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Edited Transcript of ABF.L earnings conference call or presentation 21-Apr-20 8:00am GMT

Half Year 2020 Associated British Foods PLC Earnings Call

London Jun 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Associated British Foods PLC earnings conference call or presentation Tuesday, April 21, 2020 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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* Aneesha Sherman

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* Anne Critchlow

Societe Generale Cross Asset Research - Equity Analyst

* Anubhav Malhotra

Liberum Capital Limited, Research Division - Analyst

* Bruce Michael Hubbard

Odey Asset Management LLP - Partner & Senior Analyst

* Clive W. Black

Shore Capital Group Limited - Head of Research

* Ewan Mitchell

Barclays Bank PLC, Research Division - Research Analyst

* Geoffrey Frith Ruddell

Morgan Stanley, Research Division - MD

* Georgina Sarah Johanan

JP Morgan Chase & Co, Research Division - Analyst

* Michelle Wilson

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Olivia Townsend

UBS Investment Bank, Research Division - Analyst

* Richard B. Chamberlain

RBC Capital Markets, Research Division - MD of Consumer Retail

* Simon William George Irwin

Crédit Suisse AG, Research Division - Director

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Presentation

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Operator [1]

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Hello, and welcome to the Associated British Foods interim results presentation. My name is Courtney, and I'll be your coordinator for today's event. Please note that this conference is being recorded. (Operator Instructions)

And I will now hand you over to your host, George Weston, Chief Executive, to begin today's conference. Thank you.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [2]

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Thank you, Courtney. I assume that I'm now live even without the beep. Assuming I am, thanks to all of you for joining this fairly extraordinary results presentation for the 24 weeks ended the 29th of February. I hope you're all keeping well and comfortable and sane.

Let me start with some introductory remarks on Page 2. We really have felt from the very start that we are squarely in the path of this pandemic. We closed all our Primark stores by the 22nd of March. And at the same time, we started locking down our food manufacturing sites to ensure that they could keep producing the food that this country so crucially requires through the period of this pandemic. Fortunately, we have the financial resources to meet the challenges so far and the challenges ahead. We went into this, as you all have seen, with GBP 800 million of cash, and it's been an enormous help for us. We've turned the business onto focusing on cash flow. That's in 2 parts. It's minimizing the cash outflow out of Primark, and it's also maximizing the cash inflow into food, not least by reining in on discretionary expenditure within food and also CapEx programs, which I think we can safely push out into the future. Our sights are beginning to set now on store reopening. We expect to get our first stores open in Austria in the first week of May. But as well as telling you what's been going on through COVID and where we're headed, we do have a half year review to get through, the first half of the year. I will be incorporating my assessment of COVID effects by business as I go through what will look like a fairly standard results presentation.

Just some final concluding remarks on Page 3. All of us are personally affected. There is an intensely human side to this tragedy in this business. The priority throughout, and in the future will be the safety of our employees and our customers. And both in Primark and in our food businesses, I am just immensely proud of all the work that so many people have been doing throughout the levels of the organization to help cope with this.

Let me turn then on to Slide 4 and the first half financial highlights. John will give you some translation for IFRS 16 in a moment. But the group revenues are up 2% to GBP 7.6 billion. Adjusted operating profit up 7% to GBP 682 million. Adjusted profit before tax, up 1%. And the adjusted earnings per share, up 1% to 61.8%. As you'll have seen by now, we have decided not to pay a dividend at a time with -- characterized by significant cash outflows as it would be financially irresponsible to do so. In the first half, we invested GBP 363 million back into the business. And as I've already mentioned, we ended the half, thank goodness, with net cash of GBP 801 million.

The business highlights for the first half were theSe. It was an encouraging first half. Primark saw a marked upturn in the Eurozone like-for-like sales. The margin was better than expected. We had thought that currency changes would impact margin by more than they were going to, that they ended up doing. And the social media following continued to grow. That's been particularly important through this period of lockdown. As we forecasted, the European Sugar businesses improved their profitability significantly with more to come in the second half. The increase -- the improvement in Grocery margin, what you've been watching and are hopefully guiding for some years now, continued and the profitability of the Grocery business went up again. We ended up with a strong balance sheet, improved cash flow.

With that, let me hand over to John for a more detailed look at the income statement, the P&L, the segmental and, of course, the balance sheet. John, over to you.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [3]

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Yes. Okay. So thank you, George. Well, good morning, everyone. So the effects of COVID-19 on our businesses have been significant, but we only saw these effects after the half year balance sheet date. So accordingly, a good part of this presentation will cover the effects of COVID-19 and our response. And my commentary on the first half results here will be probably more in summary. And by all mean, come back to me if you want any more detail on the first half.

This is the first period in which we report following our adoption of IFRS 16 leases using the modified retrospective approach. As a result, the statutory numbers for 2019 are stated on an IAS 17 basis. I'm going to take you through the income statements, balance sheet and cash flow as reported. I'll then take you through a reconciliation between the reported and the IFRS pro forma comparatives for 2019. And to provide the best understanding of the performance of our businesses, I believe, and especially Primark, the segmental tables are presented on an IFRS 16 pro forma basis. Along with the usual table of exchange rates at the end of this presentation, I've included the segmentals on a reported basis and these next few slides on an IFRS 16 pro forma basis and that's core completion.

Okay. So if we come on then to Slide 6. Our group revenue was GBP 7.6 billion, an increase of 2% on last year, an adjusted operating profit at GBP 682 million was up 7%. This increase in adjusted operating profit included a loss on translation of GBP 6 million as sterling was stronger in the first half than in the comparable period last year and that was mainly against the euro. The result includes 2 exceptional charges and they total the GBP 309 million that you see here. Firstly, a charge reflecting an expected lower net realizable value on some inventory at Primark of GBP 284 million. Following the closure of its stores in March, the level of inventory at Primark increased significantly as sales ceased immediately and the inbound supply chain continued for several weeks with goods in transit. A detailed assessment of all of the inventory, and that includes those in-stores, those that are landed in our warehouses in Europe and the U.S., goods in transit and finished goods at stores was conducted. We've recognized an inventory impairment charge of GBP 248 million and also an onerous contract provision of GBP 36 million for inventory at stores.

We've also taken a charge of GBP 25 million in this half year and that's in respect of our Speedibake Wakefield factory, which was destroyed by fire on the 1st of February. We've since made significant progress. And I thank our insurer, Zurich, with -- regarding receipt of compensation, and we'll get that in the second half. As a reminder, exceptional charges in the first half last year comprised of GBP 65 million impairment to the assets of Allied Bakeries and GBP 14 million in respect of Guaranteed Minimum Pensions.

Our adjusted profit measure, as a reminder, reflects the underlying performance of the businesses, and this excludes these exceptional items as well as the other items that are laid out on the slide.

Moving on now to the next slide, Slide 7. I just apologize for that. My notes have disappeared for me. Just 1 second, please. It's okay. My apologies. This is technology in -- just enduring. Let's see what we can do here. Great. So yes. So coming back to -- moving on to Slide 7. This period's unadjusted or statutory operating profit was GBP 349 million, 35% down on last year, and that was principally due to the increase in exceptional items this year. The GBP 5 million loss on the sale and closure of businesses mainly represents the closure of the Cake business and associated factory in our Tip Top business in Australia. Net interest expense increased from GBP 15 million to GBP 47 million as it included lease interest under IFRS 16 for the first time, and that more than offset the decrease in interest on reduced debt. Profit before tax declined from GBP 515 million to GBP 298 million, but, on an adjusted basis, was 1% higher than last year. I'm not going to take you through the details of the tax charge. That's in the appendix, but the effective tax rate in the half increased and that was as expected from 21.7% last year to 22.6% this year.

Coming on to the next slide, Slide 8, the earnings and dividends. Adjusted earnings per share were 1% ahead of last year at 61.8p. On an unadjusted basis, they declined 44% to 27.5p, reflecting the higher exceptional items this year. The Board, and as George has said, has decided not to declare an interim dividend. The Directors considered this prudent, particularly given our focus on managing the group's cash outflow, which will be significant in the second half of this financial year.

Slide 9, the balance sheet. Net assets were broadly in line with last year at GBP 9.1 billion. The total effect on the balance sheet of our transition to IFRS 16 was a reduction to net assets of GBP 150 million, details of which are set out in the significant accounting policies note in our interim report. We've recognized right-of-use assets, you will see here, of GBP 3.1 billion and lease liabilities of GBP 3.6 billion at the half year balance sheet date. The lower current tax creditor primarily reflected the lower statutory profits for this half year. The decline in the deferred tax liability reflects the lower net pension assets as well as the recognition of a deferred tax asset on our adoption of IFRS 16. The decrease in the net defined pension surplus was driven by the decline in bond yields. Net cash before lease liabilities reached GBP 801 million, and that was an increase of GBP 415 million over the last half year. Assets held -- assets classified as held for sale represented AB Mauri's assets in China, and those will be included in the joint venture with Wilmar International. I'm really pleased to say that antitrust clearance has just been received for this joint venture, and I expect completion of it in the second half.

