Edited Transcript of WIN.L earnings conference call or presentation 17-Jun-20 8:30am GMT

We continue to (inaudible) with Morrisons, EDF Energy, Watsons Fuels (sic) [Watson Fuels] Wickes, Dwell and Sofa Club. This business continues to attract new customers and be able to win new business on competitive terms. And we also had an exceptionally strong contract retention rate, again reflecting Wincanton’s ability to retain customers for really long periods of time. Renewals were secured with the likes of Sainsbury’s, Müller Milk, Waitrose and Partners and Adidas. And again, Tim will cover some of that in more detail later.

As I said in the brief introduction, I did complete my review of strategy with the senior team and we now have an aligned direction of travel, very much focused on the growth of our business. And the justification for the core principles that sit behind the strategy that we’ve devised being strengthened by the COVID-19 crisis, certainly not weakened. And then lastly, the organization structure has been aligned to that strategy. Most importantly, with the introduction of a COO where my primary motivation is to drive greater operational consistency across our business, and particularly in the transport area, where there are significant opportunities for us.

So moving on then to Slide 6. Slide 6 is where we’re going to cover the COVID-19 update. And I think before I get into the specifics of our sectors, really important to say and reiterate that Wincanton had a vital role in keeping the whole of the U.K. supply chain moving. And I think it’s true to say that everyone now realizes that logistics is key to the nation functioning. And we’ve gone from a very much back-of-house role to front-of-house and just how important the services that we provide are to the country. And that’s been a really big boost actually to our teams, to see our workers, many of our workers described as key workers is a real motivational boost for them and gives our business even greater momentum. And those people have shown huge commitment, and I couldn’t be more proud of the response that we provided as a business. And I think it’s worth saying that sometimes, our industry and our organization is (inaudible) as being inflexible and not innovative. And it’s true to say that sometimes we even have that self perception of ourselves. But I would say, and I think I can say this as a relatively new back, both of the country and to the industry in this country, that this crisis has really disproven that. Our teams have shown remarkable agility to respond to everything that the crisis has thrown at us and done a really outstanding job.

From a commercial perspective, business perspective, we remain commercially robust and financially resilient. And our performance reflects the diversity of our customer base, which is absolutely critical to that resilience. Wider economic uncertainty remains. Although parts of our business are performing to expectations, we remain focused on mitigation plans for some of our sectors in the short term. Well, again, I think it’s important to say we take an optimistic view of the recovery, provided that there’s no further lock down. But as it stands, we are seeing our volumes getting better every week. We would consider that to carry on.

The table that’s shown on Slide 6 is an update from our May trading statement. The picture is developing all the time, both in terms of the core business that we already have, but also in terms of the new opportunities. And the Morrisons opportunity, the conversion that I’ve just talked about is an important part of that. So what you’ll see on this table is our business units, then the arrow indicates what the initial impact of the COVID crisis was, and then there’s some text around our trend and approach.

Just briefly going through those sectors, we talked quite a bit in our trading statements about how grocery volumes did have a lockdown boost, but then they pretty quickly settled down to the sort of expected levels for this time of the year. Remains a really big strength of our business and where we see new opportunities emerging all the time, such as with Morrisons. Our retail, general merchandise, it’s a bit of a mixed picture depending on which retailer it is. But in general, volumes at the very start of crisis did reduce as the focus was on very much on the central products. This is also where we record our two-person home delivery, and as we talked about in our May trading statement, we had to suspend two-person home delivery for a few weeks while the government guidelines were clarified, but we’ve got that back again now.

We’re optimistic about the recovery in this area. We think that our range of customers are actually trading particularly well through the crisis and have been agile and managed to move into things like e-commerce, and that opens up another whole range of opportunities for us as a logistics provider.

Consumer products very much followed the trend of grocery. As you’d expect, most of those products are going through the grocery supply chain. So we saw an early boost as people stockpile for lock down. Again, volumes largely returned to normal levels. But what we do see is pretty extensive supply chain reviews going on in this area, and we definitely see opportunities from areas that currently in-source. I think it’s true to say that this crisis has proven that third-party shared user businesses are able to move resources around in order to help out different customers in a much more flexible way than if you just do it yourself.

Construction. As we talked about in our previous trading update, construction has definitely been our toughest market. But we are seeing gradual signs of recovery with week-on-week increases in activity. We do expect this to continue, and that tends to be the mood music coming out of that sector. For us, at the moment, it’s really about our traditional role of managing our costs and resources as careful as we can to get through the crisis.

Transport services suffered with — and continues to suffer with lower demand both for fleet services — fleet maintenance services in our Pullman’s business as a result of vehicles traveling less miles, but also with erratic volumes in containers. Both have been the subject of financial impairments that Tim will cover later in his numbers. And also our general haulage business, which sits in there has generally been okay, depending on which sector that’s serving, but we do really see that as an important part of the future strategy that I’ll cover later on. And then lastly, in other services, with defense and energy. So with defense, we’ve seen some good growth. It’s been a consistent performer throughout the crisis. Energy, we have seen reduced fuel demand, as you’d expect with people drastically reducing car usage, but we are gradually seeing that coming back. And particularly with shops reopening, we expect to see fuel usage go up quite considerably as people return to shopping centers. So with that, I will hand over to Tim, who will take us through the financial highlights.

