it on, make it on trend? And actually testament to the, I would say, industry-reading talent in our buying team, our buying team they are the engine in our business. They deliver great, healthy margins notwithstanding what the macro throws at them in terms of an exchange rate.

 Now clearly there is going to be pressure. I'm not sitting here to say that B&M are unaffected by exchange rate. But what I am here to say is that it's much too early to call the impact.

 Our strategic imperative as we think about next financial year is to maintain the price differential to the competition. But the great thing is that it's a level playing field. None of our competitors are able to buy these sorts of products that we are talking about in any currency other than dollars.

 These inexpensive housewares, consumer goods, toys, Christmas decorations are not made in the UK, they are not made in Turkey or any other left-field location. Frankly, it's all made in dollar-denominated countries, primarily China.

 One point of detail, of course, worth reflecting on is that the renminbi has weakened against the dollar, as well. So when you think about the headline sterling weakness please be mindful of the offset you get from the renminbi weakness. Also be mindful of the fact that when you think about China and its production base and you think about the orders that it is getting from the rest of the world, they are struggling to keep their factories at the capacity levels that they have been used to in better years.

 So one of the benefits of our business, the limited SKU model, the direct sourcing, means we are absolutely perfectly placed to work with our suppliers to mitigate cost pressures. I would also make the point that fundamentally we are low-cost operator. Our store wages as a percentage of revenues are lower than the mainstream competition.

 Our store premises costs relative to the competition is lower than the norm. And so if there is any retailer that's well-placed to actually see the challengers of next year as an opportunity rather than a threat it's B&M. Because it's when prices are going up that, frankly, everyone really loves a bargain. And for us next year is about winning market share rather than being on the defensive.

 So on that positive note, let me come onto a new development at B&M which is for those of you who watch daytime TV might have spotted it, we are for the first time going to invest in some advertising. You will recall that historically we've not invested in marketing and advertising because we've taken the view that with a regional store base it's inappropriate, inefficient to do so. But actually now that we've passed the 500 store mark and given that you can exclude certain areas, for example, in ITV regional advertising, the Southeast for example, it absolutely makes sense to invest something in mass marketing if only just to increase the brand awareness.

 And as a consequence we are going to spend GBP3 million this year, a relatively modest number actually, GBP3 million on a UK business that has GBP2 billion of revenues, we are going to spend that money just to see what impact it has on brand awareness, particularly in those parts of the country where we haven't been around for very long time. And it's predominantly going to be mainstream TV advertising fortified but a tactical national press and then our ongoing digital marketing which is going very well. We just recently passed the 1 million Facebook friends milestone which is a little moment of celebration in our digital marketing team.

 The advert is extremely simple and straightforward. The tone of voice we are using is not contrived, wacky or subversive. It's a straightforward portrayal of the products we sell, the great prices we have and the fact that you can get this at B&M. So it's an advert that is trying to make B&M for everyone as opposed to trying to be a niche, clever or tricky.

 Could we just play, it's going to take, I'm going to show you three adverts. It's going to take a minute and a half, 30 seconds of each just to give you a flavor of the message we are trying to get across.

 (video playing)

 We took the view that the more irritating that's being the better because it's more likely to stick in the mind. So apologies for putting you through that first in the morning.

 But I think one thing that struck me as I was watching those adverts and trying to be objective, hopefully you get insight, we are not a pound shop. The products that we sell, the products we major on are that sweet spot purchase between GBP5 and GBP20, GBP30 and just do the math.

 If having said all UK retail prices go up by 10%, if you are GBP5 cheaper on a doll versus the competition and everyone's prices go up by 10% we become GBP5.50 cheaper than the competition. So that's just hopefully a very sort of concrete way to explain that we see the next 12 to 24 months as an opportunity rather than a reason to go on the defensive.

 Just to complete the picture, Germany is actually going to plan. I won't repeat the numbers but the key messages are that we will open the 19 stores this year that we promised when we took you out to Germany. And in terms of the package of nine that were acquired from a family that were retiring from the industry and eight of those nine stores will have been successfully converted to the Jawoll format by the end of this month, and they are all trading absolutely to plan. And that warehouse extension that we walked you around that was empty is now fully operational and working as we would want it to.

