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Edited Transcript of ABF.L earnings conference call or presentation 24-Apr-19 8:00am GMT

Half Year 2019 Associated British Foods PLC Earnings Call

London Apr 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Associated British Foods PLC earnings conference call or presentation Wednesday, April 24, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* George Garfield Weston

Associated British Foods plc - CEO & Executive Director

* John George Bason

Associated British Foods plc - Finance Director & Executive Director

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Conference Call Participants

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* Alexander Richard Edward Okines

Exane BNP Paribas, Research Division - Research Analyst

* Andrew Hughes

UBS Investment Bank, Research Division - MD and Head of the Pan-European Non-Food Research

* Anne Critchlow

Societe Generale Cross Asset Research - Equity Analyst

* James Robert Grzinic

Jefferies LLC, Research Division - Equity Analyst

* Rebecca Anne McClellan

Grupo Santander, Research Division - Equity Analyst

* Richard B. Chamberlain

RBC Capital Markets, LLC, Research Division - MD of Consumer Retail

* Robert Russell Waldschmidt

Liberum Capital Limited, Research Division - Consumer Goods Analyst

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Presentation

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [1]

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Well, thank you all for coming to this review of our interim results for 24 weeks ended the 19th of March. I know there's a number of you who came with the opening of Birmingham and thank you for coming on that trip, too.

So the financial highlights are these, group revenue at GBP 7.5 billion, adjusted operating profit GBP 639 million, with adjusted profit before tax at GBP 627 million, the adjusted earnings per share 61.1p, the interim dividend goes up 3% in line with our progressive dividend policy to 12.05p, gross investment through the period was GBP 433 million, but we ended up the half after 6 months of good cash generation with GBP 386 million net cash on the balance sheet.

The business highlights then are these profits very much in line with expectations overall, but Primark profit up 25% driven by margin improvement and good sales growth in the U.K., in Spain, in France, in Italy and the U.S.A.

In our Sugar business, AB Sugar, we've seen the consequences of low contracted sugar prices. The efficiency improvements that we've been talking about for a number of years continue. And I think when you compare our numbers with those of some of our European competitors, you see the benefit of all this work that's been done over a number of years. You also see the consequence of a very strong business, Illovo in Africa.

Grocery then, strong underlying profit growth, U.K. bread remains tough, and again, I need to call out the strong cash flow in the period, not least as a consequence of the smaller sugar beet harvest in the Northern Hemisphere.

With that, over to you, John.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [2]

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Great. Thanks, George. So group revenue was at GBP 7.5 billion and that was an increase of 1% on last year, and adjusted operating profit at GBP 639 million was 1% down. This half year, there has been a minimal effect on profit from currency translation.

For the period, the sterling average exchange rate was consistent against the euro and the benefit of stronger rates against some of our major currencies were offset by a weaker rate against the U.S. dollar. However, recent sterling strength, particularly against the euro, would result in a loss on translation of some GBP 10 million in the second half, if these rates continue.

But the thing I would also say is, that has been included in our full year guidance. So we've taken that into account. The contribution from acquisitions in the period was GBP 2 million. The main acquisition being Yumi's, a producer of premium chilled dips and snacks in Australia.

The result includes 2 exceptional charges and they total GBP 79 million that you can see on the chart here. So firstly, an impairment of the property, plant and equipment of Allied Bakeries of GBP 65 million. As previously explained, this business is loss-making. In December 2018, we had notice of the termination of our largest private label manufacturing contract and that was received from a major retailer.

The impact of the loss in bread volume will be felt from our next financial year. So we won't feel the impact of that in the remainder of this financial year. The carrying value of the assets in this business was no longer supported by our forecast of its discounted future cash flows and consequently, a noncash impairment charge has been taken. George will comment further on our progress and strategy in Allied Bakeries.

Secondly, we're taking a charge of GBP 14 million, and that's in respect of Guaranteed Minimum Pensions, following a U.K. High Court ruling in October 2018. The ruling required equalization between men and women for the effect of unequal GMPs accrued between 1990 and 1997. And this affects all the U.K. defined benefit schemes existing at that time. This charge represents our best estimates of the additional liabilities for the group's U.K. defined benefit pension scheme.

Our adjusted profit measure reflects the underlying performance of the businesses and excludes these exceptional items together with profits or losses on the disposal of noncurrent assets, amortization of nonoperating intangibles, amortization of the acquired inventory fair value adjustments, they relate to Acetum, you remember and transaction costs. And then adjusted operating profit declined 1% to GBP 639 million.

Can I take a couple of moments just to hopefully not bore you, but at least enlighten you on the adoption of new accounting standards in the current and future financial years as set out in the significant accounting policies note in the results announcement.

