Earnings Call: H2 2015

Nov 3, 2015

Well, good morning and well done getting here, those of you who've been challenged by the Docklands Light Railway in particular. I think we will get started now. The format remains unchanged. The financial headlines then are these. Group revenues at GBP 12.8 billion. Adjusted operating profit at GBP 1.092 billion. Adjusted profit before tax then, GBP 1.034 billion. Adjusted earnings per share, 102 pence. The dividends per share, which will be voted on by shareholders at the AGM in December, our directors are recommending rises 3% to 35 pence. Gross capital investment of GBP 613 million. Now, we are giving you gross this year rather than net, because we have disposed of a fair number of property assets in particular during the course of the year, and that would have distorted the net number that we usually give you. Net debt reduced to GBP 194 million as a consequence of cash flows being strong once more. Turning onto the business highlights. Overall, it was a strong performance. We have had our currency challenges and also commodity challenges, most particularly sugar prices. Primark expanded its group sales by 13%, opened nearly 1 million square feet of space. Sugar, yes, much lower EU prices as had been well flagged, but the cost improvement program that we have now been talking about for a couple of years has delivered once more. A significant profit progress, and I am delighted by this, at both ingredients and also agriculture, and further margin improvement for our grocery businesses. With that, for more detail on our financials, let me pass over to John. Thanks, George. Good morning, everyone. This year, sterling strengthened against our major trading currencies, except the US dollar, and particularly against those currencies whose countries rely on commodity exports. A table of average and year-end exchange rates is included, as usual, at the end of your slide pack. The impact on the income statement this year was to reduce the growth in revenue by GBP 378 million, and operating profit by GBP 31 million, which we calculated by retranslating the 2014 results at 2015 actual average exchange rates. Given the scale of the effect, it is important to understand the underlying changes in both revenue and profit. Changes at a group and business segment level are shown at constant exchange rates as well as actual. Group revenue was GBP 12.8 billion, an increase of 2% at constant currency, and a reduction of 1% at actual rates. A key influence on this year's underlying performance has been deflation in many of our major commodities, making revenue growth difficult to achieve. The most notable example, of course, is the substantial decline in the EU sugar price. Adjusted operating profit was GBP 1,092 million, down 4% at constant currency and 6% lower at actual rates. Acquisitions and disposals had no material effect on the results this year. Our adjusted profit measure reflects the underlying performance of the business and excludes profits less losses on the sale of disposal, on the disposal of non-current assets, the amortization of non-operating intangibles and exceptional items. We made a net profit of GBP 8 million this year on the disposal of non-current assets, and that was principally the redevelopment of a former factory site in Western Australia. The amortization is in respect of those intangible assets acquired since September 2004. The charge reduced from GBP 72 million last year to GBP 55 million this year, and absent any other acquisitions, this charge will fall again in 2016, as most of the assets have now been fully amortized. The exceptional charge of GBP 98 million was reported at the half year and related to the non-cash impairment of the group's shareholder loans to Vivergo Fuels following a fall in crude oil and bioethanol prices. Unadjusted operating profit after bearing this exceptional charge was 12% lower at GBP 947 million. We're taking a charge this year of GBP 172 million as a loss on disposal of businesses, and there are two main elements in this number. You will recall our decision last January to withdraw from beet sugar operations in Heilongjiang, China. The two uneconomic factories at Yi'an and BoCheng were both sold, realizing a non-cash loss of GBP 100 million. In May, we assumed BP's 47% interest in Vivergo Fuels. As part of the acquisition accounting, we recorded a non-cash charge of GBP 75 million. This was a great opportunity to increase our ownership of this well-invested plant. However, the outlook for ethanol prices in the medium term is uncertain, and we foresee that we may need to run the business at a small loss over that period. As the percentage of ethanol inclusion in gasoline increases in line with EU-mandated targets by 2020, we expect the market to move from surplus to deficit, which should lead to a price increase. In view of the uncertainty, we've ascribed no fair value to Vivergo's tangible fixed assets in the group's balance sheet. Net interest expense shows a reduction from GBP 58 million to GBP 53 million, reflecting a lower average level of debt during the year. The private placement notes carry an average fixed interest rate of 5.1%, and GBP 78 million of these notes is repayable in March 2016. Profit before tax was 30% lower than last year at GBP 717 million. But adjusting for the items referred to earlier, the decline was 6%, from GBP 1,105 million to GBP 1,034 million. A loss of GBP 8 million was attributable to non-controlling interests this year, compared with last year's profit of GBP 21 million, largely as a result of the lower profitability after interest and tax of some of our African sugar businesses. This is on an unadjusted basis and includes the remaining charge for amortization of intangibles acquired with Illovo. I think you'll be pleased to know then, as a result of that, we'll have an unadjusted and adjusted minorities will be the same going forward. The tax charge was lower than last year, and I will explain the different components. The underlying tax rate was 21.3%, in line with the rate used at the half year. The reduction from last year's 23.3% reflects a change in the country mix of profits and the further reduction in the U.K. corporation tax rate from 21% to 20% with effect from the 1st of April 2015. We expect our underlying tax rate to increase slightly in the coming year as the mix of profit changes, with more profit likely to be delivered by businesses that are subject to a corporate tax rate that is higher than that in the U.K. This will be partly offset by the benefit of further reductions in the U.K. corporation tax rate that were approved by the House of Commons last week. The stepped reductions to 19% and then 18% are not effective until April 2017 and April 2020, respectively, and therefore will not give rise to a reduction in the current