Earnings Call: H2 2012

Nov 6, 2012

Good morning. Welcome to Panmure Gordon's smart new offices. Congratulations on finding your way up here. We have the review of ABF's annual results for the 52 weeks ended on September 15, 2012. No changes to the format. I will go through the financial and business highlights first before handing on to John, who will go through the income statement, the balance sheet, the P&L, and the segmental analysis before handing back to me to go through the business by sector. The financial highlights are these. Group revenues were up 11% to GBP 12.3 billion. The adjusted operating profit up 17% to GBP 1.077 billion. Adjusted profit before tax, also up 17% to GBP 974 million. Adjusted earnings per share up 18% to 87.2 pence. Dividends will rise by 15% for the full year to 28.5 pence. Capital investment was down slightly on the year before, but still very high at GBP 707 million. We end the year with a net debt of GBP 1.06 billion. Our business highlights. Clearly, these have been a very good set of results. They are taken after adjusting for major restructurings undertaken, particularly in Australia, but also in the U.K. bread business, and yeast to some extent. It has been a banner year for AB Sugar. We have seen an acceleration of the space growth in Primark, also the sales growth and a return of some of that margin. A good further growth from Twinings Ovaltine. A difficult year for the meat business in Australia and also for our yeast and bakery ingredients business. Finally, very strong cash flows for the group. John, over to you. Good morning. Okay, turning to the income statement. Group revenue increased by 11% to GBP 12.3 billion, and adjusted operating profit was up 17% at GBP 1,077 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 19% 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 US and Australian dollars, but are strengthening against the euro and rand. The year-end rates reflect sterling's recent strengthening against all four currencies. The adjusted profit measure reflects the underlying performance of the business and excludes profits less losses on disposal of non-current assets, which this year was a small loss compared with last year's profit, and the amortization of non-operating intangibles. This amortization covers those intangible assets acquired since September 2004, and the charge was 100 million this year, compared with 83 million last year. Adjusted operating profit also excludes exceptional items. As we announced in the pre-close trading update, we have taken a charge of 98 million to impair the assets of the meat business in Australia. Although a recovery plan is in place and a number of operational improvements have already been made, the discounted cash flow forecasts for the meat business were not sufficient to support the carrying value of its assets at the year-end. The accounting rules, however, prevent the inclusion of the sale of the former meat processing sites that we are expecting in Western Australia and Victoria. These are currently being redeveloped, and the net cash inflows in future years are expected to be substantial. Unadjusted operating profit increased by 4% to GBP 873 million. The primary elements of the GBP 9 million loss on the sale and closure of businesses were a GBP 15 million non-cash charge for the write-off of Illovo's investment in pre-project expenditure in Mali, following our decision not to pursue the development of this business, and a GBP 9 million credit for deferred profit on the disposal of the group's former Polish sugar operations in 2009. Net interest expense amounted to GBP 105 million, compared with GBP 92 million last year. This reflected two things. The higher rate of interest on the private placement funds raised in March when compared with bank financing, and a higher average level of net debt during the year. As you will see in a minute, cash flow for the year was actually very strong. But we started the year with a much higher level of net debt than the previous year. I will remind you that the benefits of the private placement funding are a lengthening of our debt maturity profile and a diversification of our sources of funding. Profit before tax was GBP 4 million ahead of last year at GBP 761 million. Adjusted for the items referred to earlier, we delivered a 17% increase from GBP 835 million to GBP 974 million in adjusted profit before tax. The tax charge fell slightly from GBP 180 million to GBP 178 million, with a small reduction in the tax rate from 23.8% to 23.4%. Profit attributable to non-controlling interests was slightly lower this year, largely as a result of lower profitability in our China sugar operations. By the way, the adjusted number for non-controlling interests is GBP 44 million. I know a number of you use that for your spreadsheets. Moving on to tax. Looking at the separate components of the tax charge, three adjustments are made to the reported charge to arrive at the underlying rate of 24.8%, which is marginally up on last year's 24.6%. The first one, the tax credit on the amortization of goodwill and intangibles increased from GBP 25 million to GBP 33 million, driven by this year's higher amortization charge, which is itself excluded from the adjusted profit measure. A small credit arose on the disposal of businesses and assets, and the exceptional item gave rise to a deferred tax credit of GBP 29 million. The underlying rate of 24.8% is lower than the 25.9% that we used at the half year. The half year rate did not reflect the Chancellor's further 1% reduction in the U.K. corporation tax rate to 24%, which applied from the 1st of April 2012, but which hadn't been announced at the balance sheet date. The rest of the reduction in the underlying rate was the result of changes in the mix of profits across the group. We expect next year's underlying tax rate to be slightly higher than this year. Although next year's tax charge will benefit from the 1% reduction in the U.K. statutory rate from 24% to 23%, which is affected from the 1st of April 2013. As the proportion of profits earned in countries with a higher corporate tax rate than the U.K. increases, this will result in an upward pressure in our underlying rate. Adjusted earnings per share increased by 18% to 87.2 pence. Earnings per share were 2% ahead of last year at 70.3 pence. A final dividend of 20 pence has been proposed, making a total dividend for the year of 28.5 pence, a 15% increase. I think this might be a little higher than some of you were expecting. This reflects our confidence in being able to maintain an appropriate level of investment in the business as a consequence of the strong cash delivery and a reduced level of net debt. Dividend cover on an adjusted basis remains at three times. Turning to the balance sheet, net assets were largely unchanged at GBP 6.2 billion. After sterling weakness over the last few years, sterling was stronger against all of our major currencies this year and actually gave rise to a loss of GBP 230 million on the translation of overseas net assets. Currency translation apart, intangibles were lower than last year as the amortization charge exceeded additions in the year. Other non-current assets increased by GBP 34 million, and that is with capital additions being ahead of both depreciation and the write-down of the Australian meat assets. Working capital at the year-end was actually GBP 73 million