So the group has this year adopted IFRS 15, and that's revenue from contracts with customers. And as previously advised, there's been no change to the timing or revenue or profit recognition. However, some GBP 16 million of payments to customers in Grocery in the first half, which were previously expensed and categorized as an operating expense have now been deducted from Grocery revenue. And as a result of that, there's a 1% difference in the Grocery growth. So in fact, we'll see later the Grocery growth reported as 3% underlying on the same accounting basis is 4%. I point that out because I think 4% is a good achievement in Grocery.

The group has also this year adopted IFRS 9 Financial Instruments, and that's had no material impact on the group.

IFRS 16 Leases will take account or will take effect from our 2020 financial year. And we're making timely progress in preparing for its adoption using the modified retrospective approach. In other words, we won't be restating prior years.

As previously explained to you, we'll give you further details of the expected impact on the group's results and financial position in the 2019 annual results announcement in November of this year.

We've applied hyperinflationary accounting under IAS 29 in respect of our business in Argentina from the beginning of this financial year, and that's following a sustained period of high inflation there. The effect on operating profit in the half year has been minimal. But the remaining cumulative impact to date is GBP 40 million after-tax. And that's been reflected, I always say it's in reserves, but it's reflected in other comprehensive income in the period. We've also adjusted the constant currency measure to include Argentina revenues and profits at actual exchange rates, and that normalizes the effect of consumer price inflation in that country.

So carrying on with the income statement. So this period's unadjusted or statutory profit was GBP 534 million, 14% down on last year principally due to the exceptional items in this year.

The GBP 7 million loss on the sale of businesses represents the disposal of our underutilized to Ohly yeast fermentation facility in Hutchinson, Minnesota.

Net interest expense reduced from GBP 18 million last year to GBP 15 million this primarily reflecting higher cash deposits, which in turn benefited from higher interest rates.

Other financial income/expense improved from a charge of GBP 2 million last year to a credit of GBP 3 million this due to the increase in the defined benefit pension scheme surplus between the 2017 and 2018 financial year ends.

Profit before tax declined from GBP 603 million to GBP 515 million, but on an adjusted basis, and that's at the bottom of the chart, was in line with last year.

For tax. The underlying charge or effective tax rate has increased marginally from 21.3% to 21.7% due to a change in the mix of profits by tax jurisdiction.

The credit on intangible amortization last year included, as a reminder, the deferred tax benefit which resulted from the reduction in the U.S. federal corporation tax rate in January 2018.

Coming on to earnings and dividends. Adjusted earnings per share were in line with last year at 61.1p. On a non-adjusted basis, they declined 19% to 49.2p, and that again mainly reflects the exceptional items this year. The board has declared an interim dividend of 12.05p per share, and that's an increase of 3% from last year.

Now let's move on now to the balance sheet. Net assets increased year-on-year by GBP 300 million to GBP 9.2 billion driven by the retained profit over the year, less the decrease in the net defined benefit pension surplus following the recent decline in bond yields. The increase in tangible and intangible fixed assets was driven by capital investment ahead of depreciation and the acquisition of Yumi's.

The reduction in working capital is a result of lower European sugar production this year, mainly in Europe, and George will make reference to this later. Net cash of GBP 386 million is up over GBP 260 million from last half year.

So let's move on to the cash flow. Cash flow this period was better than last year. This was driven by the smaller sugar production in the Northern Hemisphere that I've just referred to. As a reminder, there is always a seasonal increase in working capital at this time of year. And that's because sugar stocks are at their peak in Europe at the half year and payments have already been made to the growers for their sugar beets.

Total capital expenditure was in line with last year at some GBP 350 million. The marginal reduction in Primark capital expenditure, can I say, is not a signal of slowing investment, but merely reflects the phasing of spend in Primark between the first and second half of this year. The GBP 42 million outflow on the acquisitions line is mainly Yumi's.

So let's have a look at the segmental analysis by business. Revenue was ahead in all businesses with the exception of Sugar, where the decline in revenue was mainly the result of the reduction in EU sugar prices.

Grocery profits grew by GBP 8 million as reported, and I think probably ahead of most of the expectations in the room, so it's a great result. But on an underlying basis, if you exclude the GBP 12 million onetime cost of closing the Twinings tea factory in China, which were taken basically on the nose and not adjusting out, profits actually grew by 10% on constant currency. And I'll say this very quietly, but that means that the margin in Grocery exceeded 10%.

So the decline in adjusted operating profit at AB Sugar was the consequence of lower EU prices, poor crop in China, a later phasing of profit in Illovo this financial year. We expect the profit decline for the full year to have been reflected in this first half. And so with better sugar prices, we expect the sugar profit to improve from here.

Primark profits were up 25% and margin improved by just under 200 basis points. This was driven by a weaker dollar on purchases contracted for the first half, but also in good part driven by better buying, tight stock management and lower markdowns in the first half.