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Timothy Charles Lawlor, Wincanton plc – CFO & Executive Director [2]

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To the numbers, and I’m going to take us back to in 2019/’20 and focus on much on the past numbers, but I will provide an update on the year-to-date financial impacts at the end of this section.

And before I get into the results, I’ll just cover the fact that we are presenting a dual set of numbers this year. We’re presenting IFRS 16 and IAS 17. So as most of you will know, we are now in a world of IFRS 16, which adjusts for capitalizing leases. And the impact on the P&L and the profit related numbers are significant. So this year, we’re showing you both formats. I will, through this presentation, focus primarily on the IAS 17 numbers for comparability. But going forward, we’ll just stick with IFRS 16 for future financials.

So moving to the numbers themselves. First of all, a very strong year in terms of revenue growth. Our revenue growth was the highest over 10 years at over 5%. That’s not to say that’s the target. And of course, we will be striving for higher levels of growth in the future. And James will cover this in the strategy discussion later on. Nevertheless, it was a strong year for revenue growth.

In terms of profits, both EBITDA and operating profit were up by over GBP 2 million, and profit before tax is up even more because of the benefits we’ve got from the reduced finance costs of which themselves come from our stronger balance sheet position.

Cash generation has been good. Euro net debt has come down again, and the average net debt during the year has come down. I should point out, the average net debt is about GBP 50 million higher than the year-end net debt due to the high degree of seasonal movements we have in the business and the large amount of cash that we have flowing and announce the business with the business of our size.

And finally, I point out that our net asset position is positive for the first time in a decade as well. That’s driven by ever decreasing levels of net debt, but also far improving pension position with our pension moving from a deficit, not only to a surplus, but to a significant surplus at the end of the year.

So Jackie, if you move me on to the next slide, please. And in terms of revenue, it’s been a strange year, in particular the last 6 months. So for much of the year, the uncertainty related to Brexit and then latterly, it’s the general election and peers of labor government and various factors that delayed decision-making. And impacted volumes in some sectors, such as construction, which was a drag on revenue and the headwind we had to deal with. And then things were starting to pick up when a long came coronavirus at the end of the year. But it’s not — corona has not had a significant impact on the year. Containers is the area that was hit most significantly by the Far East shutdown towards the end of the year.

Transport services brought the point of the lower volumes in the year. But elsewhere, volumes are very good, and particularly in our growing e-commerce business.

So as you can see from the chart 2, significant growth areas were grocery and general merchandise. The grocery business involves the running of large distribution centers and dedicated transport networks, primarily due to open book with fee and gain share arrangements. So the increase in revenue from last year was due to the business that we started up during the year from prior year wins, such as the new distribution center at Wellingborough for Co-op and chilled transportation for Sainsbury’s. And it also included the most significant win of the year, which was with Morrisons, where we were awarded a 5-year contract to provide transportation services and vehicle maintenance at 3 sites.

As James mentioned before, we’re delighted that only yesterday, we signed a contract with Morrisons to effectively double the size of our accounts with an additional site for transport operations in vehicle maintenance in the Southwestern England, and the commencement of transport planning operations from our Derby control center.

General merchandise also delivered strong above average growth. This is the business that includes large retailers such as Kingfisher, IKEA, wilko and includes much of our multichannel eFulfillment activities, in particular, includes our market-leading two-man food delivery service.

And growth in this area has come from a combination of new business and the expansion of the account revenue from some of our larger customers. The increase in open book grocery and fall in some of the closed book-related transport explains why there’s been a shift upwards in our open book to closed book mix with open book now consisting of 60 — making up 64% of the revenue of the group as own. Moving forward then Jackie. So looking at retail and consumer. An excellent year, an excellent year for retail and consumer, growth of over 10% in this market. And also improving margins with a significant jump in operating profit year-on-year. This was driven by some of the business wins that I just talked about, but also some specific wins, including in our eFulfillment area, a 3-year deal with Wickes to deliver kitchen and bathroom products, a deal with Sofa Club for a complete supply chain and eFulfillment service. And we’ve been selected as the delivery partner for Dwell Furniture, again, on a 3-year contract.

Furthermore, renewals were high, and all of our larger contracts were retained in the year. These included a large Sainsbury’s contract in London, a bonded warehouse operation for Waitrose and the warehouse and distribution services for Williams Sonoma.

So the revenue contributed a big chunk of the profit growth, but margins also increased, and this was down to greater operational and scale efficiencies across the business. We were able to grow the top line without a significant growth in our overheads and our support costs. And hence, margin grew across this sector to a record operating margin of 4.7% on an IAS 17 basis, 5% on IFRS 16.

Next slide, please, Jackie. I&T, Industrial & Transport, had a more difficult year. This is the area that was more impacted by the macro events of the year. And revenues were down and margins were reduced in the year. Nevertheless, there was a good chunk of new business won in the year.

We commenced our work for the distribution of concrete products for aggregate industries. We won a new contract and commenced that with Hapag-Lloyd for container transportation. The work that we won last year with HMRC for inspection of import containers started in the year and ramped up slightly during the course of the year. Really important work with EDF for the construction of the power plant at Hinkley Point has continued to go well, and new task orders were signed on that contract in the year. And we built our EnergyLink business, our closed book EnergyLink Corporations out with an additional win with Watson Fuels in the year.

