Earnings Call: H2 2011

Nov 8, 2011

Everyone is here, then perhaps we can start. I have just been told to turn my phone off. If I could ask that you all do the same. It is always a risk giving people prezzies in brown paper bags that you can rustle. I will find it quite distracting. Just as a minor point, those nice brown paper bags were boxes, cardboard boxes, carrying Primark goods from the Far East out to the U.K. only about a month ago. The vast bulk of our packaging is recycled and turned into these brown paper bags these days. Anyway, let me start with saying welcome to these annual results for the 52 weeks ended the 17th of September 2011. The format is the same as in previous years. I will go through the financial and business highlights before handing over to John. When he has completed his financial look at the year, I will come back and go through the business of ABF sector by sector. The financial highlights then are these group revenues were up 9% to £11.1 billion. Adjusted operating profit up 1% to £920 million, and adjusted profit before tax also up 1% to £835 million. Earnings per share are up 2% to 74 pence, and the dividend per share will be going up by 4% to 24.75p. A year of heavy capital expenditure, investment of £825 million, and we ended the year with a net debt of £1,285 million. Our business highlights. For a number of reasons, we have characterized this as a year of progress, and I hope to justify that statement later on. Strong business performances in a number of parts of the group. Record profits in the sugar business, AB Sugar, and also at AB Agri. Twinings, Ovaltine, and U.K. Grocery both had very good years. Primark, we saw 3% like-for-like growth and significant space expansion. George Weston Foods and Ingredients, which I will come back to, were disappointing. Finally, this heavy capital investment primarily, or the largest parts of which came in Primark selling space at 12% extra space and a capital bill of over £300 million. AB Sugar capacity increases, which I will come back to again when I talk more about sugar. John, if I can hand over to you. George, thanks. Good morning, everyone. Turning to the income statement, group revenue increased by 9% to £11.1 billion, with growth in every business segment and substantial increases for sugar and Primark. There were no acquisitions or disposals during the year. On a constant currency basis, and with last year's revenues restated on a comparable 52-week basis, the underlying revenue increase was also 9%. Adjusted operating profit increased by 1% to £920 million. I have included a table of average and year-end exchange rates at the end of your slide pack, but the only significant movement this year was the Australian dollar, which strengthened further against sterling. Overall currency movements had no material effect on profit year on year. But with last year adjusted onto a 52-week basis, adjusted operating profit was actually ahead by 3%. The adjusted profit measure provides a true reflection of the underlying performance of the business and excludes profits, less losses on disposal of non-current assets, which this year was a small profit compared with last year's loss, and the amortization of non-operating intangibles. This amortization covers those intangible assets acquired since September 2004 and was very similar to last year at GBP 83 million. Unadjusted operating profit increased by 3% to GBP 842 million. The profit of GBP 28 million on the sale and closure of businesses last year primarily related to a gain on the sale of the Polish sugar business, net of a provision for the cost of closing the Queensland abattoir that was acquired with the KR Castlemaine business in 2008. No businesses were sold or closed in 2011. Net interest expense amounted to GBP 92 million, and that compared with a GBP 76 million charge last year. Average net borrowings were much higher this year because of the high level of capital investment and the working capital funding requirement, which was also much higher as commodity costs prices increased during the year. Other financial income of GBP 7 million, compared with last year's expense of GBP 8 million. As I explained last year, this is a consequence of higher expected returns on assets at the beginning of the year. Profit before tax was GBP 6 million below last year at GBP 757 million. Adjusted for the items referred to earlier, we delivered a 1% increase to GBP 835 million. The tax charge actually fell from GBP 194 million to GBP 180 million, with a reduction in the tax rate from 25.4% to 23.8%. This reflects the benefit, which most of you will have factored into your models, of the 2% reduction in the rate of U.K. corporation tax from 27% to 25%. This yielded a credit of GBP 12 million as the deferred tax liabilities were recalculated at the lower rate. We also benefited from the closure of a number of open years' tax assessments in several different tax jurisdictions. Profit attributable to non-controlling interests was higher this year, largely as a result of improved profitability in our China Sugar operations. Turning to tax, we usually look at the separate components of the tax charge, but this year only one adjustment is required to the reported charge to arrive at the underlying rate. If we exclude the credit that relates to the amortization of goodwill and intangibles, which are themselves excluded from the adjusted profit, the underlying rate fell from 26.8% to 24.6%. This is two percentage points lower than the 26.6% rate used at the half year. A little less than half of this reduction is the result of a fall in the U.K. corporation tax rate. You will recall that I explained at the half year that our underlying rate at that time took into account the announced reduction in the U.K. tax rate from 28% to 27% from the 1st of April 2011, but it didn't reflect the Chancellor's further 1% reduction to 26%, which also applied at the same date. The rest of the reduction in the underlying rate was the result of the agreement with various tax authorities on open year assessments. At this stage, it's worth noting that we expect next year's underlying tax rate to be higher than that this year. Although next year's tax charge will benefit from a further 1% reduction in the U.K. statutory rate from 26% to 25%, this will be also effective from the 1st of April. We think that the proportion of profit earned in countries with higher corporate tax rates than the U.K. will increase, and as a result, that will have