lower than last year. Average working capital during the year, expressed as a percentage of sales, showed an improvement. This was principally driven by two things, the non-recurrence of the commodity cost inflation that we saw last year or the previous year, and lower stock at Primark as a result of improved inventory management systems. The strong cash generation drove net debt GBP 224 million lower at the year-end to GBP 1 billion and GBP 61 million. The group has total committed borrowing facilities amounting to GBP 2.6 billion, of which GBP 1.2 billion was drawn down at the year-end. For those of you that know ABF well and its financing, we will pop the champagne corks when British Sugar 10.75% debentures finally mature next year. I certainly will. The group's net deferred tax liability fell by GBP 77 million due to the creation of a deferred tax asset on the exceptional item, an adjustment to reflect the falling U.K. corporation tax rate and GBP 17 million on currency translation. The net pension liability of GBP 95 million on an IAS 19 basis has increased since last year as lower bond yields increased scheme liabilities by a greater amount than the increase in scheme assets. Cash flow, I think this is a standout. Our cash flow performance was really strong. Free cash flow was GBP 630 million higher than last year, and that is an inflow of GBP 445 million, compared with last year's outflow of GBP 185 million. The main drivers were a much higher adjusted operating profit, a higher add back for depreciation and amortization, largely the consequence of capital invested in recent years on assets which are now operational, a working capital inflow of GBP 43 million compared to last year's outflow of GBP 199 million, and as expected, a lower level of capital expenditure in the food businesses. As you know, we do not generally refer to EBITDA. I would remind you that the first time I actually raised it was two years ago, when I remarked that our EBITDA had exceeded GBP 1 billion for the first time. That was two years ago. As you can see this year, we are almost GBP 1.5 billion EBITDA. We expect a high level of investment in Primark to continue as we expand in the U.K., Ireland, and continental Europe. Gross acquisitions in the year amounted to GBP 45 million, of which GBP 34 million was spent on Elephant Atta, with the balance being deferred consideration payable on acquisitions made in previous years. The acquisitions and disposals line here shows a GBP 19 million outflow and includes a repayment of loans made to joint ventures. Turning now to the performance analysis by business segment. Revenue was achieved by all segments, albeit only by a fraction in Ingredients. Profit was strongly ahead in Sugar and Primark. Agriculture matched last year's record, but Grocery and Ingredients declined. Grocery and Ingredients both face challenging trading conditions, but we have taken a charge for the major restructurings undertaken this year in Australia, in the U.K. bakeries, and in AB Mauri. Unsurprisingly, these segments therefore saw a decline in margin. Turning to Primark, I was pleased to see Primark's margin return to last year's level of 10.2% for the full year, and the sugar margin reached 19.1%. Return on average capital employed largely tracked the segmental profit performance. However, the Primark return of 19.2% is actually up from 18.2% last year. I think that's notable given the level of capital expenditure in that business and reflects not only the profit increase, but also better management of inventory levels during the year. Overall, the group return improved from 15.8% to 17%. Moving on to the segmental analysis by geography, revenue increased in all regions. In the U.K. and Europe and Africa, profit and margin reflected the Sugar and Primark performance. Profit in the Americas was lower as a result of the investment in new products by ACH and difficult trading conditions for Capullo in Mexico. The profit decline in Asia Pacific reflects lower sugar prices in China, the restructuring at George Weston Foods, together with the trading difficulties in the meat business and lower profit for Eastern China. Okay. At that point, I'll pass back to George. Thank you, John. If we start then with Sugar, where we've had this fantastic year with operating profit up 62% to over GBP 500 million. The reasons for that, I think, are threefold. Firstly, we've seen strong regional pricing, particularly in Europe. Secondly, we've seen higher sugar production everywhere except Southern China. Thirdly, we've seen improvements in agricultural performance and also in factory performance. It's worth just lingering for a moment on that improvement in agricultural performance. Some of it, of course, is weather-related, but a lot isn't. It's notable in the U.K. that sugar beet field yields have been increasing faster than that of other crops for years and years and years and reflects the excellent work that's done between British Sugar agricultural teams and the U.K. farming community. In China North, as I'll show you later, yields continue to increase. In Africa, there is continuing investment in the agricultural part of our businesses in Illovo, most notably improvements to agriculture. A lot of self-help in agriculture, not just weather. Moving on to Europe, European sugar. Strong prices last year, obviously. It is notable they have held up or even increased a little in the negotiating round this year. In the U.K., those prices were helped by an increase in sugar production of some 30% to 1.3 million tons. It really was a fantastic crop that we processed with record field yields, the highest sucrose contents than we had seen in the beet. Then a really good factory performance on the back, again of continuous improvement and continuous investment in the four U.K. factories. Staying on the U.K., Vivergo production, that is the bioethanol plant up in Hull joint venture with BP, it is coming on stream by the end of this calendar year. Spain also had an excellent year. Field yields, again, were at a record level and factory performances continued to improve, not least on the back of very good work sharing best practice between the U.K. and Spanish teams. It is worth then just pausing to note the 100th anniversary of the start of sugar beet processing in the U.K. at scale. That was at Cantley, which remains one of our important factories. 