Good morning, everybody, and thank you for joining us in the room here on our live webcast this morning. For those of you who do not know me or are listening in for the first time, I am Patrick Coveney. I am the Group CEO, and I am joined by Jonathan Davies, our Deputy CEO and CFO. We are also joined in the room by Geert Verellen, our incoming CFO. Geert joined us seven weeks ago, and since then, he has been knee-deep getting to know the business. I know he is also looking forward to meeting many of you this morning and in the coming weeks and months. He officially takes the reins as Group CFO from Jonathan on the 9th of June, and we are fortunate that Jonathan has chosen to stay with us until the end of the year to fully support us as we deliver our plan.
I've asked Geert to take the opportunity to introduce himself and to share some of his initial reflections on SSP before we begin the Q&A portion of today's update. Let me start by briefly setting out the highlights from the first half. As a board and as a leadership team, we're focused on the imperative to build margins, returns, and cash flows from the structurally attractive set of market positions that we've built in food travel markets across the world. Last December, we set out a specific plan to do that, and we're delivering on this plan and indeed have plans in place to accelerate it further during the second half of 2025. I will come back to that in the second half of this presentation. Our business has traded well in the first half, with sales growing at 12%, including like-for-like sales growth of 5%.
That revenue growth converted into 31% growth in operating profit, with a 40 basis point improvement in operating margin. Our reported first half leverage at 2.2 times, while elevated, reflects the planned phasing of our full-year capital budget into the less busy first half and a seasonal working capital outflow that Jonathan will explain in a minute. Importantly, we have specific actions in place to deliver a year-end leverage outcome towards the lower end of the one and a half to two times target range. We are now almost two months into our second half, with a clear agenda to build on our plan. We are doing this with a tight focus on trading our business well through the peak summer travel period, and we are encouraged by Group like-for-like sales of 5% in the first six weeks of the second half.
We're getting further traction on our European plan, with a particular focus on rebuilding the fundamentals of our French business. We're stepping up returns from the recent investments that we've made in net gains and in M&A across the world, and we're substantially reducing our overhead base across the group, recognizing that in a more uncertain world, cost efficiency needs to play a bigger role in underpinning our future margin and returns progression. In addition, subject to the continued recent positive momentum in Indian stock market conditions, we plan to deliver an IPO of our Indian joint venture, TFS, this summer. Taken together, this first half delivery and our second half plans put us in a position to maintain full-year guidance and also put us on track to consider a share buyback program towards the end of this calendar year.
I'll now hand you over to Jonathan to take you through the financial review.
Thank you, Patrick, and good morning, everybody. We have had a good first half led by strong sales growth despite the more challenging economic backdrop. Looking at the highlights briefly, sales were around GBP 1.7 billion, up 12% year on year on a constant currency basis. Underlying EBITDA was up by 13% to GBP 114 million, and operating profit up 31% to GBP 45 million. EPS was a small loss per share of GBP 0.04, as expected, and that compares to a loss of GBP 0.01 last year. Leverage at the end of March was 2.2 times net debt to EBITDA compared to 2.1 times last year. We are proposing to pay an interim dividend of GBP 1.40 per share, representing a payout ratio of between 30-40% of net income and a split of roughly one-third to two-thirds between the interim and final dividend. Now, turning to sales.
Like-for-like sales, as Patrick said, have remained robust during the first half at 6% and in line with our expectations, which were for sales of 4%-5% for the full year, with the first half at around 6% and the second half at around 4%. Like-for-like in the second quarter at 5%, and that's after adjusting for the leap year, was slightly softer than the first quarter, which was mainly due to the timing of Easter, which fell in April this year compared to March last year. We continue to see good overall sales growth across all of our regions, which you see on the next chart.
Looking first at like-for-like sales at a group level, they were in line with expectations, but they were slightly softer than expected in North America at 2%, but slightly better than planned in the U.K. at 8% and Asia and the Middle East at 13%. Now, Asia and the Middle East performed particularly well, benefiting from strong trading in a number of key markets, including India, Malaysia, Egypt, and Australia. Trading in the U.K. has remained very encouraging, driven by good passenger growth in the air sector and an improving trend in rail, helped by less strike disruption compared to last year and a very good performance from our M&S Simply Food business. Like-for-like sales in continental Europe were around 3%, broadly as expected, despite the weaker levels of consumer spending in many of the markets, which continue to impact our rail operations.
The net gains of 5% reflected the further mobilization of our new contract pipeline, and that contributed 12% to sales in Asia and the Middle East and 8% to North America. Acquisitions contributed 4% to overall sales, reflecting the acquisitions of ARE in Australia, Taurus Gemilang in Indonesia, and the two small acquisitions in Canada and Atlanta last year. Looking now at current trading, over the first six weeks, Group like-for-like sales have been up by about 5%, very consistent with that first half run rate and in line with expectations. That is despite the weaker sales in North America. Trading in North America, you can see, has been a bit softer, with like-for-like sales down 2%.
This follows the recent tariff announcements by the Trump administration, which appear to have hit international flights to and from the U.S., particularly to Europe, as well as impacting wider consumer confidence. However, it's worth remembering here that over 80% of the passengers in the North American market are from domestic flights, which have been less impacted. In the U.K., you can see that trading has remained very strong, up 10%, and that's despite the impact from the supply shortages we've seen in our M&S business following their well-publicized cyber attack a few weeks ago. Looking at like-for-like sales in the round, the slightly softer trading in North America continues to be offset by stronger trading elsewhere in the group, notably in the U.K., Asia-Pacific, and the Middle East. Therefore, we feel confident in maintaining our guidance for the full year.
