Earnings Call: H2 2017

Nov 7, 2017

The door is shut, so I guess you are all here. Thanks to all of you for coming to this review of the annual results for the 52 weeks which ended on September 16, 2017. Many of you will already have seen our financial highlights. Here they are. At constant currency, group revenue is up 6%, adjusted operating profit up 13%. Adjusted profits before tax then up 22%, adjusted earnings per share up 20%. Dividends we have announced will be rising by 12% for the year. Gross investment is a very high number of GBP 945 million, driven in particular by CapEx. Despite that, cash generation has been strong, and we end the year with net cash of GBP 673 million. Very good financial results for the year. The business highlights then are these excellent progress across the group. It really is across the group. Good underlying growth in so many different places. There is, of course, some benefit of currency translation on top of that. Primark, very strong sales performance, particularly in the second half. On a comparable basis, Primark sales were 14% ahead, 10% in the U.K. It has been a year of significant expansion of retail space, so 1.5 million square feet of new space, 30 new stores. If that is not a record, it is pretty close to. We have been talking about a step change coming in sugar profitability. It came this year. It is not just the consequence of better pricing, it is also the consequence of five years work on our cost base. We have reduced the cost base in our sugar businesses by a long way north of GBP 100 million through that period, and I think turned that business from a good sugar business into a great one. Further improvements in profits and ingredients, further margin progress there, in particular, grocery also ahead. As John will show you in a moment, very strong cash flow even after record capital investment. John, for the financials, please. George, thank you very much. Group revenue was GBP 15.4 billion, an increase of 15%, and adjusted operating profit was GBP 1.36 billion, up 22% at actual exchange rates. Acquisitions and disposals had only a very small effect on operating profit again this year. Our adjusted profit measure reflects the underlying performance of the businesses, and as usual, excludes profits or losses on the disposal of non-current assets, the amortization of non-operating intangibles and transaction costs. The amortization of non-operating intangibles increased to GBP 28 million this year, reflecting the acquisitions made. Transaction costs and acquisitions amounted to GBP 5 million in both years. We had some changes to accounting periods between the two years, the net result of which was immaterial. Last year was a 53-week year for British Sugar, the U.K. Grocery businesses, GWF, AB Agri, and Primark. 2016 included an extra week's trading compared with this year. This was broadly offset by last year's change in Illovo's year-end, which resulted in the consolidation of only 11 months' results in 2016. Following the results of the U.K. referendum on EU membership in June 2016, sterling devalued against all of our major currencies. The increase in adjusted operating profit that we see here year on year of GBP 245 million included a translation benefit of GBP 85 million, most of which arose because of the timing of the devaluation in the first three quarters of our financial year. The increase of GBP 160 million in adjusted operating profit at constant exchange rates clearly demonstrates the strength in the underlying growth of our businesses. Sterling weakness against the US dollar had an adverse 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, and you will see that the major effect arose in average rates, which affected the income statement. There were only minor differences in closing rates, and so currency translation had little net effect on the balance sheet. This year's unadjusted or statutory operating profit was GBP 1,336,000,000, 21% higher than last year. The profit of GBP 293 million from the sale of businesses arose on the disposal of our U.S. herbs and spices business and the cane sugar operations in South China, with very little impact on the group's trading profit. The larger part of the GBP 14 million charge last year related to a provision for the future costs associated with the reversion of leases on stores that were previously assigned to another retailer. The net interest expense was level with last year, despite the improvements in our net cash position as a result of the group's longer term financing. That's mainly through the US private placement and local borrowings maintained as a hedge against assets in high inflation countries. The movements in other financial expense reflects the change from a net surplus in our defined benefit pension schemes at the beginning of 2016 to a deficit at the beginning of 2017, following the decline in U.K. bond yields in September 2016. I'll bring you up to date with where the pension schemes are now, because it's moved back into surplus, so it's just you need to follow the timeline. Profit before tax was 51% higher than last year at GBP 1,576,000,000, and 22% higher on an adjusted basis. The underlying tax rate was 22.4%, higher than last year's 21.2%, and broadly in line with where we'd said it would be a year ago. As a reminder, the calculation of deferred tax liabilities last year benefited from the announced reductions in the U.K. corporation tax rate to 19% on the 1st of April 2017, and 17% with effect from the 1st of April 2020. At this stage, I expect the underlying tax rate for the new financial year to be similar to this year, so around the 22.4%. The credit on intangible amortization is higher this year, reflecting changes in deferred tax and the higher amortization charge. The tax charge of GBP 87 million relates to the business disposals. Adjusted earnings per share increased by 20% to 127.1 pence. On an unadjusted basis, they were 47% higher at 151.6 pence, which includes the profit on disposal of businesses. A final dividend of 29.65 pence per share has been proposed, making total dividends for the year of 41 pence, a 12% increase. Dividend cover on an adjusted basis will increase slightly to 3.1 times. Moving now on to the balance sheet. Net assets increased by GBP 1.3 billion this year to GBP 8.4 billion. What were the drivers of this big increase? Well, the first one is the move from net debt of GBP 330 million last year to net cash of GBP 673 million this year. That is as a result of strong profit from operations, which I will show you later, and the proceeds from the business disposals. The second is the movement from a defined benefit pension liability last year to a net surplus this year. Both of these movements have strengthened our financial position significantly. As a reminder, last year's net debt shown here of GBP 330 million reconciles to the headline figure of GBP 315 million after allowing for a net GBP 15 million of cash, which is included in assets held for sale. The increase in intangibles and PP&E were driven by capital investment ahead of depreciation. Year-end working capital fell by GBP 92 million and average working capital as a percentage of sales was substantially