Earnings Call: H2 2018

Nov 6, 2018

Well, welcome to this review of the annual results of ABF for the 52 weeks ended 15th of September 2018. The financial highlights of the year are these: group revenue is up 3%, adjusted operating profit and adjusted profit before tax are both up 5%, adjusted earnings per share up 6%. If we can persuade the shareholders to accept it, dividends per share will go up by 10%. We invested GBP 1.165 billion back into the business this year, and we end the year with net cash of GBP 614 million. The business highlights are these. I think the underlying performance of the group was even better than the numbers suggest, and John will take you through some of that and try to justify my statement in a moment. Highlights, then grocery businesses across the world. Twinings Ovaltine had a particularly strong year, and we acquired Acetum, the balsamic vinegar company based in Modena, and we think the prospects of that business are very, very good. The ingredients portfolio had another extremely good year. Profits have nearly doubled since 2015. Moving on to Primark. We saw margin improvement, not least on the back of sterling's appreciation, although there was some better buying going on there, too. So over GBP 100 million profit improvement in Primark. I am particularly pleased with the trading of Primark in the U.K. in a difficult year for the high street. AB Sugar saw the consequences of the first year of volatile EU prices. It is now fully exposed to the world market. Illovo remains highly profitable and had a good year. With that, John, over to you. Great. Thanks, George. So coming on as usual to the income statement. Group revenue was GBP 15.6 billion, an increase of 1%, and adjusted operating profit was GBP 1,404 million, up 3% at actual exchange rates. The main acquisition this year was Acetum, and this business contributed GBP 11 million of profit. The operations at the Vivergo bioethanol plant in Hull were shut down at the end of the financial year. Although the operating losses for both years are included in these numbers, they are separately identified in the segmental analysis, and I will show you that later. The increase in adjusted operating profit included a loss on translation of GBP 22 million as sterling strengthened during the year against most of our trading currencies other than the euro. At constant exchange rates, the increase in adjusted operating profit was 5%. The weakness of the U.S. dollar, particularly in the second half, had a favorable transactional effect on Primark's margin, and I will make more specific comments on that later. A table of average and year-end exchange rates for our major currencies is included at the end of your slide pack. Our adjusted profit measure reflects the underlying performance of the businesses and excludes profits or losses on the disposal of non-current assets, amortization of non-operating intangibles, which increased to GBP 41 million, reflecting the acquisition of Acetum, acquired inventory fair value adjustments as required by IFRS 3 on the acquisition of Acetum, and transaction costs. This year's unadjusted or statutory operating profit was GBP 1,344 million, 1% higher than last year. Last year included the profit of GBP 293 million on the disposal of our U.S. herbs and spices business and the cane sugar operations in South China. This year, the loss on closure of businesses principally comprises the one-time closure costs of the Vivergo bioethanol plant and a provision for rental guarantees given on U.K. property leases that were previously assigned to another retailer. The closure costs of Vivergo include the write-off of all of its assets. The net interest expense was lower than last year due to lower interest rates on our non-sterling denominated local borrowings in the Illovo Sugar businesses in southern Africa, in addition to a higher yield on our USD cash deposits. Although falling, the group still has an interest expense despite having net cash on the balance sheet. This relates to our longer-term financing through U.S. private placements and local borrowings maintained as a hedge against assets in high inflation countries. Profit before tax was 5% higher than last year at GBP 1,373 million on an adjusted basis. Unadjusted profit before tax was 19% lower, and that is taking account of the profit on sale of businesses last year. Coming on to tax. The underlying tax rate was 21.3%, lower than last year's 22.4%, and that is primarily due to the reduction in the U.S. federal corporate tax rate from 35% to 21% with effect from the 1st of January 2018. At this stage, I expect the underlying tax rate for the new financial year to be similar to this year. The credit on intangible amortization is higher this year, reflecting the increased amortization charge. The overall tax charge was higher last year, and that is because it included the charge that you see here of GBP 87 million relating to the business disposals. Adjusted earnings per share increased by 6% to 134.9 pence. On an unadjusted basis, they were 16% lower at 127.5 pence due to the profit on disposal of businesses last year. A final dividend of 33.3 pence per share has been proposed, making total dividends for the year of 45 pence, a 10% increase. We expect to continue our existing progressive dividend policy and maintain a comfortable level of cover. Moving now on to the balance sheet. Net assets increased by GBP 0.9 billion to 9.3, and that was really driven by the retained profit for the year and the increase in net defined benefits pension assets as the U.K. scheme moved actually further into surplus over the year. The increase in tangible and intangible fixed assets was driven by capital investment ahead of depreciation and the acquisition of Acetum. Average working capital as a percentage of sales actually increased from 6.5% last year to 7.2% this year, and working capital at the year-end was also higher than last year. Working capital at Primark increased, and that reflected, as you might expect, the growth of that business. Sugar inventories in British Sugar and Azucarera increased from, if I remind you, the very low levels in September 2017, and they have increased as a result of high sugar beet yields last year and the consequent increase in sugar production this year. I expect a reduction in these inventory levels in the new financial year, with lower production forecasted for the new campaign at British Sugar. Other net financial assets this year include the mark-to-market gains on forward purchases of USD by Primark as a hedge against their input costs when purchase orders are placed, and Primark's margin in the first half of the new financial year will benefit as a result. Net deferred tax liabilities were higher this year, with the most significant increase being those relating to the U.K. pension scheme moving further into surplus. The U.K. defined benefit pension scheme accounts for 91% of the group's pension assets. The improvements in the U.K. scheme was driven by the increase in long-term bond yields and higher investment returns. The last triennial evaluation was