tax charge until those dates. However, these reductions will be reflected in next year's deferred tax liabilities. The other influences on our reported tax rate are the GBP 8 million credit arising on the goodwill and intangible amortization, which is reducing in line with the reduction in the amortization charge itself. A charge of GBP 3 million on the disposal of fixed assets. The loss on this year's disposal of businesses does not attract any tax relief. Finally, a GBP 22 million credit on the Vivergo Fuels loan impairment. Following the group's acquisition of a controlling stake in Vivergo in the second half, we've now been able to take advantage, which we've done here, compared to the half year, of a more beneficial relief for those losses. Earnings and dividends. Adjusted earnings per share fell by 2% to 102 pence. Earnings per share were 30% below last year at 67.3 pence, reflecting the exceptional item and the loss on disposal of businesses. A final dividend of 25 pence per share has been proposed, making total dividends for the year of 35 pence, a 3% increase. Dividend cover on an adjusted basis is 2.9 times. Moving on to the balance sheet. Unusually for us, net assets reduced and were actually GBP 202 million lower at GBP 6.6 billion. The factors reducing net assets were GBP 432 million negative impact of sterling strength on the translation of overseas net assets and the assets written off or disposed of in the year. Working capital at the year-end was GBP 101 million lower than last year, impacted by the strength of sterling on translation and lower food commodity prices. Within this figure, inventories were actually higher, driven by European stock levels, sugar stock levels, and higher new season inventory at Primark. Average working capital expressed as a percentage of sales, which is really the measure that we certainly look at, was broadly level with last year at 9.4%. Another year of strong cash generation drove net debt GBP 252 million lower to GBP 194 million at the year-end. As a reminder, this is comfortably accommodated by the group's total committed borrowing facilities of GBP 2.1 billion. Although our bank obligation is reducing, I think it's worth reminding you, as I did at the half year, but I'll do it again, that a new accounting standard for leasing is expected shortly. This is going to add lease obligations together with the related right-of-use assets to the balance sheet. These will be significant for us as we take account of Primark's leases. The number that comes onto the balance sheet will really depend on the methodology that is actually chosen in the accounting standard, and we have to wait for that. The methodology and the timing for transition have yet to be announced, but we'll give you more details of that when they become clear. Our defined benefit schemes remain well-funded, and the net pension liability at the year-end was just GBP 16 million. Other net financial assets, the caption you see on the balance sheet there, comprises two main elements. The first is the mark-to-market value of the forward currency contracts taken up by Primark in its normal course, and typically on a rolling six-month basis to cover its contracted US dollar garment purchases. The second relates to currency swaps on some of our term debt from US dollars to euros to match our underlying currency assets more closely. The maturity profile of these swaps is matched to the maturity profile of our private placement debt, and the mark-to-market gains on these swaps are therefore largely unchanged from the half-year position. Although the balance that we see here of GBP 41 million is similar to last year, it is reduced markedly from the half-year balance of GBP 131 million. I explained at the interim results that our forward cover, taken out at a weaker US dollar exchange rate, would run until August 2015. The reduction in the value of these derivative assets since then emphasizes the extent to which Primark's second half-year results were protected from sterling and euro weakness against the dollar. Obviously, as we are coming to the next year, that protection has come away. Sterling has appreciated against our major trading currencies this year, except for the US dollar. The shift in the euro exchange rate early this calendar year is highlighted here, and I explained the consequences of this to you in April. Since April, you can see from these charts that the currencies of many of the commodity exporting countries have now weakened substantially. We could go on to the next slide, please. Here is the Australian dollar, Brazilian real, the rand, and the Zambia kwacha. Our working assumption is that these rates will be with us for some time to come. I mentioned earlier that the impact of currency translation on adjusted operating profit this year was GBP 31 million. If all of these current rates, not only the ones on this chart, but also the euro and so forth prevail, we expect translation losses in the new financial year to be of a similar order, around the GBP 30 million mark, with each of our reporting business segments being affected. As I explained last time, the total transactional impact, however, is likely to be greater and will be seen primarily in Primark's margin. A substantial proportion of garments for Primark are sourced in US dollars. The buying teams at Primark have worked hard and have mitigated more than half of the gross impact of the dollar strength that we saw during the last financial year. As already indicated, this will have an adverse effect on Primark margins, which I think you have factored in, and with a likely higher impact in the first half. Now if we come on to cash flow. If you go to the next one. Thank you. Cash flow was again strong, with a free cash flow of GBP 617 million, which is in line with last year. The change in working capital from last year's inflow of GBP 100 million to an outflow this year of GBP 66 million was mostly driven by the higher Sugar stocks and Primark inventory. As a result of currency translation, the balance sheets are lower this year. Moving now to capital expenditure. As expected, the spend in our food businesses was lower this year following completion of the capital investment program in our U.K. bakeries last year. The expansion of Primark is accelerating, and the reduction in CapEx that we see here year-on-year simply reflects the phasing of expenditure, with many large projects coming to fruition around the year-end. I expect this number, the Primark number, to increase to over GBP 400 million next year. The redevelopment of the former factory site in Western Australia and the sale of some redundant retail sites drove the increase in cash generated from the sale of PP&E to GBP 72 million, and that is what George made reference to on the first chart. You can see the high level of income we