 So how do I summarize? So to reflect we absolutely don't see any change in customer behavior, but we would reiterate the point that this business grew tremendously fast through a recession. We do well in difficult times.

 In terms of the right up-to-date position in terms of the golden quarter, the words we'd use are a solid start and given that the big day is only now six weeks away we are reasonably happy that we are going to have a good season. Obviously lots to be done between now and then, but certainly the building blocks are in place. Stock is flowing nicely, all the product's here, good stock availability and initial reactions are positive.

 I would reiterate the perspective we've shared with you in terms of the dollar and that it's absolutely a level playing field. And whilst we recognize that there will be some movement over the next 12 to 18 months our competitive advantage is unchanged: limited assortment, low-cost direct sourcing.

 We want to be to general merchandise what Aldi are to grocery. We want to be to general merchandise what Primark are to fashion. Very simple, unchanged model and in tough environments those two things become all the more important.

 The big picture remains unchanged in terms of new store rollouts. We've reconfirmed this morning 50 stores this year, 50 stores next year, no changes, no falling back, no caution. But then also notwithstanding that this business chokes off a lot of cash.

 So with that shall be take some questions and hopefully have a bit of a debate.

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Questions and Answers
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 Caroline Gulliver,  Jefferies - Analyst   [1]
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 Good morning, Caroline Gulliver from Jefferies. A couple of questions if I may.

 The first, let's see, if we just start with the new stores and in particular the relocations, could you tell us what the potential is for the number of stores that you think could be relocated to larger sites and indeed what the average extension is or the average extra space is that you are adding? I understand [you worked] seven presentation, that's six new relocations is (inaudible) eventually about four new stores.

 And then moving on to international, obviously Germany is going well. Just wondering if you have any more thoughts on any markets beyond Germany now that one seems to be going to plan?

 And then just finally online, I know last Christmas it went particularly online in that final couple of weeks pre-Christmas. Have you changed anything about the way you are running the business this year to make sure that you don't lose out?

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 Simon Arora,  B&M European Value Retail SA - CEO   [2]
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 Great questions. So the answer in terms of relocations is that broadly speaking when you close a small high street store of 8,000 square feet and you move to an out-of-town store that's twice the size it just does a turnover. It's a really simple mathematics, and so six relocations equating to four new stores validate that.

 We haven't put a number on how many of our stores we believe should be or can be relocated. A lot depends on just when the lease comes due and extends. You wouldn't want to relocate too early because then you are carrying the void cost of the old store.

 I think what I'd say to you is that I wouldn't change the way you model our top-line growth, stick to the 50 new stores. But it just may be that within that 50 some of it is relocation activity rather than pure new space going down and the existing space being unimpacted.

 Your second question around foreign expansion, our medium-term aspiration to become the Dollar General of Europe is absent the unchanged. We continue to actively look for a platform in other markets. Nothing to report as of this morning but it's still firmly part of our strategy.

 We've still got plenty of growth in the UK and Germany (inaudible). There's no burning platform or imperative to do so quickly because as I say we have essentially go out in our core markets.

 On the online question I'm not sure if we've shared this but actually last December was a really strong month for us. We had an incredibly strong like-for-like performance in December.

 Now that it's a year on we can share that price. We traded about plus 4%, plus 5% in December. And so, yes, whilst we accept that online had a good Christmas last year B&M also had a good year at Christmas last year.

 And I think the reality is unchanged that for our type of product, a lot of the product that you saw in that TV advertising, it really doesn't lend itself to inexpensive home deliveries. The average ticket is still quite modest. Mail-order packaging is still quite tricky.

 So at the moment it's not part of our proposition. We review it all the time. If the consumer forces us to go online obviously we will do it but at the moment it doesn't make commercial sense to do so.

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 Pradeep Pratti,  Credit Suisse - Analyst   [3]
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 Hi there. Pradeep Pratti from Credit Suisse. Two questions from me.

 First, on the mix, could you may be give some number or some detail around the mix change from time of the IPO how much is supporting FMCG now versus two or three years ago and how much is your big-ticket items two or three years ago? And given that gross margin is up 20 bps in the first half I think your guidance for the full year still lags gross margin, I think that's what you said for the first quarter.