improved, moving from 8.4% to 6.5%. This was largely the consequence of a reduction in sugar inventories, especially at British Sugar and tight stock management at Primark. In the coming year, I expect some reversal with an increase in sugar inventories. Other net financial liabilities this year primarily relate to mark-to-market losses on forward purchases of U.S. dollars by Primark as a hedge against their input costs when orders were placed. When these currency forwards were valued at the year-end, exchange rates have moved against us, resulting in mark-to-market losses, which will have an adverse effect on profit in the first half of the new financial year when the related inventory is sold. Net deferred tax liabilities were higher this year, with the most significant increase being those relating to the U.K. pension scheme moving from a deficit to a surplus. The U.K. defined benefit pension scheme accounts for some 90% of the group's pension liabilities. This was the main reason for the move from a net pension deficit for the group last year of GBP 290 million to a surplus of GBP 126 million this year-end. That improvement in the U.K. scheme was driven by higher investment returns than expected and experience gains since the last triennial valuation in 2014. Since our financial year-end, the trustees of the U.K. pension scheme have approved the 2017 triennial valuation, which revealed a surplus of GBP 176 million on a funding basis. Obviously the pension scheme is in good shape. Last year, GBP 237 million of net assets were held for sale relating to the U.S. herbs and spices and the South China cane sugar businesses. Cash flow. I think by any measure, this was a very strong measure, a very strong year for cash generation, with a free cash flow of GBP 924 million compared with last year's GBP 483 million. This was delivered after funding a record level of capital expenditure with some very strong investments in food, but driven really by an increase at Primark. I have already explained the reduction in working capital, and this is evidenced by the cash inflow of GBP 126 million here. I expect a working capital outflow next year. The tax outflow of GBP 264 million is the cash tax paid on trading operations and is higher than last year, reflecting higher profits. The increase in dividends received from joint ventures and associates relates to our highly successful U.S. commodity oils joint venture, Stratas Foods. The gross proceeds from business disposals were some GBP 500 million. Cash tax of GBP 92 million was paid on these disposals, and GBP 103 million of debt was assumed by the purchaser of the China sugar business. After pension liabilities assumed by the purchaser of the U.S. business and related transaction costs, this leaves us with the GBP 278 million of cash that you see here. Turning now to the performance analysis by business segment. Here are the highlights for me on this page. Group revenues increased by GBP 2 billion this year, with every business segment contributing to the growth and half of it coming from currency translation. We delivered the expected step change in profit for sugar, with an increase of GBP 188 million to GBP 223 million. In grocery, the progress in Twinings Ovaltine, ACH, and George Weston Foods was partially offset by the loss sustained by UK Bakeries, and the margin declined for the segment from 9.5% to 9.0%. Ingredients clearly had an impressive year, with excellent revenue and profit growth. Profit growth and the margin of 10.4% for Primark were better than expected. The margin decline of 120 basis points was the result of the transactional effect of the devaluation of sterling against the US dollar on input costs, offset to a considerable degree by effective input margin mitigation and a lower than normal level of markdown following the strength of our summer trading. With most of next year's first half U.K. purchases contracted at a weaker sterling/US dollar exchange rate, there will be an adverse effect on margin in the first half. However, the strengthening of the euro against the US dollar in recent months will have a beneficial transaction effect on Primark's Eurozone margins, particularly in the second half of the year, if these prevail. Net currency, probably transaction for Primark will be a positive in the coming year. Together with a more typical level of markdowns and the absorption of cost increases, we expect full year margins for Primark for the new financial year to be similar to the 10.4% that we achieved this year. Margin for the group increased from 8.5% to 8.9% for continuing businesses, and return on capital employed increased from 18.4% to 20.5%. Importantly for me, every business segment now has a strong return on capital employed. By geography, finally. The international breadth of the group, I think is demonstrated here with a reduction to some 37% of both revenue and profit being generated by the U.K. The strong growth of Primark in continental Europe and Illovo in Africa has resulted in the Europe and Africa segment becoming the group's largest geographic segment by revenue and by profit. The increase in revenues in the U.K. was driven by British Sugar and Primark. The increase in Europe and Africa was driven by Primark, Illovo, and currency translation gains. The major driver of revenue increase in the Americas and Asia Pacific was currency. In the U.K., British Sugar's profit more than offset a decline in Primark's margin and the losses at Allied Bakeries. Profit increased by more than 50% in Europe and Africa, with a strong contribution from each of Primark, Illovo, and also Ingredients, importantly. George Weston Foods and Twinings Ovaltine were the main drivers of profit growth in Asia Pacific, but a higher level of rationalization costs just held back the margin there. At that point, I will hand back to George. Thank you very much, John. Starting with sugar, and well done the sugar teams. I cannot emphasize enough the importance and the success of the ongoing profit improvement program. This year's savings contributed significantly to that GBP 223 million outturn. And taken as a whole across now five years, the performance improvement program, the cost reduction, has left us in a very strong position indeed, particularly as we start to see the consequences of European quotas falling away. We are one of the world's lowest cost producers now, and there is more to come on that cost base, too. Illovo, in its first full year of our ownership, delivered strongly for us. And you will remember that this was the first year without South China cane sugar. So we did see higher prices globally and in Europe. Profits were up both in the U.K. and Spain. Production in the U.K. was only 900,000 tons. That was the consequence of us wanting to get through the stock overhang of a couple of years ago. We are now through that. In Spain, though, volumes were well ahead. We have entered into multi-year contracts with now the majority of our U.K. beet growers. We have always had multi-year contracts in Spain. To have them in the U.K., I think gives us a level of security, both for ourselves and also for our customers, which in more uncertain times without quotas, I think is a