100 years ago, I think it was managed in the first instance by a Dutch management team, and it is still going strong today. On to China, our sugar business there. We saw production of sugar in the north up 37% to 287,000 tons. The area planted to beet increased. Again, the beet yield in those fields increased, and the factory operations improved as well. We expect further progress this year, particularly in the areas of yield and factory operations. Volumes were unchanged in the south. They were lower than we would have hoped. We were constrained by the damage done by frost and drought the previous year, along with heavy rains, but we were still just under 490,000 tons of production. I believe this year will be better. China suffered from lower prices, however, and that brought the profits down through the country somewhat. The important factory northwest of Beijing, a town called Zhangbei, where we had a factory, we relocated and placed it in the course of the year. This is what it looks like today. It is a very large factory. The man in the front holding the sugar beet is Mark Bainbridge, who oversaw the construction of that plant. Very quick construction project, brought in on time and on budget. It is commissioning now. Moving on then to Illovo. Production bounced back to 1.8 million tons of sugar. We saw the return of more normal sucrose levels outside South Africa, and inside South Africa we saw a recovery after the drought of the previous two years. Zambia and Swaziland, the two most recent factory expansions, those two operations are now operating close to capacity. We endured the necessary but painful devaluation of the Malawian kwacha in the course of the year, with only some reduction in the profitability in that business, and that was a very good effort given that the currency devalued overnight by 50%. Co-products in Illovo are becoming increasingly important. We are in the midst of building a bioethanol plant fed by molasses in Tanzania. We are producing electricity in Swaziland from bagasse. As the years go on, co-products production, electricity generation, will become a bigger and bigger part of what Illovo does. Moving then from sugar into our agricultural businesses. Another good performance. Profit was flat, but last year benefited from the year before, rather benefited from a volatility in grain prices, allowing the traders at Frontier to run riot. This year we did not have that volatility, and the profit was pulled up to the previous levels by three improvements, really. The first one was very good sugar beet feed prices in the U.K. The second one was growth in the specialty AB Vista business animal feed ingredients, particularly the new Quantum Blue enzyme, which was introduced in the middle of the year, which I mentioned last time we were together. Thirdly, by good progress in China, where not least we have signed a contract with Tyson to produce animal feed for a major pig growing operation, processing operation that they are investing in in that country. Frontier returning there. High demand for crop inputs, that is an important part of the business at Frontier now, and as I say, grain trading at more normal levels. Moving on to the grocery businesses then. Within these numbers, there is a significant restructuring to reduce the cost base, most notably in Australia, but also in U.K. bakeries. George Weston Foods had, as I say, bore the brunt of those restructuring charges I mentioned at the half year. The extent was reduction in management levels that that restructuring paid for. The meat business in Australia is working better now. The tonnages of meat going through that factory are increasing. Service levels are very good. There is significant work left to be done cost base, and that will be the task of this year. The U.K. grocery brands performed well. I will come back on to bread at the moment. I want to reemphasize that Jordans had a very good year. Patak's and Blue Dragon did well. Silver Spoon did well. Setting the restructuring charges aside, the underlying profitability in bread was only marginally reduced. Going on to Twinings Ovaltine, we saw another year of very good growth, particularly in Ovaltine. Which is where I turn to now. Revenues up, profits well up. The marketing investment increased once more. Twinings gained share in all its major markets, despite the state of consumer finance in those major markets. We saw strong growth in the U.S., strong growth in Australia. The supply chain investment, which has taken us the best part of three years and has involved the building of a new factory, the significant expansion of a second one, and the closure of one. That work is nearly complete by January, and the last work at Andover will be complete. Ovaltine has seen exceptional growth. We overcame the challenge of the Thai floods. A lot of the area around Bangkok was flooded for three months. We saw particular success in Brazil, where there has always been resonance to the Ovaltine brand, and that brand is now being revived in the São Paulo region in particular. Allied Bakeries then. We have lowered the cost base by restructuring, taking out management layers. We've lowered the cost base as a consequence of the heavy investment program, which I will return to in a moment. We closed two small bakeries. That was always in the plan. That was Newcastle and Cumbernauld, and the overhead is reduced significantly. The market remains very competitive. But as I said before, the profit on an underlying basis is only marginally down. The brand Kingsmill itself became the leader in the healthier white bread sector, which is the second largest after white, and that was good work done. We have new plants which we put in over the last two or three years in Glasgow, in Stockport, West Bromwich, Stevenage, and Walthamstow. Stockport is now complete and operating. It's probably the most advanced bakery in the U.K., and we're delighted with its performance so far. The work at Walthamstow is well underway and should be completed by spring. Once it's complete, we'll be able to double back on West Brom and install a similar plant to Stockport and Walthamstow's in that important bakery. Moving into the States with ACH. Mazola performance was good during the year. We've invested heavily in new product launch, particularly around bakery ingredient products. Mexico remained competitive. Volume of Capullo dropped marginally in that country. Stratas, which is the joint venture we established with ADM, is now operating very well. Margins improved, volumes improved, and that business is really hitting its straps. I said regarding Australia at the half year that we had three things to do. We needed to get the overheads across the whole business down. We needed to get the meat factory performing better, and we needed to stabilize bread margins. The overhead reduction has occurred. 349 heads have come out of overhead in that business. The meat factory I mentioned, there is still work to be done on the cost base, but there are certainly green shoots there. And the bread margins, I was very encouraged to see that the wheat price increase that the Australian market has seen, as well as the U.K., that has been successfully passed on, has been successfully recovered in the last few weeks. The retail and competitive environment, of course, remains challenging. And the consequence of all this taken together was that we did see lower revenues and a reduction in profitability in that group. This year will be better. Moving then to ingredients. A sector where we've got two distinct businesses. The specialty ingredients businesses of ABFI, that had a good year. Progress in enzymes, progress in our oils part, especially oils part of that business. Moving on to AB Mauri, which had a poor year. As I've mentioned at the half year, we have a commercial plan in place. The management capability is being established both in the regions. So to deliver on that commercial plan is being established both in the regions but also in the center. We have a new chief executive who has joined the business and will be taking his office in the new calendar year. There were some restructuring costs in that business in the year just gone. If we move finally on to retail, with revenues and profits up 17% on a constant currency basis. Selling space increase exceed. We opened 900,000 sq ft. Like for like growth, very credible 3% in the environment. As John mentioned before, we saw