 The second question is on inflation. Maybe can you give some color on inflation by category and I think you mentioned that could this probably see some recovery in inflation?

 And third on this fall on business rates, do you know if there's going to be a net benefit from the investment [trades regime] starting next year.

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 Simon Arora,  B&M European Value Retail SA - CEO   [4]
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 Four questions, let's try and keep it to two. I will very quickly address.

 So from a mix perspective it has shifted slightly towards a general merchandise but that's driven more by just having the space mix. In other words, it's the largest stores rather than the smaller stores and that's where we have the higher general merchandise offer.

 In terms of this financial year the number of bps the product mix shift worse --

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 Paul McDonald,  B&M European Value Retail SA - CFO   [5]
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 In terms of the mix shift in terms of margin we're think about, yes, 20, 25 basis points is the shift in between just in terms of the new store figures actually, yes. Although the stores are doing probably 70, 80 bps higher margin than the rest of the chain I'd say just the mix impact of the new numbers relevant to the number of stores gives you about 20, 25 basis points as a mix impact. And those stores going forward if we continue to open those larger stores which is where we have been because typically over the last two or three years we've been opening stores which have been roundabout the 21,000, 22,000 square foot level, if you look into next year you'd expect to see a similar impact, as well.

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 Simon Arora,  B&M European Value Retail SA - CEO   [6]
------------------------------
 In terms of the gross margin guidance for the year we would keep the early guidance as flat on the basis that our hedging policy is six months. And so clearly the second half used a different exchange rate to the first half. But, again, don't do the simple math by just saying it goes straight off your gross margin but from a prudent budgeting point of view internally we're assuming flat.

 In terms of inflation I'd say for the period that we just reported on grocery inflation had not yet been a factor. So up until the end of September these numbers incorporate probably about minus 1%, minus 2% deflation rather than any inflation. But you are quite right, that puts your change over the next 12 months.

 And then your final query on business rates, the headline is that whilst our ratable values fell we benefited from the revaluation. Unfortunately, her Majesty's Government also decided to put a limit on how much you could benefit by the transitional relief as a cap on the amount that your bills could fall by if you were a large-size business like ours. And so not -- no material impact to our P&L in the next few years.

 So there's a hand up at the back.

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 Jonathan Pritchard,  Peel Hunt Limited - Analyst   [7]
------------------------------
 Jonathan Pritchard at Peel Hunt. Just a quick three.

 In Germany could you just give us a [stay] at the full-year 2018 openings and whether the cash payback still very similar to the UK? I noticed in the granularity of the opening program something called a bargains plus garden center which seems an interesting concept. Could you just tell us a bit about that concept and again the payback characteristics of that?

 And very strong cash flow performance today. No spikes in the CapEx obvious? Has the special for this year become, is it becoming a probability rather than a possibility?

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [8]
------------------------------
 So in terms of Germany our previous guidance remains unchanged which is we would target circa 20% growth.

------------------------------
 Paul McDonald,  B&M European Value Retail SA - CFO   [9]
------------------------------
 In terms of new store numbers, new store numbers --

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [10]
------------------------------
 Garden center question, I wasn't quite sure, you are saying -- sorry, that's not a strategic shift. There is a couple of stores that happen to have an empty garden center from a previous occupier next-door that we're not a full-sized home store, we just took the space because it was there. So don't read anything into that.

 And then you are quite right on the special dividend if you do the maths if we hit consensus earnings our net debt to EBITDA is back down to 1.7% or so at the --

------------------------------
 Paul McDonald,  B&M European Value Retail SA - CFO   [11]
------------------------------
 1.75%

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [12]
------------------------------
 1.75% at the end of the current financial year. We've already shared with you our capital allocation policy.

 New stores, ordinary dividend, M&A and then return to shareholders. And what I'd say is that we will review with the Board at the end of the year what to do with that potential to make a further return to shareholders. But we will go through that capital allocation policy that is on a slide in some of the earlier presentations.

------------------------------
 Jonathan Pritchard,  Peel Hunt Limited - Analyst   [13]
------------------------------
 (inaudible - microphone inaccessible)

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [14]
------------------------------
 A slower payback in that the average revenue per store is more modest but the cost of fitting it out is similar. It's still a very attractive payback. So it's less than further, sorry --

------------------------------
 Matthew Taylor,  Numis Securities - Analyst   [15]
------------------------------
 Matthew Taylor from Numis. Thank you for that. Just a couple of questions.