good place to be. In Illovo, we have seen product improvement coming through. You remember, we are trying to grow domestic markets. That requires higher quality sugar than that which we would previously put on a boat and send to a refinery. Those domestic markets in Southern Africa continue to grow. The weather has come back in a number of the countries which we operate, so the yields have come back. It was a good first year with Illovo. And in our two remaining sugar factories in China, in the north of the country, we have seen a record sugar beet crop and profits ahead in that excellent business as well. Just to show you what has been happening in sugar pricing. World, New York number 11 is the major traded part of the sugar market. We have come off the levels of $0.18-$0.20, which we enjoyed for a period of time, and now we are sitting 14 and a half. More significant for our business, the spot prices in Europe have come down significantly in the last few months, both as world production has moved into surplus or stayed in surplus. Then most recently, when the reality of a truly huge EU sugar crop, including in the U.K., has become apparent. We think we'll be processing more than 1.4 million tons of sugar this year in the U.K. alone. Difficult in the first year of deregulation. I think that big crop is likely to put welcome pressure on the inefficient across Europe pretty smartly. Agriculture then had a more difficult year, with profits reducing GBP 58 to GBP 50 million. On revenues that were well ahead as a consequence of commodity price inflation in the U.K., but that's a cost-plus business, much of the U.K. business. We had with the lower sugar beet crop, that 900,000 tons of sugar, we had less sugar beet feed to sell in the U.K. That's an important part of the agricultural business, and we saw the financial consequences of that. AB Vista, the specialty part of agriculture, continued to see growth, and we continued to invest in new business opportunities, particularly in specialty feed. The large beet crop this year will see a large quantity of sugar beet available for sale. Agriculture, I think looking forward, should see a reversal of the declines of this year. Moving next on to grocery. Twinings, Ovaltine, we always put that first. It's always growing, and it did so again. We saw welcome margin improvement at ACH and George Weston Foods. Difficult trading environments in the UK Bakeries, which I'll come back to. Then two nice acquisitions. Well, excuse me, three acquisitions, two in sports nutrition, and then Acetum, the balsamic vinegar company in Modena, and let me just dwell on those two for a moment. They're both differentiated businesses. They both give us opportunities to grow, but obviously for different reasons. Sports nutrition is a nascent market in the U.K. It's a growing market. We bought two brands, HIGH5 and Reflex. They're good brands. They're well recognized in the marketplace, and both are based on good nutritional science. Our job is to grow the brand saliency and with that, sales. It started well, and it's two nice business that we are integrating together into one at the moment. Acetum, it's a lovely business in the area of flavor in which we're already well invested. It has great products, particularly the one on the left-hand side. Some of you, I think, will find examples of it in your pack in front of you. It's the closest we've ever got to a bribe. I'm assured it's really not. They're in the middle of the room. They're in the middle of the room. You might want it. The product on the left-hand side, which is aged is, I think, is absolutely fantastic. It's a well invested business. It has PGI status, which means that you can't put balsamic vinegar or Modena on anything that doesn't come from Modena. And what we like, I think, most about this business is its good international position. So 90% of what Aceta makes is sold outside Italy across 60 markets, and we think we can grow many of those markets over time. We've done it before, and we think we'll do it again. Moving then on to the businesses that we had a year ago, and starting with Twinings Ovaltine, hot beverages. Twinings brand itself performed very well in its major markets and other markets, too. We have expanded the range of infusions and green teas. We compete in a number of areas, but particularly product quality of advertising, and packaging. I would just like to point out some of this packaging innovation we have seen this year, where we continue to add to our premium credentials. Moving across to Ovaltine, the largest market, as you know, is Thailand. We saw good growth in Thailand that year, and in a country which has been characterized by a certain amount of political instability, that was very reassuring. Then I have to mention my favorite product, Crunchy Cream, every time I stand up. Here, production is now in-house, and we have got plenty of capacity to produce for our markets. We had another good year of growth for Crunchy Cream in both Switzerland and Germany in particular, and no surprise there. It is lovely. Staying on grocery in Australia, we launched Thins there. You may be aware of them in the U.K. market. We are the only producer in Australia. We built the small factories to produce them. We advertised this new product category heavily when we launched them earlier this year, and they are going well. At Don KRC, the meat business based North Melbourne, we saw higher volumes through the factory and good production efficiencies and an increase in the profitability of that business. In North America, having sold the spices business, we now have two categories that make up ACH. The first one is Mazola, and the second one is bakery ingredients, which are the three product areas on the right. I have talked in the past about Mazola plant sterol advertising driving sales and also driving margins over time in corn oil. Let me just show you now an example of that advertising, which has been aired over the last 12 months. Who said kids can't cook? Who said men can't bake? Who said that women can't grill? There are a lot of cooking misconceptions out there. Like the one that says olive oil is the only heart-healthy cooking oil. Mazola corn oil has significantly more cholesterol-blocking plant sterols than olive oil. A clinical study showed it can help lower cholesterol two times more than extra virgin olive oil. When it comes to heart health, one thing is clear, Mazola is a smart choice. America's number one selling heart-healthy cooking oil. Very clear, and it's a campaign, a positioning for the brand that we will continue to push year after year after year. Going back to North America then, we had a good year in home baking. We saw growth in, I think, all our categories, domestic yeast being the largest of them, but also corn starch and corn syrup. Then another strong year by our joint venture, Stratas Foods. It's a business that has really delivered for us over a number of years. So taking George Weston and North America together, good year for both businesses and margin improvements in both these businesses. The U.K., it's been a very difficult trading environment for all our businesses as a consequence of the commodity price inflation