Overall, however, revenue did fall in the year. This was partly due to the exit from underperforming contracts in the first half in transport services that we’ve talked about before. And also the volume pressure that I’ve mentioned, in particular, in containers at the end of the year and in construction in a period before Christmas.

And as this change in the volume mix and the delays in work that impacted the profitability most in this sector, we had periods where our utilization of the network were lower as we waited for work to start, and we saw some volume softness in the markets. It did start to recover before COVID but we’ve seen, as we’ve mentioned before, that drop again, particularly in early April.

Also, I should call out that our fleet maintenance business, Pullman, which is part of transport services, which one of the relatively small parts of our business, did have a disappointing year with its workshop volumes down as the price competition from our OEM competition increased and some regional players introduce some price pressure. What we’ve done is incur some restructuring costs and rationalize our workshop network and central cost base in that business. We’ve also come to an end of a long-standing higher-margin open book contracts to maintain our home delivery fleets where we elected not to pursue a closed book arrangement, which is what the customer wanted. We’ve been burned by that risk before, and it would be the one thing to do to take on that level of risk.

More positively though in I&T, it was a very strong year for renewals. There were some significant renewals in the year and all of our large renewals were successful. Among others, they included transportation services for Lucozade Ribena Suntory and our heritage milk contract with Muller was renewed in the year. Jackie, next slide, please.

So in terms of our profit measures, our margins were largely maintained across the group. As you’ve seen, the mix of the margins between sectors was different but as a whole of the group, we’ve maintained our EBITDA and operating profit margins largely unchanged, and our profit before tax margin has increased by 10 basis points due to the benefits of lower financing costs. These lower financing costs have come from balance sheet reductions to debt and pension. So in terms of debt, we’ve had lower interest payable in the year. And in terms of pension, we’ve eliminated our pension deficit and so eliminated the pension interest cost. And indeed, we expect the pension interest to move into an income situation in FY ’21 and should be GBP 2 million better due to the surplus that we’re going into the year with.

So as Id mention tax, that the underlying tax on an IAS 17 basis was GBP 8.6 million, which was at an effective tax rate of 16.3%, so very similar to last year. And the tax rate for next year is expected to be at similar levels, assuming that there are no significant changes introduced by the government during the year. Next slide please.

We took some non-underlying profit charges in the year and had some profits in the non-underlying items. The most significant of these was a noncash impairment charge in recognition of the future impact of COVID-19 on certain parts of our business. So as part of the year-end process, it’s standard to consider any indications of impairments to assets across the business. And clearly, COVID was a trigger for reviewing assets across the business to determine whether the reduction in activity in the future indicated an issue with the recoverability of assets. So we’ve assessed the asset values across the business and determined that with the forecast future cash flow impacts, particularly in the first 6 months of this year being significant, we have been required to write-down the value of fixed assets by GBP 4 million, leased assets by GBP 4 million and inventory by about GBP 1 million. And these impairments have come in the Pullman, containers and construction areas of the business.

This is a noncash charge, as I mentioned, the impact will be on depreciation in the future years and the depreciation charge will reduce by approximately GBP 2 million a year as a consequence of the lower asset values being taken forward.

The second item on the list here is the — related to fees incurred on M&A activity, which was principally the potential acquisition of Eddie Stobart, which we discussed a length at the half year. We worked on this for several months. We could see the strategic value that could be created from the business. But ultimately, we concluded that the issues and the risks that we identified, I mean, it wasn’t right to proceed to an offer. And hence, the fees needed to be taken as a P&L charge. We’re absolutely sure we did the right thing to put out. It’s unfortunate that we had to take the fees in so doing, but it was the way thing also to explore that strategic opportunity.

Finally, the other profit item in the year was the profit on disposal of a warehouse in Scotland that was underutilized. We got proceeds of GBP 5.5 million and a gain of GBP 2.3 million, which we have taken as a non-underlying item. Jackie, next slide, please.

So turning to cash flow. Good cash generation in the year. We continue to have good cash collections. We manage our cash very tightly. Working down this cash flow, there was a working capital outflow at year-end, and this is partly due to a last payment run, which we elected to make and partly due to the additional receivables in relation to the GBP 60 million increase in revenue that we got year-on-year. But there’s no underlying change to our working capital profile as a result of this move. Tax payments increased as we indicated they would, last year. And this is due to a combination of the HMRC’s rules on the timing of payments, which meant that we had to make extra payments this year because they’ve moved to an earlier payment profile for tax and also the benefit that we got last year from higher pension contributions, which reduced our tax charge to abnormally low level last year.

The cash tax continues to trend below the P&L charge due to the benefit of tax deductions from other — from the pension contributions. In terms of other items, this went down year-on-year, primarily because we had lower restructuring cash payments during the year. We also had a lower level of onerous property lease payments in the year.