 Concerning your 850 store target, is it possible to get some sort of idea how many of your current 585 UK stores are in conflict if you like with that 850 original target? I wonder if you have done any maths on that, any thoughts on that?

 Just, secondly, on deflection which were talking about 34 stores affected by the end of the year, how will that progress through FY18? Bearing in mind, obviously, the FY16 cohort was most in terms of deflection, but we see there's a bit of ongoing deflection from the current store opening program.

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [16]
------------------------------
 So our UK store base at the end of the period was 519 versus that target of 850. We haven't done a rigorous [optimal] store-by-store analysis, but intuitively and instinctively knowing the estate I would say about 10% of those break the rules that were used to come up with the 850 store target. So clearly there is some upside to that number.

 Then as you think about deflection caused by the new store program, the simple math saw that when you are opening 50 stores on 519 the smaller number has a smaller impact even if the same proportion were in cannibalization territory or, in other words, within three miles of an existing store. So it will reduce. It won't go away entirely because we make no bones about the fact that even if there is a modest drag on like-for-likes it is still absolutely the right thing to do because as our profits and our cash flows demonstrate that new store opening program of last year that caused that deflection or cannibalization still generated great profit growth.

------------------------------
 Adam Cochrane,  UBS - Analyst   [17]
------------------------------
 Adam Cochrane, UBS. In terms of looking at your pricing policy as you head into Q4 and into next year, are you still of the view that you will wait for others to increase prices before you do so you will effectively follow just to maintain the same price differential?

 And then, secondly, when thinking about your purchasing of grocery products particularly you are obviously hearing the debates with the big grocers and the big manufacturers do you think you're still in a position that you can achieve as good a bargain as some of the larger retailers with regard to these big suppliers?

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 Simon Arora,  B&M European Value Retail SA - CEO   [18]
------------------------------
 So in terms of the pricing differential I'd share with you that we are extremely nimble and agile. We will change the retail price every week if we need to maintain, need to do so to maintain the price differential.

 So we are not hamstrung or we don't set our prices in concrete. If we find a competitor has matched those we will drop again and that's been the case for 10 years. And so we have no issues around that.

 In terms of grocery what I'd say to you is that when you think about our sector, when you think about Wilkinsons, ourselves, Home Bargains, Poundland to an extent, the aggregate demand from that channel is actually probably not far off on a line-by-line basis the demand from one of the big four supermarket chains. And so for the FMCG companies or the suppliers if their pricing gets out of kilter for our channel we just won't sell it if the volumes aren't there.

 So it is in their interest to have products that sell on our shelves. Be mindful that Aldi and [Riddle] are not particularly engaged with those big brands owners, and so if they want an offset to be overall decline in market share that the big four are experiencing they need to work with our channel.

 And then final element of that negotiating position is that we don't have to sell that product. If we can't buy that particular chocolate bar at the right price we will just put a different brand from a different manufacturer on the shelf instead. So you always have that opportunity to play off the different brands because it's not a full-service supermarket.

 We don't profess to have to have every single leading brand that you could possibly imagine. We will pick and choose.

------------------------------
 Adam Cochrane,  UBS - Analyst   [19]
------------------------------
 Have you been prepared to play hardball with the suppliers and take their products off the shelf if the price is not good enough for a period of time?

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [20]
------------------------------
 We have not had to do that because actually our business for those suppliers is one of the few businesses they have where they are experiencing really strong positive growth. Our business is growing at 18% a year. That creates a very positive partnership ethos rather than a confrontational one.

------------------------------
 Warwick Okines,  Deutsche Bank Equity Research - Analyst   [21]
------------------------------
 Good morning. Warwick Okines from Deutsche Bank. Just following on from that, are there any examples of products in the first half that you could give or category lines where you have mitigated FX pressures maybe using more label or private label perhaps, just any examples of product mitigation?

 And secondly on cannibalization, I appreciate your comments about cannibalization next year fading. Will the cannibalization effect in the third quarter be under 100 basis points do you think?