that followed devaluation. Obviously, the really difficult area has been bakery, which I'll talk to in a moment. Life hasn't been easy for anyone, and despite that, Jordans, Dorset, Ryvita, and AB World Foods, and Westmill had good years. Jordans and Dorset continue to grow internationally. It's one of the things that offsets some of the margin squeeze that we've seen in the U.K. Those international sales, as I say, growing well. The U.K. has become a good place to manufacture, I think, anything but food included. Lower sterling rates have certainly helped our international sales growth, both in Jordans and also in World Foods, and have helped us with, in the first instance, with import substitution. We are very competitive. We are well through the building phase for new Ryvita crispbread factory. It's just outside Lincoln. Important new facility for us. That'll be finished this year. It's another example of us investing in our cost base. Major project. World Foods, we have rebranded and relaunched Blue Dragon with great success. Patak's and Blue Dragon have both increased their U.K. market share. Then one I do not think I have mentioned in the past, we have a super noodle business in the U.K. Noodles, by and large in the past, have come from China. They do not anymore. They come from Stockport. We have a lovely supply chain. We have a big flour mill in Manchester, which turns U.K. wheat very efficiently into noodle flour, and then a big noodle plant just up the road in Trafford Park. We have increased market share in the U.K. There has been a trend away from rice to noodles in the U.K., particularly in the Chinese sector, and we benefit from that. We are beginning to export noodles, too. There are still a few Chinese noodles coming into the U.K., and we are after them. Nice differentiated business. We have a product advantage. We have real efficiency in the supply chain, and it has gone really well over the last few years. It is now big enough to mention in this audience. Bakeries are doing it tough. We really are doing everything we can with this business. We control costs as well as anyone, and I think probably better than anyone. I think we are the low-cost producer in the U.K. We are very well invested. As you will remember, we spent over GBP 200 million over a number of years rebuilding our U.K. bakery network. We have super plant and equipment. We are investing in our brands. That is Kingsmill, Allinson, and Burgen. But with commodity inflation, flour prices in particular, not being recovered in the marketplace, this business has become loss-making, and it is not sustainable in that position. As you would expect, we are in negotiations and discussions with our customers around a range of items, and let me leave it at that. But the position cannot go on indefinitely. Moving across to Ingredients, we have had a number of years of good improvements in both our Ingredients businesses, being yeast and bakery ingredients on one hand, and then a range of specialty ingredients on the other. Mauri continues to improve its profit and its margin. Progress in all geographies, particularly in North America. We have bought a medium-size blending facility in the Midwest, a company called Specialty Blending, which improves our capability in bakery ingredients other than yeast. Then I think it is worthwhile calling out the performance of the teams in South America, where I was just a couple of weeks ago. Argentina and Brazil have really difficult macroeconomic situations, high levels of unemployment, big decreases in disposable wealth, and it is all flowing through into every part of the marketplace. Nonetheless, in Brazil in particular, they actually managed to increase the profitability of the business, and Argentina has fought really hard to limit the potential downside of operating in Argentina at the moment. Those two markets, they are both evidence of some improvement in consumer sentiment, but really good work by the teams there. As indeed there has been across the specialty ingredients part of our portfolio, strong sales growth, good increase in margins, particularly in enzymes and specialty lipids. Enzyme production, we have given ourselves about 40% more capacity by investing in our plant in Rajamäki in Finland. That work has now been completed, so we have capacity for growth. We were right up against capacity constraints until we did that work. We have two particular focuses at the moment. We will create more in the future, but human nutrition and pharmaceutical excipients, these are both areas of good growth, considerable focus, and quite a lot of capability in our Ingredients businesses. From enzymes to Primark. Very strong sales growth across the business, particularly, but not exclusively in the U.K. So the U.K. up 10%, and Continental Europe up 16%. Summer trading was very strong, and sales were largely made at full margin, hence the reduction in the markdown percentage that we saw, particularly in the second half. We opened 30 new stores in the year, 1.5 million sq ft of space. That is a recent record. I think you need to go back to Littlewoods' expansion years in 2006 to see something equivalent. It is worth pointing out, through all the success in the U.K., 15 out of the top 20 stores by sales densities are now in Continental Europe. We have seen market share growth in all countries, and I think in this year in particular, we have all seen just how committed Primark is to price leadership. In an era of inflation in the U.K. in particular, we actually brought prices down on average. Now, that I think demonstrates how committed we are to price leadership and to our consumers. I think this year has also demonstrated that Primark is about a lot more than simply price, and let me show you through some of the illustrations what I mean by that. Autumn/winter ranges are selling strongly. October was quieter, as it was for the whole high street, but we got off to a really good start in August and these last few days. This last week when the weather has gone colder, we have seen very good sales performance. Same mixture of fashionability and price. So statement T-shirts for a fiver. The hoodie. Red is an important color for the fashionistas this year. The hoodie at £7. Then the cord jacket, great sales reaction to that product, for £15. We have also been, I think, increasing or deepening our fashion credentials. We formed a link in the U.K. with Glamour magazine, and we brought out a range of nine must-have fashion items, and we have promoted them through Glamour magazine. The aviator jacket on the right-hand side for £30 has been a phenomenal success. We are great value both for basics and evermore for great fashion. Both are integrated more and more with our digital and social media activities. I showed you last time some of what we do on social media, and let me go back over that and update you on it. So we are followed by now 10.7 million people on social media, including over 5 million on Instagram. That is versus 8.6 million a year ago. We get over 10 million visits monthly to our website. That is up from 8 million a year ago. It is across all geographies, all languages. I mentioned last year that we had been particularly