Turning to profit, operating profit increased by 31% year on year, as I've said, with margin up 40 basis points. North America saw a lower operating margin, down 90 basis points, largely due to the release of COVID provisions last year, as we've previously reported. Adjusting for these, underlying operating margin would have been broadly flat year on year, boosted by very good further progress on gross margins, which mitigated some of the pressures on labor rates. Looking at continental Europe, whilst we're still making an operating loss in the first half, we saw a margin improvement of 80 basis points. Both the Nordic region and Spain delivered stronger year-on-year performances, but France in particular continues to be challenging, and Patrick will cover some more detail later.
In the U.K., we delivered another period of good operating profit growth, up 40%, with year-on-year margin enhancement of 120 basis points, helped by the very strong top line. Finally, in Asia and the Middle East, we saw profit growth of 18% on a reported basis, but with a lower operating margin. However, looking at this on a like-for-like comparable basis, that is adjusting for the deconsolidation of the high-margin Mumbai business and the ARE acquisition in Australia, operating margin would have been flat year on year. Now, running down the Group P&L, gross margin improved by 80 basis points. This was another very strong performance, helped by the easing of some of the inflationary pressures we have seen in some food commodities and also helped by the higher mix of air sales compared to rail. In air, remember, we typically see higher gross margins.
However, once again, we have also demonstrated, I think, our ability to mitigate cost inflation through pricing action and our work on menu and range engineering. Labor ratios were 70 basis points higher than last year, reflecting some of the inflationary pressures on pay rates, particularly in North America, but also, importantly, the release of some of these remaining COVID provisions in the prior year. Patrick is going to cover some of our more recent initiatives to boost both gross margins and improve labor efficiency later on. Just to complete the picture, concession fees were 30 basis points higher year on year, principally reflecting the higher mix of air versus rail, as I said earlier, with reference to the gross margin.
Depreciation fell to 4.1% of sales, mainly as a result of the strong top line growth, helped by the maturing of some of our prior year investments and a small benefit from the impairments, which I'll cover later. Looking further down the P&L, we saw a small net loss of GBP 3 million compared to a loss of GBP 8 million in the prior year. As ever, the low level of profit in the first half reflects the increasing second half weighting of our sales due to our higher dependence on the air and leisure travel markets. Interest charges rose to GBP 20 million due to the higher average net debt over the period, arising mainly from the acquisition spend, but this was partially offset by the savings from our debt refinancings over the last 12 months in the U.S.PP market.
The tax charge of GBP 6 million reflects an expected tax rate of 21.2% for the full year, as we are already anticipating further benefits from the recognition of deferred tax assets in North America in the U.S. The minority charges were flat year on year. I'll come back to these in a moment. Before I do that, however, just looking to the right-hand side of the chart, I should explain the unusually high exceptional charge at around GBP 50 million, nearly all of which was non-cash. This includes a GBP 27 million charge for a change in accounting treatment of some of our major IT programs. This is a non-cash item and solely relates to the capitalization of development costs for certain cloud-based systems and covers the last three years. This aligns our accounting with the latest standards. The full detail you'll find in the R&S.
Further to this, we have impaired fixed assets in a number of markets, most notably in France and in Italy, following a strategic review of our operations there. Now, let me give you some more detail about the minorities in our joint ventures. In North America, the minority interest share of profit rose slightly despite the reduction in overall operating profit, reflecting the relatively stronger year-on-year performance in airports with high JV partner shares and the softer performance in Canada, where we own 100% of the business. In India, the minority interest charge reduced slightly, with the very strong performance in our core business offsetting the transfer of our Mumbai lounge business into the new joint venture with Adani Airports, which we now report as an associate, and we explained with our results in December.
In Asia and the Middle East, the minority interest charge remained flat despite the increase in operating profit in those regions, mainly due to the impact of startup costs in our new joint venture business in Saudi Arabia. Finally, moving to the cash flow, we used GBP 161 million of cash in the first half, and that was after the investment of GBP 130 million in capital projects, and that represented nearly 60% of our expected full-year spend. We also invested a further GBP 8 million on the acquisition of Taurus Gemilang in Indonesia, which we completed in November. We saw a working capital outflow of GBP 53 million, reflecting the normal seasonal use of working capital in the business due to the lower sales in February and March compared to August and September last year.
It is worth noting that this effect was exacerbated this year by the later timing of Easter, leaving our negative working capital somewhat lower than normal at the end of March. However, this effect has already essentially unwound in the first part of the second half. All of this left net debt at GBP 764 million at the end of the half, with leverage at 2.2 compared with 2.1 times last year. Just to complete the picture, looking forward, given the seasonality of our CapEx and working capital cycle over the year and the planned cash generation in the second half, we would expect leverage to return to the lower end of our target range, which is between 1.5-2 times by the year end.
Importantly, that would put us in a position to return cash to shareholders, which we would consider later in the year. With that, I'm going to pass you back to Patrick to take you through the strategic highlights and the outlook.
Thanks, Jonathan. Last December, I spoke about the work that we had done in FY 2023 and 2024 to strengthen and expand our business with the objective of delivering great propositions for customers and clients and sustainable returns to our investors. As we have rebuilt SSP post-COVID, we've prioritized building our presence and our capability in higher growth and higher returning air channel markets, defending our existing market positions, and renewing and extending profitable contracts. These investments have created a strong platform, but it was a platform that was not yet delivering the margins, the returns, and the cash flows that we or you rightly expect. Some of that returns gap was about legacy channel positions, some was about timing, and some was about the opportunity to execute better.
This year, we moved into a critical phase, one that slows the pace of further investment into the business and focuses hard on building returns and profitability on the heightened level of recent investment, thereby setting the business up for sustainable steady-state growth, but critically, at higher levels of margin and return.