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [22]
------------------------------
 So the example I'd share with you on what happens with a product to allow you to continue to make gross margins is branding. So whereas previously you may have had a non-brand radio, you might move over to a Goodmans radio, and clearly that then takes you into a different set of price points, a different value proposition for the consumer.

 And as you look in our general merchandise categories whether it's ever ready, whether it's Goodmans, whether it's [Belgrade] which is a heritage housewares brand you will see that we can use brand as a way to continue to deliver great values for the consumer whilst at the same time protecting our margins. The second question I will pass to Paul in terms of cannibalization.

------------------------------
 Paul McDonald,  B&M European Value Retail SA - CFO   [23]
------------------------------
 Yes, I think you are probably where it is a 1.6% differential in Q2. It will clearly be heading towards 1%, we won't quite get to 1%, it will probably be a little bit shy of that but it will be certainly reducing around by at least a third anyway.

------------------------------
 Richard Chamberlain,  RBC Capital Markets - Analyst   [24]
------------------------------
 Thanks, good morning. It's Richard Chamberlain, RBC.

 Just going back on the food side, I wondered, Simon, if you can say how much of the food offer at the moment is imported from outside the UK just want to get a sense of the currency exposure on the food side of the business. Then second, I wondered if the closures of stores, I think there was only three, but also the relocations, did that have any meaningful impact on the like-for-like sales performance in the first half? Thanks.

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [25]
------------------------------
 So on food, imported or what you might call gray traded grocery is a tiny portion of our offer. And, unfortunately, it sometimes gets overemphasized because quite easily an analyst or an investor can walk into our stores, see one or two items that have got a French label at the back rather than the UK one and assume that everything is important. It's tiny, tiny, it's 1% or 2% of our offer.

 The vast majority of what we sell is sourced from Unilever, Proctor & Gamble, Kellogg's, Heinz, Kraft, PepsiCo, etc. And so it's just not something that we think about a lot. In terms of the like-for-like, Paul?

------------------------------
 Paul McDonald,  B&M European Value Retail SA - CFO   [26]
------------------------------
 Sorry, in terms of like-for-like closures they are very small. In fact, you are talking three closures in the overall, it might have had a little marginal impact where it's three stores over, an LFL basis (multiple speakers) yes, it's not included in the LFL, so it will be very small.

 It terms of relocations yet again effectively we are treating them as new stores. They are not treated as LFL stores in any way, so it's basically closing our own stores. So you would not see very highly impact on our LFL if anything at all.

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [27]
------------------------------
 It's an important point of detail, the numbers we report you are not being flattered by relocations being called like-for-like sales. We treat it as a closure and a new store.

------------------------------
 Richard Chamberlain,  RBC Capital Markets - Analyst   [28]
------------------------------
 The closures and relocations were stores doing poor like-for-like sales, is that correct? Or is it actually (multiple speakers)

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [29]
------------------------------
 It can sometimes just be that it's a store that was open five, six years ago, too small to get the decent offer out now and --

------------------------------
 Richard Chamberlain,  RBC Capital Markets - Analyst   [30]
------------------------------
 Need more space?

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [31]
------------------------------
 More space coming around the corner.

------------------------------
 Yon Kerner,  Presidio - Analyst   [32]
------------------------------
 Hi, [Yon Kerner] for [Presidio]. I really enjoyed the chart where you highlighted the gross margin with [OMT] versus the current view.

 When we look back to 2007 to 2009 the pound depreciated about 20% versus the dollar and you maintained or expanded gross margins during that period. Could you maybe highlight if there are any differences between what you were experiencing today versus that period and probably it's a long time ago? And also just recap what flexibility you have to maintain gross margins as we enter into fiscal 2018.

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [33]
------------------------------
 So I think at the risk of repeating myself the key theme is that it's a level playing field. And whether you are the supermarket, the category specialist or the variety retailers everyone is buying in dollars. And in that context there is no reason why we shouldn't be able to maintain gross margins because some of those competitors we are talking about they are on 2% EBITDA margins.

 For them to absorb some of these cost pressures means that they are effectively saying we are now lossmaking. That's not really going to happen.

 And so in that context we are optimistic that it's not going to be the end of the world that some commentators believe. But it is too early to say. And I wouldn't want to come away from this morning thinking that that's no problem, B&M are guiding to the same gross margins for the next three years.