actually undertaken in 2017, which determined a surplus of GBP 176 million on a funding basis. There's no recovery plan that we need to agree. New accounting standards, just while we're here. The details of the impact of the adoption of new accounting standards in future financial years are set out in significant accounting policies note in the results announcement. It's a long note, so take it for bedtime reading, but let me give you the summary. In summary, we'll adopt IFRS 9 and 15 in the next financial year. I expect no material impact to arise from the adoption of both of those. IFRS 16, leases, is obviously a much more significant accounting standard to adopt. That will take effect from our 2020 financial year. We'll give you full details of the expected impact on the group's results and financial position in the 2019 annual report. The reason we're waiting till then is it's just the degree of detail that you have to go to literally lease by lease to work it through. However, although significant, I can assure you of the following, that interest cover and gearing on the new reporting basis will be conservative, and we don't expect any changes to our growth plans for the future as a result of adoption of that standard. Cash flow. Moving now on to that. Free cash flow of GBP 557 million compared with last year's GBP 924 million. The principal difference of this is the reduction in working capital. Of this reduction is working capital. Last year, if I can remind you, I highlighted that the working capital inflow that we had in that year actually was unusual and that a working capital outflow was expected this year, as indeed is the case. Capital expenditure was level with the record level that we achieved last year. The tax outflow of GBP 297 million is the cash tax paid on trading operations and is higher than last year, reflecting higher profits. The net cash outlay on acquisitions of GBP 207 million was principally in respect of Acetum. A further GBP 89 million of debt was assumed on this acquisition. Last year, proceeds after tax from business disposals was the GBP 278 million that you see there. Turning now to the performance analysis by business segment. George has highlighted at the beginning of this, strong profit performances by grocery, agriculture, ingredients, and retail. The best measure of their underlying performance is the constant currency increase, and I'll give you these. Grocery up 14%, agriculture up 23%, ingredients up 23%, and retail up 13%. Grocery profit, actually, the increment there, you'll notice, is actually GBP 32 million. It has taken grocery up to a profit of some third of a billion pounds, sizable division by any measure. Margin and return on capital employed improved as a result. Ingredients had an impressive year. A note that return on capital employed now has reached 18.1% for that division. Profit at Primark was actually up over GBP 100 million, at GBP 108 million. The margin improvement, which is probably better than most of you were expecting, was 90 basis points. All of that was delivered in the second half. Obviously, the transactional benefit of a weaker U.S. dollar on input costs was part of it, but also another year of better buying, and markdowns for the year were lower than expected after a very successful sell-through of our merchandise, particularly over the summer. With all of next year's first half purchases at Primark contracted at more favorable exchange rates than in the same period in the prior year, margin improvement will continue into the first half of the new year. However, the strengthening of the U.S. dollar in recent months will have an adverse transaction effect on Primark's margins in the second half of next year should current rates prevail. I know some of you have just asked it, just a quick reminder. The second half, the transaction rate is about 135 for Primark against the dollar, and obviously the current spot is like 128, 129 for the U.S. dollar, and that is why it will be negative at current rates in the second half. The exchange rates applicable to purchases in that second half, however, will be sensitive to exchange rate volatility, which I think is likely to arise given ongoing Brexit negotiations. At this stage, the full year, and I think this is the best estimate we can give you, the full year operating profit margin in Primark next year is expected to be broadly in line with that achieved this year. The Sugar segment excludes the Vivergo sales and operating losses for both years, and these make up most of the numbers on the disposed businesses line. The decline in Sugar profit is primarily due to lower EU prices, which adversely affected our U.K. and Spanish businesses. In our next financial year, we will see the full year effect of those lower EU prices. That will deliver a further reduction in the average price achieved this year. An operating result for AB Sugar will be significantly lower than that achieved here. Margin for the group increased for continuing businesses from 9.2% to 9.3%, and return on capital employed reduced marginally from 20.9% for continuing businesses to 20.6%, and that reflected the lower profits in Sugar. By geography, let us just take a moment on these. The increase in revenues and profit in the U.K. was driven by Primark's superior trading in the U.K., and that was only partially offset by the reduction at British Sugar. Coming on to Europe and Africa. Primark's Eurozone business delivered a growth in profit. The profit decline in the Europe and Africa segment reflected our Spanish Sugar business, which moved into loss. The decline in the EU sugar price is reflected more quickly and was so in the Spanish business in the results there. The drivers of the profit and margin increase in the Americas were growth in AB Mauri and ABF Ingredients, but it was also a reduction in the losses for Primark U.S. George will take you through trading in Primark U.S. later. Profit in Asia Pacific actually was very strongly ahead, as you can see there. The biggest contributors were Twinings, Ovaltine, and margin improvement at George Weston Foods in Australia. At that point, I'll pass back to George so he can take you through more detail through the businesses. Thank you very much. Starting with Sugar, John has rehearsed the consequences of the exposure of the U.K. and Spanish businesses to volatile and low world market prices. Illovo continued to be highly profitable. This is a business which is much less affected by gyrations in world market prices. There's been very good work done in Illovo also on routes to market. We had an excellent result in China. Remember, we still have the beet business in the northeast of China. We've spent years working to build a resilient and high-quality business based on beet in China, and I think we're there now. The business was nicely profitable in this year. The performance improvement savings, I've mentioned many times in the past, this was one of the best years for cost reduction across all our sugar businesses, and we expect that to continue in the future. Then, of course, we shut down the Vivergo bioethanol