Let's come on to the second half. Because I know a lot of you will be looking at the second half, I'm actually going to give you the exchange rates between this second half and the second half last year.

So for purchases, which are now virtually fully contracted, the U.S. dollar exchange rate against sterling are this half year GBP 1.30 comparing to GBP 1.35 last year; and then for the euro, $1.14 against $1.19. So you can see, there's been quite a change and it's actually gone against us. So as a result of that, we will see a margin decline in the second half for Primark driven by that, but we expect margin a little ahead for the full year.

Central cost increased. As a reminder, last year included the benefit of a reassessment on our self-insured claims.

Return on capital employed for the group declined mainly due to the reduction in profits at AB Sugar. The small reduction that you see in the Grocery return on capital employed is due to the significant capital investments that have been made in the last year where returns have yet to come, and that includes the expansion of the Twinings tea factory in Poland, new capacity for Ryvita Bardney in Lincolnshire and then also extra noodle capacity for Westmill.

Coming on to the segmental analysis by geography. The decline in U.K. profit was mainly driven by the reduction at British Sugar and AB Agri, and that's partially offset by growth in Primark profit. I'm actually pleased that Europe and Africa results increased, and that was driven by Primark, notably in our Iberia and France where profits were well up, but partially offset by the later phasing of profits this year at Illovo.

Profit in the Americas grew strongly. And the notable feature of that for me was the reduction in the operating loss at Primark in the U.S. So that is reflected in there and then also some margin improvement at ACH.

Asia Pacific was impacted in the first half by the GBP 12 million onetime charge at Twinings. It was also affected by a loss this year from our Chinese sugar operations, but that's partially offset by further margin and profit growth in George Weston Foods.

I now hand it over to George.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [3]

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Thank you very much. Starting with Sugar then, we've reordered this a little bit to reflect the importance of Illovo to our Sugar businesses. The Illovo profit was in line with last year, but the phasing of our profit will be later. That's simply timing of sales. Prices in the EU, of course, have been much lower. Stocks are tightening. And I'll show you some of that later on. Our performance improvement savings program continues. We will be taking tens of millions of pounds of cost out of that business this year as we have for several years in the past and for several years to come. We've announced lower beet prices to be paid to farmers in Spain. And a lowlight for the year, the beet crop in the north of China was very poor this year.

So Sugar operations. The U.K. produced 1.15 million tonnes, rather more than we had expected when the harvest started. The beet continued to grow through the autumn. We had a good campaign in British Sugar, significantly better than last year's. Production though was down in Spain. Again, that was more weather than anything else. Poor quality beet in China reduced production. And then Illovo, we expect through the full season to have produced 1.76 million tonnes.

Let me just give you a little bit of an insight into some of the work that's going on to continue to improve that business in Africa, Illovo.

Drip irrigation, which we've installed particularly in Eswatini, what was Swaziland, and also in Malawi. We target the lowest-yielding land and anywhere where we're water constrained. Drip irrigation reduces water consumption by about 30% compared with other methods of irrigation. And we've seen in the early days of drip, harvest a 25% cane yield improvement, so very significant improvements as a consequence of drip irrigation. And there's a lot more potential to keep on investing in it throughout our African businesses.

Moving then over to Europe. Here is the evolution of prices since September 2017. October, the regime ended. That was the first big drop. And then prices have drifted down to where they are at their lowest no more than just over half what they'd been not long prior to the deregulation of the market. Green shoots though are evident here. Sorry, the contracted prices between 2017 and today really reflect the very big crop in 2017/'18. Sugar production, we expect to be lower in 2018 than it was previous year. Well, it has been. And stocks have been tightening as well.

Let me show you the evidence of that. So below the 0 line is export of sugar from the EU out onto the world market. Above the line, which we got to in January 2019, we've become a net importer of sugar again.

So sugar is no longer in quite such abundant supply in Europe than it was once. The area that is being planted now is down for next year across Europe, U.K. 7% down. And we're seeing, albeit on small volumes, spot EU prices higher than we've seen for some while. So reason to believe that prices have turned.

Moving on then to Agriculture where we've enjoyed higher feed prices in both the U.K. and China. We've seen reduced margins though adverse mix in U.K. feed despite the higher prices. And then there's a significant profit phasing issue that -- well, not an issue, the characteristic will be more profit benefit in the second half, particularly Frontier, and the timing of sugar beet feed sales also is more second half weighted than previously.

Grocery businesses which have been strong, good underlying profit growth at 10%. It says 9.7% margin here. So I can't give John his 10% just yet. Twinings Ovaltine had another good half, but more so margin improvement in George Weston Foods, in ACH and Acetum. And Allied Bakeries, as John has flagged, we've had some success in pushing prices on, but we've also lost significant private label contract.