have had from those disposals. The year-on-year movement in the other caption, and that is a movement of GBP 113 million from the negative GBP 51 million to the positive GBP 62 million, is largely explained by the non-repeat of last year's purchase of shares to satisfy future obligations for long-term incentives. Then particularly dividends received from joint ventures and associates this year being much higher, especially from Stratas Foods. Now let us move on to the business segment. Primark delivered a strong result. Sales there were ahead 8% or 13% at constant currency. The revenue declines in all of our food businesses were primarily the result of food commodity price deflation, and particularly so in sugar. The profit increases in grocery, agriculture, ingredients, and retail all reflect strong underlying business performance, although they were insufficient to offset the decline in sugar profits. The actual impact of lower sugar prices in the year in the sugar business was over GBP 200 million. So it is actually around getting on for GBP 220 million. But the significant cost reductions, and George will talk about these, delivered by the business were the main factor in limiting the sugar profit decline to the GBP 146 million that we see here. Agriculture not only reached GBP 60 million profit, but the 5% profit margin and 19.2% return on capital employed are notable achievements for this business. The further recovery in ingredients is evident with a near doubling of profit. I am pleased with the further margin increase in grocery, which reached 9%. The decline of 80 basis points in Primark's margin is in line with expectations and is driven, as a reminder, by a return to more typical levels of markdown this year following the exceptional trading by Primark in 2014. Finally, by geography, British Sugar was the main contributor to the decline in U.K. revenue and profit, in part offset by growth in Primark. Primark's growth in continental Europe is an increasingly important contributor to the improvement in sales in the Europe and Africa segment, but profit was reduced by sugar in Spain and at Illovo. In the Americas, the improvements in revenue and profit is driven by ACH and the AB Mauri businesses. The revenue decline in Asia Pacific is mainly driven by the weakening of the Australian dollar. In aggregate, the profitability of our businesses in China improved substantially, and with George Weston Foods in line with last year, profit was much improved. So we will now look at the performance of each of our businesses in more detail, and I will pass back to George. Thanks. Thanks, John. We will start as we usually do with sugar. Two big themes this year. The first one is that huge reduction in the EU price, the effect of that coming through, as John has said, approaching GBP 220 million, but offset by the cost reduction program, which is now in its third year and is delivering extremely well. Euro weakness, against sterling in particular, will have an impact on next year's figures. The last headline from sugar is just to repeat what John has said about Vivergo Fuels and the purchase of BP shares. We do see this as a medium-term opportunity for the group. If I could turn then to the cost improvement program. As I say, it's the third year of an ongoing program. It's saved us so far well over GBP 100 million. It's sustainable, and it continues. Cost is coming out of our sugar businesses everywhere, really. Sugar extractions are up. Factory efficiencies have improved. Energy reduction programs have further to run but are delivering well. We've seen significant overhead reductions, particularly in the U.K. and Spain. Agricultural productivity and agricultural efficiency, most notably in Africa, has also been a feature of this year. Beet costs is a feature then in Europe, both in the U.K. this year and also in Spain. In 2016-17, we get a further reduction in beet costs in the U.K. that has been agreed with farmers in this country. Production this year was at a record 1.45 million tons. In the U.K., we didn't necessarily need all the sugar, but we celebrated the agricultural abundance of the crop and our ability to handle it through four factories. This year, we're aiming for something around a million tons. We now expect to get that. The campaign in 2015, which started in September, is running well. In Spain, we produced more sugar as well, 0.71 million tons. The increase largely came out of our factory in the south of Spain. Again, factory performances were good. That led to cost reduction in Spain as well. In South Africa, we were challenged by a drought. That was the main factor behind the reduction in sugar produced in Illovo from 1.8, 1.9 million tons that we would normally expect down to 1.64. China also performed well. The cane factories in the south had a good year. It's worth pointing out also that the two remaining beet factories, both in Hebei and in Inner Mongolia, are now producing sugar with the efficiency very close to that of European factories. Land efficiency is transformed over the last few years, and factory efficiency is very good too. We can produce sugar out of beet at just about the same cost as we can out of cane now in China. Sugar prices, though, you can see how they've come down. You can also see in the slide on the left-hand side, how they've stabilized. I don't expect them to increase significantly in the course of this year in Europe, but I absolutely don't expect to see any further reduction. The world market price also has been heading down through the course of the year. It's jumped up a little in the last few weeks on the back of expectations of future crops in Brazil and perhaps India, with an effect from El Niño. There is a lot of stock, though, in the system, so I don't expect those prices to rise significantly from here, at least for the time being. Turning on to agriculture, where profits were up 20%, and John has mentioned already the good increase in margins and return on capital employed. The China feed business performed very well. That was part of the contribution to an improvement overall in China. The standout performances, though, were in the specialty agricultural businesses, specialty nutrition, and then AB Vista, our specialty enzyme business. It grew very strongly, and we expect it will grow further. Moving on then, down the supply chain from agriculture to our grocery businesses. You know our brands well. You have some of them in your Primark bags that are either sitting on, beside, or in front of you. We saw, during the year, strong profit growth from Twinings, Ovaltine, and also from ACH. Commodity food price deflation was a characteristic of the year that we coped with, I think, quite well. A high level of competition in bread markets for the 50th consecutive year, at least. Further margin improvements across the