Capital expenditure has been broadly the same level as last year. The largest area of investment has been in IT systems, including the development of a new transport management system, which we will finish deploying in the coming months. We have commenced in the New Year a program to upgrade our back office finance and HR systems. We paused this temporarily at the outbreak of the COVID crisis, but we’ve since recommenced it because we’ve taken a view that delaying the project wouldn’t be in the interest of the business. It’s an important part of our strategic direction going forward. And hence, we are continuing with that and expect it to incur up to GBP 5 million of CapEx this year on that project.

Overall, our free cash flow after CapEx is GBP 40 million, which enabled us to not only service our dividend and pension payments in the year, but it also led to a net debt reduction of GBP 9.2 million compared to last year. So closing net debt position of GBP 10.1 million.

Next slide, please, Jackie. So in terms of pensions, the chart on the top right-hand side of this chart shows, it’s been a remarkable improvement in our pension position in recent years. We are showing the surplus of GBP 94 million at the end of the year compared to a deficit of GBP 7 million at the same time as last year and a deficit of over GBP 100 million just a few years ago. The year-end position is slightly misleading, however. It’s in part caused by something which is absolutely real, which is the cash contributions that we made in the year of GBP 18 million, but it also includes some temporary market movements. And this, without boring you with too much detail, is the result of the liabilities coming down at the end of the year because the discount rates increased because of the increase in credit spreads, and that movement wasn’t matched with assets. But as credit spreads have come down after March 31, the discount rates will drop again. And we expect the abilities to go up again and the net results of all of that is that surplus will come down. There will still be a surplus of the precise amount, we do not know at this stage, but it will be lower than 94%.

Perhaps more importantly, in terms of the cash contributions, we agreed lower cash contributions for the year ahead with our pension trustees in light of the COVID situation, which was extremely helpful for our liquidity. We’re expecting to pay GBP 12 million as a result of this year with GBP 6 million deferred into next year. Although this deferral is subject to dividend payments and to the extent that we introduced cash dividends during the period of deferral, we will have to pay some of that deferred cash contribution as well.

We’re now in the process of the next triennial valuation. It’s based on the March 2020 position. Discussions have commenced. They were slowed down during the peak of the crisis, but we’ll continue in earnest halfway through the results. Clearly, the COVID situation has caused some confusion to this process, and we’re trying to get to the bottom of all the implications. But we’re hopeful that we can conclude the negotiations in time for the end of this financial year to be able to announce the full result, the full impact, either at this point next year with our full year results or sooner.

So then let’s move to the final slide for me, which is the financial impacts of COVID. And we provided a fair degree of information in our trading updates. We issued a trading update at the end of March and then again in the middle of May. So some of this is repetitive, but we can update on what’s happening in May as well. So first of all, we have taken a number of cash actions to monitor our liquidity and to ensure that our liquidity gives us plenty of headroom to withstand any cash shocks or surprises. We’ve taken advantage of the government scheme to benefit from deferrals, particularly on VAT. We furloughed around 2,500 people at a peak, but our number of employees furloughed is down now to a little over 1,000. We’ve taken a number of self-help actions like defleeting rapidly as — where possible. We’ve introduced pay reductions for management from the start of April, and we’ve cut discretionary and noncritical expenditure. And also to help our cash position, we’ve had productive discussions with all our stakeholders and agreed deferrals on pensions and lease payments.

Unfortunately, we’ve had to take the decision to suspend dividends as we announced in the middle of May. This is in order to just retain as much cash as possible in the company. We will keep dividends under review as we closely monitor our liquidity forecast going forward. It’s our intention to reintroduce dividends as soon as possible, but only as soon as it’s prudent to do so. So that decision will be driven by our liquidity forecast, which should become clearer over time. We’ve also been successful in securing a short-term extension of our RCF arrangements, our revolving credit facility with a banking syndicate. We’ve increased our facility by GBP 40 million to GBP 181 million for a 12-month period, which provides us with greater capacity to deal with short-term shocks and gives us time to better understand our future financing needs as the medium-term impacts of the virus becomes clearer.

At the end of 2020 — 31st of March 2020, we had significant covenant headroom. Our net debt-to-EBITDA leverage ratio was at 0.5 versus a maximum of 2.75. And our interest cover and fixed charge cover also have significant headroom. And we’ll monitor — continuing to monitor covenants closely as we monitor liquidity and the performance of the business. And we don’t really expect covenant pressure in a severe downside case at the end of the financial year.

Our current position for cash is healthy. We have net debt of only GBP 20 million at the end of May, which compares to GBP 70 million at the same point last year. And this is primarily the result of the deferral repayments, which will unwind later in the year. But it’s ahead of our downside modeling that we had at this stage.

And if I just touch on where we are for revenues in the year, we said in our May statements that we were 15% down year-on-year in April. The position has improved in May. May revenues were up about 7% from April to May. And while April was impacted significantly by the fact that the lost revenue was in our close book operations and so had a disproportionate impact on profit, the encouraging thing is that the return of revenue in May is in the same area. So it has a disproportionate impact on profit the other way. I’d still say that profit is down more than revenue in the year-to-date. And we will monitor closely and take whatever steps necessary to get the cost base right, but also to be ready for the recovery as it emerges. So I think that concludes the financial slides. Back to you, James.