plant. Sadly, wheat prices went up too much. It's the final straw, particularly in the absence of any mandated E10 in the U.K. fuels market. Here is the European pricing environment. We came out of the sugar regime at a time when world market prices were low and falling. A quirk of nature gave us a fantastic crop right across Northern Europe. EU sugar production was very high, and that sugar had to go somewhere. The consequence was that EU prices dropped really quite quickly, as you can see from the red line here. Two things to point. Firstly, there will be a premium, there is a premium still for European prices over world market prices. That's a consequence of the cost of service and product quality in Europe. You can't take world market prices and simply ascribe them to the European market. European market prices will be higher. The second thing to say is, I think, I hope that the point of lowest world market prices is now behind us. Operations then, in our sugar businesses. British Sugar is the lowest cost producer by some way in the EU. There's more cost to come out. Clearly, we had a huge crop to process in the year. We went up from just under 1 million tons to 1.37 million tons of sugar. This year's crop will be rather smaller, will be around 1 million tons, we think. Azucarera saw an increase in sugar beet production. Now the task is to address the high prices we pay for beet in the Spanish market. Those discussions are beginning now. Illovo produced more sugar at 1.7 million tons as a consequence of good crop management, and also, much better weather in Southern Africa. China, both the growers grew better beet, and we processed it better, and those, along with fairly solid pricing environment for sugar in China, produced a much better profit outcome than we have seen previously. To reassure you about the cost reduction exercise, or practices around agricultural development process efficiencies and adding value to co-products, all that is continuing and continuing well. Agriculture then. It was a good year for the agricultural businesses. We had a lot of sugar beet feed to merchant on the back of this immense U.K. crop. We benefited in the back half of the year from trading volatility coming back into the U.K. agricultural grain sector. We have also, the dry weather over the summer led to increased need for feed for feeding animals on-farm. The Chinese business had a much better year, and we saw further growth in our feed enzymes business, which is, as you know, a global business. Moving on to Grocery, Twinings Ovaltine had a very strong year, Ovaltine in particular, and I will come back to that in a moment. We saw good margin improvement in George Weston Foods. We saw a year of continuing unacceptable losses in Allied Bakeries, which I will come back to again, and the first year's contribution from Acetum. But starting with Twinings Ovaltine, two particular markets to mention, Thailand and Switzerland. Thailand is our biggest market for Ovaltine. We introduced a number of new products. They were received well. Demand for the product generally across all the different sub-sectors of Ovaltine was strong. Then Switzerland. In Switzerland, Ovaltine was the best performing grocery brand of any in that market on the back, again, of a good NPD and also an extension of sales coverage. Essentially, we got Ovaltine into Migros for the first time. It is worth reminding you that there are plenty of other Ovaltine markets growing very nicely. China, Brazil, Nigeria, Vietnam, they all had good years too. They are smaller markets than Switzerland and Thailand, but they are nice sources of growth for that business, both now and into the future. Twinings also did well. We announced just last Monday that we will be shutting our tea factory in China and consolidating it into our plant in Poland. Despite being a brand-led business, the supply chain is a very important part of what we do, minimizing costs in that supply chain, and that is the next step in the Twinings tea supply chain. We will have two factories for tea, one in Poland and one in the U.K. We launched herbal infusions in the U.K., in U.S., Australia, and Italy, and these products sold well. That was more in the back half of the year than the former, but we are encouraged by how they were received. Then as a great example, I think, of the ideas that are still being generated by the marketing and new product development teams at Twinings, we launched Cold In’fuse. This is a sort of teabag format product that is designed to go into water bottles. Rather than tell you more about it, let me show you a launch ad in Australia. We launched it in Australia and the U.K., and here is an advertisement that we played in Australia. Water is pretty incredible, and Twinings has something that is about to shake up the way we drink it. Watch this. See? Told you. New Twinings In’fuse, naturally flavored cold water infusions. There you go. It has been extremely well-received in both markets. In fact, we are out of capacity. Once we have installed more kit to produce it, this is the range of products you will be able to purchase, and we will launch it into other markets, too. But the supply chain needs to catch up with the demand that has been generated in the U.K. and Australia alike. Very good piece of work. Elsewhere in grocery then, Australia and North America. These two markets have been a great source of profit growth to us over the last, actually, 2 years. In Australia, profit growth is particularly the consequence of significant cost reduction, particularly head office cost reduction, although bread profits are also ahead, and the meat business at Don is nicely profitable, and cost reduction work continues at that site. North America, our profits are now back over where they were when we had the spices business. We have seen good volume growth around Mazola, and we have also seen brand growth in Capullo in Mexico. We are enjoying favorable commodity oil costs in America. That won't last forever, but we certainly enjoy it while it does. Moving then to Italy and Acetum. Acetum is the leading producer of balsamic vinegar in Modena. Modena has been producing balsamic vinegar for 1,000 years. It is the home of balsamic vinegar, and Acetum is the biggest and best business there. The integration of that business into ABF is progressing well. Yes, we saw some higher raw material costs. The must that is the starting point of balsamic vinegar went up in price. It is coming back down again, and we will benefit from that this year. Elsewhere in grocery, Jordans, Dorset Cereals, and AB World Foods both had good years, particularly in international growth. Particularly strong international growth from both brands, and also growth from new products in both businesses. In your packs, you have examples of granola. For the first time, Jordans is launching cereals for children, initially in the U.K. and France, but to be rolled out further through the year. These are healthier alternatives to traditional cereals for children. They are all natural. They are composed of entirely natural ingredients with nothing