Turning to Twinings for a moment. Cold Infuse which we've talked about last time is a success. We've only launched this in the U.K. and Australia. We've only recently installed enough capacity to supply those 2 markets. We will be expanding the markets it's available in from the summer. There's been a lot of work going on, on the supply chain as well, the closure of the factory in China, the relocation of the equipment into Poland, and I will show you a little bit of that in a moment.

Let me turn though to an ad we've been running mainly online for Cold Infuse.

(presentation)

We're delighted by the progress of that business. The Cold Infuse capacity has gone into Poland as, as I say, has the Chinese tea factory capacity. Let me give you an idea of what that Polish factory now looks like. We've got a short video.

(presentation)

Where I love this sort of train set kit more than some people do, but it was my decision to put that video in. The factory is highly automated but very flexible. That's the key to it is the flexibility. So the successful launch of Cold Infuse supply chain investment.

Ovaltine. Let me just give you an idea of some of the developments of that business. We've talked in the past about brand extension in Switzerland. Brand extension is not going on just in Switzerland. It's also in Thailand and Brazil and elsewhere. Something over half the sales of the Swiss business are now non-powder, nontraditional Ovaltine product. So we think that the success of the extensions allows us to look into the future with continued optimism for future growth of the brand.

Moving on elsewhere in the Grocery businesses, North America good profit growth. Mazola continues to grow on the back of the plant sterol campaign which runs and runs. And our Mexican Grocery business, which reports up into ACH has improved its trading significantly, too.

As has Australia. Australia is probably in the fourth year of strong profit growth, margins, profits well ahead, Tip Top volumes ahead. The Don KRC factory, where really it's about continuing to drive factory efficiency improvements, that has had another good year.

And then we are really quite excited about Yumi's which is a high quality dips, vegetable dips business we acquired just before Christmas. We bought the #3 brand in Australia. It's already turned into the #1 brand, not I think as a consequence of what we did, but because of the momentum it has behind it. The key to it is our tremendous food values. This is a business that makes its product from fresh fruit and vegetable rather than preprocessed fruit and vegetables and the taste is better as a consequence. So very well placed business growing quickly.

Our Jordans Dorset Ryvita is seeing good market growth, particularly internationally. And that is very satisfying. Also, major supply chain improvements actually nearly coming to an end in that business. We've built the new Ryvita factory in Bardney. We've put the muesli factory that was at Poundbury into Poole and improved it in the process and Poundbury is shut. We will be transferring bars manufacture into the Cambridge site as well.

Acetum which we bought now about 18 months ago. We suffered in the first year from high must. That is the grape must. The principal raw material costs went up significantly. They've now come back down and margin has recovered very well. We aim to develop the leading brand in the category, the category being balsamic vinegar from Modena. And here is an example of some of the creative which I think is elegant and fully in keeping with the qualities we want to establish for that brand. So the marketing is well in place and going well, and we're beginning to see brand growth on the back of it.

Our Allied Bakeries continues to work to reduce costs. There's been some successful product development, particularly in seeded in the Allinson brand and also diversification beyond bread is non-bread production which we started this year. We have seen some success during the year in raising prices. I've said to you for a couple of years that the losses weren't acceptable. We set out to try to reduce them. The most uneconomic private label contract we lost when we suggested the price might go up and the retailer of old suggested it might go down. And we agreed to differ on that and part company. We are developing further options to improve the profitability of the business.

In Ingredients then, 2 different parts of the Ingredients business. ABFI, the pharma excipients, plant cereal business all grew well. Good growth in enzymes for bakery, food and detergent markets. The enzyme business has been held back by lower prices in animal feed enzymes which it makes for AB Agri.

In Mauri though we've seen sales growth in all regions. We've successfully recovered distribution cost inflation in North America. The businesses in South America despite the difficult macroeconomic environment have performed well. And we continue to invest in plant operating efficiency and capacity expansion, particularly in non-yeast bakery ingredients.

Let me pause briefly before heading on to Retail. So Primark sales grew by 4.4%. We added 300,000 square feet of new space during the period. We're in the process of consolidating the buying functions into Dublin. That's an important project for us. We also have a major project to improve in-store efficiency. We will improve our customer experience in store through doing that. And we will also, we think, reduce labor cost through that project. It will take a couple of years, but it's well underway and it's important to us.

Through the first half, the womenswear offering was particularly strong. It's contributed to some of the like-for-like growth in this country in particular. And then a big cause of the improvement in profit was margin ahead on a weaker dollar compared with the U.S.A., but also on the back of better buying and lower markdowns which to some extent reflects the strong womenswear offer.

In the U.K., sales were up 2.3%. There was 0.6% like-for-like growth. And the total market share in the U.K., both online and offline, is well ahead.

The U.S. has performed strongly. Autumn was particularly strong. Winter was particularly cold so that held back the shoppers. But now that the weather has warmed up, we're seeing the return of good like-for-like performance in our U.S. stores.

