Earnings Call: H2 2013

Nov 5, 2013

Okay, good morning. Thank you all for coming. I know that there's been a choice of presentations this morning, and I'm very grateful for you choosing to come to ours. This is the annual results presentation for the 52 weeks ending 9/14/2013. The format is as before, as in prior years. I'll go through the financial and the business highlights before John will take you through the income statement, the balance sheet, the cash flow, and the segmental analysis, before I return to give you my take on our operations business by business. If I start with the financial highlights, which many of you will have seen by now. Group revenues solidly ahead 9% to GBP 13.3 billion. Adjusted operating profit up 10%, adjusted profit before tax up 13%, and adjusted earnings per share then also up 13% to GBP 98.9 pence. Dividends per share, which we will be recommending to shareholders in December, are up 12% to GBP 32 pence. It's been another year of heavy capital investment. We've spent GBP 600 million on new plant and equipment across the group, and we're very pleased that net debt has reduced by about GBP 200 million to GBP 804 million at year-end. It's been another year of strong growth and strong cash generation. We've seen a remarkable performance by Primark. The grocery group, we're delighted, is also much improved. It's been the result of a lot of hard work by teams all over the world. We've had a record profit from our agricultural businesses, and well done them. AB Sugar is down, but in line with our expectations. And then we've had a difficult year in our Chinese sugar business, and also, we've been busy getting on rationalizing some of the ingredients portfolio in the group. John, if I could hand over to you now. Thanks, George. Good morning, everyone. Group revenue increased by 9% to GBP 13.3 billion, and adjusted operating profit was up by 10% at GBP 1,185 million. Neither acquisitions nor disposals had a material effect on the results. Movements in foreign exchange rates had no significant effect on revenues, but at constant currency, adjusted operating profit was 12% ahead. A table of average and year-end exchange rates is included at the end of your slide pack. The average rates used to translate the income statement show a slight weakening of sterling against the U.S. dollar and euro, but a strengthening against the Australian dollar and, more significantly, against the rand. The year-end rates reflect a similar pattern. The adjusted profit measure reflects the underlying performance of the business and excludes profits less losses on disposal of non-current assets and the amortization of non-operating intangibles. This amortization covers those intangible assets acquired since September 2004, and the charge was GBP 92 million this year, compared with GBP 100 million last year. Last year's exceptional charge of GBP 98 million, just to remind you, related to the impairment of the assets of the meat business in Australia. Unadjusted operating profit increased by 25% to GBP 1,093 million. The income statement this year includes a loss on the sale and closure of businesses of GBP 128 million. You will already be aware of two items included here, GBP 26 million arising on the disposal of our U.S. whey protein business and GBP 15 million on the disposal of our sugar factory in Chifeng, North China, both losses including the write-off of associated goodwill. Following the decision at the year-end to discontinue yeast extract manufacture in Harbin, China, a charge of GBP 72 million has been taken to write down the carrying value of ingredients assets, together with restructuring costs. A charge of GBP 13 million was also taken to write down the value of our yeast plants in India, where it is becoming more difficult to meet the increasingly strict regulatory requirements for waste discharge. Net interest expense shows a substantial reduction from GBP 105 million to GBP 87 million. This mainly reflected the strong cash flow in the year. We also redeemed British Sugar's 10.75% debenture on the 4th of July, but this will have more of an impact in the coming year, in 2014. Profit before tax was 15% higher than last year at GBP 876 million. Adjusted for the items referred to earlier, we delivered a 13% pre-tax increase from GBP 974 million to GBP 1,096 million. Profit attributable to non-controlling interests was higher this year, largely as a result of the increased profitability of our African sugar operations. An explanation of the increase in the tax charge is now explained in more detail. Looking at the separate components of the tax charge. The main reason for the increase in the reported charge from 23.4% to 27.6%, is that last year's rate included a GBP 29 million deferred tax credit on the exceptional item. The tax credit on the amortization of goodwill and intangibles fell from GBP 33 million to GBP 29 million, driven by this year's lower amortization charge. The underlying rate actually fell from 24.8% to 24.2%, and that 24.2% is much lower than the 25.7% used at the half year. The half year rate did not reflect the benefit to deferred tax arising from the phased reduction in the U.K. corporation tax rate to 20%, which had not been enacted at the interim balance sheet date, but obviously has been since. We expect next year's underlying tax rate to be similar, if not slightly lower than this year. Next year's current tax charge will benefit from the 2% reduction in the U.K. statutory rate from 23% to 21%, which is effective from the 1st of April 2014. Adjusted earnings per share increased by 13% to 98.9 pence. We will be adopting the revised IAS 19 for pension costs in 2014, which will see the restatement of our 2013 financial statements to reflect the new treatment of administration costs and the use of the discount rate when calculating the income on scheme assets rather than the expected rate of return. These changes will reduce our 2013 adjusted operating profit by GBP 4 million and increase the other financial expense by GBP 3 million. Adjusted earnings per share for 2013 will then be restated to 98.2 pence. Earnings per share were 6% ahead of last year at 74.8 pence. A final dividend of 22.65p per share has been proposed, making a total dividend for the year of 32 pence, a 12% increase. Dividend cover on an adjusted basis is just over three times. Now, turning to the balance sheet. Net assets were GBP 276 million higher at GBP 6.5 billion. After sterling weakness over the last few years, sterling was stronger against a number of currencies this year, which gave rise to a net loss of GBP 134 million on the translation of overseas net assets. Intangibles, you will notice, are GBP 188 million lower than last year, and that's as a result of the following. The amortization charged in the year, but then also goodwill written off for businesses sold and on translation losses. Those far exceeded the additions to operating intangibles in the year. PP&E and other non-current assets were only GBP 20 million higher. Capital additions exceeded depreciation actually by GBP 183 million, but