focusing on mobile last year. This year, there has been a lot of focus on video, both instructional videos and also just product awareness videos, delivered increasingly, as I say, through mobile. Womenswear product is the top department on social media, but over the last 12 months in particular, there's been a great focus on both beauty and also home, two categories which have grown strongly over the last year. Let me show you this. This was our top post on Instagram, 118,000 likes, and it was about home, not about any of the fashion ranges. The most watched video, with over 800,000 views, over 40,000 comments, was Well, it was within license and it was Harry Potter, and here it is. Great reaction to Harry Potter. Licensed product is another important part of the mix. We had particular successes this year with Beauty and the Beast. It started in March with the Chip Cup. We've now sold almost half a million of them. We moved then on to purses and bags, and they have similarly sold in extraordinary numbers. Harry Potter, just to dwell on that again. We turned the trend room into perhaps one of our most important stores, Oxford Street East, into a magic area and given it over entirely to Harry Potter. That's the bottom right. It's sort of some fascination for me that in terms of participation, so percentages of sales, the best market for Harry Potter is not the U.K., it's Italy. Moving now into what is in store now, other themes. For those of you who are not aware of it, hygge is a Danish lifestyle trend. It's all about being warm and cozy at home at night and being glued, I think, to box sets. We've done Describing my life. Primark has done our own affordable take on hygge. We brought together both homeware, but also nightwear into areas where they will be shopped together, and we've put it in our windows and online, and the reaction has been very strong indeed. Because we're coming up to Christmas, here is a great photo of some of the ranges which are available for Christmas parties and Christmas celebrations in the coming month. We're about a lot more, I hope you can see, than simply price. We're about a lot more in ranges, we're also about a lot more in stores. Now I've picked these three out from the 30 that we opened, because they've all got a little bit of a twist to them. Zwolle is a lovely medieval town in Holland, where we have, I think, blended in as sensitively as we can into that market, and I think have done a good job there. Bracknell is a secondary market in the U.K. We've opened Bracknell this year. This is a significant store, and it's the best looking retailer in town. So we continue to invest in high quality, appealing stores. Top right is Val d'Europe, which is in Euro Disney, or near Euro Disney. We opened it. It's our most recent French opening and hugely successful it has been, not least around Disney license. We have a big Disney license in that store. The in-store experience, just as the outside of the stores, the windows get ever more attractive, so the in-store experience improves too. This is Verona, in the heart of fashionable Italy. I think it shows you the quality of our in-store display and the merchandising. If we move across then into other stores, it doesn't really matter where they are. This happens to be Algarve, a new store in Portugal. We work to continue improving the in-store experience. This is the jean shop, what we call the denim kitchen. You can see real confidence and shopability and range in our jeans offer. This is beauty in Colchester. A year ago, we wouldn't have been able to show a picture like this. We're getting ever better at beauty. We're giving it more space. We've got a lot of confidence in it, as do our customers, and beauty has been a great driver of sales performance over the last 12 months. Back to Val d'Europe. This is part of the Disney-themed area in that store. Again, eclectic range of Disney merchandise. Back to some numbers then. 1.5 million sq ft of new space was opened. Net 30 new stores. Three of them were in Italy. Italy and France are two newest markets in Europe, have been very successful over the last two years. France, as you can see from this next slide, we're now up to 11 stores. Italy, only four. We opened a significant number of new stores in the U.K., as you can see. So actually, that 4.5% like-for-like growth through the year in the U.K., would've been 5.5% without cannibalization. Lots more space for new stores in Europe. We're up to 345. Primark USA, we've now got eight stores open and we've added three during the year. We've extended Boston by 20%. We've done a good job, I think, fine-tuning the product ranges. I think we've got products more or less right there. The average store size, I have to remember, store age, I have to remind myself, is less than a year, so we've still got a lot of learning to do. You'll have seen the announcement that we are reducing the size of a couple of stores. We have a wide range of store sizes everywhere else. In the U.S., we opened everything at about 50,000 sq ft in the malls, and I think we've got an opportunity to reduce costs in a couple or maybe three of the stores simply by taking some space down. We think that we won't lose sales for doing so. We opened the Braintree store, which I think was our seventh, successfully from a slightly smaller space, 40,000 sq ft rather than 50,000. What last to be said? Brooklyn, we're looking forward to. It opens next summer. Customers love us. They come back. I was talking to someone just earlier on today who, in our Staten Island store, met someone who couldn't wait for a store to open in Brooklyn because he was traveling all the way. By and large, we're still fighting against awareness or lack of awareness. In the malls in which we're operating, we are selling well, but outside the catchment area of those malls, I think brand awareness remains quite low. We're happy with the progress we're making. Knowledge of brand takes a while. Looking forward, we're going to open in Primark, we're going to open about 1.2 million sq ft of space this year. The biggest markets, sorry, the markets which will have most out of space, France, Germany, and the U.K., and there will be a number of important new stores, Stuttgart, Munich, first store in Munich, Toulouse, Bordeaux, and Antwerp. Perhaps more than 15 out of 20 will be top sold density stores will be in Europe this time in a year. Back to the group as a whole, excellent progress across the group. Really has been a good year. Primark, very strong sales, particularly in the U.K., significant expansion. A step change in Sugar profitability. Profit improvements in a lot of other places in the group, too. Then there is very strong cash flow that John has taken you through. Looking ahead, more space expansion in Primark. That rollout continues unabated. Margins, we think after two years of margin pressure, will be in line with the current year. The year just gone, more progress from Grocery Agriculture ingredients. Sugar, there will be higher volumes, particularly in the U.K. Lower costs, again, but those two benefits will only partially mitigate the lower EU prices that we have seen in this negotiating round. At the moment, we are not