 We just don't know. What's absolutely more important for us as a management team is the long-term vision of gaining market share from less competitive business models. And we will maintain that price differential whatever they do whether that's rational or not and that's the right thing to do in terms of long-term value creation.

 But, yes, too early to say but we are well-positioned. Low cost base and ad support and direct sourcing.

------------------------------
 Yon Kerner,  Presidio - Analyst   [34]
------------------------------
 So can I ask you one more quick one, on capital allocation the stock is, obviously, in a much different start today than when you decided to pay the special dividend. So as we roll forward through the year-end discussion with the Board what share buybacks for your consideration?

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [35]
------------------------------
 Yes, we are relatively ambivalent between share buybacks and special dividends. Unfortunately, if you ask 10 shareholders which you prefer you would find that five say one and five say the other, so you can't -- there is no right answer to that. It's a decision, it's a high-quality problem, put it that way, but it's a decision for the Board at the end of the financial year, not one for today.

------------------------------
 Abhilash Mohapatra,  Goldman Sachs - Analyst   [36]
------------------------------
 Abhilash Mohapatra, Goldman Sachs. Just one from me please. On the theme of price rises, potential price rises, is price elasticity a factor for you at all or is that just not relevant at your kind of price points?

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [37]
------------------------------
 That's a really good question. So be mindful that the vast majority of what we sell is a relatively modest ticket price. 97%, 98% of what we sell is below GBP20.

 And so it's not like high ticket electricals or furniture where clearly prices change, people just decide not to buy it at all. And the more interesting dynamic is as prices go up actually there's an opportunity to gain market share from the more traditional retailer because we don't believe that if a cushion goes from GBP5 to GBP6 you are necessarily going to sell less cushions. What's more an opportunity of is to sell more GBP6 cushions when the competition has gone from GBP12 to GBP14.

 So we actually welcome a bit of inflation. One of the reasons why our like-for-like have been flat for a while is because we've had deflation. And the metric you saw earlier on around the 6 basis points increase in our store rating as a percentage of revenues, frankly, that metric is crying out for a bit of inflation, retail price inflation because our store wages the inflation there is built-in by statute.

 That's going to happen whether we like it or not. So what we need to offset that is retail price inflation.

 One last question at the back. Otherwise it will drag on all morning, and I know that some of you want to get back to other meetings.

------------------------------
 Assad Malic,  Citi - Analyst   [38]
------------------------------
 Thanks, Simon. Assad Malic From Citi. Just two hopefully pretty quick questions.

 Firstly, can you maybe just run is through the number of stores that are coming up for lease expiry inside the next three years? And then, secondly, just walking around some of the stores when you look at things like Dulux paint it looks like there's more I'd say supplier branding going into that than perhaps expansion of ranges. Are you getting more feedback from suppliers as to which ranges you should be stocking in store in terms of what are the fastest moving lines and whether there is more scale to expand that into next year?

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [39]
------------------------------
 I will deal with the second question first. So the really interesting thing that's happening is that B&M is being seen as a perfectly good place in which to sell your leading brand products. So until a year ago we had the UK's number two paint brand.

 We now have the UK's number one paint brand, Dulux rather than Crown. As I mentioned the last time we presented you can now buy Black & Decker tools rather than a me-too own label version of that tool. And that dynamic is taking place across various different parts of the business.

 For example, our bed linen currently is Silentnight bed linen. Silentnight is a leading bedding brand in the UK, whereas three months ago it was an own label B&M home bed linen range.

 So as we grow, as we become a GBP2 billion revenue business, GBP2.5 billion revenue business, the brand owners recognize that they need to work with us. Otherwise, they are missing out on having their products in front of 3 million people every single week.

 In terms of your earlier question about lease expiries, a typical lease is about 10 years duration. I think an average lease to expiry is about seven to eight years.

------------------------------
 Paul McDonald,  B&M European Value Retail SA - CFO   [40]
------------------------------
 Yes, seven, eight years.

------------------------------
 Simon Arora,  B&M European Value Retail SA - CEO   [41]
------------------------------
 So you just do the maths on the 500 stores, potentially there's about 10% every year that's up for review. Very good, thank you everyone for your time and look forward to seeing you next time. Cheers.




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