an improvement in the second half margin that took the total year back to where it had been the year before. The spring/summer ranges were very well received. We also sold something over 7.5 million items which were Union Jack themed across the Olympics and the Diamond Jubilee. Margins, I think I have mentioned, we are having to absorb higher VAT rates in Spain, in Netherlands, and Ireland, and we are also seeing the consequences in margin of a weaker euro against the dollar. Nonetheless, in continental Europe, we are enjoying superior sales densities to those that we see in the U.K. and Ireland, and despite the absorption of those extra costs in the VAT, we are seeing good margins in all the markets in which we operate in continental Europe. There is marked excitement at new store openings. One anecdote, we opened our first store in Austria in Innsbruck a few weeks ago. Innsbruck is several hundred miles away from the nearest Primark store. We opened on a Thursday. On the Saturday following, we had our first two busloads of Swiss arrive to go shopping. I do not think there are many retailers in the world that generate that sort of excitement. Maybe Apple, maybe Ikea. The new store design which you can see, most notably at Oxford Street East, I think, has moved the store environment on once again. In terms of selling space expansion, this is where the new stores came from, 5% increase in the U.K., particularly around expansion of existing stores. Iberia, 45%, I will come back to that in just a moment. Northern continental Europe, more than doubling of the space, particularly with those five new stores we opened around Christmas last year in Germany. So, a total of 13% space expansion. The major drivers then of those selling space expansion, those large stores in Germany, Berlin, Essen, Dortmund, Saarbrücken, Hanover. Berlin opened with the largest first store sales of any store, including Oxford Street West. Then expansion in city centers in the U.K. and Ireland. New stores, obviously, Oxford Street East, but also major expansions in Newcastle, refurbishment and expansion in Dublin, and the same in Manchester. Then a major increase in Iberia. If you allow us 15 months rather than the 12 months to September, we will have gone from 24 stores to 41 in Iberia by December this year. Some pictures to support. That was the queue at opening time in Berlin. That queue remained all day, remained disciplined all day and remained well-behaved all day. Dortmund, because it is a nice picture, and Essen similarly, both trading exceptionally well. This was the first container then to go into the Mönchengladbach depot, the first of many, I suspect. The depot is larger than that in Spain at Torija, just north of Madrid, and it marks an important step in the servicing of the North European network of stores. It is currently serving 14 stores in Northern Europe. This is Oxford Street East. Some of you may have seen, it really is a wonderful flagship for us. It is trading just above our expectations. Oxford Street West is trading well above where we thought it would be. So Oxford Street in total has taken a great leap on as a marketplace for us. To show that we are not just building nice stores in Oxford Street, here is Chelmsford, which we opened just a few weeks ago. It is also trading well, but most important, that store environment, which I talked about before, finds reflection here, too. Newcastle then, this is where we are at the moment, 43,500 sq ft. BHS is next to us, or was next to us. We are moving into their space. It will be the second-largest store after Manchester when it is completed by the spring, and again, a real flagship for us in a very important market. Mary Street, Dublin, we did not know whether to stick this in or not, but it is where the business started. It is going through its biggest refurbishment since the 1960s, and it will be another wonderful store for us. On to Spain then, this other area, third area of growth. These are the stores that we had opened in September 2011. By Christmas this year, this will be our network up to 41 stores. Significant market share in that market, and as I mentioned before, good sales densities, good margin. I am now going to do something I have not done before and look backwards over a longer period of time. This is the first year where we have made over GBP 1 billion as an adjusted profit figure. It is the first year where our market capitalization has gone over GBP 10 billion. Here is the last 10 years. Sales have increased over a 10-year period at 10% per year. Adjusted operating profit has been going up by 11% over that 10-year period, EPS by 8%, and dividends following EPS at 8%. It has been a story of job creation, not least in the last year. We have added 10,000 new jobs, particularly to the under 25s in Primark across, and that is something that we are very proud of. We have invested throughout this period in a sustained way in all our businesses, not just the fast-growing ones like Primark, but also those that go through periods of unfashionability. We have invested not only capital, but also at times revenue, be it marketing in a business like marketing funds, in a business like Twinings or absorption of price of cost inflation, notably Primark a couple of years ago. We have also invested in people, and we have invested in time. I think we have shown a consistency of purpose over a long period of time. I think we have been robustly long-term owners of these businesses, and we have wrapped up all this in financial discipline, not least thanks to John looking fiercely at some of us a lot of the time. If we look finally to the new financial year, I think it is a year in which we will make some further progress. We flagged our expectation that there will be some reduction in profitability in AB Sugar. We are paying more for sugar beet in the U.K. The crop is not as good, and the euro has gone against us. We will see another year of good growth in Primark. Year to date so far, we are only seven weeks in, sales have been good and autumn winter range is again well accepted. We will see recovery in grocery, the non-repeat of the exceptional charges, but also underlying improvement based on that, not least on those charges that we took last year. Capital expenditure will remain high in Primark. It will come down somewhat in food. It will be a year to add to the 10 previously of continued investment in all parts of the group. Thank you very much. Okay. Shall we open this up to any questions from the floor? Right. As usual, if you could say your name. Maybe start with Alan Erskine in the front here. Sorry. Yes. Alan Erskine from UBS. Just three questions, please. Firstly, last year obviously all the stars aligned in terms of the EU sugar business. I would just be interested to know, would you see that level of profitability as being a high watermark that you will never return to again? Or to what extent it is a high watermark? My second question is just a bit of housekeeping really. Does Primark have negative working capital? Therefore, as it grows, what impact does it have on the group's working capital? Thirdly, George, you just mentioned that you thought the grocery business would make some underlying progress, and you talked in the presentation specifically about an improvement in Australia. Would it be fair then to add back GBP 30 million to the GBP 187 million and then assume that you will