factoring in any material currency effects. That, again, is the first time in three years that we have been able to say that. We expect to see further progress in adjusted operating profit and earnings in the coming year. Thank you very much. Great. Questions? We will open up to questions. Warren Ackerman. Good morning, John. Good morning, George. Warren Ackerman, SocGen. Couple of questions. First one on sugar profits. You did GBP 223 million, John. Given the low sugar price charts you showed us, can you give us your best guesstimate quantum of how big a reduction we should expect in sugar profits in 2018? That is the first question. The second one for George is on the balance sheet. You are now net cash. Can you just talk about the uses of cash going forward? Do you expect CapEx to go up even more than it already did this year? Because we have been in periods of net cash in the past. How do you feel about the balance sheet net cash? Could we maybe hope for bigger returns for shareholders in terms of dividend payout, et cetera? I noted our dividend growth is lower than the earnings growth, so your cover is rebuilding. Just finally, if I can squeeze a third one in on Primark. John, you've said that margins will be flat for the year. Can you give some idea of the quantum of the first half, second half phasing? Obviously down in the first half, up in the second half. Maybe isolate the mark-to-market losses on those currency forwards that you talked about in your prepared remarks. Thank you. Great. Okay. Let's start with sugar. Warren, as you said, compared to the number just over GBP 220 million for AB Sugar, it would not be right for me to give exactly a number for the forecast for the coming year. But I think it's some tens of millions off from that. I think it's below the GBP 200 million mark, but not by more than a few tens of millions. This is not- Not going all the way back down. It's not going all the way back down again. So it's that, which I think is important. Just a reminder, we've got that, if I can describe it, that bedrock of a low profitability, which is over GBP 100 million. So we are seeing more volatility clearly in the EU sugar profit. But nevertheless, it will still be profitable for next year. So that's probably where I am. So a bit softer than maybe where we thought it was, just because of where we've got good visibility now for the EU with most of British Sugar contracted. So, I think that's a good call. Okay. Balance sheet and use of cash. Yes, the dividend is going up by only 12%, still 12%. That comes after 2 years where the dividend increase was greater than the earnings per share growth, which was actually negative. We would much rather have a constant and reliable dividend progression than one that bounced around. That is the first thing about dividend. Dividends have increased consistently for years now. Onto the balance sheet. We are never going to apologize for being conservatively financed. I think 2 things, and we are never going to apologize for taking our time. That balance sheet strength is both a source of security, but more importantly, it is a source of strength and flexibility. The balance sheet in ABF is there to serve the needs of the business, not to meet some particular ratio. Having just spent quite a lot of money on ACH, having spent quite a lot of money on CapEx, I am very comfortable that whether we are GBP 600 million in the black or whether we are GBP 300 million in the red, it does not really matter. We are conservatively financed, and we have got balance sheet strength for opportunities that may come our way. Do not expect any great change in how we operate with our balance sheet or with our dividend policy. Coming back to Primark, it feels not many, a few tens of basis points are down, I think, in the first half, and then some offset to that similar sort of number of tens of basis points in the second half. The mark-to-market loss is just as a reminder. That is really because the sterling U.S. dollars moved from about 125 to about 130. So that is the mark-to-market losses. I am factoring those coming through in the first half in that guidance. It is just how it showed up in the balance sheet is really what I was highlighting there. Thank you. Second one. Okay. We'll go with Jeremy Fialko. Good morning. Jeremy Fialko at Redburn. Two questions. First one is on the U.K. bread business. Has the business got a lot of, let's say, pension liabilities or other degrees of fixed cost absorption within its P&L that make it more difficult for you to do something, let's say, a little bit more radical with that business if the situation didn't improve? The second question is on the European sugar market. Just a sense of where you think the price might actually bottom in terms of the European sugar price. Whether you think this sort of high 300s is where it is, or whether you think it's got another few tens of euros to go before the oversupply might clear. Thanks. Yeah. I think just taking the European sugar market one first. With this very big crop, that crop has to clear through exports. The European market is not going to grow significantly because sugar is cheap. It has to clear by through exports, which makes it seem likely that the bottom will be sort of export parity for the European market. I think it can go lower and probably will go lower than the sort of high 300s. Having said that, the sugar round takes a while to operate and our average number is just that, it's an average of sales made over a several month period. The bread business, no, there's no reason why we can't, if the right thing to do was to restructure that business more radically, we could do it. I think you mentioned something like pension costs or whatever. Actually, remember, we think we've got some of the most productive bakeries anywhere. That's what the capital investment Jeremy was about. In terms of that cost, I think it's a smaller part of it. Okay. Joanna. Georgina, rather. Beg your pardon. Thanks. It's Georgina. Yeah. I'll get it right eventually. No worries. From JP Morgan. Three questions on Primark, please. The first one, just in terms of pricing. You mentioned that you've actually sort of moved average prices lower. I was just wondering if you could share, has that been in line with the market in terms of prices coming down at the lower end of the architecture and perhaps even nudging up at the top? Or how you've kind of structured that, and indeed, was it in response to others moving their entry price points lower? Okay. Second question, just on Germany. I know you've mentioned in the past that you thought you could improve there, perhaps in terms of ranges or maybe even in terms of store locations. If you could just give some color on how Primark's sort of trading in Germany and around that would be great. Then finally, I think at the last set of results, you just kind of mentioned click and collect and you were exploring it, looking into it for Primark. So any update on that would be really helpful, please. Thank you. Sure. So price points. Two generic comments which are true of every year. The first one is that competitors challenge us the whole time, and we respond the whole time. This year, perhaps