group, though, up to 9% now in margin terms. We are also delighted to have acquired and then set about integrating Dorset Cereals. I will say a little bit more about that business later on. Twinings, Ovaltine, the profits grew strongly. We saw record market shares for Twinings brand in the U.K., Australia, and Italy. We launched a new range of black teas in the U.K., which I think I mentioned at the half year. Emerging markets are more difficult. Ovaltine had a more difficult time as a consequence, but was still absolutely fine. It is worth pointing out also, calling out as well, that in a company which is so commercially led and so brand led, we saw very strong factory performances, and that also contributed strongly to the overall profit growth this year. In Allied Bakeries, the capital investment program is complete. I think there is still opportunity for further cost reduction, but that big capital program is done. We saw bread volumes rise. We grew them through the year. We have launched Sandwich Thins, and that has been a great success. We did see lower margins for bread, in particular in the U.K., through the course of the year, however. Into Jordans, Dorset, Ryvita. Jordans performed well. Dorset Cereals has been integrated very well. We are well underway in the program of premiumizing that wonderful brand. We think that there is great opportunity in Dorset Cereals for us. Within Ryvita, we saw lower crisp bread sales, not least because Ryvita Thins grew so strongly through the course of the year. That business overall is doing really well. Elsewhere in the grocery business, Westmill Foods, our ethnic foods business. We are seeing recovery in the U.K. ethnic restaurant trade, particularly in the takeaway part of it. I think that is a testament to the increase in disposable income that people in this country are now enjoying. Patak's and Blue Dragon maintain their leading positions in the U.K. retail market, but also saw export volumes increasing through the year. Turning to the States and ACH, the plant sterol campaign, which continues to drive volumes and premiums in Mazola. I think that campaign has years still to run. Consumers react very positively to it. I have to call out the exceptional profit growth that we saw from Stratas, our bottle oils joint venture with ADM. That had a super year. In Australia, we lowered the price of our branded bread. The gap between branded bread and own label had got too wide. That worked. Market shares for branded bread are increasing again, and we were pleased with that. At Don, our meats business, which has given us difficulties in the past, volumes through the factory are increasing. Factory efficiencies have increased well. We suffered from significantly higher bought-in meat costs in the first half of the year as the American producers struggled with a virus in their pig herds. The second half was substantially better and gives us a lot of encouragement about how this year might be. Moving then to Ingredients, arguably the star of the show. It was the second year of significant profit recovery, and it came across the board in our Ingredients businesses. AB Mauri, which is our yeast and bakery ingredients businesses, we saw a good profit improvement from all regions, and that was great. We also saw supply chain improvements, supply chain efficiencies. That contributed to us as well. 18 months ago, we bought a bakery ingredients business from Gb Plange in Europe, and we've integrated that very successfully through the course of the year into our existing European bakery and yeast businesses. ABFI, our other specialty ingredients business, has had a super year. A highly successful year for enzymes, but not just there, also profit improvement from yeast extracts, from cereal extrusions, and from specialty lipids. You can see the improvements in margin and also return on capital employed of our ingredients businesses. I think there's more to come. Primark next. Firstly, with headlines, the expansion obviously continues. At constant currency, sales are up 13%. We opened a number of new stores, and we saw very high sales densities across all of them. Like-for-likes were up 1%. The markdowns, as John mentioned, returned to more normal levels, and that was the reason behind that reduction in the overall margin of the group. Heavy investment in the warehouse infrastructure, I'll come back to that later. We opened our first store in the U.S. I'll also come back to that. Just after year-end, we opened Gran Via in Madrid, and the queue is still around the block. The 41st store in Spain, and it's absolutely magnificent. Over the year then, the trading pattern, we didn't enjoy much the warm 2014 autumn. We had a very good Christmas. Easter was cold, and then we had a strong finish to the year, so July, August were both good. Like-for-likes up 1%. If you exclude Netherlands and Germany, where we opened so many new stores in a tight geographic area, like-for-likes are actually up 4%. The stores that we opened in Germany and Netherlands all opened well, and the stores that were already open are still trading at above the average for the rest of the group. Elsewhere in Europe, Spain, Portugal, and Northern Ireland were well ahead on like-for-likes. U.K. was positive, and France continues to excite us all. We opened Lyon just last week. We had enjoyed, in terms of sales per square foot, our biggest opening day sales in that store. Boston is trading well. I'm very conscious it's only one store and it's only eight weeks, but it's very good. In a year's time, we will have a lot more information for you on the U.S. The second store opens towards the end of November, King of Prussia Mall in Philadelphia. We are very reluctant at this stage to draw too many conclusions from one store and eight weeks, but so far so good. Let me move on to some of the ranges in store for autumn winter. On the left-hand side, the coat being worn by the girl at the back, the blue coat, sells for GBP 20. The cardigan the girl at the front is GBP 10, and the gilet, that's the purple vest that she's wearing, is GBP 7. The parka the man on the right top is GBP 25, and the knitted dress, the lady underneath her, is GBP 18. All selling well. Christmas is important to us as a business. It's probably important to you personally, and you may be wondering what to buy. We've put together a video. It's not your average TV Christmas ad. Rather, it will be playing in stores, and it will be available on social media. But if we could play, we have about three minutes' worth of footage here. I think it's great. There you are, ideas for Christmas parties and Christmas presents. Price. Ooh, here we go. Apologies for this. Good. Our ranges and our values are two of the parts of the business that we're so well-known for. Our store experience, though, is something which is developing