In the Eurozone, sales were up 5.3%. Strong growth in Spain, in France, which has had a particularly good year in Italy and in Belgium. Like-for-like sales though on the back of the poor performance in Germany are down 3.2%.

And let me briefly turn to Germany where we strengthened the management team. We must get our store cost base optimized. In a few cases that will involve reducing the footage of some of our stores, getting the number of people we employ right for the sales base that we've got. We need to listen. We are listening to our consumers, tailoring our communications better. We have done an adequate job over the last few years at communicating our offer and communicating our ethics, and we are putting all that right now.

Part of that communication is putting up with the Primark Cares messaging in all our German stores and also telling our customers that we've been certified as a Top Employer in Germany for the year 2019 by the main employers institute. That's an important communication to our shoppers and something that we're very proud of.

We've also launched sustainable cotton jeans throughout Europe, but in Northern Europe in particular, in Germany especially. They have been very well received indeed. They're in the top 5 Primark selling products week in, week out. I think it surprised a number of people that we price these jeans made of sustainable cotton at the same price as those made out of less sustainable cotton.

We've also launched products made out of recycled polyester in conjunction with Alice Liveing, who's been collaborating with us in workout wear for a while. And I think we'll see a lot more use of recycled product and recycling generally into the future.

Key collaborations in the period: Saffron Barker on home, Stacey Solomon on womenswear in particular and Alex Steinherr on beauty. And their ranges have all sold through extremely well.

Digital and social media, which is such an important part of our conversation with our customers. We've added 1 million followers on social media. We've now got over 14 million. Our Instagram is up over 7 million across our 5 channels. And we've seen an increased engagement through Primania. One of the most liked posts was this of a Christmas set for all the family.

Turning to womenswear and the good ranges. We've had animal prints, cord pinafores and military cargo particularly strong at the moment and then short, stripe T-shirts as well. Menswear, hoodies for GBP 12, striped crews and then the printed shirts, embroidered tees, strong elements to the spring/summer ranges as well.

Just a moment on licensed product where John's granddaughter on the left-hand side is modeling the Disney range of babygrows and also the family hairstyle. More seriously, in Birmingham, many of you have seen it, the Harry Potter shop has been so far a great success. And then the Disney Café also in Birmingham, the first Disney Café outside the theme parks has been -- there's a queue outside it since the moment it opened.

Health and beauty has also had a standout season. The range expands. The quality of the product is great. And the free from animal testing is an important feature of our own brand offer. The beauty salon also in Birmingham, I think, demonstrates our commitment to the sector. And it is also trading very well so far.

I couldn't help but put in a little film we made about the Birmingham store opening. I know it wasn't in the period that we're talking about, but it came just after. And it is, I think, an important flag about where we think that we're developing the business into the future. So let me show this little film.

(presentation)

It had the highest sales of any Primark store worldwide last week. I don't think the high street is dead, but it is changing and you've got to invest in it and innovate in it in order to survive.

It's worth just looking back, I think, at other stages -- at how this business has developed over the years. This was Stratford which we called store of the future back in 2011. It represented quite a step-on from Oxford Street, which we were so proud of back in 2007. It just shows you this business keeps on moving and has been for a long time. It's a key part of, I think, what makes it so successful.

Going on then to stores that we did open during the period. Bluewater, which is a shopping center. They wouldn't have us a few years ago and which we are delighted now to be trading in.

Sevilla is, I think, either the second or the third high street store only in Spain. Spain is a wonderful market for us, but it was all built around shopping centers until we opened ground there. And then Sevilla has come along. It was also -- has been a very successful opening.

Toulouse in France is, I just want to linger on for a moment, the French business has been performing extremely well this year in really very tough circumstances. We've had demonstrations and riots down past this store every Saturday for just about the last 23 weeks. And some Saturdays we can open it, some we're closing halfway through. And the entire French team has kept this business performing very, very strongly, as I say, in difficult times. And here then is the third store in Berlin, Berlin Zoom, which we also opened during the year.

The selling space then for the record, '19 and '18, the expansion is this. So 12 stores over the last 12 months across 7 markets, just pulling out a few anecdotes from it. Italy is very strong. We've only got 4 stores. France, as I say, is very strong. We're up to 14. And the U.S.A. which is so encouraging also still on 9. So although the U.K. is getting closer to a full representation across the market, there is plenty of runway across interesting other large markets in Europe.

We expect to add 950,000 square feet of selling space through this full year. That's before we shut 150,000 square feet of selling space, including a smaller store in Oviedo. We moved to a different shopping center. And then continuing the very successful space reduction in the U.S. We've taken about 40,000 square feet out of our store in the King of Prussia mall in Philadelphia. And then we will in all likelihood take some space out of a small number of German stores. These are the store openings in the second half. With the exception of Bonn, Utrecht and Ljubljana, all the stores are open. We opened 6 in 6 days over the last 10 days.