Moving on now to Slide 10, cash flow. Free cash flow improved from GBP 81 million last year to GBP 141 million this year. The cash flow statement for the current financial year reflects our adoption of IFRS 16, a higher operating profit, a higher add-back to depreciation and that includes that on right-of-use assets. And the outflow for the repayment of lease liabilities is separately reflected here. Last year's cash flow obviously just included the rental expenses. Changes made by HMRC to the timing of U.K. corporation tax payments came into effect this year. So this first half includes 4 quarterly payments, and that compares to the usual 2 quarters in the first half last year. A reminder, of course, that the dividends paid here are actually the final dividends on the previous financial years.

Okay. So coming on to next slide, 11. This really sets out the pro forma effect of IFRS 16 on the first half of 2019. Adjusted operating profit was increased by GBP 28 million, and the interest on lease liabilities amounted to GBP 39 million. And so the net effect of both of these is to dilute adjusted profit before tax by GBP 11 million. Adjusted EPS reflects this dilution on the 61.1p reported last year becomes 60.0p on a pro forma basis. Effect on the key Primark metrics in the first half of last year would've been to increase margin from 11.7% reported to 12.4% and it's the 12.4% that we will compare to when looking at this half year. And for return on capital employed, it's come down from 29.4% to 15.5%.

So just for the sake of the record, the next slide, 12, shows the financial highlights with IFRS 16 comparatives. And look, here you'll notice that compared to the slide that George first showed, it's the consistency which we normally get in the increase in revenue, operating profit, profit before tax and earnings per share, where you can see that they are all up by 3%.

Okay. Turning now to the performance analysis by business segment. Comparatives in these slides are presented on an IFRS 16 pro forma basis, and that's the basis of the comparatives for the rest of this presentation. So looking at Slide 13. I'm really pleased to report that Grocery made further progress in the period with a GBP 21 million growth in operating profit and a margin increase to 11.2%. The main drivers of this were good trading at ACH, of the onetime cost last year for the closure of Twinings factory in China and reduced losses following cost reductions in Allied Bakeries. The improvements in adjusted operating profit at AB Sugar was a result of higher EU prices in British Sugar and Azucarera, a much-improved crop in China and further reductions in the cost of sugar production in all of our businesses. This was partially offset by Illovo, where high-margin domestic sales in South Africa fell and the early onset of the rainy season curtailed production across the region. With sales prices contracted in our European businesses for the second half and a profit weighting to the second half in Illovo, I want to stress that we expect a material increase in Sugar profit for the full year. Primark sales were up 4% and were hardly affected by COVID-19 in this period. The decline in margin was much smaller than originally expected, 50 basis points, given the adverse effect of the stronger U.S. dollar on purchases this half year compared to last year. There was substantial margin mitigation, and that was through lower material costs, but also very much with another strong performance by our buying teams with improved sourcing and tight stock management. Return on capital employed for the group improved and that was due to the higher profits for Grocery and then also for AB Sugar.

By geography, Slide 14. The increase in U.K. profit was mainly driven by the benefits of higher EU sugar prices of British Sugar. Europe and Africa, profits declined mainly due to Illovo with a lower first half result and the later phasing of Illovo profits that I referred to earlier. In the Americas, profit increases were delivered in Primark. Importantly, Primark recorded a breakeven result for this first half, and then also ACH, Twinings and our feed enzyme businesses were better. This is partially offset by increased competition for our ABF Ingredients businesses there. Asia Pacific included a much reduced loss for our China sugar business, improved performance for AB Mauri's yeast and bakery ingredients businesses in China while last year's results also included that onetime cost for the closure of the Twinings tea factory in China.

Let me come on to Slide 15. George is really going to describe in more detail the actions taken in March and April, especially in Primark, to control the cash outflow resulting from the closure of the Primark stores, but we've stopped discretionary spend and deferred nonessential capital expenditure. I just really wanted to share this chart with you, which is our latest view in 2020 of the capital expenditure expected by our food businesses for the full year. We had already expected a decrease this year on that of the prior year following the completion of a number of major projects. But I wanted to show you that in the context of the sustained investment in our food businesses measured by CapEx ahead of depreciation over a number of years. And so I wanted to assure you that the deferral of capital expenditure in this second half will not affect the future profitability of our food businesses.

Let me come on to my final slide, which is Slide 16, cash liquidity. With a significant loss of sales, we're focused on ensuring that we've got ample cash liquidity to meet the challenges ahead despite the uncertainties. We really wanted to take off the table, given all the uncertainties, that cash liquidity may be remotely any issue for ABF, and I believe we've done that. So as I described earlier, the group has had a strong balance sheet at the half year, including net cash of GBP 801 million. And also, we had the undrawn, at that time, committed revolving credit facility, or RCF, of GBP 1.1 billion. So as a precaution to avoid any possible illiquidity in the banking market, the funds were drawn down in full on the RCF on the 18th of March. And so our current central cash on hand, the cash deposited in our banks, is now some GBP 1.5 billion and that reflects this drawdown and then also the cash outflow at Primark since the closure of the stores in March. Our RCF carries an EBITDA to net debt covenant of 3.5x. We saw absolutely no need to seek a waiver for the covenant test for September 2020 and, furthermore, our forecast did not indicate that the covenants would be breached either in February 2021, but we considered it prudent to seek a waiver nonetheless. Maybe perhaps not surprisingly, we received confirmation that this waiver had been granted on the 8th of April, just to remove any sort of nagging doubts. Additionally, we received confirmation from the Bank of England on the 15th of April of our eligibility to access funding under the COVID Corporate Financing Facility. We do not anticipate using -- utilizing this facility to any great extent and are confident that as a result of all of this, we have the financial headroom to meet the challenges ahead.

So with a minor apology with the glitch with my notes there, I'll now pass back to George to take you through performance of each of our businesses in more details. Over to you, George.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [4]

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John, thank you. Well recovered. Moving then to Slide 18 and starting this review with our Sugar businesses, much improved pricing for European businesses, so both Spain and in the U.K. We paid less for sugar beet in Spain. We processed much higher quality sugar beet in China. Those were all significant sources of profit improvement for us. The price of -- the volume of sugar sold into domestic market in South Africa has declined. That is a downside. And in the first half, the later -- the early arrival of rains has pushed profit into the second half of the year also. That's a downside in the first half. The efficiency improvements, which have been going on for 5 or 6 years now, continue. We think that there is still significant room for cost saving in British Sugar in the U.K., in particular, and also in Illovo, and we're well underway with projects associated with that. There has been limited COVID-19 impacts on demand for sugar, some switched from industrial and foodservice into retail packs, but not -- nothing of huge significance. There's been disruption in the supply chains, but only to a manageable extent. We had, at one stage, well over 100 people absent from factories in the U.K. Most of those have now returned to work. And there's been some disruption to freight in Africa, in particular, also across the English channel, but by and large, that latter one, we benefited from. So manageable supply chain disruption and limited impact on demand.

Moving on then to Slide 19, Sugar operations. The U.K. produced 1.81 -- sorry, 1.18 million tonnes. It was a difficult campaign because it was so wet. But we got all the sugar beet out of the ground, not least due to the great efforts of everyone at Newark factory who ran the longest campaign of any in European sugar processing history, 208 days and well done them. We had less sugar -- less crop area to process in Northern Spain. We expect to partially recover from that in 2021. And then in Illovo, we expect, given more normal weather patterns in the second half, to be -- for production to be in line with that of last year, 1.7 million tonnes. And then the much-improved beet quality in China, we also, this year, for the first time, paid for a significant amount on that sugar based on the quantity of sugar in beet rather than the absolute tonnage of the sugar beet, and we will pay for a higher percentage again next year on that basis.

Slide 20, just a little include to this -- so what I said -- what John just mentioned, unseasonably early rains. Here is a bridge in Tanzania, we used to get sugar beets to the factory on the far side. You can see the rather optimistic smoke, suggesting the factory is still trying to process despite the fact that there's not a hope of getting anything across that bridge. Factory shut thereafter -- shortly thereafter.

Moving on then to the commercial area. And here is a chart of the largest traded part of the world sugar market. This is New York No. 11. You can see that the decline in oil prices that's brought the rally in overall sugar prices crashing back down largely to where it started from a year ago or so. All the reverses of the last 6 months have gone. The price now in the world market is similar to the prevailing price on the world market when we were contracting our European prices most recently. So we don't think that the current prices should produce any significant dampener on prices for -- to be negotiated now. Why is that? Well, particularly because we think European demand will be in excess of the sugar that European producers produce in the next campaign. For a second time, we expect to be -- Europe to be a deficit market.