there was a bit more of that. We moved prices down, in some categories in reaction, in response to that. Secondly, no, there hasn't been any offsetting kind of push top end up to fund. We took those price reductions out of our margins. We didn't mix. The second generic point is, of course, there's so much newness in Primark every year that complete like-for-like comparison on price is awfully difficult. But no, we just moved prices down. So part of the reduction in margin as we started the year was obviously currency, some of it was actions that we took. I suppose we've got a mindset in Primark that, over time we bring prices down. We don't push them up, and it was another year of that. Germany had a better year this year than in prior years. The building program still continues. As you see, the Munich store will be our first store in Munich. Stuttgart, which is a big market for us, that'll be our second market. There is always adaption to local taste. I think in Germany we're better, than perhaps we were a couple of years ago, and they will have benefited. So German purchasing comes out of Reading buying office, which had such success in the U.K., and some of that flowed across into Germany too. No, Germany better. Just one comment. We do talk about Germany. Listen, sometimes we lose track of perhaps our scale already in Germany. Our sales are probably about three quarters of a billion euros. That's a sizable business by any. Yeah. Our sales densities remain above the company average. Going on to click and collect. Yeah, we keep our eye on it. We work out where it might be relevant to us. The most important part of online for us is the communication piece. Our job is to attract people into the stores because of what they see online, evermore. Another thing that we work on increasingly is in-store availability. Whether in the future click and collect will play a role in that, is a moot point at this stage. I think there's probably more to be gained in the short run, shortly in term, by sort of in-store disciplines and ordering disciplines being better. On a Saturday afternoon, our availability isn't where we'd like it to be. Thank you. James Grzinic in the middle there. James. Good morning. It is James Grzinic from Jefferies. Two quick ones. George, firstly, at what point does the gross cash balance become so embarrassingly big that it becomes more of an enabler for businesses? Potentially that is going to be the case in a couple of years' time. I am just wondering Yeah the scale of that. Secondly, should we conclude from what you said on Braintree that that is doing 20% higher sales than cities in the other regional mall locations in the U.S.? Braintree, yes. It is, isn't it? It is. Yeah, no. We've lost any of the sales potential in Braintree by opening 40,000 rather than 50. On the cash balance, I'd be surprised if the cash balance went up this year. We've spent quite a lot of money on acquisitions, the working capital. There'll be working capital demand from that sugar crop. I'm comfortable where it is. I'd be comfortable with a bit higher, I'd be comfortable with it going down. It's sort of in the right place. Big range, but, I think I have nothing more to add really at this stage. Only with the capability. Look, I don't think either of us are about just building up huge cash balances, and putting it in a piggy bank. But we are a company that first and foremost believes in reinvesting in our business. And, yeah. Do you generally sense that valuations for M&A are starting to move more in favor of you? Is that starting to change? What would you say about that? I don't think I would particularly say that. But I think you've got to be smart in what you look out for. I still believe that some of the valuations are extremely high in food. Some of the things we looked at this year, there'll be no surprises that we look at the big transactions. It was just blimey. Yes, exactly. Whereas, I can assure you the Acetum acquisition was at a, for us, a very sensible multiple. We'll maintain our capital disciplines looking at this process. Okay. Thank you. That's great. Okay, Richard Chamberlain over here. Thank you. Thank you. Yeah, morning. Richard Chamberlain, RBC. Just a couple more on Primark, please. On the mainland Europe side, should we expect cannibalization, do you think, to ease off a little bit this year? I think it was a factor again, particularly in the Netherlands. Should we expect that to ease off as maybe space growth is a little bit less? The other one is around beauty. I mean, clearly, again, very strong volume growth. Is that having any kind of diluted mix effect on margin or is, or actually margin's broadly comparable with the rest of the business? Thanks. On cannibalization, we'll continue to see cannibalization in France. None in Italy this year because there are no store openings. Germany, the second Stuttgart opening will affect. It's more of the same. This year, the country of highest cannibalization was Netherlands. We won't have that one this year. But by and large, you shouldn't look for anything but some cannibalization going on Europe as we increase the number of stores. Then beauty, no, doesn't cannibalize margin. One of the joys of beauty is it doesn't take up a huge amount of space. Okay. John, just on your point about a working capital outflow be likely in FY 2018. Yes Is that all around the sugar crop? Yes, it is. Or the inventory? Is there anything with Primark there? We do have a focus on management of working capital across the group. I mean, clearly George said there's a huge crop coming through in Europe and, by any imaginings, that's going to mean an increase in sugar stocks. That's really what I'm saying. Okay. Okay. Thank you. Great. Take Jon Cox at the back there. Thank you. Yeah. Jon Cox, Kepler Cheuvreux. Just back to Primark and the rate of expansion going forward this year. You're talking about 1.2 million sq ft, obviously decelerating from the 1.5 million we saw this year. What are your thoughts going forward? Why is it a little bit slower? You just need to sort of pause for breath or, what are your thoughts on that? Just on expansion, the U.S., probably you're not expanding as quickly as maybe many of us thought. Is that really you're not quite happy with the way things are going there? You're talking about reducing space. What is your thoughts on that as well going forward? Or is it really about more opportunities in Europe compared to North America? Thank you. Okay. John, let me answer the first question. Emphatically, no. This is not about a slowdown or pause for breath. It's a reminder, how do we approach the acquisition of stores? It's on a one-by-one basis. It isn't top-down. It's all about the quality of the store location and size of store and a discipline that Primark's had for decades in terms of going for the right stores. We're looking across all of the countries where we're operating. It really is just how the buses arrive. There almost should be a law to this, and I'm not quite sure what law of mathematics it is, but you're looking at all of these stores, and sometimes it's 1.5, sometimes it's 1.2, but it's not top-down pulling back. That's why, looking forward for the medium