move forward from there? Is there anything else that we need to triangulate in that calculation? Thank you. Okay. Sugar, yes, the stars did align. Good pricing, great crop, great factory performance. Those are the three big drivers. You never say never. There is lots of opportunity for growth in Africa. There are opportunities for growth in China. There is still tremendous opportunity in the cost base across all the markets. At least looking forward to this year, pricing has remained good. So I would not say it is necessarily a high watermark. It has been a great year, and I do not think I want to forecast too much beyond that other than to say this year there are more headwinds than there were last year. Moving on to Primark. No. At some points in the year, we run with working capital, but by and large, the answer is no, we do not. We pay our suppliers fairly rapidly, so they are not funding the business for us. It is part of the compact, really we have with them. To be clear, Primark has a small positive working capital rather than negative. Finally, on to grocery and on to Australia. Yeah, I think that is a fair assumption. You add back the restructuring charge, and then we see progress from there, if we do our jobs well. Thanks. Graham Jones. It is Graham Jones from Panmure. Just on grocery, you commented about recovery in costs in Australia. Could you also make a comment about price recovery in U.K. bread? It looks like you have picked up some Co-op business. Premier Foods are describing it as high cost to serve, low margin business. I was wondering if you could give your thoughts on that business. Then the second question, just on ingredients. One of the issues that AB Mauri has faced has been the high molasses cost in China. Yeah. With the fall in Chinese sugar prices, has there been any change in that dynamic? Just to answer the last question first. Yes, Chinese molasses prices have come down somewhat in this year, and that will help Mauri and also the yeast extract factory at Patharmban. Then wheat cost inflation. Yes, we have recovered it in the U.K. That has been work well done, I have to say, in the face of some pretty fierce resistance from our customers. The Co-op, we are very pleased we have picked up this business. When I was running Allied Bakeries, I tried to pick it up and failed, and the current team has been trying for five years. It is a big part of the market that we have never had access to. Most of that business is branded, and I would make one without wishing to go into too much judgmental detail. Hovis has held that business since they bought Bakeries from the Co-op back in the 1970s. James. James had his hand up. We will come to you in a moment, David. Oh, no, let us do David. You have had your hand up longer. Yes, David. Hi, David Hayes from Nomura. Just under the space for it. You have got these 12 stores already planned out for Christmas. If you take the average new store size, it looks like without any more stores for the rest of the year, you could be up by 14% or 15%. I do not know whether you are comfortable with that metric 14% or 15% space, assuming you are comfortable with for the new year. Then secondly, on ingredients profit, which looks on the way to second half, excluding the restructuring, looked like it was running at about GBP 9 million profit in the second half versus the first half, GBP 23 million. I just wonder whether that is a new run rate and what is driving that second half performance, or whether there is a recovery to come through there. Thanks very much. David, first of all, in terms of the Primark expansion, it always is lumpy in terms of when the stores open. I think I would be uncomfortable at 14 or 15. But as you know, the sort of longer term guidance that was given of around 10%, it does feel as though we've got a very good pipeline of floor space addition coming through in Primark. Running above the 10%, then I think that that's probably where it is. In ingredients, yes, profit continues to decline into the second half. That's where it starts from in the first half. We expect to see some recovery through the year, but it's always difficult to anticipate the timing of that sort of recovery. Essentially, non-recovery of cost increases, which I think reflects the fact that we haven't been in a strong enough commercial position in the markets in which we've been operating, plus a couple of one-offs which may reverse. The business in Brazil was hit hard by a change of competitive stance. Now that may change back again. Turkey has been difficult. But by and large, I think we've discovered that commercially we weren't as strong as we thought we were when the test of cost inflation was put on the business, and that's the long-term fix. Should we go with James next, over here? Yeah. Hi there. James Targett from Berenberg. A couple of questions. Firstly, on grocery again. You mentioned the various actions you've taken to lower the cost base and some ongoing stuff which needs to be done in Australia. Could you give us an idea of what you're hoping for a midterm margin in grocery business going forward and relative to how it has been? I appreciate, trading conditions are still volatile. Secondly, just on Primark. You mentioned trading's been good so far. I just wondered if it has been any change, really, from the summer period. Regarding the opening of Oxford Street East, if you have seen any meaningful cannibalization of the West store. Thank you. Shall I start with grocery margins? You do the margins. Look, I am really quite conscious that a couple of years ago, we talked very much about grocery margins and not a target, remember, James. Forgive the pun. I think clearly higher margins in grocery is where we want it to go. Look, we have got a mix of businesses in our grocery portfolio. Some have got high margins. If you look at Twinings Ovaltine, Twinings Ovaltine has got margins in the high teens. I think our bread businesses, with the best will in the world operating well, will be single-digit margins. Something like Jordans, Ryvita, AB World Foods certainly are 10% at the very least. As a blend, when we do not have exceptional charges across the piece and we have resolved the problems in Australian meat, then a margin towards 10%, I think is where we should see in the medium term. I would not like us to come off that. There were two parts to the Primark question. I can remember the Oxford Street cannibalization one. What was the- Just the current trading for anyway. I think we have got to be careful with current trading because there is a big weather effect going on. Cold autumn weather started at a much more normal time of year this year than it did last year, and therefore the like-to-like comparisons, although they are really good, needs to be taken in that context. We had a very good week last week. It was half-term, the weather was cold, the stars aligned there. So far, so good. When we get into the more difficult comps at Christmas, we will have a much better idea of just how strongly we are trading. We are pleased with the first seven weeks. Oxford Street East, there is an argument that says you could take Oxford Street as one store and say, what is happening there. The answer is we are well up. The West, if you want to be sort of hair-shirted about it, as we will be in our like-for-like calculations, look at the West. West, since East opened in this period of really strong