artificial added. They contain real fruit pieces, they are high in fiber, and they still taste great. That is the key to selling them. We are very enthusiastic about granola. We have also launched in the year three-in-one kits for Indian food. Butter chicken is a product for the Canadian market. An oven bake then is in the U.K. still, too. Good product innovations in world foods, and around the Patak's brand. Moving then onto bread. It goes without saying that the bread market in the U.K. is tough. There is a shift to private label still underway that makes it even tougher. We have done a good job in the year launching new products, both under Kingsmill and Allinson. There's an Allinson product in your bags. Also with well-received Kingsmill advertising. We were doing a good job at reducing the losses that we were suffering in Allied Bakeries, then the wheat price went up on the back of the poor harvest this year. We're back into the territory of unacceptable losses. We're in discussions with our retail partners about prices at the moment, so I don't think I should say much more at this stage. The losses in Allied Bakeries were unacceptable in the year. Okay. Then on to ingredients, where we had another really good year, both in ABFI and also in yeast. Profits increased in all the businesses in ABFI, particularly in the enzyme business. We expanded the enzyme factory in Rajamäki in Finland the year before. We completed the expansion the year before. That extra capacity is being well utilized now, both with existing products and also products which have been more recently developed. That expansion is paying off very well. Specialty lipids, which is based in the East Coast of the States, had a good year, as did our West Coast U.S.-based protein extrusion business. These are products that particularly go into cereal bars. Turning to yeast, another year of sustained and good growth. Significant improvement in the operational performance of this business. Good growth in profitability and sales in the United States and Canada. Despite the difficulties in the Latin American market, and we have important businesses in Brazil, Argentina, and actually Venezuela as well, we grew that business despite all the headwinds there. We're investing in new technologies and new products, so from bakery yeast in particular into other uses of yeast and other strains of specialty yeast. I think that is a route for us into the future. Okay. Let's then go on to retail and Primark. We had 5% sales growth. We added 900,000 square feet of space. The merchandise was received well throughout the year. Fashion in particular, women's fashion, had a strong year. We've talked in the past, and I make no apologies that I'll talk about it again, about the strong digital and social media engagement. It's a very important part of the model now. As John has flagged, we saw a very welcome increase in our overall margin. The U.K. was particularly strong. Sales up 5.3%, like-for-like growth 1.2%, and significant further market share growth in the U.K. markets. Sales in the Eurozone were held back by very poor weather at three points during the year. We were trying to sell autumn/winter in Spain when it was 85 degrees in November last year. There is always going to be in Europe also some cannibalization, particularly in Holland where the effects of the opening of the Damrak store in Amsterdam are still felt in the suburbs of that city. We had a year of soft trading in Germany. German high street, footfall on German high street is well down the discount end of the clothing businesses. All clothing businesses also had a tough year in Germany, and we weren't immune from that. We did increase sales overall in Germany, however, as we did in all the markets in which we trade. The U.S. though was very encouraging. We saw strong like-for-like sales in the second half of the year, and those have continued and indeed accelerated into this year. The small store format, which we mentioned, we took two stores from 50,000 square feet or so down to 35. That has worked very well. We haven't lost any sales. In fact, we've seen sales increases in both the stores at 35,000 square feet over the sales we achieved at 50. So that is working well. Then we opened Brooklyn, and because it is the morning after Guy Fawkes Night, I can say that it's opened. It's gone off like a firecracker. It is trading extremely well. We are looking now to open further stores in the States beyond the two that we've already announced, so that's Sawgrass and American Dream, which is in New Jersey. We will cautiously start to look for other sites in the Northeast of the States, sites that we can reach from the depot in Pennsylvania. Let's have a look at some of the fashion and other commercial aspects of the businesses. As I say, we had a good year with women's fashion, and here are some examples of it. The rainbow striped dress on the left-hand side, modeled for us by Primark influencer Suzanne Jackson. It's a sophisticated take on rainbow stripes. A mini me on the right-hand side, the kids' jacket at £12, the adult's at £20. They both sold extremely well during the year. There's more going on in the fashion market. There are more trends now than there have been for a couple of years where life was dominated by athleisure. There's more newness, and that plays to our strength. Licensed products also had a very good year for us. License is a key line for product. We have a great range of licensed products available in store. We have deals with brands such as Warner Brothers, Disney, and Marvel. We launch products around TV series like "Love Island" and "Game of Thrones." We have a license attached to classic super brands such as The Beatles and The Rolling Stones, and also computer games, too. You can buy licensed products in all store categories, womenswear, menswear, kids, homeware. Some of you will have seen, I'm sure, the Harry Potter store at the Tottenham Court Road store. We've also got Harry Potter store-in-stores in Boston, in Dublin, Madrid, and Antwerp. Licensed, really good. Health and beauty, similarly. Last year, health and beauty was Primark's fastest-growing department. The range now includes makeup, skincare, hair care products. We now have a dedicated beauty-focused Instagram channel which showcases, in particular, makeup tutorials. I showed you one of those once before. We also make good use of influencers. One of the biggest influencers in the world of health and beauty, Huda Kattan, she has over 28 million followers on Instagram, commented on her blog during the year that Primark's PS... beauty range was the best thing she'd discovered all year. In July of 2018, all Primark's own brand cosmetics were awarded the Leaping Bunny status by Cruelty Free International, which is the gold standard certification program for products that are free from animal testing. That is an important thing to be able to say about Primark's range in health and beauty. We also did very good work with sustainable cotton. We have mentioned in the past the sustainable cotton program. What we were able to do this year was use the