As I said earlier, we tightened our FY 2025 business agenda to build this profitability and returns, focusing on driving sustainable growth, progressing our profit recovery plan in continental Europe, and in France and Germany in particular, taking action to permanently reset the margins and returns in these businesses, stepping up our focus on all elements of cost efficiency, and finally, driving returns on the elevated level of recent investment and tightening levels of new capital expenditure to strengthen operating and free cash flows, thereby leaving us on track to consider a share buyback program towards the end of this calendar year. Let me take each of these priorities one at a time, starting with delivering sustainable growth. It would be remiss of me not to remind you that, as ever, our business is supported by clear structural tailwinds.
As you can see from the chart in the middle of this slide, the latest external data points to the outlook being particularly strong in Asia-Pacific and the Middle East, with three-quarters of the growth in passenger numbers over the next decade expected to come from there and North America. The strategic and investment choices that we have made since COVID have positioned SSP well to benefit from these tailwinds. Those tailwinds are evident in the organic and like-for-like sales growth that Jonathan set out earlier for the first half. Critically, we are building a business to reflect where travel is going to be and where we can generate strong returns for the next decade or more. Moving on now to how we capture that opportunity and serve customers and clients in these markets.
In North America, the world's largest travel market and where we have a significant opportunity to grow market share further, we have now built our presence to 57 airports, up from 51 a year ago, with several more in the pipeline. In continental Europe, where renewal levels in the last two years were almost twice historical levels, we focused on the effective mobilization of those units and were pleased with the on-plan effective mobilization of our significant renewal programs in the Canary Islands and in Norway. Indeed, with the challenges and changes that we're putting through in France and Germany, it can be easy to lose sight of the quality and improving trajectory that we have in the Nordics, and particularly in Spain. In the U.K., where we have reset our leadership team and our proposition since COVID, the business is progressing well on all fronts.
Our commitment to enhancing the customer experience as we renew our units is paying off with particularly strong customer ratings, including a reputation score now up to 4.6 out of 5. Undoubtedly, the quality of those propositions has contributed to the strong level of U.K. like-for-like sales in the half at 8% and our good momentum into the second half. We're building a foundation for future growth and future returns in Asia-Pacific and in the Middle East. Our Indian businesses continue to trade very well for us, with like-for-like sales of 11% in the half. Saudi Arabia is another strategically important market for us. This is a significant current and future travel market with huge planned further investments into aviation.
We've teamed up with several important brand partners like Prada Monche, Caffé Nero, and a local brand, Café Beteel, to start to build a significant platform for SSP for the future. Indeed, from a base of operating four units in Riyadh a year ago, we're currently operating 37 units across Riyadh and Jeddah airports. Our second priority is to build the profitability of our continental European business, where, as we acknowledged, due to a combination of external headwinds, legacy channel positions, timing effects, and some of our own operational challenges, recent levels of profitability hadn't tracked where we would expect or need them to be. We put in place a substantive change program to address each of these areas, with that work being led by a new Regional CEO, Satya Menard, who started at the beginning of the financial year.
It's fair to say that both the level of challenge and the level of change that we're putting through in France and Germany has been greater and deeper than we'd anticipated. The key message here, though, is that we're fixing it, and we're fixing it properly for the long term. What do I mean by fixing in Europe? Key activities include, first of all, across all of our European estate, identifying any underperforming units, contracts, and markets, and taking action to address these. Simply put, we had too many loss-making areas of our business, and we're acting aggressively to address these. Let me give you three examples of what we mean. At a country or market level, we have reset our strategy, and crucially, we've reset our rent profile in the Netherlands such that we have transitioned now to a sustainably profitable business in the Netherlands.
In contrast, as Jonathan referenced earlier, we've conducted a strategic review of our small business in Italy, and we're exploring options in relation to our loss-making units there. At a contract level, in several large European airports and rail stations, where passenger flows are different to what we expected or planned for, we're aggressively seeking, and in several cases, already securing remedies for clients on a case-by-case basis. Thirdly, at a unit level across the region, we have specific sales driving or cost-based interventions in flight to bring these units back to acceptable levels of return by FY 2026. Secondly, we've completely changed and restructured our management team in France, which is our largest market in continental Europe. Third, across the whole region, we're implementing a lower-cost operating model on all fronts.
Fourth, we are tightly managing the exit from our legacy loss-making German motorway service station business ahead of a complete closure in 2026. We closed 38 units in the first half and expect to close a further 34 by the end of this financial year. Lastly, and critically, we are building on the strong positions and strengthening returns profile that we have in Spain and across the Nordic region. In aggregate, margins in continental Europe, while 80 basis points better than in the prior year, are still too low, and we have further actions in flight to improve them. The confidence that we're building from these programs enables us to reaffirm a regional operating margin target build from 1.5% of sales last year to approximately 3% this year and on to approximately 5% in the medium term.
At a 5% margin level, continental Europe would be operating above our group cost of capital. The improvement plan that we're putting in place in Europe, taking our operating margin from 1.5%- 5%, would add in the region of GBP 4.00 of earnings to the group income statement. At the same time, we would expect European capital expenditure to be lower than before. Next year, we're planning for CapEx of approximately half the FY 2024 level due to a combination of lower planned levels of renewals and a more restrictive approach to capital allocation into the region. What this means overall is we are creating a stronger, more profitable, but somewhat smaller continental European division that will become a less material part of SSP's portfolio over time. The third priority in building returns is driving efficiencies across our cost base.
In an uncertain world, the world in which we're living today, cost efficiency must play a stronger role for us both in the second half and as we set the business up for FY 2026. Our initiatives span all elements of our cost base, and as you can see in this slide, and at the Group Executive Committee level, we pull these together into a rolling program of operating cost reductions. I've already touched on our programs to tackle above-market rents at market, at channel, and at airport levels, and we're also actively tackling support center and overhead costs. In the second half of this year, we've initiated a project to simplify and scale back support costs across the group. This will streamline and reduce complexity in our support teams with an approach that looks end-to-end across the business and, importantly, protects delivery of our frontline teams.