Moving on to Grocery then from Sugar. Strong profit growth in the first half benefiting from the closure -- sorry, from the nonrepeat of the closure costs of the China tea plant, but benefiting also from good trading at ACH, good sales growth at George Weston Foods and reduced operating losses at Allied Bakeries.

On to Slide 23. Twining's commercial initiatives included sales growth from black tea and herbal teas, a new range of infusions, both hot and cold, in the U.S., U.K. and France, and I'll show you illustration of those in a moment. Ovaltine had a more difficult first half in Thailand, but successful new products illustrated on the right-hand side of this slide in Brazil and Switzerland. COVID-19 has seen a switch inevitably from foodservice to retail. We have significant foodservice businesses in Brazil, in China and in Thailand. They have all suffered, but sales through retail have, by and large, compensated for those declines in foodservice. The supply chain has been challenged. We have 2 tea factories in particular and oversight. And also the big site in Swarzedz in Poland, they've suffered absence, worries about upstream supply. But they've kept going and kept producing extremely well. So no significant consequences from supply chain difficulties. We've had from time to time, for example, difficulties in getting containers for the exports out of Swarzedz. Containers, by and large, are all in the wrong place at the moment.

Moving on to Slide 24 and some of the wellness range extensions in the States. Calm and Detox have played a significant part in my life over the last month or so.

Moving on to 25 and turning to North America, where we've had good profit growth from ACH. Mazola is firmly established now as the #1 edible oil brand in retail. Anthony's Goods that we bought, Californian producer of specialty bakery flours, has continued on the same growth trajectory that we bought into when we acquired the majority share of it. And other bakery products, corn starch, corn syrup, yeast that ACH also sells, have benefited from the COVID-19 lockdown and increased home baking as a consequence of that. So we've seen a sales boost for ACH. In some case, I think it's probably pantry loading, and people will eventually, once we're out of lockdown, will buy less for a period of time. I think the bakery ingredients will be genuine, some higher consumption during this period of lockdown. The factories, 2, in particular, have been challenged. We have a factory that produces both corn oil and also corn starch in Chicago. It's kept working really well with significantly increased demand whilst challenged with absence. They've done a tremendous job of keeping going through this period. And then one of the real hotspots we have across ABF is the joint venture site in New Jersey, which is another bottled oil production site where we've had significant serious illness amongst the workforce.

Turning then to Australia to George Weston Foods. Tip Top sales were ahead through the period. We launched range extensions with Thins, which have gone well, good advertising campaign done around back-to-school. And then the growth at Yumi's continues again, firmly in the #1 slot for dips in Australia. COVID-19 has had significant effects in Australia, particularly around demand change. Our meat business has a significant foodservice customer base, which has suffered hugely, but retail consumption of the bacon and the ham that we make has, by and large, compensated for the losses in foodservice. Bread demand, as it has been everywhere, has been very strong. We've kept up with the increased demand for bread and the supply chains, the bakeries, the depots, the trucks have all done really, really well. Two other ones to mention, they're more by way of interesting anecdotes than profit-moving consequences of COVID-19. Our dips business, Yumi's, has seen a very large increase in the sale of hummus. I think every vegan went into lock town with a big part of Yumi's hummus. But in some of the fancier dips, which are used for entertaining in Australia, obviously, that stopped, and the sales of those reduced. We have perhaps the extremes of our diversity as a company in Australia. We have a -- called -- chemical cleaning business called Jasol, which produces sanitizers for retail, for foodservice and for others. It's been incredibly busy through this period and has performed really, really well. Its ability to supply greatly increased amounts of hand sanitizer into the retail sector has allowed one of the major Australian supermarkets to keep going.

Tip Top, so Slide 26, is just an illustration of some of the learnings about supply chain robustness that we acquired through the bushfires early in the year. We did a tremendous job of keeping stores and regions supplied with bread through the bushfire -- fires are burning this year.

Staying on Grocery, but moving back to the U.K. and AB World Foods, which had a good first half pre-COVID-19. Good sales growth of Blue Dragon; Patak in the U.K. -- Patak's growth across Europe and the United States. We bought a small brand called Al'Fez, which we have high hopes for. It's North African-Moroccan-Middle Eastern food, and we will get production into our sites in time. And we give good commercial access for the products. We're excited by that one. We've seen a sales boost for AB World Foods and we've seen heroic efforts at our Leigh factory to produce significantly greater demand for the pastes and sauces we make there in an area which is characterized by quite high absence. Leigh is a hotspot for COVID-19 in this country.

Acetum, margins ahead this year. Sales growth in Italy, U.K. and France, particularly on the back of the brand work we've been -- we've got started with around the Mazzetti brand, that is going well. And then the factory has been astonishingly resilient in Italy despite losing a member of staff to the disease, being right in the middle of an area of very high infection in Italy. They've actually increased supply by something like 20% through this period.

Allied Bakeries sold less own-label bread as the major contract we lost has transitioned away from us. We've done a very good job of taking costs out of the business, both in manufacturing and also in distribution. There's more to come out again and the operating losses have been significantly reduced as a consequence of that cost reduction exercise. These bakeries have been under significant pressure with the increased demand through the period of COVID-19, something like 20% increase in the demand from bread. We've been absolutely full throughout the period and at no stage have we lost production because of the disease, really good effort by a lot of people.

Silver Spoon benefited in the first half from improved sugar prices as the rest of our U.K. Sugar business did as well. We introduced a new range of home baking kits under the Allinson brand. And then when COVID-19 hit, we've been coping with significant sales increases. We've been operating at capacity for retail sugar, which by and large has been adequate for the market demand, but also flour, where despite producing an extra over 350 tonnes of prepacked flour a week, we simply don't have the capacity to meet demand. We're all locked down baking away like mad, which is the first time we've done that for about 30 years. So not surprisingly, the production capacity over time has reduced to meet the normal demand. But the factory at the mill at Bishop's Stortford has again done their very best, and the very best is very good.

Just wrapping up in Grocery. Good demand increase for Ryvita. We're all now, of course, having lunch at home, and many people are rediscovering Ryvita. We hope that, that increase in demand will stick once we're let out. And then some parts of the retail ABF portfolio, which have had a harder time, Westmill food supplies, Indian and Chinese restaurants, many of which are shut. So its sales have been significantly negatively impacted. And then AB Sports Nutrition had its sales devastated by the cancellation of sports events and the closure of every gym through the country.

Let me just have a sip of water before turning to Ingredients. So ABF Ingredients had a more difficult first half, particularly at Abitec and SPI Pharma, where we sold less than previous periods. We saw good growth in our enzyme business, both in animal feed but also in bakery enzymes and other technical enzymes. These are products that typically go into things like detergents. We've continued to invest heavily in production capacity in ABF Ingredients. And actually, some of those projects are ones that we've let continue through this period of a clampdown on CapEx. They're important projects. COVID-19 has seen the enzyme factory go from -- which we expanded a couple of years ago, become completely full. And that increased demand has come from 2 places. It's very profitable demand for us because enzymes are high margin.

The first one is animal feed enzymes, where I think animal feed producers have stocked up on smaller ingredients to ensure that they have supply, should there be disruption to supply chains. There hasn't been disruption. But nonetheless, demand has been very strong for things like animal phytase. I suspect that, that will reverse once the pandemic has abated.

The second part of the increased demand, though, has come out of bakery enzymes and that is real. Industrial bakery around the world has enjoyed significant increases in demand. It's not just the U.K. and Australia, it's everywhere. And we have been pumping out bakery enzymes just as fast as we can.

Moving on to AB Mauri, which is one of the very -- in terms of keeping important parts of the supply chain going, one of the really important parts of that, we produce something like 25% of the world's bakery yeast.

If we weren't able to do so because we didn't -- because we were -- we suffered from absence or incapacity, then the world would go awfully short on bread very, very quickly. We've been supplying at something like 98% on time in full across the world, including across the U.K. It's been an absolutely fantastic effort.

We've never seen a better order fulfillment rates. Volumes have been strong as well, and it hasn't been easy. From the very start of COVID, we saw pressures on the Mauri system in China, and it spread across the world. We have an important site in Casteggio in Northern Italy as well, which has also been very much impacted by COVID-19.

Going back into the first half though. Sales and profit growth from AB Mauri, particularly good performance in the U.S. New product -- new investment in capacity to make non-dairy whip creamer in Brazil is paying off very well with sales ahead of the expectation.

And then as John said, we really are thrilled by the competition clearance. This will allow us to go ahead with the joint venture with Wilmar in China. That will transform our business in China. We'll get access to fantastic distribution, and we'll also invest in lowest cost production in that country.

Agriculture is sometimes an afterthought in these presentations, and I can see people sort of itching to get on to Primark, whenever I come across Agriculture. Through the period of supply chain challenge, this has probably been the most important thing that we've done, is to keep on producing animal feed, particularly in this country, where we have a very high market share of broiler chickens and also pork.