impairment charges, primarily related to the closure of businesses and translation losses, virtually offset this increase. Working capital at the year end was GBP 58 million higher than last year, and with higher stock at Primark as a result of the increase in retail square footage. Average working capital, expressed as a percentage of sales during the year, importantly showed a further improvement. You've probably seen that for a few years now. The strong cash generation drove net debt GBP 257 million lower at the year end to GBP 804 million. The group has total committed borrowing facilities amounting to GBP 2.4 billion, of which GBP 1 billion was drawn down at the year end. The very expensive British Sugar debenture was redeemed in July, and also 120 million US dollars of private placement notes were also repaid. The group's net deferred tax liability fell by GBP 26 million, and that's primarily as a result of the enacted phased reduction in the UK corporation tax rate. Provisions fell during the year by 59, driven by the settlement of deferred consideration on acquisitions made in prior years, and that was partly offset by new provisions being created for restructuring. Net pension liability reduced from GBP 95 million to GBP 44 million, with the value of scheme assets increasing by more than the scheme liabilities. Coming on to cash flow. Look, our cash flow performance was, again, I think, really strong. Free cash flow was GBP 134 million higher than last year, and that was an inflow of GBP 579 million compared with last year's inflow of GBP 445 million. The main drivers were a higher adjusted operating profit, a higher add back for depreciation and amortization, and a lower level of capital expenditure. That's net of a working capital outflow of GBP 97 million this year, compared with last year's inflow of 43. This year's reduction in the level of capital expenditure at Primark may come as a surprise to you. It's not an indication that our expansion is slowing. If anything, it's actually increasing, but is a result of phasing. 2012 included much of the expenditure on the major extensions and refits completed in the U.K. in 2013, and some spend that we actually expected at the end of the 2013 financial year was delayed into the beginning of the current financial year. I expect the investments in Primark in 2014 to be ahead of the spend in 2012. CapEx in Food declined again this year, and a number of projects were completed, particularly in Ingredients and Sugar. I expect further reduction in the Food CapEx next year. Tax paid increased from GBP 191 million to GBP 252 million. This is due, in part, to the group's increased profitability this year. However, a substantial proportion of the difference also relates to the payment this year of 50% of the tax due on last year's big increase in profit in the U.K. This year saw the last payment of GBP 30 million additional contribution to the U.K. defined benefit scheme, arising from the five-year deficit reduction plan agreed with the regulator in 2008. This was the last year that we saw that GBP 30 million. The next actuarial valuation of the scheme is due in April 2014. on October 1, 2012, new legislation came into effect, which required all eligible U.K. employees to be automatically enrolled into a qualifying pension scheme. We conducted an extensive awareness campaign in the months leading up to our selected implementation date of February 1, 2013, and that resulted in an additional 15,000 employees joining the existing defined contribution section of the scheme. The additional costs in 2013 have been borne in operating profit. No new acquisitions were made in the year, but deferred consideration payable on acquisitions made in previous years amounted to GBP 71 million this year, and proceeds from disposals amounted to GBP 35 million. This caption also includes investments in and loans to joint ventures. Turning now to the performance analysis by business segment. Revenue growth was again achieved in all segments. Profit was strongly ahead in Grocery and Primark, and Agriculture had a record year. Profit from Sugar held up well and was in line with expectations, although down on last year, as we had signaled. On an underlying basis, the result from Ingredients was in line with last year. Notice that the sales and profits of the U.S. Whey Proteins business, which was sold during the year, are shown separately on the businesses disposed line. Grocery benefited not only from the reduction in restructuring charges taken last year in Australia and the U.K. bakeries, but also from good underlying trading. Primark's margin at 12%, probably better than most of you had, benefited in the first half from reduced cotton costs and lower markdowns actually all year. Overall, the group return on capital employed improved from 17.0% to 18.4% for continuing businesses, with Grocery and Primark more than offsetting a decline in Sugar. Moving on to the segmental analysis by geography. Revenue, profit, and margin growth was achieved by three of the four regions. I want to point out, because I am pleased with the scale and improvement in profit in Europe and Africa, which was driven both by Primark in continental Europe and Illovo. It also absorbed the EUR 21 million charge for rationalization of dry yeast capacity in Italy, and it was still ahead by that number. The losses in Asia Pacific were caused by Chinese Sugar. There we have the EUR 22 million charge for mothballing the two factories, and a decrease in underlying profitability. This number actually masks the much improved performance from George Weston Foods in Australia. We will now look at the performance of each of our businesses in more detail, and I will pass over to George. Thank you very much. We start with Sugar. We were very pleased with the progress that the Sugar businesses made taken together. We saw lower European production and higher U.K. beet costs. However, good progress at Illovo, I will come back to. Significantly lower prices in China, which I will also take you through in a moment. Most important, and the reason for, I think, my confidence in the business, the performance improvement program, which I think I talked about first last year, is now firmly established across all the parts of the Sugar business and is giving us very meaningful operational cost improvements right across the AB Sugar business. If we turn to the E.U. Sugar, that is British Sugar and Azucarera. Sugar prices remained strong through the year, and we were pleased with that. You will remember how wet last year was, both through the summer and then into autumn. That resulted in lower beet yields in the U.K. and a tough time in the factories processing that sugar. They did a very good job, as we have come to expect, in extracting sugar from difficult beet, but it was still a struggle throughout the year. Good field yields in Spain. That is important to us looking forward into regime reform. It is important that Spanish field yields remain high and, if anything, grow yet further. Sugar beet is grown under irrigation and is more expensive