This project will substantially reduce our overhead levels, and we have some activity already in flight in the third quarter with the rest to be done in Q4. The full benefit will be realized in FY 2026, and we will update you on progress against this project later in the year. However, the two biggest levers that I wanted to talk about in relation to operating cost reduction for our business are how we optimize our labor costs and how we're reducing our cost of goods to drive up gross profit. Let me start with tackling labor. As Jonathan set out earlier, due to elevated levels of wage inflation, labor costs have risen by 70 basis points to 32.4% of sales in the half. Against that backdrop, accurate forecasting and planning of labor hours is absolutely essential.
Traditionally, our U.K. market develops best practice on frontline labor management for SSP and leads the way across our group. The example shared here, while complex, is our workforce management program, which uses technology to support our frontline operating teams. What we've done is to develop a customized labor forecasting and scheduling tool for a travel environment, which we've now launched and embedded into our operational processes with all unit managers across the U.K. The model optimizes shift patterns, better allocates colleagues to pockets of demand by hour, and is driving up to a 5% saving in labor hours currently in our U.K. air division. We're taking this tool now to other SSP markets. Reducing our cost of goods sold, currently sitting at 27.1% of the sales of the group, is another important lever to offset inflationary pressures and deliver margin accretion.
North America is the market in SSP where we've been particularly good at this for a number of years, but we started a new program earlier this year, which involved updating and standardizing our core menu and recipe database across 250 similar restaurants, the core of our North American estate, with the aim of delivering a scalable, repeatable, replicable process and set of standard menus. The effect of this will enable us to bring down cost of goods as a percentage of sales from an already strong 22% by up to 100 basis points in this important market. We will take the learnings from this program and roll it across other parts of SSP. Moving now to our fourth priority, which is to accelerate the return on our investments and to generate more cash.
At our preliminary results last year, we introduced return on capital employed as a key performance indicator for the first time. We did this to highlight that the returns of our capital base, while decent, can be improved. In FY 2023, our return on capital was 17%, rising to 17.7% last year, and we have built our plan and our incentive structures to progressively build our return on capital employed from this starting point. This is being delivered by improving our operating performance, which I've already spoken about, and by growing our capital base at a slower rate. Based on the progress that we've achieved in the first half, we are on track to deliver a good return on capital improvement for the full year.
Consistent with that, since last summer, our focus on M&A has shifted from sourcing and executing new deals to integrating the deals that we've done and building efficiencies from them. In 2023 and 2024, as you can see from this chart, we made five acquisitions, generating annualized revenues of just over GBP 200 million and adding 130 new units to our group. A good example of how we've approached this at scale has been with ARE in Australia, which was a business that was larger than our base business and where the acquisition set us up to be the market-leading player in Australia. On the back of a strong-performing original SSP business in Australia, the acquisition case anticipated that we would sustain the growth level of the combined business, reduce shared overheads, increase gross profit, marry the cultures, and strengthen our proposition with clients.
I'm pleased to report that just over a year in, we're on track in each of those areas. Relative to the acquisition cases, we're pleased to report that on the revenue line for each of these businesses, we're either at or above where we expected to be. More importantly, on the returns line, which we measure both in our current level of operating margin and in our forward-looking IRR projections, we are again either at or above the acquisitions we had for each of these five acquisitions. Moving to capital expenditure, the largest component of our investment in recent years has been in our base estate. The higher-than-usual level of contract renewal in 2023 and 2024 that you can see in the chart, described by me previously as catch-up phase, was a reflection of the fact that many renewals were put on hold in the aftermath of COVID.
During this catch-up phase, we successfully renewed approximately one-third of our estate and extended our average remaining contract tenure from four years to six. In particular, our renewals level as a percentage of sales rose to an average of 14% across that period versus a more normalized level of 10%. This, in combination with the rest of our investment program, resulted in a high level of pre-opening costs, which also put pressure on near-term profitability. In the current year, we expect the level of renewals in our investment program to revert to a more normalized level, and we see this reducing further in fiscal year 2026, which will naturally reduce cost pressures on our P&L and reduce the rate of our capital base going forward.
SSP is a disciplined post-investment appraisal process that we've spoken to you about before, and this enables us to learn and understand where we're getting the best returns and to use that to inform our future plans. From this vantage point, with the lower level of renewal activity that we've spoken about, as we move past the wave of renewal activity post-COVID, we're able to plan for a further tightening of capital spend from the GBP 280 million that we spent last year now to less than GBP 230 million this year. In FY 2026, we anticipate a further scale back of renewals, and we expect capital expenditure to reduce to less than GBP 200 million. The level of new capital being invested into the business is reducing, which is clearly helpful for returns on the overall capital base going forward.
Alongside strengthening profitability, we're fully focused on driving our cash conversion with initiatives from reduced CapEx, scale back new M&A, working capital discipline, and a cash-focused culture across SSP. We're planning for a significant improvement in our free cash flow generation in the second half of FY 2025 and into FY 2026. This enhanced level of free cash flow leaves us on track to consider a share buyback program towards the end of this calendar year. Turning now to Outlook. There are two points I want to make on this slide. First, notwithstanding the decent start to half two, with like-for-likes at 5%, we recognize that the world is a bit more uncertain than everyone expected it to be six months ago. As a consequence, it's prudent to plan for somewhat lower levels of travel than originally expected.
As you can see from the chart on the left, that will almost certainly play out differently region by region as we see different travel trends emerging in different markets. Second, we remain resolutely focused on what is within our control, and that is a great number of things. We can control our cost efficiency, our capital returns, our operational delivery, our summer trading, our service metrics, and the delivery of like-for-like initiatives and all of the individual elements across the four-point plan that I have set out earlier. It is our progress against these initiatives that gives us the confidence in our judgment today to maintain our guidance.