like-for-like growth because of the weather effect, West has actually been up, not down. You have got to give it a year to see. To see if that comes through. Look, I think it is worth taking that point. I think when we started to look at like-for-likes for next year, I said to a number of you, be careful about the effect on Oxford Street West. I think we are saying it has not been affected so much. I think that probably should inform where you are for like-for-likes for this new financial year for Primark. Warren Ackerman in the middle here. Warren Ackerman at Soc Gen. A question on the cash flow. Cash flow was well up year-on-year. Just wondering about your thoughts on CapEx in the current year. You are saying that Primark CapEx is going to remain quite high, but the non-Primark CapEx will start to fall away. If you can give us a thought on the overall CapEx. Do you actually think the free cash flow will be up given the lower CapEx year-on-year, given the good performance in 2012? That is the first question. The second one is around the 2015 sugar quotas. You called it out in the statement that there would be more investment needed in Spain and the U.K. I know there is a lot of political posturing around what is going on with the EU in 2015. I am just wondering whether you can outline what is actually being proposed by the EU, and then what the member countries are actually saying, and whether there is any knock-on impact to isoglucose also in the EU. Just finally, on sugar, again, you talked about higher costs for your sugar beets in the EU. You talked about a lower crop, and you also talked about currency going against you as the three factors that will be more adverse this year. Just wondering whether you can try and quantify those three factors. Thank you. Shall I start with cash flow, first of all? Yes, I think overall CapEx for 2013, probably in the high GBP 600 million, so down from the GBP 707 million that we had this year. So an improvement there. I would be surprised if we have the same working capital performance, however, that we had this year. The business when it grows normally will have an increase in working capital. So I would be surprised, quite honestly, if we get the same level of free cash flow generation in 2013 as we have had in 2012. But I do expect free cash flow generation in the year, and it would be our forecast that net debt at the end of 2013 would fall from this level at the end of this year. So a good feel would be around the GBP 1 billion mark is my feel for net debt by the end of the year. George, do you want to talk about the sugar quota? Yes. I think there are two separate questions going on. There is one about timing. We would view 2015 now as being less likely rather than more, maybe 2018, maybe 2020 for any change. We think there is a good chance that the current regime will be rolled over with not much change for a few years yet. The proposals from the Commission, only from the Commission, so it is not an EU proposal, are for the removal of quotas for both sugar and I think isoglucose, too. Your final question. Look, I think you are asking what were the effects of the various- Yes factors on- Yeah No, it is okay, on U.K. sugar. I think the number we have talked about is certainly the increased beet cost for 2013. So a good GBP 25 million or so being the increased cost coming through. The euro is significant. We are looking at a euro against sterling that probably had an average of maybe 115, 117 of last year, and we are at 124, 125. So there are some tens and tens of millions coming through from that. Then the lower volumes. The early days, so big caveat, please. Rather than 1.3 million tons, it may be more like 1.15 million tons this year, and that would be a number of tens of millions. So the positive of the slightly higher euro pricing that we have achieved is certainly way more than offset by those elements. There is some tens and tens of millions of GBP of a reduction in profit for British Sugar in 2013. Okay. Jeremy. Yes, sorry. Yeah. Morning. Jeremy Fialko at Redburn here. Just one question on Primark margins. I know that you have touched upon it in the presentation, but if you could just give us a little bit more detail. Do you think you are looking at a year of quite incremental margin progress in Primark, or would you hope for something more than that given, A, the cost of price, and B, it does sound as though the like-for-like trends that you are seeing are probably a little bit better than what you would have expected at this stage of the year. There must be some sort of gearing or drop-through effects that you are seeing from that. If you could just talk about that in a bit more detail, that would be good. I think we all need to hesitate before we extrapolate what we have seen in the first 7 weeks of the year across the whole of the year. But Yeah. Clearly, if your sales are really strong of undiscounted merchandise, the markdown percentage goes down and margin goes up as a consequence. We are not forecasting margin improvement from these sorts of levels, not least because of the need to absorb VAT increases in increasingly important markets, and margin pressure as a consequence of euro weakness against the dollar. Then we have got a translation effect of euros back into sterling. There are headwinds. They are more second half headwinds than first half. But nonetheless, we will see them through the course of the year. Right. Doug, just hang on. Sorry, in the middle. Yes, okay, that is great. Thanks. Hi, it's Doug Flandrin from Jefferies. Just back to Primark and the return on capital employed performance. My understanding is that's sort of been ticking down over the years, and I was wondering just your thoughts on maybe some more color on how that's turned around. And whether you thought this was an inflection point for that metric going forward. That's the first question. The second question, just on China Sugar, wondering if you could quantify maybe the drag for this year, and whether you thought that would still be a drag next year, given maybe some start-up costs, et cetera, with the new plant that you're opening there. Okay. The Primark one, I think you need to be careful of that number because it's heavily influenced by freehold leasehold mix. In Spain, for instance, all those stores are leasehold and that number is not yet adjusted for capitalizing leases. Why has it gone up, though? If you ignore that first effect, the sales densities and margins in these new European stores are very good. Drives the performance of new stores and new store space in the U.K. is very good. That drives margin up. Or sorry, drives returns up. I'd be surprised if the return goes up much from here. Yeah. I mean, it really, because as we add new capacity- New space as a quick rate. Yeah Do you want to talk about Chinese Sugar? Sorry, Chinese Sugar. Yes, big one. Sorry, Chinese Sugar. Yes, big one. Next one. I think there is still some risk around Chinese Sugar. We have seen prices going down. The government has been buying in significant quantities of sugar in an attempt to hold the price up or send it further up. In the past, that government intervention has often taken time to work through. Secondly, we think the sugar crop in the south is going to be very big this year. I think there may be a significant amount of sugar on the market. We think in these current economic times in China, although