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James Wroath, Wincanton plc – CEO & Director [3]

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Thanks, Tim. Okay. So I mean, that — as per my introduction, that was very much a run through, I think, of what we would describe as the past and the present. Now I just want to take a few minutes to take you through some more of a future view with our strategy update and outlook. So if you can just move to Slide 18, Jackie, please.

So on this slide, kind of, outlining the bones of our strategy in one page. Building on what I still consider to be very strong foundations that the Wincanton has, the executive management team and I have defined our direction. As you’ll see on this slide, there’s great people delivering sustainable supply chain value. This is our new purpose. The words in it are deliberately chosen. They reflect the high-quality and the commitment of the people that we have at Wincanton that I talked about earlier, being at the forefront of everything that we do. We really are a people business. We have 19,000 colleagues out there delivering every hour of every day for our customers. Importantly, the words also, though recognize that we must see opportunities for our services throughout the supply chain, not just in (technical difficulty). When I talk later about some of our specific market opportunities you’ll see that they don’t all focus on the final mile. And it also — the word sustainable is very deliberately chosen as well, showing the importance that we deliver ongoing value to our customers in a sustainable way. And sustainability in that sense means all meanings of the word really. So both ethically, safely, environmentally as well as financially.

The business already has a good track record of success. I think I’ve said that back in the half year results as well. But I’m absolutely certain that we can involve to take even more opportunities in the market that the quality of our offering is certain to attract. And we’ve divided up the strategy into 4 key areas: our people, our operating model, our products and services, and our markets, which I’ll talk more about in a moment.

So moving to the next slide, Jackie, Slide 19. Here, just briefly cover of the people and operating model cogs of the strategy. So from a people perspective, as I said a minute ago, we have 19,000 great people. We’ve consistently championed over the years, a number of leading development initiatives, such as the growing apprenticeship scheme, warehouse to Wheels program, which allows our warehouse operators to be developed into drivers. And also the long-running driver of the year competition, which I have a pleasure of joining last year, and we will, at some point, run again this year.

We have to recognize and we will recognize the ever-increasing battle for talent in this country. And so we’re going to leverage our position as the U.K.’s largest U.K.-owned logistics company to ensure that we continue to attract the best people by creating engaging opportunities and careers with us.

We’re going to put more investment into training academies to grow our own talent, to develop our colleagues and to make sure that we have the skills within our business that our customers need. We’ll also seek to harmonize policies and conditions wherever possible, make use of recognition initiatives and internal brand development so that we can really show Wincanton to having a one company feel.

And then lastly, as was on the previous slide underpinning the strategy, we have our new code of conduct, which is the Wincanton way, and that’s going to underpin our whole business, encapsulating our existing Wincanton values, and in general, is a guide to how we want to manage and operate the company.

From an operating model perspective, and I appreciate that this might appear to be a little bit dry, but actually, this is one of the key differentiators for Wincanton, one of our key opportunities to show ourselves as different from the competition in the market. I firmly believe, and I lead to an extent we already are, we can be more efficient, agile and empowered than our largely foreign-owned competitors. That means things like giving access to both existing and potential customers to the real decision-makers in our business, which is much more difficult for our global competition to do. We’re a large-scale player in the U.K. market, and we have huge operating credibility, but we’re actually also very much a local hero in that sense, and we need to make a lot more of this.

We also, though we need to back it up in the way that we work and how we are, and we’re going to back that up with an investment into upgrading our internal systems. And I appreciate that sometimes internal systems are seen very much as internal and not externally facing but actually with the way that our business works, particularly around the open book, we have so much engagement system to system between ourselves and our customers. This is a really crucial area for us to make an investment.

And then just to summarize that operating model, really, it’s really important to me that our customers and our people feel — see and feel that we are easy to engage with and that, that makes us able to truly differentiate from our competition. And as some of you may know, I’ve worked for the competition and big global businesses have their advantages. But sometimes agility is more difficult for them. We can make that a real differentiator in the market.

Moving on then to Slide 20, where I want to talk a little bit about our target markets and where we think we have products and services we can deploy in those markets. Always a little bit delicate going through this kind of slide. We have lots of plans and not necessarily that I want all of our competition to know about, but important to give people on this call and people who listen to Tim and I today, a good impression of our ambitions for the organization. I mean contract logistics in general does grow above GDP, mostly because of the long-term trend towards outsourcing. But it’s clear that some markets grow even faster. And our strategy is going to be the focus on those growth markets or the ones we identify to drive sustainable free cash flow growth.

As I say, this slide highlights 3 areas of particular interest to us. It’s not exhaustive, but I hope it does illustrate our ambition for growth in sectors, where I think we can add real value to customers’ supply chains, and thereby in doing so, achieve better margins. So from left to right on the slide, the first area we’re very interested in is infrastructure and major capital programs in general. We’ve actually got a long tradition in Wincanton of providing logistics services to the construction industry. As you probably know, that was accelerated over 10 years ago now with the acquisition of Redland Distribution. We have, though, despite having bulk cement and contract concrete delivery services, we are — we tend to be focused more on building materials for the housebuilding market. But in the last year or so, we’ve developed an engagement with EDF Energy at Hinkley Point, which is the largest capital project in Europe at the moment, a budget of GBP 25 billion, assisting with the logistics of building a new nuclear power plant. And that’s really opened up some very exciting possibilities for our business in the infrastructure sector.