Birmingham, Bordeaux, which was very successful. Brussels, our second store there. Wuppertal, much better than we had field; Milton Keynes, a success. And then I want to just linger a little on the second store in Belfast that we opened. We now have 2 in the end temporary stores trading spaces in Belfast. The Bank Buildings, as you remember, suffered the fire in August 2018. Thank goodness we got 1,500 customers and staff out inside 3 minutes. We didn't lay off any of our staff. We redeployed 300 people through to Christmas from August to other sites. Some of them went then into the Commonwealth House when we opened that. And the rest and more then are employed in Donegall Place as of last week.

The old Bank Buildings site will take a number of years to rebuild, but rebuild it we will. We work closely with the Belfast City Council to reduce the size of the cordon around Bank Buildings. We also made a donation of GBP 0.5 million to the City Council's recovery investment fund to support the smaller businesses that suffered such disruption as a consequence of the fire. And I am very proud of the work that the Belfast team did to secure a new trading area, but also treat employees well. It wasn't at our instigation. We just said yes to things they wanted to do.

We're opening finally then in our 12th market in Slovenia at this shopping center, the largest in Slovenia, Citypark, our 12th market. It won't be our biggest, but it will be a very nice one for us. As I said, that will open in the summer.

That takes me then on to the final outlook for the second half. We expect the underlying growth in Grocery to continue. The Sugar profits in the second half will be similar to those of last year. John has indicated the second half margin reduction is a consequence of currency, but we expect full year profit to remain as you currently expect them to do. And for the full year, adjusted earnings per share will be in line with those of last year.

And with that, over to you for questions.

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Questions and Answers

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [1]

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So we'll start in the back, Anne Critchlow.

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Anne Critchlow, Societe Generale Cross Asset Research - Equity Analyst [2]

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It's Anne Critchlow from SG. Regarding Primark space, do you think 800,000 square feet a year is about the sustainable level going forward, especially looking into next year? And also thinking about the U.S., how much would the U.S. contribute to that? And then the second question on Primark buying. How much further do you have to go on better buying?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [3]

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No. I think we'll do better than 800,000. We've got visibility out 2 or 3 years and the next 2 years will be safely north of that level on a net basis as well as gross. The U.S. in the next 18 months won't contribute much. We'll open 2 stores. There's a new shopping or expansion of a shopping center in New Jersey which we are in. And then the first Florida store will come later next year. And after that, we will continue to open stores particularly in the Northeast, but not too quickly.

Buying margin, I think in some categories it's got some way to go, but we welcome the increase in wages being paid in Bangladesh. We're aware that cotton prices are fairly low at the moment. They could go up. So there are other moving parts as well as buying scale. A lot of the relocation of the buying office has got nothing to do with buying heft. It's simply simplicity. We trip over each other too often at the moment. And as we expand into more and more markets, we must put a core of simplicity into this business and this is part of it.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [4]

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Great. Thank you. We'll try Warwick at the front. Well, Rebecca, in the back as well, got the microphone.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [5]

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Rebecca McClellan, Santander. Just a couple of questions. On the closures in Primark, what are your expectations vis-à-vis recapture rate in sort of neighboring or nearby stores? And secondly, can you quantify where the U.S. losses were or where they're trending versus last year?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [6]

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Yes. Okay. So the only store we've shut is Oviedo where we've recaptured all and more by moving to a bigger site and a better shopping center. Our experience in the states not of closing stores but of reducing the size has been that we've kept almost all the sales. In fact, we see in Freehold and what's the other one we reduced?

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [7]

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Danbury.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [8]

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Danbury. We've seen sales grow. We've seen good like-for-like growth in both those 2 stores even on the basis of a smaller store.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [9]

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U.S. losses, so last year, I think I gave you a figure of about a $20 million loss last year. It will be smaller single digit this year. So that gives you a feel of the scope of the improvement. And I think George has given you the drivers of that. And that leaves Brooklyn trading, but like-for-like growth. And then obviously the resizing of the stores. I'm very pleased with that. I mean given that, that warehouse can take triple the space that is currently there. So if we're getting towards the breakeven mark with 9 stores that's good news.

Okay then, should we try Warwick here in front.