too, and these pictures here in front of you are of denim shops in Gran Via on the left-hand side, and Downtown Crossing in Boston on the right-hand side. I think that they give you some idea of the quality of the shop fit and the competence of this important range for us. If we move on to Boston, you may have seen the picture on the left-hand side. That is the iconic Burnham Building in Downtown Crossing. The even more iconic clock on the bottom left, which used to say Filene's. We still have that Filene's sign. It's actually in the store, but it now says Primark. Hello, Boston. The top right-hand side is the picture that appears on social media more than anything else. The feature wall on the ground floor, again, gives you some indication of the fashionability of the fit out of Downtown Crossing. Moving on to Gran Via in Madrid, as I say, our first high street store in Spain after 40 stores in shopping centers and an absolutely magnificent building. It is the second largest in the group at 133,000 square feet after Manchester. The next video I took myself. It doesn't have great production values, but I want you to look at two things. Let that show, and I'll speak over it. So this is the inside of Gran Via. You see we've recreated the octagon that the original department store, which closed in the 1920s, featured, and we've also installed some truly wonderful graphics that we can run campaigns across. I think there are 11 screens, and we can roll images from one screen to the next as we did. It creates a really startling effect for the shopper. From images to numbers, we added 900,000 sq ft during the year. We opened in 20 locations. We relocated two stores, closed three, and extended four others. Significant new space, in particular this year, Germany, Netherlands, and Belgium, and some large stores in both Germany with Dresden and the other three, and then in Holland as well. Important parts of the final network in Germany, but causing some reduction in existing store sales around them. Going on then to where that leaves us. Germany is now the third largest market by footage. Belgium went from one to four during the year, Netherlands eight to 12. You can see the amount of opportunity that still exists in Europe, even before we open in Italy later on in this year and the one store, obviously, in the U.S. that we opened. Looking forward into this year then, 2015-16, we expect to open 1.5 million sq ft during the year. Significant European expansion, particularly in France, U.K., and Spain. As I say, the first store in Italy. Seven more stores in the northeast of the United States, starting in November with King of Prussia, and then going I think to Danbury, Connecticut, in the spring. Warehouse expansion is keeping up with the sales area growth. We have almost doubled the capacity since September 2013. Spain, Germany, the new depot in the States. Another new depot to supply Central Europe in the west of the Czech Republic. We are moving our depot in the U.K. from Magna Park to a larger site at Islip. Later in the year, we are opening another new depot in the Netherlands to supply the low countries and also France. To summarize these results. It was a strong operational performance. Sugar obviously saw much lower sugar prices in Europe, but saw really good cost improvements. Significant progress at Ingredients and Agriculture, further margin expansion in Grocery, and the Primark expansion continues. Looking forward into this year, we expect to see the operational momentum continuing in this year too. Good underlying trading. We do expect currency pressures to lead to a modest decline in adjusted EPS. EU sugar prices have stabilized. The cost improvement program continues. That is good for this year. It will be good for the future as well. More progress to come from Ingredients, Grocery, and Agriculture have good momentum. Accelerating the Primark expansion both in Europe and also those seven new stores in the U.S. I think this time last year, we will have a lot more to say with a lot more confidence about the U.S., and we will probably be saying about Italy that it is too early to tell. Thank you very much for listening to us both, and we will take questions now. Fraser at the front. Yeah. Good morning. Fraser from The Wall. A couple of questions. Firstly, on Primark, I noticed that the movement in profits, constant and actual exchange rates, current and also then rates, two movements in sales. I wondered if you might draw some conclusions as to the relative level of profitability. There we go. Thank you. So back to Primark. I noticed that the constant exchange rate and actual movements in sales and profits are quite different, and wondered what we could infer from that as to the profitability level of the European business. Is it by degrees lower than the U.K. business at the moment, particularly with all the opening costs that you've had in the last year? Second question on European sugar. At current prices, but with your ongoing cost reduction program, can the EU sugar business be sustainably profitable? Do we need improvements in pricing from here? If we take away the Chinese and the Illovo contribution, to be sustainably profitable. Do you want to do the margin one and I'll do sugar? Yeah, sure. I think everybody's aware that the margins of Primark vary country by country around Europe, and indeed the U.K. Actually, today is not the highest. It's virtually the highest, but it's certainly the biggest. The factor that you're seeing, Fraser, I think is, as you rightly indicated, is obviously the scale of the U.K. margin and U.K. profit. Spain's margin is actually higher, for what it's worth, than the U.K. Some of the other countries in Europe then are a little lower than the U.K. margin. Okay. On sugar at current prices, the answer is yes. There are two buts coming next. The first one is that currency change will hold back improvement this year. The second one is overhead recovery. That reduction from 1.45 million tons to 1 million tons- Yeah reduces factory loading, reduces overhead recovery as well. But fundamentally, at that sort of EUR 450 per ton price, we will be profitable. Right. Okay, and can I ask one little final one? Yeah. I was intrigued that Ovaltine is under pressure because of economic conditions. I think in Asia, you were indicating. I didn't realize Thailand or I never thought of it as a particularly economically sensitive product. Sales, for the first time, actually declined a little in Thailand. The profitability held up with cost reduction programs and mix improvement. All food consumption is sensitive to consumer income. Thailand as an economy has been under pressure. Thank you. Okay, the next one. Yeah. I cannot remember this name. Thank you. Rosie Edwards from Goldman. Just one question for you on sugar. Yes. Clearly, the previous question