cotton that has been grown for us by mainly women in India, in a sustainable way, less water, less agricultural input as a consequence of training programs. We put that cotton into women's pajamas and we sold 4.4 million pairs or sets of pajamas using that cotton. in September this year, we have announced that we are expanding that training program into Pakistan, which is an important sourcing country for us. I think, in particular, Pakistani cotton will probably go into jeans, which we source in large numbers from Primark. There is a lot of work that has been going on really for a large number of years in the Primark supply chain. Here are two big examples of it this year. What we have not, I think, been so good at in the past has been telling our customers about the care that goes into Primark's supply chain. This year, we have started to do so. We are running a campaign called Primark Cares, which highlights some of the standards we adhere to. The poster on the left is in Germany, and it calls out the recycling programs that are available in all Primark stores in Germany. You can bring used clothes back to us, and we will recycle them for them. On the right-hand side, this is in France, and it is a poster telling shoppers about the sustainable cotton that they can buy in their pajamas. Important work, both. Looking into autumn winter, where again, ranges have been very well received and where once again, there are more key new trends in the marketplace. Striped trousers have sold very well. There has been an influx of animal prints across all product types and in all colors. If you were not aware, mustard is the color to be seen in this year, and checks are very strong too. If you do not have Primark's checked heritage coat already, you will not get it because it is sold out. Digital and social media. Our total media following is almost 13 million people now. This was the year of fastest growth in the engagement between our social media team since they started work in 2013. 2 million people visit primark.com every week. The main channels with social media are Instagram, Facebook, and Twitter. We are now over 6.5 million followers on Instagram. We have launched three new Instagram channels, Primark Home, Primark Beauty, and Primark U.S. That takes us to five, the other two being Primark and Primark Man. The top post on Instagram in the year just gone was Chip once more. This time in his new manifestation as a pair of slippers. 180,000-odd people liked this. Chip is the teacup that just keeps giving. I have not talked in the past about collaborations and influencers. Primark partners with many hundreds of influencers who help to promote the brand on their own channels. This year, we are increasingly collaborating with some of these. Back in the autumn half-term last year, or the year we are talking about, we came out with a range of products on which we collaborated with Sapphie B, who is a 17-year-old YouTuber with over 1 million subscribers and 800,000 Instagram followers. This was a lifestyle collection of home, loungewear, and stationery, and that is the two pictures on the left-hand side. We are doing it again with her this year. It was very successful last year, and it is going well this year. I mentioned before the collaboration with Alice Liveing on the right-hand side, 42-piece collection that we launched with her. New collections for this year, new collaborations. Stacey Solomon on the left-hand side with the womenswear range, and then a skincare range with Alex Steinherr, who is a well-known beauty editor. These collaborations are important. I want to give you now just a little bit more feeling of the work that we are doing in America to build brand awareness. We built a pop-up shop during New York Fashion Week. We invited influencers and journalists in particular to it under the tagline, Everyone's Invited, and we made a little film that we show online about what happened in our pop-up shop. If we could just show that. There you are. Going on to the new stores that we opened just last year and some particular highlights. First, Brooklyn. It really has turned into a great store for us. It trades very strongly. Westfield, then on the top right. This is 70,000 sq ft of new store in Westfield London, down in Shepherd's Bush. It has also been trading very strongly. It has not appeared to have cannibalized Oxford Street at all, and it is a great new store for us. Valencia in Spain. Valencia is an important market. This is a downtown store and opened also extremely well. Something like 4,000 people were queuing to get in on that first day. The selling space expansion chart then shows a couple of things which I would like to pull out. Firstly, still over half our stores are in the U.K., and by the end of this year, that will still be the case, but only just. By 2020, we will have more stores outside the U.K. than in it. Secondly, last year, we opened new stores in all but two of our markets. We really are still expanding in all our markets. We had the sad loss of the Belfast store in August. We will have a store trading Commonwealth House, which was the extension that we were linking to our Belfast store. That will be up and running before Christmas. In the spring, we will open a bigger site in Fountain House, also in the center of Belfast. Obviously, the important thing was that we got all our customers, all our staff, all our colleagues, out of that building very quickly. I think it took 2 minutes to clear the building. But we have lost a store that was an iconic part of central Belfast and was a really important store for Primark too. It was their first large store after Mary Street. It has a resonance and importance to Primark that goes well beyond simply the sales that we made through that store, which have always been good. But no one has felt the loss of that store more keenly than the Primark team in Dublin. Looking forward into 2019, we will open about 1 million sq ft, a little bit more perhaps. I think the highlight will be Birmingham Pavilions, 160,000 sq ft, which will open before Easter. It will be the largest store in the group. But there will be other significant stores too. Milton Keynes in the U.K., in the center of Milton Keynes. Toulouse and Bordeaux. Toulouse actually is already opened, and the first day sales were the highest of any opening day of a Primark store in our history. Berlin, we have opened our third store there, another store in Brussels, two in Spain, and Utrecht in the Netherlands. Then last but not least, our first store in what will be our 12th market, Slovenia, a new store in Ljubljana. I expect that the current rate or the historic rate, recent rate of selling space expansion for Primark will continue. We have major existing markets where there is still a lot of room for us. Spain, Italy, where we have still only got four stores, all of which traded extremely well last year, France, and now the Eastern Seaboard of the U.S. We are also going to enter into Central and Eastern Europe, obviously, Slovenia being the first store, but we have signed up for a store in Poland. I think the brand