as a consequence of that irrigation, and yields need to compensate for that extra cost. Looking forward into sugar regime reform, we had confirmation in June 2013 that the regime would change, not in 2015, which was the original intention, but in September 2017. The two most important aspects of that change will be the following. The first one is domestic quotas will cease, and the second is that the sugar import tariff of EUR 92 per ton will remain in place. We expect to see European sugar production increase, and with that increase, prices to come down further. We will see growth in production from the most efficient producers. We believe we have two of them in British Sugar and Azucarera. But in both businesses, further efficiency improvement is absolutely imperative. Profitability will be determined very largely by the difference in efficiency level between the least and the most efficient surviving European sugar producers. We think the market is already adjusting, is already anticipating the increased sugar supply, and prices are adjusting at the moment, partly at least as a consequence of that. In Illovo, production was ahead of last year. We are very encouraged by the recovery in volumes of sugar produced in South Africa. We came out of a period of 2 years drought and particular concerns about the sustainability of sugar production in Southern KwaZulu-Natal, the coastal area, seemed to be increasingly marginal but has recovered very strongly in the last year. You will remember the investments we have made in the factories and the cane estates in Zambia and Swaziland. Both those businesses performed extremely well, and we were delighted to see that. In an era of declining world market prices, we saw relative price stability, good price stability, throughout the region that we sell sugar into in Africa. Co-product development is important to us in Illovo. In a number of areas, we are investing in the development of co-product revenue streams. We completed in June this year, a major potable alcohol distillery in Tanzania. This is John's holiday snap of it. The tanks to the right with a man standing on the top of them are molasses tanks. The one to the left contain neat alcohol. The customer for all the production of this facility is SABMiller. The commissioning went extremely well. That plant is up and running at design capacity already, and well done the teams in Tanzania for achieving that. Lastly under sugar to China. We saw both higher domestic production and also significantly higher imports into the Chinese market. The domestic production increase would not have been a problem for prices, would not have put too much downward pressure on prices because demand for sugar in China is now safely clear of any level of likely domestic production. It was the higher imports that created a great overhang of supply in the Chinese market and consequently lower prices. We have rapidly addressed the cost base as faced with the squeeze between what we pay for beet and cane and the prices that we can secure for sugar. We have mothballed 2 factories in the north of China and sold a third one. There is another wave of cost reduction overhead in both the north and the south and also in the center. We have an office in Beijing. Significant factory efficiencies, particularly labor efficiencies, are being worked at at the moment, and the overheads, as I say, have been reduced substantially. The good news is that prices now in the Chinese market are above their low point. They are being pulled up, I think, by the increase in world market prices. We are through the lowest point in pricing, and we have a business which is now much lower cost, significantly lower cost, than the one we had only a year ago or so. If I can move on then to agriculture, which made GBP 47 million for us. A number which is much, much higher than I think either John or I would have ever expected this business to make a few years ago. It has been a consequence of strong performance in the U.K. feed businesses. We brought together 2 commodity businesses into one, which we call AB Connect, 2 years ago now. We saw good synergy benefits from that work coming through this year. We also enjoyed higher molasses sugar beet prices in the U.K. market over the last 12 months. Frontier, the joint venture we own with Cargill, very successfully marketed an awfully difficult grain crop, cereal crop. The quality of the crop last year was the worst, I think, anyone had seen since the 1970s. Frontier really showed its quality as an organization in successfully marketing that crop on behalf of the U.K. farmers. The two specialist ingredient parts of our feed business, AB Vista and Premier Nutrition, grew strongly through the year. Those businesses go from strength to strength. Lastly, in agriculture, we saw a good improved profit delivery from our feed businesses in China. Moving next to our grocery portfolio. Strong profit increase, 24%, a consequence of two factors, both of which John has already mentioned. The first is the reduction in last year's restructuring costs, but then a good underlying improvement, in part, because of those restructuring costs, in part also because of good trading developments across the portfolio. Twinings Ovaltine was excellent once more. George Weston Foods much improved. They're well on the journey to sustained profitability. We also saw significant developments in Allied Bakeries, which I will take you through in just a moment. Twinings Ovaltine first. It's the most profitable part of our grocery portfolio. Both brands, Twinings and Ovaltine, saw good gains in market share in their major markets. Twinings in particular, we were delighted with very strong market share growth in the United States, in the U.K., and Australia. Ovaltine, further progress in South America and Asia. Thailand was a bit more difficult. We were lapping the floods of the prior year and the market and the recession in that country has also, I think, suppressed demand somewhat. But Ovaltine, taken as a whole, had another good year. Behind the commercial success of both brands, there now lies a well-invested global supply chain for both businesses. Twinings has the factories in U.K., Poland, and China, and Ovaltine, Switzerland, China, and Thailand. The work of creating those supply chains has taken us several years, but it's been a job very well done. Turning next to Australia. Much improved performance from both Tip Top and Don. Tip Top first. Satisfying margin improvement. Good job recovering wheat cost inflation during the year. Then very good work building on brands in what is still a very branded bread market. The one we've talked about in the past is a complete nutritional package in white bread, and there's been some brand extension there. Abbott’s, which is an important whole meal brand for us, had an extremely good year. On the back, I have to say, of some really innovative, excellent advertising, part of which I propose to show you now. It's beautiful, isn't it? We believe they should be able to enjoy all of this. We only ever feed them the good stuff. Just