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Alexander Richard Edward Okines, Exane BNP Paribas, Research Division - Research Analyst [10]

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It's Warwick Okines from Exane. Two questions, please. George, you talked about a major project to improve in-store efficiency, just wondering if you'd give us an update on that, where you are. And secondly, perhaps for John, it's still very early days, of course, but could you just give some insight into your thinking about sugar in the next financial year, please?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [11]

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Sure. Okay. So we spent about 18 months looking at all the processes in store from receiving stock through to the cash till. And we have mapped and worked out the best ways of performing all those. On top of that, we've had a look at management structures. We've looked at stock levels, all with the aim of improving availability, improving the experience for customers and yes, making sure we have the right number of staff available at the right time of day to produce so that we, A, don't waste labor hours. And secondly, that again, we have people in store when the customers are in store. We piloted that in 2 stores that we then expanded it to 6. And we're rolling it out across all the markets starting -- we're furthest on in the U.K. and Spain, which is where the 2 original pilots were. It'll, as I say, it will take us a couple of years to get across all stores.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [12]

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So coming on to sugar. I think the best thing to do there is to really to break it down into the different geographies. So the first one is clearly Illovo which you know we love that business. So let's take for the sake of argument the profitability of around GBP 100 million. I think there's every expectation that, that sort of number for next year would continue. So that, if you like, for me, has always been sort of the baseline of profitability for AB Sugar. Take China for a moment, the losses in China this year were driven by the very, very poor quality beet, which was a factor of climate. So everything else being equal, an improvement in the climate, you would expect some reduction there.

I think that the bigger turnaround obviously is Europe. So let me take first of all British Sugar. So George took you through, I think, our thinking about where European sugar prices are going and not least the sort of the premium over the world sugar price inside the EU is certainly in terms of spot prices going up. So I expect higher prices and well, of course, the cost savings continuing to come through. So I won't be at all surprised if British Sugar would move into small profitability if these sorts of prices continue for the full negotiating round.

In Spain, I think the big driver is that you will have the full year effect of better prices, but it's that big price reduction that's the big deal. I think the thing that we've notified that price. I think we've got to see is what volumes are contracted in Spain. So it's a slightly different situation to the U.K. So I think we expect lower volumes to be contracted. But nevertheless, a good improvement in getting towards the breakeven mark for that. So I'll let you add all of that out without me giving a number, but I think it's pretty clear where that's going to go.

Okay. Andy Hughes in the front here.

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Andrew Hughes, UBS Investment Bank, Research Division - MD and Head of the Pan-European Non-Food Research [13]

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Andy Hughes from UBS. Primark Germany, a few questions there. I mean you were saying you were taking some cost out and some sort of staff per square foot suggesting that maybe cost is an issue. But is the main problem just low densities then that the stores are too large and the rightsizing might see densities improve? And just as an add on to that, have you got a like-for-like figure for Europe ex Germany?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [14]

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Europe ex Germany is much closer to flat like-for-likes and there's some cannibalization in there, too. So Germany is dampening down that European performance significantly. Yes, some of the stores are too big. Some of the early stores are too big. So for instance, Gelsenkirchen, which was the first store we opened in the Ruhr valley has been extensively cannibalized through the opening of other stores in the area and we'd like to reduce the size of that one. There are other stores similarly where the level of trade simply isn't big enough to justify the space. Space occupancy is very expensive in Germany. It's an expensive market to operate in. It's an inflexible market to operate in. But yes, there's significant mileage in getting the manning levels and the stock levels right for the trade that we've got.

On top of that though, we have got negative like-for-likes. We've had them for 2 or 3 years now. And that's the other part of the issue that we're addressing. There is a significant gap between the reality of our offer and the ethics of our supply chain and what too many German customers think. That gap has opened up because we haven't been talking about ourselves enough. The process of informing our customer base of who we are and what we have in store and how we get it there is a really important task that we're taking much more seriously now.

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Andrew Hughes, UBS Investment Bank, Research Division - MD and Head of the Pan-European Non-Food Research [15]

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And just looking at the like-for-like outlook, just if nothing else changes mathematically, presumably it should get better because you'll have a lot more stores coming into the like-for-like bucket from markets like France and Italy than what the opening program looks like in Germany, but presumably the cannibalization effect will start to moderate.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [16]

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Yes. So in Germany, we're just opening, I think, 2 more stores which are in the pipeline and which we're committed to. I think actually it will take a while for the like-for-likes to improve because as we open new stores they don't go into like-for-likes until year 2. And secondly, take Milan, for example. We're going to open a second store in Milan. We will cannibalize Arese. It will be good. Arese is just madness at the moment. So again, that will dampen. That's kind of we've been trying to argue the case about good cannibalization for as long as I can remember. So I think the profitability of our European business will improve as we open more stores in fast-growing markets where sales densities are good but not, I think, the like-for-likes.

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Andrew Hughes, UBS Investment Bank, Research Division - MD and Head of the Pan-European Non-Food Research [17]

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Just one more while I have you. On Reading, just the sort of rationale behind that, was it sort of gross margin and buying scale or is it cost efficiency or is it online, all that?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [18]

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It's all of that. The big bit though is the desire to have all the buyers of menswear in the same office together. With 2 buying offices, the left hand sometimes didn't know what the right hand was doing. One is trying to supply 6 markets, the other one trying to supply another 6 markets, trying to coordinate each other's ranges to make sure. So we had levels of supervision and all sorts of coordination going on. And we don't need it if we're on the same building together.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [19]

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Great. So pass it back to James.