will travel to Eastern Europe and that work sort of starts this year. To summarize the results for the whole business, it was a good year for the group. A lot of work gone on. A lot of success sits behind what were already a very creditable set of results. The grocery margin improvement is good. The profit growth in grocery is good to see. The ingredients profit, as I say, has nearly doubled in the last three years. To see margin coming back with a combination of better buying and currency appreciation is more than welcome. The strength of the business in the U.K. was a particular highlight for Primark, and then obviously, we think we have turned a corner in the U.S. AB Sugar saw the consequences of the first few months of volatility and low prices in the EU. I remind you, U.K. business in particular is the lowest cost producer of sugar in the U.K. There is a lot more money to come out of the cost base, and I think, as I say, that the low point in the world prices is behind us. I am not a forecaster. Then Illovo remains highly profitable and largely insulated from world market volatility. We invested a lot of money, both in the food and Primark businesses and also in Chatham. So, outlook. I am obliged to make some comments about Brexit, and here they are. I think there will be limited medium-term consequences for ABF, both in the food businesses and also Primark. Really regardless of what the medium-term deal is, we have a more isolated set of supply chains than some other food businesses and actually some other retail businesses, too. So the Primark depot in the U.K., for example, primarily serves the U.K. market and not European markets as some other retailers do. However, an abrupt exit, so an unmitigated departure from the EU, an unmitigated hard Brexit, does pose a significant risk to the U.K. food supply chain. In particular, if we lost the use of Dover, and the Channel Tunnel routes for any length of time, it would be very difficult to keep the U.K. food supply chain going adequately. Moving back then into the business. We expect adjusted earnings per share to be in line with this year. That is largely the consequence of reduction of EU sugar prices, or at least a full year of those reduced sugar prices, and the rest of the business doing well. The selling space expansion in Primark will continue. John has talked about margins and the proviso about exchange rates into the second half of the year. Grocery margin profit improvement, we expect to see both, particularly in the businesses outside the U.K. Then we do have a strong balance sheet. We know the opportunities that are available to the group, and we will be investing heavily once more in this year. Thank you very much for listening and any questions you have for John, I will be happy to take. Right. Should we. Fintan Ryan. Yeah. Good morning. Fintan Ryan here from Berenberg. Firstly, a few questions, please. Firstly, on sugar. At what point do you see the need, potentially within the European business, to reduce capacity? Particularly, as you mentioned, cost reduction in Spain, at this stage, would you foresee some capacity coming out from the ABF side within Europe? Secondly, you mentioned the ingredients business in the press release as an area of further investment. Would you give us a sense of how much incremental investment will go in here, and would you see the scope for further acquisitions under the ingredients umbrella? Then finally, just in terms of the U.K. bakery business, would you be able to quantify the losses that you are seeing currently in Allied Bakeries and how you expect those to proceed into the next 12 months, particularly with the price negotiations ongoing? Thank you. Okay. Given the importance of the price negotiations, it is quite hard to answer that last question. But the losses are in the tens of millions, so it is much too big a number to keep going with. Ingredients, and sorry, I am going in reverse order. Ingredients, yes, I suspect acquisitions will play a part in our future development, but also product development will do too. Along with the profit growth, we have also been increasing the capability around NPD in all the ingredients businesses, including yeast. Yes, acquisitions will play a part as will new product development. Reducing capacity. I think capacity will come out of the European market first and foremost because farmers will grow less sugar beets at lower prices that they have to accept from processors in order for those processors to be profitable. I don't think that many sugar producers will reduce capacity themselves except as a response to a smaller supply of sugar beet coming off from growers. Given our cost competitiveness in the U.K., I would have thought that we should be reducing capacity rather later than others. I think the year that we're in will be difficult for British Sugar, but not nearly as bad, difficult as it will be for some of British Sugar's competitors in the European market. I think capacity should be coming out of the back end or the higher cost end of the production capacity. In Spain, we're paying an unsustainable price for sugar beet. We will be talking to our grower partners about that. Then I go back to, it's really for them to decide whether they want to keep on growing sugar beet at low prices. That will then determine what we do with our production capacity. Do you have any idea of the timeframe of those negotiations? I don't want to speculate too much about that. We've started them, but we don't need to conclude them before the sowing of sugar beets in March, April time in Spain. Okay. But they will have to be completed in advance of those. Okay. Andy Hughes here. Thank you. Thanks. Morning, it is Andy Hughes from UBS. A few questions on Primark, bit of a sort of mixed bag. Firstly, Germany. Yeah. How you are getting on in terms of trying to improve performance there. It looks like if Like-for-like was down 5% in continental Europe, Germany feels like it was down quite a lot more than that. Secondly, on the U.S., whether you have actually sort of nailed down a bit more what type of malls that Primark works in. Obviously, the field is wide open, you can presumably have as many as you like at the moment. Where you are sort of targeting your investment, and is there a sort of side effect from Sears store closures? Because I know you took some off Sears or some sublets from Sears. Just finally, the sort of obligatory online thinking question, presumably same answer as last time, but I thought I would ask anyway. Yeah. Thank you. Let me do them in reverse order again. So online, yeah, no change of intention. I think we are demonstrating quite nicely that if we can get the ranges right, our price points and our store quality and all the other parts of the business do continue to attract actually ever greater numbers of shoppers to our stores. In the United States, we have always believed that we benefit from high levels of footfall, whether it is in the U.K. in shopping centers or high streets. We have never liked being out of town and trying to drag people to us. I think there is something in the