grain-fed. We just let nature do its work. But Frank's pretty handy to have around, too. We raise them free range so you can taste the difference. It's lovely to see bread advertising that isn't boring. Back then and onto Don KRC, the business that's given us a lot of trouble over the last few years. We succeeded in selling more through the year, so more volumes going through the factory. The factory responds well to higher volumes. The factory conversion costs, which have been an issue for us, have reduced in the year very substantially. We're not all the way through that journey of cost reduction yet, but the team there is taking great strides, and we have a lot more confidence in Don KRC than perhaps was the case just a year ago. Allied Bakeries. It won't come as any surprise for me to tell you that Allied Bakeries enjoyed life in a competitive market once more. This is just the nature of the U.K. bread market. We did, though, see volume growth in the business. Kingsmill would be safely and securely the number 2 bread brand in the U.K., even without the Co-op supply chain contract. The winning of which was the consequence of many years at work and which we were absolutely delighted by. We are a good supplier now to the Co-op, reliable, consistent, and reactive supplier to that important business. We're coming to the end of a six-year capital program. We have rebuilt, either refurbished or completely replaced, nine bread lines across the country. It's not just the bread lines themselves that we've been replacing or repairing, it's also all the handling systems that go around bread, in particular, the flour handling and the minor ingredient handling. The latest completed project, it's commissioning now, is this one at West Brom. I showed you Walthamstow, I think, at the half year. West Brom, as I say, is now commissioning ahead of time and on budget. The point is simply that there's a lot of shiny steel there. It transforms the cost base, the quality of the bread, the consistency, the reliability of operations each time we do this. In terms of the journey we've been on then, the green dots are bakeries which are now complete. Glasgow, Stockport, Stoke on Trent, Walthamstow, and West Brom is just about to go green. That leaves us with Stevenage, where we're already underway, and by the end of this year, we'll just about be there. It's been a very major exercise. It's been magnificently delivered by the team at Allied Bakeries, and it sets us fair for many years to come in the bread business in the U.K. Elsewhere in our grocery portfolio in the U.K., good growth at Ryvita, at Jordans, at Patak's, and Blue Dragon. We bought the Elephant Atta chapati flour brand in July 2012. That was successfully integrated into Westmill Foods. It's had a good first year on, or slightly above, its acquisition case, and well done everyone at Westmill for achieving that. The market for retail sugar has been particularly competitive over the last 12 months, and trading at times has been difficult. Moving across the Atlantic to the United States. ACH, the performance was improved in that marketplace. They did well in America. For completeness, we relaunched our vegetable oil brand, Capullo, in Mexico, and that has driven good volume increases. Turning next to our ingredients portfolio. Revenue and underlying profit was in line with last year. That's not good enough because last year's figure at GBP 27 million was unacceptably poor. There have been management changes at AB Mauri, and we've seen the first of the green shoots appearing at Mauri, at very least in part, because of those management changes. We've been investing through the year, and John has taken you through some of the costs of that, in cost reduction but also in growth. We've also been rationalizing operations across the ingredients portfolio. To go through those in a little bit more detail. We've sold our U.S. whey protein business. We've ceased the manufacture of yeast extracts in the northeast of China. That plant will be turned into a dry yeast plant now. We're better off doing that in northeast China than yeast extracts. We've restructured in Italy and in India. In particular, we've ceased the manufacture of dry yeast in Italy. We've been able to do that because we've completed and commissioned the dry yeast plant in Mexico. It's a much lower cost operation. We've added dry yeast capacity and cheaper capacity also in China. Two very well-delivered projects, one in Shandong, east of Beijing, the other one in Xinjiang, which is the far west of China. That's an expansion of an existing plant. Finally, we have built a new cereal extrusion factory in Indiana in the United States, and we have plans to further expand our enzyme factory in Finland. Both those projects to allow further growth in these successful businesses. Turning finally then to Primark. Before I do, it was the day following our last meeting back in April, that the factory building at Rana Plaza collapsed, killing some 1,200 people working there. Primark was one of at least 28 international brands sourcing from the Rana Plaza building. We were sourcing from a factory on the second floor, New Wave Bottoms. The accident was truly horrific. Great loss of life. Many, many injuries on top of that loss of life, many of them life changing. We took our responsibilities very seriously. Our actions in response to it have been widely publicized. It's quite clear, I think, that we're leading the work on long-term compensation for the people affected, just as we led the way on payment of short-term compensation, and also on the provision of food aid in the immediate aftermath of the factory. We're also the first U.K. retailer to join the Accord, which is a group of European retailers, which aim to work together to bring improvements in working conditions in the supply chain in Bangladesh. I think if we all do work together, then we have a much better chance of improving realities on the ground than we do as individual retailers. Many retailers source from Bangladesh. It's very hard to find a T-shirt on the high street that doesn't come from Bangladesh. As I say, it's a challenge to all of us, whether we sell things cheaply, at medium price points or at high price points, and we've simply got to work in a more coordinated, consistent way in order to affect changes which are necessary. Turning back then to the Primark business itself. It really was a remarkable year with operating profits up 44% and sales up 22%. The margins were higher, the sales were obviously higher. We added 25% to our space in continental Europe. We're not far off continental Europe representing 50% of the sales of the U.K. business. Trading 5% like-for-like growth through the year. Both the autumn/winter and the spring/summer ranges sold really well, and congratulations to the ever-stronger buying teams for putting product in the stores that the customers were so excited by. Christmas was very good. The summer months were very good. They built good like-for-likes, came on top of the prior year's excellent like-for-likes. Northern Europe was