related to prices of 450. Yeah. And I think in the presentation, you said you don't expect a significant increase in the course of fiscal 2016. Is that however, because the contract prices have been agreed? Largely, yes. The contracting round is largely done. Exactly. Both in the U.K. and also Spain. spot wise. Yeah. Spot wise, in some markets in Europe, prices have increased. Okay. We've seen improvements in spot prices in Spain in particular. They're not transformational, but they're heading in the right direction. Okay. The stock levels are much more balanced now, and we expect to see stock levels fall through the course of 2016 and into 2017. Those aren't conditions that you would expect to lead to falling prices. Perfect. Okay, thanks. To give a scale to what George said. Yeah It's tens of euros on the price, that sort of scale. Tens of euros, yeah. Okay. Go ahead, Warren. Yeah, in the middle. Morning. It is Warren Ackerman with Soc Gen. First question on ingredients. I think you described it as the star of the show in your prepared remarks. In the past, I think ingredients made over GBP 100 million of profit, so it is nice to see the returns doubling, the margins doubling. Do you think from here that we can see what kind of quantum improvement do you expect on a much higher base, in 2016 on ingredients? First question. Secondly, another margin question on grocery this time. I remember in the past you talked a lot about the 10% margin in grocery. We are now at 9%. Yeah. Again, you talked about Australian meats hopefully improving in 2016. Should one infer that we might see the magical 10% in grocery in 2016? Yeah. Thanks. The grocery final number, as we have always said, is the consequence of the mix of different types of businesses. The meat business in Australia, yes, I expect will improve this year. That will contribute to the overall. But those sorts of businesses make their return on funds employed on volume more than they do on margin. So a bread business or a meat business or for that matter, a bottle oil business is never going to make a 10% margin. Twinings, World Foods, Jordans will make well above a 10% business. The changes are partly in the mix and partly in the contribution that everyone makes to profit improvement. I would hope that we do see further improvement in margin this year. Sorry, the first one? On ingredients- Yeah and the bounce- Yeah should we expect that to be leveling? It would be nice to see it redoubling again, I don't think we will. But I do expect to see progress from both Mauri and also from the other ingredients businesses. On ingredients, there's no law of nature that says because it was there once, it will necessarily bounce back again. I never believed in that. But I think there's a good momentum of improvement in ingredients, and I'd be really surprised if that doesn't come through in this next year. Just a final one, technical one. You talked about the accounting change on the leases coming on balance sheets. Yes. It depends on the methodology that- Yes the accounting standards apply. But you did mention a number of 2 billion. Is that- Yeah. No, absolutely. When I talk to the accountants, of which I'm one, but when I do talk to the accountants, it sort of ranges from GBP 1.8 billion to GBP 2.5 billion or whatever. Yeah, GBP 2 billion as a rough number is really where it, I think is the sort of quantum that we'd be looking at. Yeah, Richard at the front here. Morning. Richard Chamberlain, RBC. Just a couple of cash flow questions, I guess. Just on Primark, I think you say in the statement that your buying teams have successfully mitigated more than half of the impact from the stronger dollar. Is that likely to have any impact on working capital? Are you having to negotiate for shorter payment terms? Yeah. Was there an impact on product quality coming from that, or is it just straight price cost reduction? Yeah. Remember, freight rates have been coming down quite strongly through the year. Cotton prices are low. Artificial fabrics are low. So there is cost reduction throughout the system. But no, there are no changes to payment terms. Okay. Or quality either. You mentioned quality. So none of those things are affected. And just the other thing, just as a reminder, what would have been our currency loss for a lot of suppliers, where they have got their own currencies, their local currencies, would have been their currency gain. So that was really a major part of the discussion with them, Richard. But no fundamental changes to what we're buying. And just to follow up on CapEx, I think you said we're looking at over GBP 400 million for Primark this year. Yes. What do you expect on the non-Primark, the food side? Similar number on food, I think. Similar to Yes, indeed. the previous year. To this year. Yeah, absolutely. Okay, thanks. Yeah. Great. I've passed you by many times, so it's lovely to have you. Sorry if you. Yeah. Thanks. It's Alicia Forrest with Bloomberg. Yeah, Alicia. Yes, hi. Just a couple of questions here. I think I noticed at least one, maybe two Primark print, I do not know if I would call them ads, but sort of promotional stories in some women's magazines that I occasionally read. I think it was Grazia. I was just wondering if that signals a change perhaps in thinking towards advertising and, of course, with the move to the U.S., if you plan to perhaps increase advertising there over time or not? On like-for-likes, appreciate the breaking out of the short-term cannibalization impact. But I was also wondering if you could give us some indication of the distribution of like-for-like trends across markets, just broadly. Are they within a narrow range or is there quite a bit of variability? Just some color would be helpful across the different countries that you are currently in. Finally, grocery. Just wonder if you could clarify or comment on the M&A strategy there. Perhaps there has been a bit more emphasis on health and wellness in recent transactions, and just wondering if you could comment on that. Thank you. Do you want to take advertising first? Sure. No fundamental change to advertising. Yes, we do a little bit more, but it is still at a very low level in some magazines. The U.S., we will advertise store openings, but nothing else. There is more material that we have made for us online that is available to look at. That Christmas footage is an example of that. Like-for-likes, yes, there is a spread. We do not give like-for-likes by country. But just as an indication, France was spectacular through the year and- Spain and Spain was good. But France was, I will give one number, in the second half was well into the 20s. Yeah. That is clearly not everywhere. But it is only five stores. Grocery M&A, there is no change of emphasis there. We have some very nice platforms in our U.K. branded grocery businesses in