We're on track to deliver operating profit and earnings per share in line with the planning assumptions that we set out last December, which were for sales of GBP 3.7 billion-GBP 3.8 billion, operating profit of GBP 230 million-GBP 260 million, all on a constant currency basis. Finally, a word on progress against our planned IPO in India. We're continuing to address this opportunity. We've recently received regulatory approval to be able to progress with the transaction, and the shareholder engagements that we've had to date have been extensive, informative, and positive. The economic background has had some impact on the Indian stock market, but our best judgment today, given the current positive momentum in that market, is that we will complete this IPO this summer. We will, of course, keep you updated as this transaction progresses. A very quick summary from me to wrap up.
Performance in the first half has been in line with our expectations and demonstrates good year-on-year growth. We're focused on the tightened set of priorities that we set in December, and hopefully, as Jonathan and I have set out, you can see how we're delivering against them in the first half and the progress that we're making against each of these elements as we transition into the second. Notwithstanding the macroeconomic uncertainty and the likely impact or possible impacts on travel demand going forward, the actions that we are taking give us confidence to maintain our guidance and also put us on track to consider a share buyback program towards the end of this calendar year. Before we start the Q&A, if you'll forgive me, I'd like to say a few words about the man on my right, Jonathan Davies, and what is his final analyst results presentation.
Jonathan has been CFO of SSP since 2005. He's been the public face or public face as CFO of SSP since its IPO in 2014, and he's been the Deputy CEO of the business since 2021. In many ways, he's been the architect of the SSP of today, and he has been a constant through four different CEOs. This is actually his 23rd interim or final results presentation, which is some achievement in the current market. Speaking more personally, he's been a fount of wisdom, a huge support to me, and has become a great friend. To many of you, he is all that and more as well. He's a genuine class act. To embarrass him a little, could you put your hands together for Jonathan Davies? The world moves on.
I would like to introduce Geert Verellen, who joined us recently, who is going to take over from Jonathan as CFO in a couple of weeks. Geert, would you like to maybe say a few words on why you joined us, your background, and why you think that is relevant to SSP?
Absolutely. Thank you, Patrick. Can everybody hear me? Good. Thank you, Patrick. Thank you, Jonathan. It is great to be here. I am delighted to join SSP. I will take over from Jonathan in the next couple of weeks, and I am really grateful that he has offered to stay along and to make this transition for the company and for myself and likely for him also as agreeable as possible, I would say, over the next couple of weeks. I am delighted to join the team and the company specifically for a number of reasons.
Number one, I always get a lot of energy from working in environments that are fully exposed to the fast-paced customer focus. That's number one. The second one is the fact that there's always a bunch of super interesting performance management challenges that come with operating in an international context, and especially in an environment where the company or the business is exposed to significant growth markets and growth geographies. The third reason, and likely one of the most important ones, I think, is I really felt throughout this entire process of getting here, I felt a really good fit with the management team and with its leadership, and that's super important for me as I've learned throughout my career. I also believe that my background in consumer retail, in food retail specifically, and the food manufacturing business will come in handy here.
Specifically on the food manufacturing business, I would say that muscle of very disciplined capital, balance sheet, covenant, cash management that I have learned, I would say, through my last role at Maple Leaf Foods. Obviously the quintessential continuous quest in low-margin food retail to eke out more cost savings and to reinvest in price, reinvest in margin, et cetera. I'm pretty sure that that muscle will come in handy. As I reflect over my career, I've been really fortunate to have had a bunch of roles on both sides of the Atlantic. Obviously, I started out my training and my career in Belgium, then moved on to the U.S., and most recently, I was in Canada for the last 10 years, ultimately growing into a public company CFO role at Maple Leaf Foods.
Originally, I trained as a commercial engineer, then became a public accountant, then decided to move into the real world, ran an accounting department, then gradually moved into investor relations and external communication, believe it or not. I gradually grew into operating company roles and regional CFO roles before becoming a public company CFO at Maple Leaf Foods most recently in Canada. Just for context, Maple Leaf Foods is one of the leading North American poultry and pork processing companies, but also a CPG company. You had that ideal combination or interesting combination of a vertically integrated meat processor, but also a customer-facing CPG company engaging with retail. Very interesting combination and very challenging from a capital allocation perspective as well.
Throughout my career, I have learned how important it is as a finance department to work really well together, closely together with its leadership, with the CEO, in setting ambitious yet achievable targets and to hold the business to account. That is exactly what I intend to do here at SSP. Over the last couple of weeks and since I joined, the team had put together a very compelling induction or training program, treading middle ground a little bit between visiting the business, but also getting immersed into the performance management cycle, getting to know obviously the leadership around the world and the finance team in itself. Over the last couple of weeks, I've visited locations here in the U.K., spent time in Dublin at the airport, which was really interesting.
I was at Toronto Pearson a couple of weeks ago, and next week I'll be in the U.S. with our leadership team there to visit the business there. I'm really looking forward to that. What has struck me thus far is the enormous amount of enthusiasm that I find in the teams, both in the home office and in the field. I've been really amazed by the breadth of the concepts and the formats that we have and also the challenges that that brings, obviously, in terms of capital allocation, management, efficiency, and driving efficiencies throughout that network. Most importantly, I was really impressed by the focus of our teams on the consumer, the level of detailed knowledge they have in running their units, their business, and that gives me a lot of energy and enthusiasm for the future.
I would say, it just confirms the right choice that I've made to join this wonderful team. With all that, I'm going to hand it back to you, Jonathan and Patrick. Thank you.
All right. Thank you. Everyone will have a chance to, hopefully, to listen to Geert's perspectives through the rest of this year and subsequent results announcements. With that, listen, let's jump into Jonathan, your final analyst Q&A.
Perfect. Yes. It has to be Jamie.
Jamie.
No, I'm appearing with a mic.
Not in the front there.