We do have some experience in this area in the past through things like helping build aircraft carriers and frigates and also London 2012, but it’s an area that I believe and the management team believe we can do a lot more in. And it’s important to say that we aren’t just providing physical transport and warehouse services in the engagement with EDF. We really are embedded as part of the Hinkley Point team. We delivered a technology solution that’s ensured that all the delivery vehicles going to the construction site follow prescribed traffic routes, protecting the local community, which is obviously a very big factor for that project. But also importantly, we’ve removed the need for fixed and expensive roadside infrastructure to be able to do that.

We’ve also designed the logistics management system specifically for this project, but definitely with wider usage possible, and that’s for use for off-site storage of materials, which we consolidate in preparation for transport to a site. And the way I would describe that really is that we’re bringing the supply chain precision at very well-developed supply chain such as in assembly plants and their production lines to outside construction, which have been much less developed in that way. And allied to that, we also have significant experience to our defense business of security compliance, which is obviously critical in the major construction area as well.

We have significant ambition in this area. We want infrastructure to be one of our biggest sectors in the future with at least reaching the size of one of our retail businesses in the next 3 to 5 years. And we believe that’s possible because we estimate that even smaller projects of greater than GBP 10 million a year of direct logistics spend. When I say direct, that’s the final movement to the site. But on top of that, you have all of the flow of the material earlier in the supply chain as well, and we see that as a huge opportunity.

The projects tend to be long term, some as much as 10 years. EDF will be at least 5, if not 7. And what we tend to see is that our share of wallet in that process grows as time goes on. And I think allied, again, to the operating model piece, we don’t need to be a global operator to go into this market and be successful. If anything, being local is a strength, and particularly British business is prioritized for British companies.

And I think the final ambition, just to underline all of that, is we want to be the #1 player in infrastructure project logistics in the U.K. pretty soon. The middle piece, is another exciting area that we see, which is in retail. So again, this is about leveraging reputation that I believe we already have. We have a market-leading reputation in big box retail, contract logistics, with an impressive portfolio of household names in our customer list, many of which Tim referenced earlier, the likes of Sainsbury’s, Argos, Morrisons, Co-op, B&Q, Screwfix and M&S, just to name a few.

We carry out some complicated omnichannel supply chain activities for many of those customers, including a two-person home delivery service that has really exceptional customer satisfaction scores. Traditional retail tends to grow with GDP, but e-commerce grows faster and even more so since COVID-19, where we’ve seen people who wouldn’t have tried e-commerce shopping before moving into that. And we want to grow above the market rate, and therefore, we need to be much deeper into eFulfillment.

Two areas for us there that are interesting, firstly, there are dark stores. Some of you may be familiar with dark stores. This is where retailers create capacity for local deliveries, and they are stores but they don’t allow any customers and hence, the term dark. And here, there’s an opportunity for us to run those stores and perhaps even run the deliveries to customers as well. So that e-commerce can work on shorter lead times. And that, again, is an area well-publicized that you all have seen has grown significantly through COVID-19.

The other area is more around e-commerce and shared users. So this is shared user for retailers in this environment tend to be pure play, just in e-commerce, tend to be more of the small-, medium-sized businesses. And today, they have 3 options. They can do it themselves, which is good for customer experience, but not very scalable. They can go to Amazon, which is very scalable, good quality, logistics services. But they tend to have to give up quite a bit of the control of their customer experience or they can use any number of third-party logistics providers who are quite specifically focused in this area. I believe pretty strongly that there’s a big opportunity for Wincanton to be in that space to provide our high-quality scale retail logistics expertise and services in a fast-growing market, but without having to ask those customers to compromise on any control over their customers’ experience. So as I say, another place where we can take our strong experience and skills and leverage it into a more higher-margin market.

And then the third area that I want to highlight in today’s presentation is around digital marketplaces. We were one of the first to come to the market with a warehouse digital marketplace, connecting people who have space to people who want space. The next development in this area we see will come with transport. It’s already happened in a rapidly growing way in the U.S. and in Continental Europe. The U.K. is a little bit behind that curve, mostly because of both the nature of our transport market and the size of our island and the shorter distances that meant the strategic imperative for it has been a little slower to come to pass. It’s actually more exciting than the digital market the way it’s placed the warehousing because there’s a higher volume of transactions, and that’s where the money is made there. Again, it’s leveraging our current experience. We’re already a significant 3PL player, asset owner. We’re also a 4PL player, control tower, broker services as proven by the new Morrisons engagement. So we’re already a diverse market player. What a digital marketplace will actually do to take it onto the next level is allow networks to be shared. And that’s now being coined — not my phrase, but that’s now being coined us 5PL so we see some really interesting opportunities in this area.

And then lastly — and the other key point about this is, it will also allow us to make our existing model more efficient. So it will simplify and automate the order to cash process. It will bring standardize and integrated data that can allow us to take a real leadership position in the transport market.