particular, and if there are brands, for example, Dorset is a good example, which fit into a platform and have their own excellence, then we will look to acquire them. Health and wellness is a very strong trend. I think Dorset fits into that, as do other brands, Ryvita and Jordans. We are probably better off, given the prices that we have seen of some assets in health and wellness area, to develop our own offerings than to buy someone else’s. But M&A has always been part of building strength in our grocery businesses and continues to be. Great. Okay, further questions. Well, let’s take Charles at the end here. Thanks so much. Charles Picton, Artemis. Three questions, please. Firstly, on the sugar side, GBP 100 million plus of cost savings over the last three years. Can you just clarify, please, how much of that came last year? Update us on the beet cost savings that are in the pipeline for this year and next year, and also clarify if the divested Chinese sugar plants lost a material amount last year. Secondly, on Primark, is it possible to indicate what the margin might have been last year had the lesser element of hedging and the extra warehouse costs applied vis-à-vis that 12.6% margin just reported for last financial year? And finally, is it possible, please, to clarify the scale of the bread operations in revenue terms within grocery? Okay, there's a fair amount of detail within that. There is, yes. The cost reduction, and I think, so we'll- Tic-tac. Yeah. we will tic-tac. Within sugar, we are well over GBP 50 million of cost savings in the year. The beet costs came down from GBP 32 or so per ton in the U.K. to GBP 24 that we are paying this year and 20- The year after. the year after. Yeah. In Spain, we came down from 40 to 32 this year. John is going to correct me if I am saying it wrong. No, those figures are exactly that. Primark margin, where we would have seen the full extent of the consequences of the euro devaluation from January, February. We would have had six months of it. Look, I do not have a number, Charles, but you would imagine it could have been something like 100 basis points or something if it had come through. So that is the scale of probably how it is covered. You just wanted the scale of the bread business, I think just in re- Publican. Yeah. In revenue terms, Allied Bakeries is about GBP 600 million of sales. Okay. And Australia? And Australia. About the same, maybe in dollars. About the, yes. Okay, great. Jeremy Fialko at the front. Morning, it's Jeremy Fialko at Redburn. Two Primark questions. First one is just on this cannibalization effect. That was 3% this year. Presumably, it will be lower next year, and will it be existent at all? Then the second question is on pricing in Primark. I don't know whether you could just talk a little bit about the broader pricing environments on the High Street, and whether that has allowed you to recover a little bit of the higher cost through just very selective price rises. Thanks. Yeah. Cannibalization will be lower this year. Therefore, there's less drag on the like-for-likes. That, I think, answers your first one. Secondly, pricing on the High Street. We haven't moved our prices, and we haven't seen others move their prices either in the U.K. nor in continental Europe. We might not have expected it yet. We'll see what people do when their spring, summer ranges hit the shops. Yeah. But we haven't seen a price movement. Richard, did you have follow-up? Okay, fine. Bob. Bob Waldschmidt. Bob Waldschmidt from Liberum here. Two questions. In terms of Primark, correct me if I am wrong, but I think in the U.S. you guys did some partnerships with Uber to get people to the stores. Yeah. Who funded that, and do you anticipate using that in further roll-outs? I guess the second question in particular with Primark is, obviously early days in places like France or over Italy still, how many stores do you think those, or at least how much square footage do you think those areas can support? Thirdly, on sugar, the element that we have not talked about in terms of Illovo, Southern Africa, the drought, et cetera, how are we on that? When do we see profits recovery? How is the weather, et cetera? Cognizant the currencies are against you, but Yeah at least the operating performance on the ground. Thank you. We funded the Uber movement. We moved loads of students from Boston Colleges into Downtown Crossing, and that worked very well. I do not know whether we are doing it for King of Prussia. I suspect we are not, because simply Philadelphia has not got the same density of colleges. But we are open to all sorts of innovative ways of showing people Primark. The key in the States is to get people into the stores and get them talking about it. Hence moving a few thousand people by Uber in Boston. Sugar operation, there was a second part to your- France and Italy scale. France and Italy, bigger scale. Yeah. France has a population of 55, 60 million people. Italy has something similar. We are only up to 20 stores, I think now in the U.S. We are at the stage in all those markets where we do not have to say this many, we just know that there is a lot of blank space still to move into, and as it becomes available, we open. But given our experience in Spain, where our market shares, by volume, are up around-- We are number one by volume in Iberia. Can we get there in Northern Europe and other European markets? Well, I hope so. Sugar operations in Illovo, well, we need the drought to end. I think it probably has broken to some extent. That will put 200,000 or 300,000 tons, we hope, onto volumes in South Africa and make a manifest difference. A rising world sugar price will make life easier in all African markets, protected or unprotected. Illovo is doing a good job with their cost reduction programs, too. The next 18 months, I would hope to see profits improving. Okay, great. Shall we go for Richard in the middle here? Yes. Sorry, yes. Yes, yes. I will take it. Danny Hughes from UBS. Just a couple more questions on Primark. The 80 basis point margin decline last year, any way you can quantify what the markdown change was there, and also where we are in the great scheme of things on markdowns? I know it has been whizzing around a bit. Is this now back to a sort of normal level in FY 2015? Yes, I think you can more or less subtract one net margin figure from the other, and that gives you the change in the markdown. It is most of it. So 0.8 or so of a percentage point increase in the markdown percentage. That really came from two things. Firstly, that very warm autumn that we had last year led to a greater markdown of autumn/winter than we had the year before. The second one was that we underestimated the success of the new stores in France, which drained stock out of Spain. So the Iberian depot markdown, we were short of stock in