particularly strong. Like-for-likes in Spain, which were in negative territory on the back of a degree of cannibalization in the first half, went back positive in the second half. The margin improvement then came from three areas, really. Lower cotton costs in the first half. We had a full year of much more normal cotton prices. Because the ranges sold through so well, we had the lowest ever level of markdown percentage across the group. That was fantastic. It is an important point, we saw good margins across all our North European businesses, even though they are in their infancy. Store highlights of the year. We added 800,000 sq ft. We opened the second store on Oxford Street. The extensions and the refits in the U.K. and Ireland have been a very important part of the year just gone. Manchester, I'll show you a picture in a moment. Newcastle has doubled in size. Chester has been expanded. Dublin, the Mary Street store now looks absolutely magnificent. Also, the new stores. Our store on the Zeil in Frankfurt, one of the major shopping streets in Germany. The reception there for that shop has been extraordinary, as it has been for the first two stores in Austria, and then six more locations in Spain. In terms of the chart that you've seen before, 10% space added, 32% in Northern Continental Europe, going from 12 to 17 stores. Iberia, 21% increase through the year, and the U.K., up 6%. Don't just look at the 6%, look at those store refits. There's more to come. Leeds Trinity is coming, Cardiff is coming and, sometime in the next couple of years, much more space in Birmingham. Manchester is our poster child for the development of the U.K. estate. 150,000 sq ft and a coffee shop to boot in it. The real change is in store. The improvements in visual merchandising across Primark in the last few years has been one of the real features of the development of that business, and Manchester, being a flagship, reflects it all. I wanted to show you now, this is a store in Holland, in Zoetermeer, which opened just a few weeks ago. It could be the East End of Oxford Street, that shop front. It is again testament to the development of that part of the business in just the last few years. The look and feel of a Primark store from the outside is not what it was just a couple of years ago. Go inside it though, and you find shoppers find just as much value on basic clothing as they ever did. One of the interesting things that we're having to do with Primark at the moment is to increase the size of the price tags, because people find it hard to believe that the prices are where they are, given the quality of the external environment and the internal environment as well. Now, we've never seen this in the U.K., but it gives you an indication as just the reception of Primark in Northeast Europe. This is Zoetermeer, and that is a road on the outskirts of Zoetermeer letting you know how to find your way to the Primark, which has just been opened. Quite extraordinary. Looking forward then a little to Christmas. If you want to look good and sophisticated at a Christmas party coming up, we can certainly do that for you. If you're looking for something for your relatives, then we can certainly do that for you as well. I'm delighted to say that North Europeans have seen the light on onesies and Christmas jumpers for the first time this year. Further selling space expansion clearly is in our plans. We expect to add over 1 million sq ft in this financial year. We expect to open 13 stores up to Christmas 2013, that's from the start of the year to Christmas, including our first in France in a shopping center in Grand Littoral in Marseille. That's our first in France, to be followed by four more through the rest of the year. Clearly, we remain focused on developing our existing business model. We remain great fans of the High Street, and we've got a massive opportunity there, clearly in continental Europe, also a lot left in the U.K. It's not to say that we're ignoring the online realities of the retail business. Our response has been our new website. It's non-transactional. It's a great leap forward in our ability to communicate with our customers. If you haven't already seen it, and you may well not have because it only went live last Thursday, I recommend you go and have a look at it. There are three important parts to it. The store locator is much improved, and is all iPhone-enabled. The two important bits to it are what's new for the first time, customers can go online on the Primark website and see what is new in store. It was quite extraordinary how many people were checking out the Primark website, spending 10 seconds on it and coming off before, because all they could find was how they applied to get a job there and not much more. So this is really important. The second aspect to it, Primania, is one that we're very excited by. It allows shoppers to post to the Primark website pictures of themselves wearing their new Primark hauls. If the buying teams at Reading and in Dublin are anything to judge by, this will be hugely well-received by our customers. Finally then, looking forward into the new financial year. We expect the adjusted earnings per share will be similar to what they've been in 2013. We expect to see further reduction in profitability at AB Sugar as sugar prices come down. We're going to be enjoying the lower cost of financing, particularly after repayment of the 20-year-old British Sugar debenture. Stabilization of ingredients and perhaps a bit better than that. Further improvements in grocery, particularly but not exclusively in Australia. Then the acceleration of store openings across the Primark markets and of course, into France. In summary, it's been a great year. We've got a whole lot to keep us busy as well in the year to come. Thank you very much. If we can just fairly rapidly go on to questions. Jeremy Fialko. Morning, Jeremy Fialko, Redburn here. Two questions. First one is on Australian grocery. Clearly, there is some pretty big improvements there. Is this very much down to you having taken costs out versus any sort of underlying improvement in the marketplace here? I guess the follow-up from that is, given the current run rate on cost in that business, what is the rough quantum of the profit improvement you would expect next year? The second question is just a much broader one. Obviously, in terms of your market value, Primark has implied a very substantial percentage. When we look at forecast operating profits for next year, it is going to be getting on for half of the group. Obviously, this is a testament to the success of Primark, but does this bother you in any way that the group is becoming a little bit unbalanced in terms of profit streams and the value of the company? Let me take those in their order. Most of the improvements in Australia has been the consequence of self-help. Some of it in the cost base in both major businesses. The Don factory has shed a great deal of both operating cost and overhead, and the bakery business too has stripped tens of millions of dollars out of its operating base. The other