it is a tough one to read, that the growth of sugar consumption will slow down. At the same time, we expect to see some reduction in payments that we make to growers, particularly in the southwest, but we have not agreed on a number, or the industry has not agreed on a number yet with the central and regional authorities. There are moving parts in there. We think there will be some drag still in this year. Thanks. Rosie. Rosie, come up. This lady here. Yeah. Rose Head with Goldman Sachs. In keeping with your sort of slide on the longer term investment thesis. If we look at the kind of mix of your businesses over the past, even sort of seven years, there has been a big shift. With sugar now up to sort of 50%. Yeah. Fast-forward sort of five years, do you see any kind of big changes in the mix than they are today or, will sugar and Primark be the kind of key drivers in growth and sort of in line with that, do you see any changes or major changes to your portfolio in terms of kind of divesting some of the lower margin areas of either ingredients or grocery? The portfolio has always changed over time, and so it is not a static thing. I am not going to announce divestitures or parts of the portfolio to management that may well be listening and who I have not told about it yet. We do stick with our businesses, not always, not through thick and thin. There are reasons to buy things and sell things. But part of our strength, I believe, is the consistency of investment and the consistency of support that we give these teams of people operating in often very difficult circumstances. It will not be lost on most of you that part of the reason behind me showing you quite as many slides on Allied Bakeries investment is that not everyone in the industry is able to do that or chooses to do that. Allied Bakeries is still making a shareholder return for us. Yeah. We see things getting better in that business rather than worse. It is a classic example of a business which others in the past might have got shot of because it was easier to do that than to take the harder steps of investing and trying to fix things. In the long run, we think that doing those things will have been the right thing to have done. Of course, we hope that Primark will keep on growing and we expect it will keep on growing at a faster rate than the rest of the food portfolio, and therefore, the mix in the company will continue to shift. The question of sugar is a very good one, whether we think that there is a lot of mileage ahead in cost reduction still, in sharing of best practice and continuous improvement in those businesses and in the growth of production, particularly in Africa, but also in China. So, yes, there will be more investment in sugar, but there will be more investment in other parts of the group. One of the great things about, one of the things that makes this business such a fun one to be involved with, is that we are constantly surprised by the success that some parts of the business have, which we had not really anticipated. But we support these businesses, and sometimes they make great breakthroughs. We do a 5-year, of course we do sort of 5-year planning. We are always wrong. As that track record shows, it does not seem to matter all that much that we are not great at forecasting the future. Take that as you will. Maybe Liam in the middle. Yeah. Hi, Liam Rowley from Barclays. Just on Primark again, I know you have Cottontail ones coming through, but if you could give us a favor of what the medium-term margin expectation would be, assuming all things being equal, whether you can return to the 12% level. Secondly, on European sugar pricing, you said you have slightly higher pricing in euros, but I am just wondering about the expectations for the Spanish business and the shorter contracts, whether you expect some softening across the year or whether that should be stable. Thanks. Yes. On the second one, I think we could see some softening in Spain. The volumes are under a bit of pressure. I do not want to forecast them, but it must be a possibility. The margin in Primark, well, at the time of the 12%, firstly, the margin is a consequence of the other things that are going on in the business. As I say, if we have a fantastic year on markdown, the margin could go up. We have a range of margins that we are comfortable with, and 10% is well within that range. At the highest levels of margin, we were being supported by almost constant reductions in cost of goods coming out of China in that happy period from 2000 to 2008. Those days, I think, are well behind us. That particular following wind perhaps is not there anymore. As you can see, at that 10% margin, we make a very nice return on funds employed. Yeah. Robin Askwith, JP Morgan. Two questions, if I may. First, the new depot on the Continent. How many stores can that service? Is there a big field next to it if you need to expand? Secondly, just on bread, I am a bit confused as to the strategy there. Obviously, you are taking out capacity and putting new capacity in, so I am just not clear about that. Thanks. On bread, we are replacing older, less efficient capacity with more efficient capacity. We are lowering quite significantly the average cost per loaf that we produce. We are improving consistency of the product as well. If that answers that one. Yes, there is a field next door. That site, I believe, could double in size. The average store size in Northern Europe is, of course, larger than it is in Spain, so I do not think we could support as many stores out of that. But we can certainly support double or triple the number that we have got at the moment. Right. Somebody who was in the middle. Yeah, towards the. Oh, yes. Sir. Yeah. Thank you. Harald Thompson, Deutsche Bank. Just one follow-up on sugar and on prices. World sugar prices are about 40% lower where they were a couple of years ago. Clearly, when world prices were higher than EU, if you are an importer of sugar into the EU, you would not want to send it here. But now that the equation is very much the other way around, so EU is much more attractive. Yes than world, why do you think, A, importers would not want to supply the EU if they can? Clearly some can. Therefore, why would we stay in such an extraordinary situation where EU prices are at a substantial premium to world prices? There are only certain people who may export sugar into the EU. The largest group are, of course, the LDC-ACP group. Production in those countries is increasing, but as is demand for their own sugar. The first market served by sugar produced in Africa, for example, is Africa. There isn't an endless quantity that you could send to Europe if you wanted to. It doesn't exist. Some other sugar that can come from outside Europe is allowed in only with the payment of a tariff. That tariff is set by the Commission, and that supports prices in Europe as well. The world market prices have come down, but remember on the way up, there was a lag before the European prices went up. Actually the gap between the European prices and the world prices is not as extreme as it appears when you just say, well, look, it's come down from the 30 cents to the 20 cents. We never actually managed to price against the 30 cents. What you seem to be inferring is effectively the countries that can supply the EU simply don't have the spare sugar to send to us, and those that do have spare sugar incur