We don't have many sites. We've got, I think, 6. We don't have a lot of people milling, making animal feed for the supply chain in the U.K., but they are just incredibly important. The biosecurity has been absolutely brilliant. We banned foreign travel for anyone in our animal feed plants or anyone going to our animal feed plants, right at the beginning of March. So 3 weeks before, we were all shut down. We banned nonessential visits to any of these sites that includes the Managing Director of the business and me and others. Again, I think, from the 6th of March. We stocked up on micro-ingredients. Just as I said before, other people have been buying our phytase to stock up. We've been buying all the other essential minerals and additives that go into animal feed. We did that.

We also did a great job of making sure that we had clarity about who would take whose job, if someone got sick that sick. That went down to 3 levels in the organization. This business has kept going, hasn't mislead throughout the pandemic, and it's been wonderful to see, really important in terms of the U.K.'s food chain.

With that, let me just skip through some slides showing you some of the work that's gone on in our food factories to keep everyone safe. Obviously, social distancing. Slide in the middle is Tanzania, where we've also got into business of making hand sanitizer from the alcohol we produce there.

And then Poland with screens and segregation of people from one another.

A heat camera in Castlemaine to pick up anyone with the temperature coming in. Advice in Thailand on Slide 34 on the right-hand side. And then remote -- managers on sites working without seeing their bosses, their advisers, their technical support have been supported with all sorts of advice that we've altered the best practice that we've learned around the world. That job has been done very well.

We've kept our sites going. We've produced a lot more food through this period. It's been essential that we've been able to do that. We've also been supporting our communities beyond our customers. So we've distributed 150,000 units of food to hospital, to emergency services, to charities, to food banks. Actually, I think the food supply chain as a whole from retail through manufacturing, back up into ingredients, has done tremendously well through COVID-19.

Right. If I could just summarize on Slide 38 then. COVID and food. Most factories have been under intense pressure. We've had up to 23% absence for periods of time at important sites. We've kept going. We've seen huge demand through the panic buying. We've supplied most of that demand.

More people now are returning to work than a newly absent, due to sickness. That's taking pressure off us. Financially, with the ups and the downs, we expect to be in a similar place to what we'd previously forecast for the second half. So don't go writing up your forecast for food profitability.

Just some -- a few anecdotal numbers. Our Ryvita business is up 28%. We've produced 0.75 million extra packs of Jordans Cereals. We -- our own label noodle sales are up 60%. We've managed to supply that. 350,000 additional bags of flour a week from our Allinson mill. And the (inaudible) sales are north, up 20%. As I said, they're actually up 25%, right in the midst of the pandemic in Northern Italy.

Let me pause just briefly before turning on to retail. Right. We had a good first half at Primark. Sales were 3.9% up. In a very soft U.K. market, we put on a value market share. We saw a marked upturn in European like-for-like performance, very encouraging, particularly that growth -- the improvements that have been coming out of Germany.

The margin moved down a bit on dollar changes that we mitigated more than we thought. And the store expansion of only 200,000 feet was nice to have, but the store opening program was very second half weighted.

Turning to the U.K. on Slide 40. Sales up 2.7%, like-for-like decline of 1.7%. We had a particularly good November and December trading, and then the market got very soft in January and February, albeit against tough comps. But footfall throughout the period, but particularly towards the end of the winter, was low.

The breakeven result in America is an important milestone. The first half saw continued good like-for-like growth from just about all our stores and Brooklyn continuing to be the star. Sales in Europe were up 5%. Like-for-likes were positive. Sales growth, particularly strong in France and Italy and in Belgium. And then, as John has flagged the notable German improvement.

We told you in November what the problem in Germany was and what we were doing about it. And I just want to put that slide up again, 41. The new Managing Director, the strengthened team, is having a significant impact. I'll show you some examples of local marketing campaigns. I'll show you evidence of the up-weighting of sustainable ranges, particularly, but not exclusively, cotton.

And let me then move, jump on to Slide 42 with some of these illustrations. So sustainability in what we call wellness is well represented, overrepresented, in Germany and is selling well and helping to change our reputation to get German consumers to reconsider us.

The local advertising in the center is also -- local marketing is important. Digital ads on platforms like Facebook, Instagram, Pinterest. This is a picture actually for carnival in Germany. That's what I mean by local. And then we resized 3 stores, Essen being the most example -- important part of that resizing program. As you can see, the store environment -- you can't see it before, but store environment is much better now that we've taken it to a more sensible size for the demand.

Other aspects driving increased sales. The amount of product that has a sustainability -- that has sustainability credential is growing and growing and growing. We've talked about sustainable cotton and the fact that it's the largest sustainable cotton product, program in the world, and the only one we know about that can genuinely chase -- follow the cotton from field, all the way through to T-shirt in store.

But we're also using a lot -- increasing amounts of recycled plastics, particularly plastic bottles, recycled workout range on the left-hand side. And then what we call wellness, but other sustainable projects -- products like candles and other things on the right-hand side. To showcase it, we opened our first pop-up in Shoreditch Boxpark, and we took ranges and feel from that pop up into many of the larger stores across the portfolio. And it was all being very well-received.

License continues to grow for us. Gaming campaign is led by PlayStation, Xbox, Fortnite, Minecraft. We have licenses with all those. Minecraft is the biggest across all regions. It has particular resonance in Northern Europe. Netflix is a new relationship we had. We launched this with a range of products to coincide with Stranger Things program, and those products were also well-received.

Successful collaborations, also part of the mix. Stacey Solomon remains important to us in the U.K. and the Republic of Ireland in particular. Andrew Fitzsimons, who is celebrity hair stylist to the Kardashians, is new to us and launched in February 2020 across hair care products and hair accessories. We were very excited about that.

And then Alice Liveing remains an important collaboration with us across workout clothing and accessories, recycled polyester. About 70% of the latest collection that we showcase in stores is from recycled material.

The growth of social media continues, engagement continues, very important in this period of lockdown that we remain connected to our customers. And the fact that we've got 22 million followers, 10% up since last September, allows us to do that well. We greatly increased. I think we had launched our TikTok account last time we spoke, but it has grown most strongly of all.

Moving then to Slide 48 and the change in selling space, which as I said earlier -- well, the new market we opened during the period was Slovenia. That store traded extremely well until it, too, were shut down. And then some reduction in footage in Germany. As I said earlier, most of the store opening program was designed for the second half -- time for the second half.

Let me focus now -- shine a light on COVID-19 and Primark. As John said, we were barely affected in the first half. We've seen some sales fall off in a couple of the Italian stores before the first half ended, but that was all. We then shut 12 stores in 12 countries in 12 days, and we lost sales of GBP 650 million a month in that 12-month period.

We were faced at the start with the potential of a huge cash outflow, both the costs of continuing to operate the stores, but in particular, the continued inflow of goods remodeled cash outflows of something over GBP 500 million a month. We had to move very, very quickly and we did.

We canceled new product orders immediately. Now since that time, we have been working with suppliers closely and we've been very clear with them from the very start and very -- and our relationships with them has been on a one-to-one basis rather than sort of blanket announcements.

We confirmed at the -- very early on that we would pay for all the stock that was in transit. I think that's GBP 470 million of stock in transit, coming towards stores that weren't going to be able to sell it. We paid for that on normal credit terms and at full price.

Subsequently, we committed to take all the stock that was manufactured but wasn't booked into our system. And we did that, as I say, a few days afterwards and after extensive conversations with customers.

Next, we established the fund to ensure that even if garments hadn't been completed that the people who worked on those garments would be paid for the work that they had done. That was a funded up to GBP 30 million to make sure that people in vulnerable countries, in particular, were paid for the work that they had done.

We have not now, as of yesterday, and after talking to each of something approaching 500 customers of ours -- sorry, suppliers of ours, we have committed to taking all goods that were in manufacturer and due to be delivered by the 17th of April. Some GBP 370 million of stock. We will pay for that in full and take -- but take delivery of it over time.

We have a lot of stock in hand. The warehouses are absolutely full. We are -- we have bought up more warehouse space to put product that we won't be able to sell for some time into -- as it arrives from our supplying countries. We've taken what we think is a prudent provision. As John has mentioned, that GBP 284 million against stock, which we don't think we'll be able to sell at full value. Either the fashionability has declined over time or because some -- if stock had been hangers in stores for a long time, we may have to discount it to clear it.

Once we get stores open, we will get further clarity on the likely level of demand, and we can start then buying both back-to-school ranges and also, autumn/winter. We're not committing to anything yet. We think we can -- we know that we can wait for the early information we get out of the stores that opened first. We expect to get the 5 Austrian stores open in the first week of May, and we expect to get a significant number of our European doors open through May.

So if that was how we handled stock coming at us at the rate of something like GBP 300 million a month that we just have to stop it. But equally, we have to preserve our supply chains, the viability of our suppliers who've been such an important part of the growth of our business over years. And I think that we've done well. In the end, we need business to start operating again so we can place new orders for supply into the future, autumn/winter in particular.