good, great work in the year in Australia was the achievement of a much needed price increase in the bread business, where essentially we'd gone four years without cost recovery in an environment where labor costs inflate reasonably quickly. We desperately needed that price rise, and we got it, which was really good. The environment in Australia, as the Australian dollar weakens, some of the pressure on Australian manufacturing will reduce, probably not hugely in our sectors. We're not competing with imported bread, although I did see some Spanish donuts on sale in Australia in my last visit. The meat business is largely protected by hygiene legislation. But some improvement there. I think while that environmental improvement is certainly welcome, the east coast of Australia is still, it's not quite in recession, but confidence levels amongst consumers are low, and consumers have been encouraged for several years to trade down, particularly by some of the retailers. To sum and sum, the short answer is it's been self-help. John, if you want to give a number of what we hope to do this year. Yeah. I mean, I won't guide you too closely, Jeremy, but I think a few tens of millions of Australian dollars of improvement, I think, in 2014 over 2013. I think much credit to the management team in Australia. They very much delivered as we expected in 2013, and the year has started well for them into 2014. So I think further improvement very definitely there. Going on to Primark and the portfolio. I'm not sure I recognize the value of balance in a portfolio. I'm not quite sure what it does for you. There's no sort of counter-secular- Cyclical cyclical, that's the word. Cyclical advantages of different parts of the portfolio. We lived for many years with sugar being by far and away the largest part of the group. Everything else was tiddlers. I think we've demonstrated in the past that we're quite comfortable with very large parts of the group, combined with much smaller parts that we still love and can do something for. Great. Okay. Warren. Warren Ackerman. Good morning. It's Warren Ackerman at Soc Gen. Can I just ask a question about Primark margins? You've always been quite clear with us that margins will oscillate in a corridor of 10%-12%, and obviously, we're now at the top end of that corridor, the 12%. But given improving mix, the point you made on pricing, the ticket pricing going up- Yeah dollar weakness that we've seen recently- Yeah benign cotton. Should we think that that corridor still stands, or is there some thinking that it could actually go a little bit higher? I guess what's behind the question is, looking into 2014, would you expect the margin to actually come down? If so, is there anything to say on the phasing first half, second half on Primark? That's the first question. Then just secondly, just- Why don't you hold the question? Let's answer a few of those bits. Our brains are full. Our brains are full. Just one very clear thing, and I'll say it. Primark prices on like-for-like items have not increased. What George said with a slight tongue in cheek was that the size of the sign was bigger, but it wasn't a higher price, Warren. Just so we're very clear. What the chief executive meant when he said that. What the chief executive meant to say was that. Genuinely, there is not like-for-like increase in Primark pricing. There is a mix improvement, so we are selling more items of a higher ticket item than we did before. Certainly, the consumers are giving us permission to do that, with no doubt at all. Be very clear, like for like, no increase in pricing. I would also be slightly cautious about saying that there is a corridor. That is, I think, more deterministic than we really are. The margin is the consequence of the business success, if you like, and of our determination to be the lowest priced in every category in which we have an offer. Historically, you are right, it has been from just below 10, it has been higher than 12, I think, in the past. Our expectation is that because of some currency pressures, it may be a little bit lower next year. The second pressure is that you cannot budget or forecast the level of markdowns that we achieved last year. If we get there, fantastic, but you cannot stick it into your budget, and therefore, you have to increase the markdown percentage in the budgets. Okay, thank you. Just on sugar, a couple of points on sugar. Could you, John, maybe clarify the impact on U.K. sugar profits from the conclusion of the negotiations with U.K. beet farmers? I think it is GBP 4 per ton has now been agreed a few weeks ago. I think it is more of an issue for 2015, but if you could clarify what the impact of that could be. Then just one for George. Yeah. I mean, given the sugar regime has been clarified now in October 2017. Yeah Would you actually consider making further acquisitions in sugar outside of the E.U.? Shall I come on to beet cost first? Absolutely. For the financial year 2014, beet prices are very much in line with 2013. The very public discussion, shall I describe it, between the NFU and British Sugar related to the year 2015. We've looked at, there's now a price for the beet price of GBP 31.67 per ton has been agreed, and I think that will add about GBP 30 million of cost in the financial year 2015 over 2014, everything else being equal. I think we've got to be cautious for a little while on expanding further AB Sugar, for a couple of reasons. The first one is we need to get comfortable that we have a competitive cost advantage that we can take to any business that we acquire. The bigger point, and that is that performance improvement methodology, and we need to see that operating for a while. The second one is, I think that the increase in sugar production in Europe will change worldwide sugar flows, trade flows, possibly quite substantially. But we don't know by how much, because we don't know how much sugar Europe will produce and whether it ends up as being a major exporter again. And I think it's just time to settle down and work some of that through before we rush off and acquire sugar assets. Yeah. Jack Gorman. Yeah. Thank you. Jack Gorman from Davy. Just to follow up, George, on the performance improvement program on the sugar side. Apologies if I misquote you, but I think you were talking of maybe tens, perhaps hundreds of millions of opportunity. Yeah across the division in terms of cost efficiencies. Just wondering what your current thoughts are on that sort of quantum, and in particular, how you see that panning out over the near term. Yeah. Is a real investment required from the group to actually secure some of that cost initiative? Yes, there is investment required, but it tends to be small scale projects, rather than the sort of investments which have characterized our AB Sugar business in the past, which have been often to north of GBP 100 million. In the budget this year, we've already got tens of millions penciled in or inked in, for the benefits of that work. We expect to see that level of improvement increase as we get into these schemes rather than run out. I