offer that attracts passing traffic. So, we will look for busy malls. I think we have demonstrated in being able to trade in Brooklyn, which is from the area where we are, not a particularly wealthy part of town, but also in Danbury, Connecticut, which is quite wealthy, and we can trade successfully in both. So I do not think that there is a demographic division that we need to worry about too much. But we have to be cautious about choosing malls where there is good footfall. Germany then, yes, the Like-for-like decline was bigger than the 5%. German high streets have had a tough time for, I am sure, a number of different reasons. We need to keep working at our cost base. We will reduce the size of two of our German stores during the course of the year. We have got too much space, I think, in Northwest Germany, in particular. We have to keep on working on the ranges, on the social media engagement, on reassuring German consumers about the ethics that underpin the business. Just one more follow-up on the U.S. Yeah Capacity is with your existing infrastructure. Presumably, slightly smaller stores means you could end up with more stores from that central overhead. Yes, I think that's right. I would point you to how we've built the business in Spain. It's taken us 10 years to get to 45 stores. We sell more clothes in Spain than anyone else now, but we don't rush at it. I think it's particularly important that we don't rush in the States because there is greater uncertainty about the malls now and in the future, and I'd rather err on the side of caution there. Secondly, one of the things that we've learned over the last three years in the States is that the shopping locations have probably more difference from one another than we've seen in other European markets. So we have to learn our trade. That, again, I think cautions us to go more slowly than we might be able to. Whereas in Europe, there was always a space constraint. It's hard to get large boxes in the European market. That's clearly not the case in the States. We have to impose our own discipline on it. Great. Okay. Richard. Richard Chamberlain. Thanks very much. Morning, guys. Another question on Primark, please. You talked about experience in the U.S. You seem to be happier now with this sort of small or medium-sized box store format. I wondered if you think the same might apply to Germany, whether you think the rollout could now be tailored more to sort of medium-sized stores, maybe less high street biased. Is that a reason why in recent years Germany has been underperforming, I guess, the rest of the chain? The size might be too big in- I'm not sure it's been a reason for the less good sales, but I think there is an opportunity to reduce the size of some of these stores. The cost that we'll reduce, we'll take out by doing that will be probably bigger on a square foot by square foot in Germany because the operating costs are so high. Okay. Yes, I think that we will see probably more space reduction in Germany than just those two that we are talking about. And future stores, I think you are right, will be smaller. We opened in the early days, some very big stores. I was going to say it was almost the other end of the scale, wasn't it? Yeah. Yeah, 80,000 sq ft. 80,000, 90,000 sq ft. Yes, indeed. Right. Okay. Thanks. Just a quick one on presumably the lower sugar beet crop in the U.K. Yeah. Is that going to affect the agriculture business in the coming year? Yes, probably by a couple of million. Okay. Pretty small. It's not Yes, it's small. I mean, significant to them, but it's not a huge number. Yeah. Okay, thanks. Good. Thank you. James. James Krishnan. Here you go. Behind you. Thanks. Yeah, morning. Thank you. James Krishnan from Jefferies. I had two quick ones. The first one, how much are you budgeting to lose from Azucarera in the coming year? Just trying to understand how big that EB losses that you're encountering. Yes, I really don't mind saying that number. So, it's over EUR 40 million of a loss. Over EUR 40 million. Yes. It's sizable, which is obviously why we're tackling it. I presume the extreme scenario, one where beet producers do not play ball and you need to pull out of that is not off the table. It's very much of a- Sure. It's not like having a sugar factory if you haven't got any beet to put in. Fair point. Yeah. I mean, as the big factors. This is the process by which sugar production in Europe will reduce. Yeah. Farmers have choices in what they grow, and we have to respect that. The important thing about the loss for FY 2019, which is why as much as I want to improve it, you can't at this point, is that it's the beet that's in the ground now that will be processed from September through to January. So that's the cost of the sugar that will be sold in FY 2019. What we're talking about clearly, and I think you understand that, but it's worth a reminder that what we're looking to do is something that would then tackle FY 2020. So this is really about FY 2020. I don't want anybody to have anything that's misleading. It's hard to move that number now for FY 2019. On Primark U.S. Yeah If I think about year up to next, how many stores does a rollout look like? Gradual, but what are you thinking compared to when you came in? I am just reminding myself when we first went into the U.S. and talked about the Northeast, we defined the Northeast as a market of about 70 million people, which makes it look like Italy plus a bit. It is too early to start forecasting where we are aiming at. Our thinking in the past has always been, well, if we have got these stores working, let us add a couple more and see whether they work too. We do not then really have to do a lot of analysis about where we might eventually get to. So we just keep on going, and as each market works, we will add a few more. But I think you need to look at it as a market with the potential of an Italy or a France. Thank you. Okay, great. Just go and talk to him next. Thanks. It's Adam Cochrane, Citi. Yes, thanks. Just one on sugar and one on Primark. In terms of the Primark, you talked about the space being roughly the same as this year, so 1 million square feet. Yeah As you look forward, do we need the U.S. stores to start coming in to offset a lack of new space in the U.K. and it stays at 1 million? Or does the U.S. add incremental to that million square feet as we look forward two or three years? Will it stay at a million, I suppose is roughly- I think it's more likely to be that. Staying at the million. Yeah. Somewhere between a million, 1.5. It's not just the U.S. I mean, we added nothing in Italy this year, and that's a really encouraging market for us. I think we only added two stores in France. I think we're up to 11 in France. There's a lot more to go there. So those two markets, France and Italy, haven't really got going yet in terms of the space growth. Then there's Eastern Europe, which will be slightly further back. The U.S. pipeline would replace the lack of new U.K. stores. It is not just the U.S. Yeah. Okay. Fair enough. In terms of sugar, you talked about the action in Spain. You showed a