John has mentioned the mitigating actions that we took to take our operating costs out while the stores remain closed. The biggest element of that is the furlough schemes, which are available to us right across our European markets. I think we'll be -- our staff will be benefiting in 10 countries from government job-retention schemes.

I think they're very sensible schemes. They will remove -- the necessity we would be faced to make large numbers of people redundant. We -- all our nonfrontline staff, so everyone who's not on a furlough scheme, will be taking salary reductions. Typically 20%, some 10%, some 30%, but typically around about 20%. And we're also helped by the government relief for business rates for the following -- for the coming year in the U.K. That is very helpful, indeed.

We closed our stores in the U.K. 3 days before the quarter payment in April. We had no chance in the time between closing stores and the payment of that quarter day obligation to engage with landlords on the future of our relationships. We took the decision to not pay the quarter day so that we gave ourselves time to discuss where we were with our landlords.

Again, on a one-to-one basis, being very transparent about where we were and those negotiations continue. We've actually had some very welcome office of support, both in timing of payment, but also payment holidays from some of our landlords. It's important we work together on this because we all have an interest in the future health of the High Street.

We also reduced within Primark, discretionary capital and operating expenditures. Here are some examples of where we have reduced significantly costs. Cleaning, security, repairs and maintenance, energy, packaging, marketing and travel. We have -- the Primark teams have managed to reduce the operating costs by far more than I had -- any of us anticipated.

And we've got to a situation now on Page 55, with a monthly cash outflow whilst we got all the stores closed, is about GBP 100 million. Given we started with a monthly cash outflow of approaching GBP 550 million, that is remarkably speedy and thorough work.

We have, at the same time, though been looking after more than just ourselves, we have engaged very fully, I think, with -- in supporting critical workers with care packages, product donations. All the Easter perishables had no better home than people in our societies who needed them. We've donated more than 400,000 products worldwide.

Care packages include things like water bottle, tissues but also clothes, towel, bedding, toiletries, are all very helpful for people working in the frontline of care. The focus of that in the U.K. has been our support of the Nightingale Hospital in East London, where we're donating 74,000 packages. We've delivered half of it on the 15th of April, and there's another delivery in about 10 days' time.

Just some examples following Page 58 of sport and art community in the U.K. Not only down in London, but as far a field is Dumfries & Galloway. And then in Ireland, Page 60; Italy, Page 61; Slide 62, Germany and the Netherlands; and then Spain and Portugal on Page 63. We've been fully engaged, and I think generously and enthusiastically with other communities that need support.

Primark reopenings, Page 64. We expect this to be phased with Austria, as I mentioned before, expected in early May. It will -- there's a lot of work going on now to ensure that we get customer and staff distancing right. It's -- we have to keep both customers and staff safe from each other, safe in our stores. I think rightly, people wouldn't come and shop in an environment where they didn't feel safe.

We are thinking also about customer messaging in anticipation of opening. There might be a lot of different reasons why people want to come shopping again. We want to land on the right ones. And then we're evaluating autumn/winter demand. We still have some time to get that right.

So Slide 65 and my summary. It was an encouraging first half trading. The food businesses continued to perform really well. Recovery in Sugar, good growth in Grocery continuing. And through COVID, they've performed exceptionally well, and we're all incredibly proud of them. We took -- we had to take, and we did take very rapid action on Primark. And we expect the sales to come back rather more slowly than they ended, but come back, they will.

We had a strong position -- cash position at the end of the first half, thank goodness for a balance sheet with cash on it and actually thank goodness by the diversity of the group and the cash flows out of the businesses that aren't shut.

We still have a strong balance sheet. We have access to all the funding that we could possibly need. And also, all the financial resources to meet the challenges ahead, particularly around the cost of reopening Primark. We are not financially constrained in any way as we get into that next stage of this journey through COVID-19.

So thank you all very much for listening. And if we move onto questions, and I think there is a protocol about this. But let's move onto that now. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes in from the line of Clive Black calling from Shore Capital Markets.

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Clive W. Black, Shore Capital Group Limited - Head of Research [2]

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2 or 3, if I may. First of all, George, can you give any further color on the time scale with which you think it's going to take for the stock clearance process to come through for Primark, in terms of maybe quarters and perhaps years in that respect?

And secondly, also on Primark, away from coronavirus. You talked about sustainable cotton. Could you also just give an indication and magnitude of change in sustainable cotton procurement, maybe some numbers around that? You focused that on Germany.

And then lastly for me. Your Grocery business, indeed, your Ingredients business have been impacted by the switch from food and beverage to retail. Do you have any thoughts on how that may recover, once lockdown is finished, to the extent of maybe permanent damage or lower rates of demand in foodservice and corresponding retail demand?

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

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Yes. No. Thank you, Clive. We have divided the stock on hand into different buckets, if you like. There is what we call bucket one, which is the biggest, is what we call continuity items. So these are things that will sell year-round and which really don't have a fashion element to them. So socks, underwear, sweatshirts, t-shirts, towels, et cetera.

We expect -- now, of course, we don't know how fast sales will come back. But I think it's reasonable to expect that we'll be back into a normal stock position on those by sometime in spring '21. We really do have a lot of stock on hand of that.

Where there is a seasonal aspect to our ranges, that's bucket 2 and inevitably, that is spring/summer, which won't clear finally, I think, until sometime during the second half of next financial year. So this time, next year, I think we will still have some parts of bucket 2.

And then there's a smaller amount of autumn/winter that's already on its way, and that's bucket 3. That will sell-through. So I think it will take the best part of the year to get back to a normal stock position.

As the sustainable cotton, thank you very much for the question. I didn't actually check coming into this about The Sustainable Cotton Project. And I'm going to have to get back to you and tell you where it is. I think we're up to 160,000 farmers. And I think something like 15% of our cotton need will be taken care of through The Sustainable Cotton Projects. I reserve the rights to have both those numbers wrong, in which case, I will correct them.

Food and beverage switch into retail from foodservice. It's a very hard one to call. I think it's clear from early commentary from governments all over the world that restaurants and other foodservice will open after retail opens, and you can well imagine that it will -- the demand will grow only slowly.

But I would be guessing, I mean no, I've got no more privileged information than anyone else on how quickly foodservice returns. I think in China, they're still down about 30% in foodservice. And if we followed that, once we've reopened then, well, they're down 30% after a couple of months or after a month of reopening. So we'll watch it from there.

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Clive W. Black, Shore Capital Group Limited - Head of Research [4]

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And just by way of a quick follow-on, is that the prime reason why in your Grocery business, you're not changing expectations for the full year?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [5]

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There are 2 reasons. That's part of it. The other one is the -- we expect the profitability of Illovo to be down somewhat in the full year because of these sales losses in -- primarily these sales losses in South Africa. So it makes the increased sales to retail make up that hole, and then anything further is offset by declines in foodservice income, or for income from supply to food service.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [6]

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George, if -- just a -- if I just may come back on the stock and your question, Clive. So George has talked about the buckets and particularly the importance of the scale of continuity. The other thing is how the stock is stored.

So just as a reminder to everyone that sort of by and large, the stock is in the cartons or packages of, let's say, 12 or 24 of the items. And that's how it's stored in, by and large, in the warehouses. So quite frankly, if you can imagine a white shirt, it's in a carton with 23 others.

The fact that, I think the downside is that clearly, our working capital, which clearly we can finance, is higher than we would like. If that white shirt is in a package for 4 or 5 months longer than we would normally have had, then certainly, yes.

But I think that gives you a feel that even though some of those lines will be -- some of those stock levels and some of those buckets will only be coming down as we go through the next financial year, in terms of the stopping fine to sell, I don't think we have much of a doubt about that.

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Operator [7]

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The next question comes in from the line of Anne Critchlow calling from Societe Generale.

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Anne Critchlow, Societe Generale Cross Asset Research - Equity Analyst [8]

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Question is about Primark and the implementations you're putting through on social distancing when the stores reopen. Have you done any work to assess what the throughput could be, in terms of customers compared to normal, so that we can have an idea or perhaps the reduction in volume when you do reopen the stores?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [9]

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Sure. That work is going on now. And we will get a much better idea of it once we've got these first 5 stores open in Austria. One of the things that we -- that is harder to assess is, to what extent our customers will spread their demand out through the day. I believe that the food retailers have seen a change in shopping patterns in terms of, people work out that if you get there early, it's not so busy.

So the demand spreads throughout the day. We expect we will see some of that but how much, we don't know. What we know for sure is if we don't take social distancing seriously, firstly, we will be letting down our customers and our staff. But secondly, they won't come shopping. They won't come into an environment, I'm quite sure, where they don't feel safe.

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Operator [10]

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The next question comes in from the line of Aneesha Sherman calling from Bernstein.