So that’s a very quick fly through of the main cogs of the strategy. Jackie, if you can just move to the next slide. I don’t propose to go through this in a lot of detail for time, but we wanted to restate our investment case. And we wanted to stick our chin out a bit because some of the elements on here around maintaining shareholder dividends are obviously contradicted by what Tim has just said about our position now. But the reason it is important for us to get this here is because this is absolutely where we intend to get back to and to get back to as quickly as possible. Just picking out a few of the highlights. I think most of the good things on the slide are hopefully things you would recognize that Wincanton has delivered certainly over the last few years around high quality earnings, market-leading position, lots around innovation, growth, but growth based on discipline focus on higher-margin markets. And hopefully, you’ve seen from the areas that we’re now going to look into that we are very much focused on higher margin areas. A flexible business that can deliver strong cash generation and consistent EPS growth across the business. And also one that would consider earnings accretive acquisitions when the time is right. And then Jackie, just moving on finally to the last slide.

So in summary, COVID-19 highlights continued demand for our services. As I said, right at the start, this crisis, if nothing else has proven how crucial logistics are for this country. Our customers realize it even more than they did before, and the nation now realized that we have high-quality earnings and visibility. We’re very well placed to benefit as the market normalizes. I’m relatively new still in position, but I absolutely will continue to keep the resilient disciplined approach that’s made Wincanton what it is today in the firm foundation that we have.

As Tim and I have both talked about, there’s still some uncertainty around regarding levels of demand and business interruption for the rest of the year, but we have action plans in place both in terms of managing our core business, but also in bringing in new opportunities to fill the gap.

Again, as Tim said, dividend remains under review, reinstate as soon as we can. But when we’ve got greater visibility of long-term — the long-term impact of COVID-19. We’re growth-focused and we’re confident.

So with that, conscious of time, but if there are any questions, then Tim and I would be delighted to fill those.

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Questions and Answers

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James Wroath, Wincanton plc – CEO & Director [1]

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(Operator Instructions) We don’t have any requests at the moment for question through the chat function. So happy for you also to use the traditional method of calling out your name and saying you have a question.

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Steven John Woolf, Numis Securities Limited, Research Division – Analyst [2]

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Jim, just checking if you can hear me. Steve from Numis.

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James Wroath, Wincanton plc – CEO & Director [3]

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Yes, we can, Steve. Thanks.

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Steven John Woolf, Numis Securities Limited, Research Division – Analyst [4]

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No problem. Sorry, I had problem with Teams this morning. So just could you give us a bit more background to the Morrisons contract win. Just in sort of any sort of additional services you’re adding to that? Who did you win it from? When does it start? Just that sort of activity.

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James Wroath, Wincanton plc – CEO & Director [5]

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Yes, absolutely. So, delighted to run that. So the business that we won in the first place with Morrisons was 3 primary transport locations. So, big trucks and 5-vehicle maintenance units. The new business that we’ve just been awarded is for another primary transport location, which we’ve taken off a competitor. And then a slightly more complicated but really interesting piece of business around taking over the management and control of their subcontractor spend in a certain part of their business. So that is more of a 4PL technology play but gives us the opportunity to show Morrisons how we can really deliver value for them, not just as an executor of their loads, but also a planner of their workload in an efficient and a high service way. So we’re delighted to get into that. We believe there are more opportunities in the future for us to help Morrisons, both physically and technologically. And we see it as a real [coo] that less than a year into a pretty sizable engagement with them they want to double the amount of work we’ve got with them, and that reflects, I think, really, really well on our team’s delivery of new business. We had to — when we took over that work, we took a substantial number of people across from Morrisons into our organization, which is always a delicate and difficult time for people and it’s change that we have to manage. But I think the fact that they’re rewarding us for that business and some more of the technological business shows that they really appreciated how we went about that.

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Steven John Woolf, Numis Securities Limited, Research Division – Analyst [6]

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Just a follow-up. Is that a service that you have already operating in terms of the transport subcontractor management? Is that something you already do for others? Or do you potentially feel that this is something you could add value to on other contracts that you’ve got out there?

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James Wroath, Wincanton plc – CEO & Director [7]

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No. We do, do that already. Typically, though, we would do that as part of the contract and manage our customers whole network. So we would act as a prime contractor where we would do a certain amount of the work on our own assets or on their assets with us managing them, and then we would subcontract the rest. This is new in the grocery sector, to be honest with you, in the grocery sector and most of our customers would tend to plan things themselves in entirety, and we’ll be more of an executor. This is a really good opportunity to show, actually, we can move into that. But in other sectors, yes, we do, do this work, and we have the technology. And I think we talked about in previous presentations that we’re deploying in new transport management system as well and invested in that in the last couple of years, and we believe that will further strengthen our position in that sector.

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Anand Dhananjay Date, HSBC, Research Division – UK MidCap Equity Analyst [8]

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It’s Anand from HSBC. I had a couple of questions, if that’s okay. James, when you talk about — so on Slide 20, you’re talking about new growth areas like infra and a bit more in retail. Is it — would it be right to assume that you sort of dip your toe in with open book contracts? Or might the specifics of those industries require closed book? And sort of adjacent to that, does COVID mean that strategically your preferences over the contracts has increased?