term, it still seems to me, excluding the U.S., the compound space growth for Primark of some 10% still is as good as any. What's medium term? Our visibility is the next few years. The other thing, can I just say, it's sometimes, oh, is it 1.2 or 1.3 or is there something around that? It really is around just the timing of those stores. The thing we give you on that 1.2 is we own the properties or we've got the leases and we're fitting them out. It's a cast iron, a number that we can give you. Could the number creep up a little bit? Sometimes people say, "Oh well, you always hold out a little bit." Yeah, we could actually sign a store now and open it up in nine months' time. But that's how we give that sort of guidance, if that's helpful. On the U.S., don't read anything into this space contraction in a couple of stores other than we know more about those specific markets. Yeah. We're making the size appropriate for the market in which they're trading. I remind you, Downtown Crossing is going up in size. We think we can successfully trade from more space. Brooklyn is opening in the year. So net-net, the total amount of space in The States will be well up this year, and then we've got another store coming later on. We said from the beginning we'd get to about 10 stores. We'd learn as much as we can. The average store is less than a year old. We're not in a rush. But we are confident that we'll succeed. All right. Thank you. Excellent. Yeah, let's go for Jeff at the front here. Thank you. Jeff Ruddle, Morgan Stanley. Two questions. Just firstly on Primark U.S., how many stores do you need in the U.S. market to break even, given the infrastructure you've put down there? That would be question number one. Second question on sugar. Obviously, you referred a number of times about the very large crop this year. Yeah. Is that simply a weather issue or is there something more structural behind that at all? No, the weather was perfect. Sorry, taking sugar first. Every time it rained, it was followed by sunshine, and then the sunshine would go on for a while, and then it would rain again. Then it was warm and there was a lot of sunshine. It was just weather. The crop area was slightly up from that produced us the 900,000 last year. We deliberately took it down. We let it go back up to historic norms, which should have given us 1.1 to 1.2. It hasn't. It's given us a lot more. Sorry, the first question? About the minimum sort of efficient scale in the U.S. Oh, 15 to 20. Yeah. 15 to 20, and the optimization of existing sales densities. Yes Which is what we are talking about. Thank you. Sorry, just follow up on that. How much are you losing in the U.S. at the moment? We are getting on for about $20 million. Thank you. Okay. Simon Owen. Thanks. Simon Owen from Credit Suisse. Three more on Primark, I am afraid. Firstly, just on logistics, you have not opened any DCs this year, I think, so presumably there are some coming down the track. This must be the first time in a while that there has not been anything. Secondly, a lot of the outperformance this year at Primark was presumably driven by new product ranges, such as beauty coming in, licensing deals, and generally good execution. How confident are you that you can repeat similar exercises like that in the year ahead? Presumably, you know what projects are being launched over the next six months or so. On the U.S., presumably once you have proof of concept, you will start thinking a little bit more tactically around the sourcing side of the business to make better use of tariffs into the U.S., et cetera. How far off is that? Okay. We have opened a lot of DCs and expanded a lot of DCs over the last couple of years. We have nothing more actually being worked on at the moment. The next one coming at some point, but it is probably two or three years off, would be a DC to supply the Italian market. Licensing new product growth. New product areas have been very important to us this year. We think there is a lot of growth left in those categories. One of the areas of significant growth over the last three years or so has been sports, so athleisure. We think that just maybe that trend is weakening or coming. Maybe the growth has gone out of it, maybe it will start to decline. We think probably that will be a good thing because we wonder, and it can only be speculation, whether some of the difficulties that women's fashion has had across the U.K. market in particular over the last couple of years may have been driven out of athleisure. So if that starts to decline, the substitutions, I think, will be good for us. Alternatives will be good for us. Sourcing in the U.S., yeah, it has already started. Looking at other markets, Vietnam is a particularly good place to supply North America from, and the Central Americas on short lead time goods. They are also areas where we have been exploring. So excluding weather, do you think there is any evidence in autumn, winter, the good start of autumn, winter generally, that that kind of softening of athleisure has actually brought people back to women's wear, or is it just too- I think no too volatile to tell? We delivered this really strong like-for-like performance and good gains in market shares, particularly in women's, despite seeing actually like-for-like declines in our womenswear business. Womenswear has been very difficult. We've seen, I think, the first glimpses of growth going out of athleisure, but it's too early to say therefore. But good starts to autumn/winter, but it's been around across the whole of the range. Outerwear, in particular, started very well, and I showed you some of the top sellers going into autumn/winter. Thank you. Okay, thanks. Yeah, go ahead, Warwick. This gentleman here. Thank you. Warwick Okines from Deutsche Bank. In the second half of, excuse me. In the second half of the current year, are you anticipating bringing prices down in Primark as well? It would strike me that you're either assuming a very big increase in markdown rates or you're anticipating prices to come down because there's a material benefit in H2. You can have that. No, we're not. I think the broad assumption on pricing is that prices remain broadly where they are. It's a moot point as to what size of markdown. Remember, there is also increased cost as well. So if you're not moving your pricing, then there is some inflationary cost coming through. That's not in sourcing, but it's in the overhead and so forth. So factor that in. Those are really the two things. So it's the markdown percentage reverting a little to the average of the last five or six years. It is the absorption of some overhead costs, very little pricing coming through. Then probably currency, net-net, I believe, is actually now a positive for the coming year, particularly with back-end weighting. Okay. Secondly also on Primark. Should we anticipate you opening any other markets in Europe over the next two or three years? I think we will see some. Yes is the answer to that, but not major markets. Okay, thanks. Great. Which might mean sort of Slovakia, Slovenia, these sorts of, that kind of area. Okay, great. Okay. I think that's probably it. Well done. Thank you very much indeed. Thank you, everyone.