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Aneesha Sherman, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [11]

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I have 2 questions. The first one is about your cash position. So you've talked about the GBP 100 million monthly outflow run rate that you expect to see. So far, based on your current cash position, it seems your spend, upwards of GBP 300 million.

What's your expectation for how quickly you'll come down to that GBP 100 million number? Is that from now on? Or is that the kind of steady-state run rate you expect? And how quickly will you get there?

And then the second question is, in terms of warehouse labor, and you've spoken about how much increased volume you're facing in the Grocery business and some of the other businesses.

Are you able to deploy some of the Primark workforce into those sides of the business? Or are you incurring additional operating expenses and hiring temp labor or agency labor to cover some of those increased demand?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [12]

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Aneesha, great questions. The cash position, yes -- the outflow for the first month or so is -- obviously, the stock that was coming towards us, that's nearly GBP 500 million worth of stock that we're going to pay for. That hasn't all arrived, but most of it is now in and most of it is paid for.

And then secondly, it's around the timing of these furlough schemes and the times of the cash rebates from governments for these furlough schemes. So although we can claim furlough back into March in most of these schemes, we don't get the cash until roundabout now.

And those are the 2 biggest -- the wages of the shop staff and the cost of the stock that is arriving with us. Those are the 2 big cash strains of the moment. We will be down to that GBP 100 million level, John?

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [13]

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I was going to say, maybe June. So I think if we take March and April, has been the very big outflows as we're paying for the stock in transit. So several hundreds of millions going out, particularly for that. And then the expense of our employees, then with a 1-month or maybe 2-month delay in the employee recompense.

So I think by the time we're in June, I'd expect we're down to that sort of cash outflow. Of course, when the furlough schemes come off, then we have -- the lag then becomes our benefit. So then we have the cash coming back in.

But the -- I think it's these -- I think it's March and April, Aneesha, that sees a lot of this cash going out. So that's why I think you're right to ask the question. We're very, very front-end loaded in the second half, but I think we very much have the control of it.

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

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Yes. And to your question -- your second question about moving people from Primark into the food companies. There's been some lovely work that's gone on to do exactly that. Now, of course, the numbers aren't huge because the numbers in the food factories aren't huge. And the numbers of unskilled jobs in the food factories aren't huge either. But nonetheless, we're talking about several dozens of people who are essentially Primark employees now working in food.

Perhaps a bigger contribution to food supply has come from the utilization of Primark vehicles, Primark distribution to give us extra bread distribution capability. And that's made actually -- has made quite a significant -- there's been quite a considerable help, particularly while we were suffering absence in -- amongst distribution drivers. So that's being the bigger part of it.

We're also, from food -- within food, we're supplying now, auto hand sanitizers that starts life in Wissington -- is Wissington ethanol. We're supplying all our own food manufacturing in the U.K. And I think once we get Primark stores open in Europe, we'll be supplying them with hand sanitizer too, and along with a couple of hospitals in East Anglia. So the -- we're not -- the bulk of the Primark warehouse labor has been kept busy, at least, in part, through handling inbound logistics. So that's not wasted labor. It is -- they are amongst the people who, if we had no work for them, we could furlough them.

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Operator [15]

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The next question comes in from the line of Richard Chamberlain calling from RBC.

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Richard B. Chamberlain, RBC Capital Markets, Research Division - MD of Consumer Retail [16]

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Can I ask -- I actually got 3 questions as well, please. The cash flow statement, John, the GBP 318 million decrease in payables, is that mainly related to Primark? That's the first one.

And then again, just a couple on Primark, George. I guess, I wonder if you can talk about how you're maintaining engagement with customers. Obviously, some other companies are transacting online. That's probably helping maintain their engagement. So I just wonder what your -- you talked about engagement with suppliers, how you're also engaging with customers during the lockdown period? And then also maybe a bit of color on the cost and so on of how the stores will be adapted to the new social distancing requirements? Any color you can give now that you said it's kind of complex task to do that.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [17]

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Okay. John, do you want to handle the cash flow question, first?

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [18]

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Yes. Yes. So you're right. I mean, the big movements in [papers] or stock and probably in any of the time that ABF asset is very much about Primark. So it is Primark that's actually driven that particular one.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [19]

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In terms of engagement with our customers, we have these wonderful 22 million people who are following us. And if I just get some examples of the sort of work we're doing, I mean anything around the social engagement by Primark, so the donation or product, et cetera, that is all being communicated to our customers. But as is advice around how to live happily whilst lockdown -- whilst locked down, tips about fashion. There's quite a lot of communication around cosmetics. Actually, the sales of cosmetics have boomed during lockdown, I believe. So there's a lot to talk about as long as you are imagined about it. And as I say, we've got a lot of people who are more than willing to listen to us.

Then the cost of the stores, I haven't seen a figure yet. I think the operating cost, it will be a bigger operating cost than capital cost. Although -- the -- potentially adding per spec screens to till points will be quite a significant capital cost, but I don't have a number for you. I just don't -- no one has told me what it might be. And we don't --

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Richard B. Chamberlain, RBC Capital Markets, Research Division - MD of Consumer Retail [20]

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I'm assuming you might be also having to limit the number of customers in stores.

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

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Sure. We may be having to provide some markets with PPE on the way in. And I have -- I would suspect that sales densities are going to be lower for some time as we build -- as customers build confidence of going back to the High Street. Sales -- the one data point we do have is a major retailer in -- a clothing retailer in China, who all know, who I think is still seeing like-for-like sales at about 20% down on pre. That's -- I think that's the HNF number. I -- that would be, I think, in the -- if we got there within a month of reopening, we'd be pretty pleased with that.

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Operator [22]

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The next question comes in from the line of Simon Irwin calling from Crédit Suisse.

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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [23]

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Could you just talk a little bit about Illovo and the outlook for next year as to whether you think you can get over the sugar tax issues, whether there are any concerns about the coronavirus in Southern Africa? And just what the prospects for a rebound for a Illovo next year?

And just if you can talk a little bit more about any supply chain issues you're expecting or could see around commodities, particularly coming out of countries like India? I mean, you mentioned issues with tea supply. I mean, are these going to continue? Or do you see there's a problem with so much of the world in lockdown at the moment?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [24]

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Yes. Let me handle that one first and then come back to an outlook for Illovo. And perhaps John, you might chip in on that.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [25]

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Yes. Then I'll come in on deleverage, George.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [26]

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The -- we are worried about various supply chains, but we haven't faced any shortages yet. So we've got plenty of cover of ingredients -- raw materials coming from India, but we would be comforted if their ports started operating better than they -- than, obviously, they were during their own lockdown, when they weren't operating at all. Other, the -- I read somewhere that the first flush Darjeeling crop had been lost this year. And if we got into the failure to harvest more of Darjeeling crop as it comes through and then into FM, we would have a problem, but we don't have them. So of course, there are concerns, but we're not within months of any inability to supply because of those potential future concerns. What will -- what coronavirus will do to more vulnerable societies, I don't know. I think the only thing protecting our markets in Africa is that, by and large, our customers are young because the population is young. But just as a number to share with you, there are 20 ventilators in Malawi. It's obviously a concern. But we're not seeing staff absence. At the moment, we've got -- started in our harvesting of sugar in -- now, and I think all our Southern African markets, and we've got no shortage of cane cutters and no significant absence in factories. So far, so good.

John, on outlook for Illovo into next year?

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [27]

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Yes. Yes. So I think there are a few dynamics going on. And I will apologize for maybe being a little brief on the South Africa situation. The -- I think the imposition of the sugar tax certainly has had a bigger effect on domestic volumes than I think most people were expecting, and that's because of reformulations in a number of products. And so I think it's a statement of the obvious that I think -- I don't think that will come back. So I think we have seen a step down in the size of the South African domestic market, which I think basically sets a new level for us from this year from which we move forward.

There was another effect in this year, which actually I don't think will be there next year and that's -- there was a hiatus in the tariff regime. So without going into too much detail, imports are much higher than were expected. And so, as you can imagine, our domestic sales were squeezed both by a smaller consumption and then also high level of import. I don't think that import problem will be there next year.

In terms of our expectation for the Illovo business for next year, we actually have quite a comprehensive program of looking at ways of working, we'll call it fit for the future in terms of how they will work for it and in terms of looking at costs. So I would expect further cost to come out, if anything, across AB Sugar, I'd see probably Illovo being the bigger part of that with some recovery of South African domestically sold volumes going forward. So certainly, our plan for the moment is that we would see some improvements in the Illovo profit next year compared to this.

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Operator [28]

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The next question comes in from the line of Ewan Mitchell calling from Barclays.

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Ewan Mitchell, Barclays Bank PLC, Research Division - Research Analyst [29]

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A couple of questions. Firstly, I think that you mentioned significant openings across Europe in May. I just wondered if there was any more information you could give on plans there beyond last year and how we might think about that.