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James Wroath, Wincanton plc – CEO & Director [9]

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Okay. Yes, thanks, Anand, good question. So I think I’ll take the second one first. Open versus close. I think we have a pretty good balance today of what we have. That’s delivered some resilience for us in the COVID-19 crisis. I mean, you’ll know that open book tends to be lower risk, lower reward, closed book, obviously, higher risk, higher reward, and we’ve seen that in through COVID. I’m happy with our balance now. But I certainly wouldn’t be looking to strategically drive our open book percentage as much higher than they are today because I think we have higher-margin aspirations than just running open book contracts. What’s important on closed book is that we really understand the contract dynamics going in and that’s the area where you have to be obviously much more cautious. In terms of the future strategy, I think it depends on the customers really. I mean when I talk about infrastructure, I think that’s often liable to be more towards open book. The nature of those very large government type contracts, so that they don’t always come directly from the government, are ones where they need visibility and transparency. So they do tend to be more focused around open book. But that said, there’s more opportunity for us to provide the kind of technology — the technology services that I talked about a minute ago. And those technology services, we tend to be able to charge a higher management fee for those rather than being at the more providing labor end of things. e-commerce, slightly different. So the dark stores, again, likely to be the larger retailers. They tend to be focused more on an open book model. But the SMEs and the shared user network much more likely to be closed booked when you’re seeking to put a number of customers into a building becomes pretty difficult to do that on open book, and becomes a margin opportunity for us to do it on closed book. So I think we will — strategically, we’ll continue to want a mix of the 2 and not be overexposed to either. I’m broadly happy with what our mix is today.

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Anand Dhananjay Date, HSBC, Research Division – UK MidCap Equity Analyst [10]

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Okay. And I’ve got another question. It’s slightly long-winded so just bear with me. So could you talk a little bit about the relative size of the various stages of what you do? So what I’m trying to say is, in terms of the value in your business, how much is from bringing goods to national distribution centers? How much is then the movement to local distribution centers? How much is the movement to stores? And how much is the movement between local distribution centers and customer homes? The point being, if you don’t do last person — sorry, if you don’t do one-person last mile home delivery, and there’s a risk that the volume movements to stores sort of business is structurally in decline, it’s been for a long time, but maybe accelerated, can that be offset by distribution higher up to the vertical? Does that make sense?

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James Wroath, Wincanton plc – CEO & Director [11]

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Yes, it does. Yes, absolutely. I’ll maybe ask Timothy to provide anything in terms of the data in a moment on that. But we’ve done any of that in the past. What I would say is that we are into two-person home delivery, which is very much an added value service, often going into people’s homes and building things, building furniture for them. One-person delivery in this country is very much parcel delivery services, incredibly competitive, a lot of capacity in the market and not somewhere that we would want to be directly involved. But we can be more involved in the picking of that — of those orders. And we can also be more involved in the technology side of things, where customers need to be able to see visibility of pricing of those last mile deliveries. And make the right choice about which parcel carrier they use for a particular geography or a particular type of delivery. So there’s big opportunity for us to get involved in that final mile without actually executing that final mile. I would say at the moment, and again, Tim maybe can build on this in a second, but I’d say at the moment, our business, a large chunk of our revenue is in retail, traditional retail, and there, we will be moving stock from distribution centers to stores. So in number terms, that’s likely to be where we’re dominant today. As we grow that e-commerce products, then I would expect to see more of it being about us preparing deliveries to be delivered to people’s homes directly rather than through that primary network. But Tim, I don’t know if you got any analysis on numbers in that area.

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Timothy Charles Lawlor, Wincanton plc – CFO & Executive Director [12]

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Yes. And so I’d say, what we’re trying to get at here is the impact of the structural and channel shifts, but maybe already in trade and cunning. What we don’t have is revenue split by activity. So each leg of the supply chain. But perhaps to help answer your question, if we take the GBP 1.2 billion of revenue, we know that approximately just over GBP 400 million in Industrial & Transport, which is largely around transportation of goods that are less likely to be affected by online, sort of, e-commerce type shifts. So we probably take those out of the equation other than this general haulage that sits in transport services. In retail consumer, the big bit that’s impacted is the GBP 450 million of revenue in general merchandise and some of the GBP 225 million in grocery. Now that revenue is fairly evenly split between warehouse services and transport services. In terms of the warehouse structural impact, what’s this going to change? Well, one thing is it might change the size and the shape of warehouse networks, distribution center networks, but in terms of the overall product mix product volumes, it will be about the same. So I wouldn’t expect that we’d necessarily see a shift in terms of warehousing revenue there’s not opportunity there but there is more activity, perhaps it required within distribution centers for picking and packing. So rather than setting stuff out in big pallets of the same product, more smaller pallets, smaller distribution is required to take them to either to home or to smaller distribution centers or smaller outlets for collection. In terms of transport services, the mileage, the products move is unlikely to change significantly, whether it goes to stores or bigger stores or convenience stores or directly to home. The overall mileage won’t change. The mix of trucks might change depending on the size of stuff being transported. But I think, again, the stuff that we might lose in terms of the bigger trucks would be replaced by more activity on the smaller trucks. So overall, transport revenues shouldn’t be changed significantly. So as a long-winded answer to your question, which is in summary, I think the extent to which some of the traditional activities may get displaced, there will be at least sufficient compensating revenues in the growing services to compensate. And in fact, overall, we think the total logistics spend that we can go after is likely to increase as a result of more online purchasing.