Thank you. [Jamie Waller] from Morgan Stanley. Three questions, please. First, just on margins, the drop in both North America and rest of the world. I think, Jonathan, you said that was due to COVID income last year in the former and then the disposals and ARE acquisition in the latter. Just want to confirm that. Also, should we see a similar sort of drop in the second half as the anniversary? Secondly, on the overhead savings, Patrick, you said substantial. It's a GBP 400 million cost base. So are we looking for a sort of double-digit number there? Are there any sort of cash restructuring costs behind that? Then just finally, more strategically, do you need to be in some of these European countries? I mean, I know you're reviewing Italy, but how about France and Germany?
If they're never going to make it, would you consider exiting some countries? Thank you.
Jonathan, do you want to take the first and I'll do the second too?
Okay. Cool. With reference to the operating margin and, importantly, the outlook. Yes, as I said, we have seen labor pressures in the U.S., which I think are pretty widespread and you are probably familiar with from other businesses. The good news is that we have mitigated those through our ongoing efficiency programs looking at gross profit and cost of goods. Clearly, Patrick talked a little bit about one of those in North America. The COVID releases were in the first half last year. We specified them in our R&S in December. If you took that GBP 3.5 million out, you would essentially have flat operating margins in the first half in North America.
Now, looking forward, clearly conscious of the fact that the operating margin in underlying terms is flat and there are no further releases, we would anticipate partly on the back of some of the programs we just talked about, we'd expect an improving year-on-year operating margin performance in North America. It is worth saying in a period of pressures on labor costs, as you get into the busy summer season, it is easier to flex your labor and manage labor ratios more actively. I think we still would believe we're on track for a very modest margin improvement in North America if you look at the second half and importantly, the full year.
Rest of the world, again, just to confirm, the ARE acquisition is slightly dilutive of the quite high margins, operating margins we see in the Asia-Pac, Middle East region, partly because, as you know, there are certain countries within that region with very high operating margins. To make it a fair comparison, we've taken it out because it's quite a material deal. Importantly, this deconsolidation of our very profitable Mall's Mumbai lounge business that we essentially stopped consolidating when we moved it into a new joint venture in June last year does have a drag for all of the first half. That drag alone, if you do the maths based on what we've told you before about the profitability of that business, would be about a 40 basis point drag on the group, in fact. It is very material to Asia-Pac.
Now, the important thing is, as you look to the second half in June, right now, we're about to annualize the point at which it moved into the new JV. We will see a bit of a reversal in the margin Asia-Pac as a consequence of that. Clearly, that will also be part of the story whereby the group margins improve year-on-year terms in the second half, and that's quite a material element. I'll pause there. Hopefully, that covers that one, Jamie.
Yeah. Let me pick up overheads and Europe. I'm just going to reframe the numbers slightly for you, Jamie. If you take we're looking at all elements of our cost lines, but if you take the kind of notion of group, regional, country-level support costs that are above the level of airport or station for running individual parts of our business, that adds to about 5%-6% of our sales. It's a little smaller than the total number used in Jonathan's slides when you annualized for that. Of that level of group support costs, about 70% is people cost. It's quite a large overall number. It's grown a little more than in line with the sales growth of SSP if you compare us to where we were five or six years ago. We think actually it's grown too much.
We have a series of initiatives in flight to address that. They do meet the choice for language of substantial, but the two points I'd make are, one, some of that's already happening, more will happen in Q4. When we have that fully sized and implemented, we will report in due course on the actual number, but we're not in a position to confirm a number beyond, as I say, that directional guidance of substantial today. Second point on markets in Europe, I mean, our mindset here is there are no sacred cows. Hopefully, I framed some of the examples of what I mean by that. There are some countries we're coming out of.
I need to be a little careful in the exact words that I use on that, but we have given some indication of that today, where we think there is not a sort of short-term path to acceptable level of returns. We are prepared to do that. There obviously are some big channel positions that we are coming out of that we have spoken about before, which is the motorway service channel, most particularly in Germany. The mindset that we have had, which Satya is leading through with very strong support from group, is we have to change stuff and we have got to change it fast. The example of the reset of our business in the Netherlands is a good example of that, right? Simply put, we were not prepared to continue with the economic shape of the business that we had in the Netherlands.
We worked with our brand partners for incremental support and, importantly, with our principal landlord to recommit to stay in the market with material changes in our rent arrangements there to enable us to actually reset the business to a sustainably profitable business. That is what we are doing. There are a number of big stations and airports where I am not happy with where the returns are. If we do not get to a satisfactory position, you will not see us renew them. I am hopeful that based on the progress we are making already, in many cases we will. I think, more to directly answer your question of our kind of future intent at the macro level for France and Germany, we believe today that we can have post-intervention positive returning businesses in both of those markets, and we are working to do that.
If for some reason we ended up concluding that we could not, which I do not think will happen, then, as I said, there are not any sacred cows in terms of how we look at this. We do not have to be anywhere if we cannot get a return from it. That would be how I would describe it. Next question. Tim.
Thank you. Tim Barrett from Deutsche Numis. Two things, please. Firstly, on CapEx, I hear you loud and clear on that coming down and the cash benefits, but how long do you think you can keep it under GBP 200 million? Or I suppose a better question, all in, where do you see it as a percentage of sales in the medium term?
Yeah.
On Europe, really trying to understand what medium term means for 5%. Could it be as soon as 2026, subject to France and Germany?
Yeah. Two things. I mean, an important point to make about the GBP 200 million guidance for next year is the vast majority of the dropdown from GBP 230 million to below GBP 200 million will be this continued effect of a somewhat lower level of renewals. Do not interpret that as us not investing to sustain the net gains guidance that we have given in our medium-term guidance. We still think we can. Up to GBP 200 million is still a pretty healthy level of total CapEx we are putting into the business. I think the best, I am always a little wary, to be blunt, Tim, about the use of depreciation as a percentage of sales because I am not sure they exactly correlate with each other. It can be a useful rule of thumb, but it is not much better than that.