think the important thing about the quantum is that it's certainly needed. Part of it would obviously offset the inflationary pressures that you're going to get every year. It will defray that. Then also with sugar prices coming down, we'll be able to defray some of the impact of that as well. That's why the fact that the scale of these is so important and it is an important thing for AB Sugar looking forward. What we're looking for in the end is relative cost advantage. Yeah. Shall we pass over to Mike Dennis first of all, and we could Mike Dennis from Cantor Fitzgerald. Just a quick question on the grocery. In terms of the baking business, you talked about margin pressures, yet you talked about obviously the volume growth you got from the Co-op. Yeah. Is that industry going to become a bit like Australia in terms of the fact that now Hovis is basically buying volume in the U.K. market, you are going to find it very difficult to make a good return on that investment that you just made in Allied? I just want to get your feeling for how you see the U.K. baking market actually, or bread market actually evolving. Yes. I do not think that the nature of the U.K. bread market will change much. It has been like this for years and years. I think that we have established a strong position in the market with very reliable production, high quality bread, and a lower cost base than our major competitors. And again, it is the reality of that lower cost base, which I think will give us our return on the investment in the years to come. Do you think they will continue to fund the GBP 1 loading for 40% of the market? I really don't know. We can speculate afterwards, perhaps rather than talking to the world about it. Absolutely. Bob Ultschmidt, yeah. A couple questions if I may. It's Bob Ultschmidt from Merrill Lynch. Firstly, on Primark in terms of your expansions, you note 13 by Christmas of this year. If we think about that in terms of your earlier comments through the course of the year, is that in line or earlier, and how do you see the weighting of store opens as we go through fiscal 2014? I guess second of all, it seems like we're still on track for, call it a 1 million sq ft per annum for the next three years or so in terms of what's out there. Is that a reasonable assumption? I guess lastly on Primark, in terms of your partnership with ASOS, any comments on how that went, why you ended, would you reconsider doing it again, et cetera? Just one last question if I may, on sugar. Can you give us an idea of how the development of sugar pricing is coming, how quickly it's coming down, vis-à-vis your expectations and market. Thank you. On Primark, we expect to have a fairly even weighting of store openings first half, second half, this year. Last year, we opened almost everything that we opened in the first half. I think we only got one open in the second. 1 million square feet looking forward, not a bad number. We would hope to do a little bit better than that, I think. There is always uncertainty when you look further out in the opening, the store pipeline. ASOS. ASOS. Yep, we learned a lot through ASOS. We learned something about where customer demand is, relative to where we place certain ranges. So we learned something about the ranging in different categories and different geographies of store. We learned something about sizing, the importance of consistency of sizing. We have done a lot of good work recently improving that, but we know we have got further to go. Ultimately, what we learned was that we can sell profitably on the high street much cheaper than anyone can do online. We have to keep an eye on that, but that was hugely reassuring given our commitment to the high street all over Europe. Will we do another trial? I am not aware of the discussions that are going on at the moment, but the high street is by far and away our focus still. Sugar price decrease. Sugar price decrease. Do you want to handle that? Yeah. Look, without sort of giving numbers out, I think there's no doubt that for the marketing year 2014, I think sugar pricing came down further than we would have expected maybe three or four months ago. Without sort of giving numbers, but certainly well in excess of 10% reduction in those prices. We were surprised. It's come down further in the U.K. than in much of continental Europe, and that was a surprise. Okay. Graham Jones. Graham Jones from Panmure Gordon. Just sticking with Primark, just on Rana Plaza, could you possibly quantify the cost of the compensation? My feeling is it's more than just a couple of million pounds. In terms of the ongoing cost of supporting those families that have been affected, was that provisioned in the operating profit for 2013? Then the second thing on Primark, obviously, there's been press speculation about a possible move to the U.S. Presumably, you think you haven't quite covered all of Europe yet, but would you like to give any comment on the opportunity in the U.S. Then thirdly, on grocery, U.S. corn oil prices are a lot lower year-on-year. Is there any margin benefit at ACH this year because of that? Rana Plaza, we've spent about GBP 2 million so far. We don't know what the long-term compensation will cost because we haven't done the assessments of injury. Until we've done that, we won't know what it's going to cost the business to support those people. John has taken a stab at a number in the accounts this year. It'll be wrong. But we got to put something in. We're not going to ship. We're not- I don't know how to take that. Sorry, let me repeat the point. We don't know what the cost is. We don't know what the cost is. Yes. The important thing is that we get the compensation right, not that we set a budget for it. What was the next part? We have made a good provision in the 2013 numbers for it anyway. Yeah. That is the important thing. Was it- To move to the U.S. We've got 10 stores in Germany. We've got 161 in the U.K. We've got none in France. We'll have five by the end of the year. The priority is quite clearly continental Europe. Having said that, we have appointed a, can't remember his exact title, but someone to look around at new markets. The adjacent markets in Europe are his first priority. What does Italy look like? What does Scandinavia look like? Is there an opportunity in Luxembourg? Yes, but probably only one. Nothing in Eastern Europe. How does Poland look like? There are a lot of questions. But this business in Northern Europe, in particular, is nascent at best. Nothing in France. That's the priority. Grocery U.S. corn oil. Yeah, it's come down quite a lot. It's not only the reduction in the absolute level that's been important, it's been the inversion of the traditional relationship between corn oil and soy. Our competitors are soy oil brands, Crisco and Wesson. They've also always had a cost advantage based on soy being 3 or 4 cents cheaper than corn. Corn is now sitting about 2 cents below soy. Whether that'll last or not, I don't know. There has been a little bit of marginal improvement over the last 18 months in the Mazola brand, partly as a