And then secondly, in the supply chain, and I know you mentioned the funds that you have set up to pay workers for the work they have done. Any comments on how resilient you feel the supply chain is obviously with Primark being closed? They have no new orders. Are their balance sheets as strong as yours, et cetera? How should we think about that going forward?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [30]

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Yes. Okay. So we have a date of 2nd May for Austria. We believe that somewhere around that date, perhaps a few days later, we may be allowed to open in the Netherlands. Germany, I think, is already allowed smaller stores, I think stores under 400 square meters to reopen and they will have an eye on bigger stores. Italy is relaxing its lockdown and we would hope that perhaps by mid-May, we may be allowed to trade in that country as we may be allowed to trade by the end of May in Spain and Portugal. I think the countries where we have less confidence that we'll be open inside the next month or so are the U.K., which, of course, half our sales, and France and Ireland. So we think that -- we think we -- somewhere between think and hope, that by the end of May, we will have the majority of our markets open. I'm sorry, that was that one.

The vulnerability of the supply chain. These supply chains need funding assistance from other parties. Yes, we've got -- we started with a stronger balance sheet, but we can't buy ourselves, fund an industry, which is shut. So we really do need governments, banks, international funding agencies to help with the funding of these businesses while COVID is affecting them.

Guaranteeing or committing to taking the stock that they've either partly made or fully made, I think, allows for greater certainty for a supplier with another thunder. And I really do hope that we will be placing new orders before too much longer for autumn-winter, which will also help them. And I think we've done a great deal, both in paying very rapidly for the stock that we're taking and also for providing commitments to take just about everything else. In the end, it's got to be our ability to place new orders because the stores are open, that will give them -- that will keep them in business. Having said that some of them are not as robust as we might be, there are, nonetheless, some very sizable companies in India, in Bangladesh, in China in the garment manufacturing industry. So there is quite a lot of resilience and financial capability in existence in that supply chain, along with, of course, a lot of people, a lot of other players who are more hand to mouth.

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Operator [31]

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The next question comes from the line of Georgina Johanan calling from JPMorgan.

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Georgina Sarah Johanan, JP Morgan Chase & Co, Research Division - Analyst [32]

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A few questions from me, please. Just on the first one, a clarification question. Apologies if I misunderstood. Of course, you referenced GBP 1.5 billion of inventory that you have at the moment and then you talked about some other stock that was committed, I think, GBP 370 million or so. So is the right way to think about it that you sort of maximum stock position, while stores remain shut, is actually closer to GBP 1.9 billion than GBP 1.5 billion, please? And that was my first one.

And then my second question...

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

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Sorry, should we just take that one first, Georgina?

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

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The -- we will -- we've made the commitment for the GBP 370 million of stock, but it actually goes -- it goes on to our balance sheet to when we've actually placed the order. And so while the stores remain closed, actually, over these next few months, I'll be surprised if the stock number really goes up significantly. So we're talking about commitments, which will affect our cash flow in a later period, okay? So that GBP 1.5 billion, I think, is probably, for the moment, the limits of where the stock will be for the next number of months, if that makes sense.

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Georgina Sarah Johanan, JP Morgan Chase & Co, Research Division - Analyst [35]

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And -- yes, that does. I guess I'm trying to get a sense of how we should be thinking about working capital outflow for the year overall. I mean, of course, you talked helpfully about the stock provision. But do you guys have a best estimate at the moment that you could share with us, assuming stores start reopening from early May as to what the outflows sort of for the year overall could be, to help us understand basically where your liquidity position will be ending the year, for example?

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

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Georgina, it's really tough. And that's why it's so -- and because it's so hard to forecast as it's why it's so important for us to have ample liquidity available to us. The 2 big unknowables, if we assume that stores will open at some point over the next 6 to 8 weeks, are a, sales through those stores through that period. And we can guess at it, and we can look and see what's happening in China, but that is an exercise largely of sticking your finger in the air.

And the second thing we don't know at the moment is how these furlough schemes will come to an end as markets and business reopen. We know in Austria that people that -- if we open very slowly and have less need for full complement of staff in those 5 stores, then we can leave the rest on furlough until we do need them. But Austria is just about the only country, which has brought clarity to that question, and it's a really big cash item, so that's why I think it's just really hard. And I think any number that we came up with would be no better at this stage than yours. And the big thing is around sales rate on reopening.

John, is that fair?

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

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Yes, I think it is fair. The thing I do want to leave you with, as I thought in terms of our liquidity for the second half. Look, I've given you the feel of the cash outflows in March and April, which is many, many hundreds of millions and we've got those cash outflows relating. So I think it -- depending on how -- what the startup looks like, you can see that our cash balance is going to be down. Let me give you a very, very broad number. It could be high numbers of hundreds of millions for the second half and that's what we have more than capacity to be able to do. But it's a big number that we're looking at there. And how we start up and so on, I think is -- compared to that initial outflow is probably of a lesser order.

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Georgina Sarah Johanan, JP Morgan Chase & Co, Research Division - Analyst [38]

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That's really helpful. And then I've just got 2 others, please. The first one is you talked about having overstock, but whether you'd actually consider any clearing any stock through channels that you wouldn't normally use.

And then the second question was just assuming stores are sort of largely reopened by September, for example, how quickly would you need to be placing the orders for the autumn/winter product to actually ensure that you have seasonal product for reopening, sort of what we're going to by lead times there, please?

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

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Yes. Okay. We have considered clearing stock through other channels. As John has said, most of this stock will have full value when we come to sell it in whatever period of time. And therefore, economically, it's better to keep it in a shed rather just to dump it now. We don't need to dump it in order to liberate cash to pay for autumn/winter orders. We've got plenty of cash to do that. So if it makes sense, in maybe some particularly seasonal items to use other channels, we will. But the main -- our primary belief is that we're better to keep the goods in stock and sell them later than to discount them heavily now.

Placing orders, well, it varies by product, by market, and we have all the dates in a great big spreadsheet of when we need to order stuff by, and we're fine at the moment. And we will be fine as we -- at the time when we started to learn experiences about -- when we start to learn from some of the store openings, we'll get a much better view of how much we need in time for those to place the orders. All bets are off, of course, for getting the order right if we have another lockdown, but other than that, I think we will get a clearer picture of the autumn/winter buy volumes in time to place it.

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Operator [40]

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The next question comes in from the line of Michelle Wilson calling from Berenberg.

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Michelle Wilson, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [41]

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Three quick questions for me, please. So just, first of all, you helpfully told us you expect GBP 100 million cash outflow while the stores are closed. Could you just help us understand where you would need sales densities to get back to for the stores to get back to breakeven? So you mentioned you'd be happy with sales densities down, 20% in the first kind of month or so of reopening. Would that get Primark stores back to the breakeven level?

And the second question, you mentioned you don't expect to use the CCFF to any great extent. But does that mean on a base case scenario, you are expecting to need to dip into the CCFF?

And then just finally, you're obviously not paying an interim dividend while you focus on cash outflows. Should we rule out any potential M&A during this period to take the advantages that might be available in the market at the moment?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [42]

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Let me handle that last one. Any M&A of scale is ruled out. We've actually completed a couple of smaller deals in the Agricultural space, which have been well underway, but these are small.

John, on the cash outflow and store reopen.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [43]

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Yes. Let's -- well, first of all, can I just deal with the one on the base case that you asked, Michelle? We're not remotely close to dipping in to the CCFF, so the Bank of England facility. We're not remotely close to that. So it really is there as a backstop. What I don't want to say is we may dip into it, but only to sort of -- it may be a sort of a treasury decision more than anything else. But the base case that I've got, which actually is more conservative in terms of -- and I think it's that said in the going concern paper, would not see us dipping into it at all. We've got enough cash reserves to take us through. So I hope, Michelle, is that point clear?

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Michelle Wilson, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [44]

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Yes, very clear.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [45]

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And then modeling what rate of sale, what like-for-like produces positive cash flows in Primark?

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [46]

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Yes, Michelle, I think for good reason, I'm not going to answer that one because I think what we've got to look at is to see what level of sales we get to, but then also what costs we have in the actual stores themselves. And that the Primark team are so aligned to this, Michelle. So I think -- let's see. What Primark has done over the years is that it's always been good at reacting to not only the consumer environment that it sees, but also the level of sales. And we've seen that as we've got -- as we've seen in Germany or elsewhere. So I think it would be premature of me to give you any guidance on that one.

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Operator [47]

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The next question comes in from the line of Olivia Townsend calling from UBS.

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Olivia Townsend, UBS Investment Bank, Research Division - Analyst [48]

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I have 3 quick questions. My first one is just on the stock clearance question. I was wondering if you could put some numbers on what proportion of your stock would fall into which of those buckets that you were talking about. Specifically, what proportion would be sort of more basic items that can be sold year-round?

My second question is on the Primark store openings that you were talking about. They are sort of H2 weighted. As it stands now, do you expect most of this still to open throughout Q4? Or some into FY '21? Or is it too early to say?