little chart with the sugar price ticking up at the end. Yes. When do you start to strike the contracts? At which point, as that sugar price goes up, could that solve the problems of a Spain negotiation and these things as the sugar price goes up? I think both in the U.K. and also in Spain, we will have upside profit sharing built into the contracts we have with growers. Whereas in the past, the price has essentially been the price for sugar beet. In the U.K., there is already a profit-sharing mechanism. I think we have agreed Yeah for next year, 19 pound something or other, but if the sales price is above a certain level, growers will start to share that too. Another part of the question, I think, behind it from you, Adam, is, for the U.K., the sales contracts are mainly on an annual basis. Those are, for most customers, pretty well locked and loaded Yeah for our financial year 2019. Less so in Spain, some of that could feed through. I think the thing to look at is not just the world sugar price, because certainly there has been a, we are going to call it a tick-up at the moment, which is the appreciation of the real. We are certainly seeing quite a lot of sugar being produced by India, for example. I think one thing to keep an eye on is that premium for the domestic, I am saying domestic, it is EU supply, which is really about quality and consistency of the sugar that is produced. For us, that premium is at quite a low level at the moment. That is because of all the sugar that is in the EU. The fact that the EU will see a lot less being produced, probably in the next year, should see some tightening of that. The thing to look at is not only the actual world sugar price, but it is also the EU premium. Those are the two things that obviously, clearly determines the EU price. Did you strike your FY 2019 contracts at the low point on that chart? From FY 2020 now will look better irrespective of any work you do on costs, et cetera? Some and some. You do not strike all your contract. You strike the contracts over a period of months. Okay. Some people have bought at more favorable times, and some people less. Okay. Thanks. Thank you. Just over here. Simon Owen, first of all, in the corner. Simon Owen from Credit Suisse. Couple of questions. George, what is your sense of the political environment around sugar post-Brexit? What do you think the government's priorities are likely to be in terms of keeping the industry healthy and incentivizing it? Yeah. John, as we think about IFRS 16, can you give us a sense of what the lease liabilities are in the U.K. and non-U.K.? I think, the U.K. sugar business is, in my view, the best, most globally competitive part of U.K. scale agriculture. I hope that the government would recognize that is quite a prize to maintain. Having said that, there are clear political headlines, sorry, headwinds, around sugar and health, and a general desire to dial up perceived environmental standards in the U.K. We grow our sugar here, I think, with the least globally use of agricultural chemicals, but still we use some. You may well have seen that one of the important ones, the family of neonicotinoids, was banned for sugar beet use last year. That is a problem for us. It is one that we will overcome in time. I think it reflects that decision, more political need than science. I worry a little bit. There is an important strategic review that will start post-Brexit, undertaken by Defra, on the role of agriculture, environment, and health. That will run through next year, and that will be important. Barring a hard Brexit, you would not expect any kind of big changes, say, within the first 12 months or so? No, I do not think so. Our working assumption is that French sugar will still have unfettered access to the U.K. market. There is very good reason, to keep about the same level of duty on imported sugars from outside the E.U. in place. Non-preferential. Non-preferential. Yeah. Preferential sugar should, I hope, still come into the U.K. Absolutely. Just on leases. Look, I am going to say, the accountants give me a heavy caveat. About GBP 2.5 billion is about the number for the discounted value of our future, but that is plus or minus half a billion, believe it or not. What is the kind of average lease length across the portfolio? High single digits of that. Thank you. Simon Bowler, behind. Morning. Simon Bowler from Numis. A couple of quick questions on Primark. First one, you spoke a bit in the first couple of questions around smaller stores in U.S. and Germany, then we have seen some of the other markets you are in, you are opening almost ever larger stores. Which just seems a little bit of a contrast, and I am wondering if that is something you have identified in terms of how the brand sits or resonates within different markets or whether certain categories, Primark Man does not work in Germany or whatever it is that means a smaller store format is more appropriate. Then second question was, I wondered if you would give any sense of what profitability within the German market had done under the pressure of those like-for-likes, how you have been able to variably manage profitability in that market. Well, sorry, just first thing, these are smaller stores. They are not small. So 35,000 sq ft is still a size that we are trading in many of the U.K. high streets. I think we opened Truro a couple of years ago, and it was 20-odd. Firstly, in the States, that 37,000 sq ft, sorry, that 35 or so format just reflects footfall in U.S. malls. To some extent, probably- Sales densities overall and sales densities overall as a consequence of there being much more retail space per head of population than in Europe. It also, I think, reflects our desire. We would rather over trade space that was too small than under trade space that was too big. It might be that America, that we go back to some of these smaller stores and go, "Well, they are too small now." It is an exercise. It is a process we are going through in Spain now. But in Spain, when we went in, the first stores were 25,000 sq ft. And the average size has grown over time. Just quickly while you are there. I do not think, Simon, there is anything particular about the range. No. There are different emphases for the range as you go to the different markets, but it is not that part of the range is just simply not working in one of the countries. So that is not the case. So that is not the driver of this. With regards to German profitability and management thereof? Inevitably, it was reduced reasonably significantly by the sales decline. Also, in the case of Germany, the difficulty in reducing staffing costs in particular. The labor market is much more inflexible. It just takes longer to catch up to the staffing you require in the German market. But a reminder of, I won't give quite the margins. Germany is profitable, and the sales in Germany, about EUR 0.7 billion. It's just a reminder of this certainly is a scale business, but it's around the like-for-likes that we're looking at here. Yeah, sure. Thank you. Okay. Well done. Okay. Thank you. Thank you, everybody. Thanks very much.