consequence, partly as a result of other things, too. Thanks. Go ahead. Please. Thanks. Charles Pick of Numis. Three questions, please. Firstly, regarding China, is it possible to quantify the loss, please, last year? Just trying to get at what the underlying figure was, ex that 22 million that was charged for the two factory mothballings. Secondly, regarding CapEx, it was mentioned that some of the CapEx at Primark was deferred. Yeah. Is it possible to quantify what that magnitude was and also what the CapEx at Primark and the food operations might be in the current potential year? Yeah. And third question, please. I think in the past you've indicated the margins at Primark are roughly similar between the various geographies. Yes. Was that again the case last year? John, you can handle all three. Well, okay. Let's take them up from the beginning. The China losses, China Sugar underlying in excess of GBP 40 million loss. Okay? That's the underlying loss, GBP 40 million loss in 2013. We think that will come down somewhat in 2014 for the reasons that George has given. In terms of capital expenditure, I thought I was really trying to give you, Charles, really a feel for where I thought the CapEx was going to go. Probably a good GBP 50 million coming out of 2013 into 2014. You notice that I think mid-300 as a capital expenditure, at the very least for Primark, maybe getting towards 400 for the 2014 year, and then a bit less on food. Giving the total, probably in the high 600s. I'm sorry, the final one was on? It was about the margins between those geographic regions for Primark. Were they again similar? Yes. I think one of the things that George put up on the slide, which I think is very important, is that we look very carefully at the margin, particularly in Northern Continental Europe. Structurally, labor costs are higher there than certainly in the U.K., and the team have worked very hard in terms of getting an acceptable margin structure. Without absolutely breaking it down, in Northern Continental Europe, we have got double-digit margins, a bit less than the U.K. But that really is very important because that is the base that we are building on as we go forward. People say, is it dilutive as you grow forward? A bit, but not an awful lot, no. Yeah. You mentioned labor costs. This is Stuart Foster from JP Morgan. Yeah. You mentioned labor costs across Europe being slightly higher. I noticed that there is a government initiative to try and get living wages throughout the U.K. Where do you stand on that, please? Cost increases. Labor is an important part of our cost base. If labor costs go up, someone is going to have to pay for it. I would have thought that it depends on the level, but a substantial increase in labor costs in U.K. retailing would, not just us, but everyone would lead to marked increase in consumer prices, whether that is in food or clothing. I am not going to speculate, giving my view whether I think it is a good thing or not. I just think that there are consequences. All these promises have to be paid for somewhere. Yeah. Warren, did you want to follow up? Yeah. Hi. Just a couple of follow-ups. It's Warren Ackerman at Soc Gen. You did 5% like-for-like at Primark in the year, which was obviously fantastic relative to your competition. You do have a very tough comp in the first quarter. I think you did 9% or 11% if you include the extra space productivity. Would you expect the like-for-like growth in the current year therefore to be a bit more second-half weighted? Or is the comment that the autumn-winter range being very encouraging suggesting that you're still going to do a decent number in the first quarter despite the tougher comp? Yeah. The second question is just on the earnings guidance for the year, John. You're saying flat earnings for the years of 2014, which is 99p, that is I think a bit lower than consensus, which is about 102p, 103p. Obviously, sugar's coming down. But you've got other things coming back. Some of the one-offs are reversing. You should expect to see some decent profit growth in Primark and grocery. I was wondering whether you could just discuss some of the moving parts on that comment for us. That would be useful. Thanks. Sure. Charles, you do like-for-like. Yeah. I think like-for-likes in Primark will be second-half weighted, particularly sitting here now after a very warm autumn. Lapping, John will probably tell me I shouldn't tell you, but period one last year, like-for-likes were +20%. We've just had period one. It's quite hard to lap that with good further growth. So it'll be second half, weighted. What do you mean, period one? Sorry. September. First four weeks. September, first four weeks, yeah. The middle of September to the middle of October. Sorry. Yeah. Yeah. So yeah, no, second half weighted. John, do you want to? Yeah. Yes, talking about the guidance for next year. First of all, I do not expect people particularly to change on the back of the guidance that is actually there. I think we are not giving anything new in terms of a sugar outlook or for any of the businesses that we had given at the pre-close trading update. First of all, let me make that one very clear. The word that is not used there is flat. The word that is used there is similar to 2013. Warren, I think that allows a little bit of flexibility within a few percent of where it is. I would be surprised if people moved their numbers very much from where they are for 2014. Can I just being slightly churlish, John, on the financing costs being a little bit lower? Yes Because of the debenture. Yes. Could you maybe quantify how much lower? Oh, yeah. A few tens of millions lower. Just like we had a big consumption this year, we will have another good consumption into 2014. It is great. A very good move. Robin Ascough. Robin Ascough, JP Morgan. Just a question about grocery margins. Yeah. Obviously moved from 5% to 6%. I think in the past you have talked about perhaps they should move to 8%, 9%, 10%. Is that something you could envisage next two to three years? There seems to be a lot more momentum in the business, et cetera. A lot of things coming around. Yeah. Three very different situations going on. Firstly, the growth of Twinings, Ovaltine, Patak's, Blue Dragon, Jordans, and Ryvita, where the margins are already double digits. The growth of those businesses at those sorts of margins relative to the rest of the business will determine the average of the whole lot. Secondly, the continuation of the improvement in Australia. But the Australian businesses, meat businesses and bread businesses never run at double-digit margins. But there is lots of improvement there, which will bring the average up. And the third is the bread business in the U.K., which again, we would never expect to have a double-digit margin. But we would expect to see further improvement in the profitability there. How the average all works out, I do not know. We would hope to see further progress from 6%. Just given the timing, is there maybe one more question, or are we through? That's okay. Thank you all very much. Thank you very much.