I think in that context, in or around 4% of sales is combining a normalized level of renewals and an ability to keep investing to sustain the medium-term guidance we've given our net gains is about right. You would probably see that 2026 level nudge up a little in 2027, but it shouldn't be as high as it would have been in even this year or indeed last. Your second question was on the timing of medium term. I mean, the words are the words, right? We've said medium term. We're digging in really hard to make a lot of change across Europe. Some of it's about portfolio, some of it's about rent, some of it's about team, some of it's about culture, some of it's about capital intensity. We have the right people doing it, and we're on track with where we need to be.
I think we've got to let that team who've been in situ now for not much more than six months really continue to drive on on that. We'll probably provide a little bit more clarity on what we mean by medium term at the full year result. Yeah. Ali.
Morning. [Alan Echo] from HSBC. Three questions, please. Can I just ask your comments on the buyback and combined with the cautiousness of next year? Are you just thinking of recycling the CapEx savings that you're putting through into the buyback, or would you use your balance sheet and leverage to consider adding to that? Secondly, just assumptions for the second half of this year, could you just give us an idea of by regions what you expect to happen in the second half and whether the trading after the first six weeks is improving or getting worse based on that? And then finally, just in terms of the cost optimization strategy, is this something that's going to be delivered ostensibly annualized year on year after 2026?
Yeah. Let me try to pick those in sequence. I might start with the last. The mindset we have here is that the world's a bit more uncertain than everyone thought it was going to be six months ago. We would be mad not to be a little prudent or cautious on what that might mean for travel. We're very conscious of the medium-term guidance that we gave, and we are not withdrawing from that one iota. We sensibly, I think, believe that cost efficiency and looking after our own shop, so to speak, needs to play a more important part in underpinning that than potential acceleration in travel growth from here. Think about what we're saying on cost as providing an underpin for a potentially more uncertain travel environment. That would be the mindset, I would say.
We're committing to have all of this done in 2025 so that it rolls fully in 2026. As I said earlier, some of this is already in flight, and some will be implemented through Q4. On second half guidance, I mean, I'm not sure we can say much more than we've already said. Clearly, if we had some concern about guidance beyond what we've said already, we would have to set it, and we haven't. I mean, Jonathan, you might want to just talk a little bit.
Just to give you a little bit of color by region, as you say, we can't read too precise here, but just a few points to think about. In North America, clearly, the latest six weeks coincides with the announcements from Trump about tariffs, which had a pretty immediate impact on international in- and outbound passengers from the U.S. The very latest data, and some of you will have seen this, is a little bit more encouraging in terms of a recovery. I am hoping that that is the low point. Difficult to call, as Patrick said, but we would hope there might be some upside as we get looking to the latter part of the year, albeit we face quite tough comps in North America. If you look at the U.K., again, very difficult to call.
There is undoubtedly still some drag from the M&S supply chain issues, albeit, again, they are improving week by week, as indeed many of you may have seen through walking through M&S's in London stations, albeit it's still at this moment based on essentially old-style manual stock and order. We are quite confident about the benefits of the improvements in our air business through some of the renewals and reinvestments we have made. Continental Europe is difficult to call, still sluggish, but worth remembering that there were a number of sort of one-off type factors which hurt us in the second half last year, most notably the Paris Olympics, as well as some of the disruption from the ongoing renewals program, which is largely through by now. Again, room for some encouragement, but nevertheless, trading tough.
Finally, looking at Asia PAC, clearly many moving parts, but just worth remembering when you look at the overall year-on-year sales there that we do, as I mentioned a moment ago, we do annualize against the point where we started to deconsolidate the Mumbai lounge business. As we have told you before, the year-on-year impact of that is something like a sort of GBP 40 million swing. We hit for the latter part of this half the point where the comps suddenly normalize. As ever, there is a lot of moving parts, but I do not think I can go further than that other than to reinforce the point Patrick has made that we remain cautious, but feel that the 4% guidance we have given feels like a good judgment of where the market will be.
Yeah. And then, Ali, just to circle back on your first question, which is about buyback. Clearly, we've given more specific language on timing and on mechanic than we've formally given in the time that I've been here. We are conscious of the fact that our kind of intent here would be to have the business at the lower end of the leverage range to ensure that we are putting appropriate investment in to meet the kind of net gains target and the sustainable growth of the business, but then to use incremental cash that we're generating once we're at that lower level and achieving that level of net gains and to begin to reward shareholders, most likely through a mechanic of a buyback.
I would say also that any sort of semblance of best practice in this space would be not to initiate a buyback and then stop it. What we would like to actually do here if we're in a position to do what we've indicated is to have something that would be programmatic and continuous. We have to cross a number of milestones before we get to that. You can certainly see a kind of step on in our intent from what we've given in the results today. Yeah. Thank you. Anna.
Thank you. Good morning. Anna Barnfather from Panmure Liberum. Just revisiting the cost efficiencies, I understand you will start to quantify as you get further along in the program. Can you just give us an idea about geographic distribution of those cost synergies, whether they're specifically weighted towards North America in the first phase and how that will evolve?
Yeah. I can. I mean, when you take the scale of that sort of 5%-6% level in support costs across the group that I have referenced, they broadly mirror the size of the business. You often will have a somewhat overweighting towards new emerging markets because you are investing to grow them, and you might have a nudge less in mature markets because you have been operating at maturity for a while. I think the vast majority of the direct costs that I have referenced will sit in regions and markets and not in the corporate center. I think the answer here for the program that we are rolling out, we have done, and to be a little bit careful here, we have implemented some aspects of that already coming out of some of the work that we were doing in Europe led by Satya.
We've implemented some aspects of that in our approach to digital and technology across the business, and that's already in flight. The rest will be ongoing work that we will implement in Q4, and it will be across the whole group.