Iberia, and that has returned to normal. We sold virtually everything at full price, didn't we? Yeah. In France in that first year. But we let some shoppers down both in France and Iberia, because we just didn't have the stock for them. The absolute level, though, is broadly average, is it, for over the period of time? Yeah. So without giving the level. Yeah. Yes. We feel it is, by talking to the Primark management, the discount level is around the level that we've seen in other years. In 2015, it was low in 2014. Just one last thing on the U.S. Is there anything you can say in terms of repeat customers to the store? I think we just have to be so careful. It's been very successful first 8 weeks. Repeat is over years. It's not over two visits in a short period of time. As I say, we haven't gone through Thanksgiving, we haven't gone through Christmas. Will they come back in spring/summer? I hope so. But I think the best we're going to say is, so far, so good. It's been well reported. The prices have amazed people. The fashion ranges are selling well. Outerwear in particular, even though we opened when it was warm still in Boston, sold straight away. That was great. So lots of good things for one store, and very brief. And we did ship people Uber cabs to get them there. But it's good. It's good. Okay. Thanks very much. Any more questions? Yeah, great. Audrey at the end, yeah. Thank you. Audrey Borius from Morgan Stanley. A couple of questions on Primark. Yeah. Number one, I know you're not going to discuss current trading, but if you could give us some indication in terms of what you're seeing, in terms of competitive intensity, the level of markdowns. Obviously, if you discount the fact that FY 2014 was abnormal, FY 2015 was normal, where are we heading for FY 2016? And given the margin decline that you've guided to for FY 2016 for Primark, a change in the level of markdown is included in that, or is it just FX? I just wanted to clarify that. Also, could we discuss your strategy in the U.S. ahead of Black Friday? Thank you. Shall I just take the margin one first, George? Yeah. I can just cover that. Look, I am happy in this public forum to say, look, the margin decline for Primark broadly, in FY 2016 on FY 2015 is about 150 basis points. The majority of that is driven by FX. I am not assuming any major change in markdown percentage. The other thing it does incorporate, because some people have asked the question, is probably just a couple of tens of basis points for the increased investment in the warehousing. So it is warehousing, small bit in there, and really driven by FX, and no real change in markdown. Okay. In terms of what we are seeing in the trading, it is quite hard to disentangle better weather from the ranges and the prices. But this year has started well and has started well across all our European markets. Coming into Black Friday, I am not going to say anything specific because it is quite sensitive, but we are much more an everyday low price retailer than we are a discounter. Of course, we will have some offers for Black Friday, but it is one of the really important bits of learning early on is what is right for Primark and Black Friday. Okay, great. We will scoot over here. Jack, how did I miss you? I have been calling on you. Thanks, John. Jack Gorman from Davy. Two quick questions on Primark, please. Just as a follow-up to the margin detail you provided, can you just give us a sense on the phasing of that? So, if I think about Primark margin in the second half of next year, how do you think that would compare with the second half of the current year? My first question. The second one relates to returning capital within Primark itself. I think it is still above 30%, as reported in your slides this morning. Can you give us a sense of the, I suppose, the variance in returns profile, firstly, between newer stores or stores in continental Europe that have had higher sales densities? And then if we think about maybe the U.S. and what that may and may show in terms of returns profile over time versus what you have generated in the existing footprint. Thanks. Should I take the half one, half two first? Yeah. I think we have said in the narrative that I think the margin decline will be higher in H1 and less in H2 of the new financial year. So overall, around 150 basis points. So look, add 20, 30 onto the 150 for the first half and take it off the 150 for the second half is roughly where I would go at this stage. Okay. In terms of returns, it is a statement of the blindingly obvious that the older stores have a higher rate of return because the asset base declines over. So, a 10-year-old store just has way less capital employed than the newer ones. I think it is notable that the returns have been climbing as our average estate has got newer. I think that gives you some insight into, well, I think it is an insight into two things. Firstly, the higher leasehold number proportion in European stores. Yeah. In Spain, we do not have a single freehold, for example. But also it does indicate that the returns across Europe are good. In America, we do not know what the returns are going to be. It depends whether loads of people come and shop with us. Again, we have not got any freeholds planned at this stage. Should we take just one final? Was there maybe a final question anywhere? Alex, in the middle here. Excuse me, Alex Smith at Investec. Just on Gran Vía, it sounds like it's had a pretty good start. Yeah Has that had any impact on trading in your other six or seven stores in Madrid, or are they still trading well? Very little. Okay. We thought it would have a significant effect on them, and it hasn't. Right. One of the excitements about Gran Vía is it seems to be new shoppers rather than the diversion of people who are going to the shopping centers around Madrid where all the other stores are located. Then a follow-up question on the new DC, I think in Boor. Yeah. Is that about servicing new store openings in the existing markets that you have Yeah and Italy perhaps? Or in five years' time, should we think about that servicing some neighboring Eastern European markets? No. Boor looks west. Looks into Central Europe more than it does look east. So it's parts of Germany in particular. Thanks. Surprisingly, geographically, it's actually west of Berlin and Vienna, for example. Yeah It's really quite far out when you look at it. Okay. Yes, Jamie. Hi, Jamie Merriman at Bernstein. Just a quick one. Can you just talk about what the capacity is for the Bethlehem, Pennsylvania warehouse for Primark? Just how many stores could that support and how scalable is it? Yeah. It is scalable. At the moment, it's about 500,000 sq ft, so a little bit smaller than- Yeah Mönchengladbach, for example. I don't want to- Yeah. Yeah. No, that's fine. Thank you. Okay, great. Thank you very much.