significant tariffs, which artificially keeps the price high. Tariffs and costs. Yeah, costs. Just remember that. Yeah. To get sugar from Malawi, for example, to the U.K., it is quite an exercise in logistics. Then, yes. Sorry. Go ahead. Please. I was going to say, I think your assumption that there is a big difference between the world price and the EU price, I do not think is right. It is higher, but you have got to take the normal price, which is cents per pound, remember, is for sugar raws. So, you have the transportation cost, you have the refining cost, as well as the tariffs, and all of that added on. And you have got to do that sort of conversion. And so, even at current $0.20 a pound or so, you would still be well over the sort of EUR 600 and odd per ton in terms of refined white sugar delivered within the EU. It is not. I really do not want you to go away today thinking that there is this big disparity between the world sugar price and the EU price. Well, anyway, that is not what I was referring to first. What I am trying to say is, you are happy with the status quo of where EU sugar pricing is? Maybe a bit of downward pressure, but Yes no real movement. Yes. Okay. Yes, I think that will answer it. Okay. Yes. Jack Gorman at the back there. Yeah. Thanks, John. Jack Gorman from Davy. One question just on Primark. You outlined to us in the slides the scale of expansion you've had in Iberia in particular over the course of the last 15 months, obviously including the next three. Can you just give us a little bit more color in terms of what is happening in that market? Clearly, at a macro level, it is very difficult. You guys have been expanding very aggressively in that market over the last number of years, and planning are winning share quite significantly. Can you just give us a sense of, if you can, what types of competitors you are winning the share from, and if there has been any particular competitive response from some of those players in the market? Thank you. I think there is still a significant quantity of share of clothing sales in Spain from markets and independents. I think we have been taking share there. There is a significant sales from hypermarkets, and I think we have been taking some share there. Then across the rest of the fashion clothing retailers, I am sure we are picking up share more or less everywhere. The market, of course, is hard. Just one anecdote, which I do not think I shared with you at the half year, I think it came afterwards. When we advertised for staff for our Alicante store, 200 positions, 200 vacancies available, we had 26,000 applications for jobs. I think that is the reality of- Yeah the rate of unemployment amongst the young in Spain. We absolutely see it. Yes, it is a difficult marketplace, and I think it is a market, though, where being the best value player has particular resonance, and being new has a particular resonance. For all the aggressive expansion, we are still not on a single Spanish high street. We are entirely in shopping centers. One of the characteristics we have seen in the last couple of years is the availability of space in shopping centers is it is much easier to get in. Right. Maybe. Yeah. It is Bob Altman at Merrill Lynch. Excuse me. Two questions if I may. One on sugar, one on Primark. On sugar, in terms of Illovo and the investment opportunities— you have mentioned that two of your countries where you have got expansion and new capacity, what are your plans in terms of potentially further expanding there in future? Yeah. Also with respect to the sugar which can come from Africa— Yeah provided it is not satisfying local demand, how much of that do you control or have control, some influence over? Yeah. On Primark, in terms of Germany, we have heard about how the depot can clearly supply more stores, but what are the constraints in terms of getting those stores? Yeah What is the visibility in terms of potentially getting them? Thank you. Illovo has lots of expansion potential, and it has lots of investment opportunities in co-products. The consumption of alcoholic spirits in Africa is going up quite quickly with wealth, and we are potentially a strong source of supply of that. That is what the Tanzanian distillery is based on. Plus, there is a demand for fuel alcohol as well. We have got distilleries in South Africa. We have got the distillery being built in Tanzania, so there is room for more there. Back on the sugar one, though, yes, there is opportunity in a number of the countries to invest further behind sugar. I think we need to be careful while the privileged right of access into the EU of LDC sugar is uncertain again, or at least the attractiveness of that market in the future is uncertain. But the African markets are growing strongly, so 10% types of growth rates. We would like to supply those markets. We do not determine where Illovo Sugar goes from ABF. Illovo has a 49% listed minority, and it must maximize its revenues for the benefit of all shareholders, not for the convenience of our sugar operations in Europe. So it sets its own course there. Store availability in Germany, we are trying to get big space on high streets. That is always difficult, not impossible. There are fewer shopping centers in Germany, and not many new ones being built. So Germany has lots of potential, but we want to get the right space, not any old space. So there is that discipline that was always applied to the U.K. is being applied to Germany as well. Good. Alan? Yeah. Maybe only two last questions. Sorry, Alan Erskine. Just one question. You highlighted EBITDA is heading to GBP 1.5 billion and net debt is heading below GBP 1 billion. My question is, at what point would you start to get uncomfortable that your balance sheet was being underleveraged? We sat very comfortable. We sat for very many years with GBP 1 billion of cash in the bank, and it did not worry a previous generation, and I am not sure it would worry this one either. Got it. The balance sheet is the servant of the business, not the other way around. With the sort of investment opportunities we think that we can see at the moment, and which we hope will come our way in the future, having good cash availability, having low risk as a consequence of a strong balance sheet, having the ability to move fast because of a strong balance sheet, all these things are great. If we ever get into a position of an embarrassment of cash, we will address it then. What we have demonstrated over the years is that investing back in this business has been a successful thing to do, and I hope that we manage to keep on doing that. Maybe one last question at the back. Yeah. Thanks very much. It is Charles Pickett, Numis. Two questions, please. Firstly, on the geographic, the Asia Pacific. If you adjust out for the Chinese sugar operations and also adjust for restructuring costs, is it possible to give a flavor of what sort of EBIT is being earned there and vis-a-vis the prior year as well? Also, can you quantify, please, the drop in Primark stocks year on year? I wouldn't like to shoot from the hip on an adjusted segmental, if you don't mind. But I can certainly sort of come back to you on that. The reduction in Primark stocks, I mean, is tens and tens of millions that has come out of that. It's a little vague, but I will come back to you on an adjusted segmental for you. Give me a call. Okay. Thank you very much, everybody. Thank you