Thank you. Just another one on North America. Obviously, we can see that the passenger numbers have been a bit weak, but I presume you've taken some pricing as well. Perhaps you could sort of explain really the breakdown of that sort of flat to -2% like-for-like and whether that flows through to margin impact.
Yeah. I mean, it's as near as makes no difference, a perfect correlation with the TSA travel numbers. As the number of passengers going through North American airports has slowed or modestly declined in the period that we've referenced, that's flowed through to our level of sales. I mean, I think it's important just to do a little bit of stand back here. The U.S. is moving around a bit now, but any sort of stand back from this would, I think, still conclude that it is the right market to be central to our strategy.
It is a huge level of predictable domestic travel, huge level of consumer spend, relatively low rent, relatively long tenured contracts, and with a business that has a sort of very strong reputation and a growing level of market share on the back of some competitive dynamics that we've spoken about before in terms of the share gain opportunity for us. Yeah, we would prefer for TSA numbers to be a little bit more positive and for there not to have been the recent falloff in international travelers going into America. If we think about this on a multi-year basis, the fact that we've stepped up from in a year from 51 to 57 airports in three years from 35 to 57 airports, I think that's a really good decision for us to be making.
There would be a little bit of near-term noise on like-for-likes, but the fundamentals of the attractiveness of the business and the underlying economics of the business are very good. We continue to be positively disposed to build out our business in SSP America.
To your precise point on pricing, I mean, yes, there, of course, will be some pricing in there. Therefore, the volumes are slightly weaker than the headline reported numbers. It is worth stressing that price increases have been relatively modest there, as we have seen inflationary pressures ease compared to what we have seen in the last couple of years. We focus much more on cost of goods, menu engineering, including the work that Patrick talked about earlier on.
Yeah. Anyway, Harry.
Yeah. Good morning. It's Harry Gowers from J.P. Morgan Two questions, if I can. The first one, just on the U.S., can I just ask if is the business there more weighted or positioned towards domestic or international traffic or terminals? On continental Europe in terms of the turnaround, was the H1 result maybe in line with the progress that you expected at this stage? I think you cited some weaker spending trends across the region as well. Is that something which could hold you back in terms of getting towards the margins that you want this year?
Yeah.
Thanks a lot.
Yeah. I mean, worth remembering, we have quite a big business in Canada as well as the U.S., Harry, so when we think about North America. I mean, this is mainly a domestic business. Jonathan often cites this, 80% plus quite a bit is domestic travel. You will see as we dig into these movements through Q2 and into Q3, it is the airports with the greatest share of international travel, New York airports, for example, West Coast airports that have been most hit by the tariff uncertainty, geopolitical impact of various kinds. You'll find some odd quirks to that. More people coming out of Washington trying to do deals. More people going out of Ottawa trying to do deals.
The picture is a falloff in international travel in a business that still remains substantially domestic would be how I would describe it. I don't think I'm that or.
I think it's fairly straightforward. I mean, worth just saying, just to build on this point about the like-for-like passenger numbers as measured by the TSA, I mean, we look every week at TSA numbers versus our own like-for-like sales and transaction numbers by airport. We have that data. So we can very easily correlate what's going on, albeit we don't, of course, have a domestic international split in all cases. But we know where the weighting is by airport. So we can follow this pretty closely.
Yeah. If I give you the kind of stand back on Europe, the numbers are about where we expected them to be, but the work and the level of change has been harder. I'll just give you a couple of examples of what I mean by that. It is important for me to say, and hopefully it came through in the presentation and the R&S, that the totality of what we do in the reporting segment that is continental Europe does not have one story. The Spanish business that we are trading is trading as well as it has ever done in its history. The speed of the recovery, much needed recovery, we spoke last year about the level of new units and mobilization, those units in the Scandinavian or Nordic region, that is very much on track. We are pleased with the path that we are on.
In aggregate, the scale of the changes that we're needing to put through in France and Germany are more than we expected them to be. Two slightly different stories there. Our business in Germany is just compromised by a very economically challenged motorway service station business that we're exiting. We've gone back and forth on whether there would be a more brutal and rapid exit than the one we're doing and whether or not we should just confront some of the risks and do that. The cash costs of pivoting to that are really penal. I don't think we'd be thanked by investors for doing that, but the sooner we're out of it, the better. It is a phased exit, and the nature of that exit is a drag on Germany and on the business.
The last bit is France, where one of the benefits of having a Paris-based, French-speaking, originally French national head of our European business is that we have turned up every rock in the place as part of resetting it, and we have found more stuff to fix than we'd anticipated. It's not so much a story of first half numbers. It's a case of the scale of the change that we're putting through. To give you some examples, I mean, we have a senior leadership team of seven in France that we started the year with. There's only one of them in the business today. We have multiple in-flight client engagements in different parts of what we're doing in the business. It is a large business in the context of SSP. It should be a good returning business given the channel and market positions that we have.
It does not earn anything like the return that it should be capable of at the moment, and we got to fix that. That is a big, big part of what is happening in Europe now. Hopefully, I have given you a sense to some of the things that we are working on. We are working on permanently fixing it. I am very conscious I have some of our own colleagues who listen into this call who are sitting in, as I say, in Spain or the Nordics and kind of feel like they are being tired with the same brush as everyone else in terms of the narrative. That is not quite right. Of course, investors rightly care about the aggregate performance for the reporting segments that we put together.
As I say, to kind of come back to where I started, where the financial outcomes are where we expected them to be, the work is harder. Yeah. We will be able to tell you. Okay. Listen, I think why do we not cut it there? Listen, thanks for joining us. Happy to follow up. And again, to one final time, thank the man on my right side for everything that he has done. I look forward to seeing you soon. Do you want to say anything, Jonathan, by the way?
No. I think we've had long enough. You've heard enough from me. Thank you.