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James Robert Grzinic, Jefferies LLC, Research Division - Equity Analyst [20]

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James Grzinic from Jefferies. I had a couple. The first one is, I'm just curious as to what spot prices are looking like in sugar if you can be a bit more precise? I understand it's on low volumes, but it would be quite interesting to understand those sort of levels. Secondly, are you finding that Primark price advantage is tending to widen in a number of markets as a number of your competitors are putting on incremental cost structures to be able to go multichannel?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [21]

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In all honesty to the second question, I don't think so. What I'm aware of is the reduction in competitive intensity in both Spain and the U.K. with Pep who had a good hard go with us 2 years ago I think largely retreating into Poundland stores. And then in Spain, Lefties, again, reducing the competitive pressure there. We went through 2 years of reducing prices in those 2 markets quite a lot, and we haven't seen a replica of that, a repeat of that, although the competitive intensity in Ireland has stepped up in terms of reduced prices. Sorry, what was the first?

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James Robert Grzinic, Jefferies LLC, Research Division - Equity Analyst [22]

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Spot prices on sugar was sort of asked.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [23]

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Yes. There's a big health warning on this. I think Europe will produce a surplus next year. There's just not a surplus there at the moment. So we're seeing prices well over EUR 100, in some cases higher than the contracted round average was, but I don't think that we will carry that through.

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James Robert Grzinic, Jefferies LLC, Research Division - Equity Analyst [24]

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Over EUR 100 basically?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [25]

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Yes. And the rest, but small parcels, small parcels.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [26]

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They're small parcels.

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James Robert Grzinic, Jefferies LLC, Research Division - Equity Analyst [27]

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That's interesting.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [28]

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Don't get too excited.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [29]

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Let's see how it comes through. We'll then go to Richard Chamberlain here at the front here.

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Richard B. Chamberlain, RBC Capital Markets, LLC, Research Division - MD of Consumer Retail [30]

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Richard Chamberlain, RBC. A couple more on Primark, please. The Primark Cares campaign, is that just being shown in store by the side of the checkout desk or was that going to form part of either a national or sort of regionalized marketing campaign? That's the first one. And then I guess Italy. I think you still have 4 stores in Italy. What are the future store opening plans in Italy and maybe Poland as well if you could throw that in?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [31]

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So Primark Cares, no, will be evident in all stores and not just over the checkout. It's important that we tell our customers both about how we try to ensure good practice in our supply chain in regard to the people who are employed, 1 million people who are involved in making our clothes. And secondly and increasingly, that there's environmental care there, too. So recycling schemes, we've got more to say about that. I think it's important that people realize that we don't want clothes to go to landfill either. As to Italy, yes, we have a number of stores that will open next year.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [32]

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Yes. Yes. So I think you'll see a lot more starting to come through in Italy.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [33]

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Come through. And in Poland, I think we've announced one. There are more coming behind that, too.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [34]

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Okay. Any more questions? Okay. Bob, Bob Waldschmidt.

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Robert Russell Waldschmidt, Liberum Capital Limited, Research Division - Consumer Goods Analyst [35]

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Bob Waldschmidt from Liberum. When you think about addressing some of the square footage in terms of reductions potentially in Germany and then after seeing that nice Birmingham store where you've got hairdressers and [3 courts], would you look to reduce square footage by introducing some of those services?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [36]

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Yes. Absolutely. Absolutely. Yes, go ahead.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [37]

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Okay. Well, thank you. Oh, did you want some? Yes, go on.

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Unidentified Analyst, [38]

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I'll just quickly ask on the balance sheet. You're piling up cash pretty healthily these days. Any plans to do anything about it or is it just going to sit there and keep growing?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [39]

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Look, I think there's a sensible range of conservatism. And I think we're still within it. We bought Acetum. We bought Yumi's. There are plenty of other projects that we're looking at. At this stage, I think we would look to reinvest that money back into the business. I can reassure you, we're not in the business of simply building an enormous cash pile for the sake of having an enormous cash pile. It's there to give us capacity.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [40]

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But it's a nice structural cash generation which I'm sure you appreciate.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [41]

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I mean I think there's a -- at this point, I have to reiterate the point that balance sheet will look very different under lease accounting. And we do have retail businesses by its nature, potentially more volatile and sugar has gone from being a very steady cash earner to being volatile. So I think there are good structural reasons why we might want to see the conservatism of the balance sheet increase but not endlessly.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [42]

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Okay. Thank you very much, everyone.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [43]

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Thank you.