And then my last question is on funding costs. Just briefly, if you could give us any idea on the impact of drawing down your RCFs in terms of funding costs for the full year? That would be great.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [49]

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I think the -- in terms of stock, I think the continuity items make up over half what we have or will have in stock or are committed to, under the bulk of the rest is spring/summer '20, which we think will be saleable in '21. That's the answer to that question.

Store openings, we're taking the view of one step at a time. So let's work out how to get 376 stores open first before we worry about the opening of the -- I think it's 11 stores, which were -- would, in normal times, have been opened by the new financial year. We will get to them, of course, but only once we've settled ourselves down in the new operating reality.

And then funding cost, John, I think, is one for you.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [50]

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Yes. No, it is. So look, with less borrowings or if not its success on year, down at maybe only a few tens of basis points. The -- our funding is a number of tens of basis points above that. So we're certainly somewhat below 100 basis points as the cost. So round figures, high single digits of millions for the drawing down of the RCF for the full year, okay, millions of pounds.

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Operator [51]

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The next question comes in from the line of Bruce Hubbard calling from Odey.

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Bruce Michael Hubbard, Odey Asset Management LLP - Partner & Senior Analyst [52]

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John slightly covered in the last question, but a series of sort of related questions around the capital cycle. Forgive me if I've missed it, but I didn't think I'd seen some sense of guidance for full year CapEx for group rather than Primark.

And also, I would assume, and is it in your plans, that rolling through to FY '21, one might assume dramatically constrained CapEx as a source of sort of getting your balance sheet back to where it was?

And then a subsidiary point on space, if I may, is on Primark, you canceled lots of space opening? Or is that just a problem for when the business is open again?

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [53]

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George, so let's start the CapEx right at the beginning.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [54]

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Yes.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [55]

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So yes, we've -- the CapEx has come down. So this is roughly, roughly. So a number that would have been maybe over GBP 800 million. I think for this full financial year, I think we might struggle to get to GBP 600 million. So maybe in the GBP 500 million as the CapEx for this financial year, Bruce?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [56]

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And then looking forward, it all depends on the restoration of positive cash flows and at what level from Primark. We really do want to get back into spending money again, both within Primark and also in the food group. But we have to be constrained by well -- negative cash flows keep the lid on CapEx. If we go positive, well, it depends what the shape of the balance sheet is by the time we get what is the net debt number we're looking at once we start generating cash again. We rather hope that we will still have a comfortable balance sheet once all this is ended, in which case, I would personally be very comfortable committing CapEx before reducing debt levels. I hope I can do both.

John, do you want to...

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [57]

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No, no. I think that's a very good coverage. That's great.

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Bruce Michael Hubbard, Odey Asset Management LLP - Partner & Senior Analyst [58]

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And if I could just do a quick follow-up. The net debt to EBITDA, who defines EBITDA and how?

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [59]

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Sorry. Could you say that again, Bruce?

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Bruce Michael Hubbard, Odey Asset Management LLP - Partner & Senior Analyst [60]

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Sorry, on the covenants, yes, net debt to EBITDA, who defines EBITDA and how?

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [61]

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Right. Okay. So I've had a crash course in this myself, Bruce. As you can well imagine. So no, it is as laid out in the documentation with the -- both the RCF and also the private placement notes. So we've got the same basis. And EBITDA is stated net of exceptionals, okay? So it is -- so it's the unadjusted EBITDA for the group as -- and it's always the -- it's the 1 year up to the test. Either the half year or the full year, it's the preceding EBITDA adjusted from prior year seasonal test.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [62]

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Thank you. And that should be why even with the exceptionals that we've taken, you gauge that will give you a very good feel for why I feel comfortable for September of this year, and we didn't (inaudible) it just going to remind everybody for February next year that (inaudible) the sort of margin of error removed that for February 2021.

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Operator [63]

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The next question comes in from the line of Geoff Ruddell calling from Morgan Stanley.

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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [64]

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So a couple of quick questions, please. Firstly, following up from Bruce's question. Is the EBITDA in the covenant pre- or post-IFRS 16, please?

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [65]

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It's pre-IFRS 16.

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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [66]

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Secondly, when have you actually next got a relevant covenant test if the February one is waived? Is that September '21?

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [67]

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September '21, correct. Well, I mean, the next one is September '20, which I don't have any problem with. So then the one beyond that, then will be September 2021, yes.

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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [68]

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Fine. And then one final quick question. Do you know how much you have the ability to borrow -- I mean, how you're -- effectively your credit limit with the CCFF. Have they just indicated you are able to use them? Or they indicated how much you could borrow?

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [69]

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Look, we have great guidance on it. So it is there. So I think, look, we are broadly at the same level as other major corporates that have been given the eligibility.

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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [70]

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So you do know a number, you just don't want to share it. Is that fine?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [71]

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They don't want to share it.

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [72]

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They don't want to share it. So I think that's what I'm doing. I'm respecting that one. So there's nothing particularly to hide. It's a considerable sum, and we're very grateful to have it as the backstop.

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Operator [73]

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The final question comes in from the line of Anubhav Malhotra calling from Liberum.

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Anubhav Malhotra, Liberum Capital Limited, Research Division - Analyst [74]

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Can you give me any details on how you arrived at the GBP 284 million provision for the lower net realizable value of the inventory, maybe in terms of whether all the country-wise store opening timings that you just mentioned have already been built into that? And what percentage of the existing inventory that you think you will need to markdown?

And secondly, does the entire provision linked to only the spring/summer 2020 stock that will be sold over the next few months? As you said, you intend to carry over a lot of stock to sell at full value next season.

And lastly, can there be a further addition to this provision once more stock that you have not taken on your books yet once that comes in?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [75]

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John?

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John George Bason, Associated British Foods plc - Finance Director & Executive Director [76]

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Right. Okay. So the bigger part of the provision is actually the stock that is sitting in the stores now. So remember that we closed the stores quickly, and so this is where the stock is actually out of the packaging. We have very little backroom facility. So it is -- the bigger part of that is actually stuff that's sitting on the floor. So you can imagine I say on the floor, actually merchandise within the store. So that's the bigger part. A smaller part is spring/summer 2020, which either because it's date coded or because it relates maybe to specific events, which have been canceled this year, that is also a part of it. And then a third bucket is, should we save some of the more fashionable lines, which we have taken a percentage on with the view that maybe those fashions make a run.

As far as the continuity stock that's already packaged in the warehouses and so forth, we don't see any impairment problem with those at all. So I think that probably gives you the best feel of it.

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Anubhav Malhotra, Liberum Capital Limited, Research Division - Analyst [77]

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Excellent. And if you allow me one follow up to George, in particular. So I realize the current crisis is nowhere near over. But are there any initial learnings or dig rates that you have with regards to the Primark business, whether they be related to reliance on sourcing from Asia, which you saw in January and February this year could have been a problem? Or a lack of some sort of an online offer? So anyway this crisis has given you reason to consider how to improve the business in Primark?

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [78]

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I think the -- it's -- look, it's a longer question -- longer answer than I can share with you now. The fact that we have such short payment terms, but quite a long supply chain gives us a very big cash obligation if we ever have the closed stores or close all our stores again. But really, I hope this will be a once in 100-year event. I think we've had to model a second closure. But really, this is so unusual that to alter the business model hugely based on this thing kind of happening every 5 or 6 years, I think that's hard to get your head around.

I think online -- online, I'm not -- I don't think the online-only people have had -- clothing people that is, have had a great time of it either. I think sales are well down at all clothing. All we need is a pair of jeans, some sweat pants and a T-shirt to -- maybe a sweatshirt to get through this lockdown period. So I don't think if we had an online offer, it would have made much of a difference. I don't think we'd closed -- we would have cleared a very large amount of stock through that. The capacity we need for a business of our scale exists a long way from home. We can't get these sort of volumes out of Leicester or Turkey or Romania. We are reliant on the capacity in China, in Bangladesh, in India. And that, I think, is probably a good thing.

I go back to my initial comments. There's always risk in a crisis to overlearn the lessons. If we ever got into online, it was because it was a good idea in its own right rather than it was a contingency for pandemic. Contingencies for those -- for the pandemic turned out to be a conservative balance sheet and some diversification coming from other parts of the business and then an ability to move very fast. And that, I think, is -- those are the things that will have got us through this pandemic. If we'd had an online offer, I don't think it will help much.

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Operator [79]

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Thank you. That does conclude today's question-and-answer session. So I'll turn the call back across to yourself, George, for any final or closing remarks.

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George Garfield Weston, Associated British Foods plc - CEO & Executive Director [80]

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No, I'm not in the habit of making closing remarks. In this case, I'll just say thank you all very much for attending and keep safe, and I look forward to seeing many of you in the flesh at some point in the reasonably near future. So thanks all.

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Operator [81]

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Thank you for joining today's call. You may now disconnect your handsets.