an upward pressure on our underlying rate. Earnings and dividends. Adjusted earnings per share increased by 2% to 74 pence. Earnings per share were 1% below last year at 68.7 pence. Last year's earnings benefited from the sale of the Polish sugar business. A final dividend of 16.85 pence per share has been proposed, making a total dividend for the year of 24.75 pence, and that's a 4% increase. Dividend cover on an adjusted basis remains at three times. Coming on to the balance sheet now. Net assets increased by 431 million to GBP 6.2 billion. Sterling was weaker against the euro, Australian dollar, and renminbi at the year end, with most other currencies little changed from last year. That actually gave rise to a small increase of 91 million on translation of net assets. Intangibles were lower than last year as the amortization charge exceeded additions in the year. PP&E and other non-current assets increased by 573 million, and that reflected capital additions which were substantially greater than depreciation in the year. As I flagged this time last year, working capital indeed has turned out to be substantially higher. It finished the year 231 million ahead, and this really was driven by three factors. Growth of the business obviously normally drives a higher working capital requirement. The second element is that of course, high commodity costs inflated working capital. The other thing we'd highlight is, and George is going to explain this later, that at the year end for Primark, we're in the middle of a substantial store opening program, and that required a higher level of stock holding, not only for those stores that have just been opened, but those stores that are about to open during this autumn season. Looking ahead, commodity costs I think appear to be subsiding, and we do expect some benefit for working capital in the current year. We continue to pay close attention to cash management throughout the year, and importantly, our average working capital expressed as a percentage of sales for the group was little change from last year. Actually, if we exclude Primark, that percentage expressed as a sales declined. Funding of this higher working capital and capital investment drove net debt 469 million higher at the year end to GBP 1.285 billion. The group has total committed borrowing facilities amounting to GBP 2.3 billion, half of which was provided under a syndicated loan, which does not mature until July 2015. GBP 1.4 billion was drawn down on the total facilities at the year end. I think it's worth noting in these difficult times in the financial markets that there is a strength and a breadth in the syndicate of 12 banks, which provides support to ABF and supports our financial needs, and I think properly reflects the scale and international presence of our group. The level of provisions fell this year as much of the cost of rationalizing the Australian meat business and Twinings tea production has now been incurred. We also settled provisions that had been acquired with the Azucarera sugar business, but these were offset by a corresponding receivable on the balance sheet, which has obviously also reduced. The net pension liability of GBP 44 million on an IAS 19 basis has reduced since last year. That is with the benefit of the third annual deficit reduction contribution of GBP 30 million to the U.K. scheme, together with an increase in the market value of the U.K.'s scheme's investments. Of course, remember that this year-end is after some of the financial turmoil that was seen during August and early September, so obviously takes that into account. Non-controlling interests in the balance sheet at the year-end fell by GBP 24 million as we bought out the minorities in our North China Sugar business during the year. Cash flow. Free cash flow was negative this year, an outflow of GBP 185 million compared with last year's inflow of GBP 402 million. The main drivers, as you can see, were working capital moving from an inflow of GBP 193 million last year to an outflow of GBP 199 million, and that is for the reasons that I have already given you. Also, I think not unsurprisingly, a higher level of capital expenditure for Primark. Capital expenditure in the food businesses was again very substantial. Gross capital expenditure and the purchase of intangibles together amounted to GBP 843 million. A number of major investments in long-term projects have now completed or are coming to an end. Just to mention a few of them, the development of the yeast and yeast extract plant in China is finished. Expansion of our sugar interests in Southern China completed during the year. Construction of the Vivergo biofuels plant in the U.K. to finish this coming year. The same for the meat factory in Melbourne. We also completed capital investments in Glasgow and West Bromwich for Allied Bakeries in the year that is gone. While we expect investment in Primark to continue at this level, so the sort of proxy there is around that GBP 300 million mark, which shouldn't surprise you to grow the estate at current levels, we do now expect to see some reduction in capital expenditure for the rest of the group. We made no material acquisitions or disposals this year, but we did spend GBP 75 million, and that was buying out the minority shareholders in the North China Sugar business, settling deferred consideration of Azucarera, and this caption also includes a loan to Vivergo to finance its construction. Let's just finally now turn to the segmental analysis. Revenue and profit growth was achieved by grocery, sugar, and agriculture, all of which maintained or increased margins. Although Ingredients and Primark both increased revenues during the year, their profit was lower. Maintenance of the grocery margin, despite a disappointing performance from George Weston Foods, I think was a good achievement in the year. That reflects strong performances, particularly from Twinings, Ovaltine, and U.K. Grocery, together with the benefit of lower restructuring charges that we have talked about before. Most businesses carried higher inventory values, not volumes, but values during the year in grocery. Capital employed also included the full cost of the new meat factory in Australia and investments in Twinings and the U.K. bakeries. The return on average capital employed for grocery fell as a result. The substantial increase in profit at AB Sugar drove higher margins and return on capital employed. In Ingredients, AB Mauri faced significant raw material cost increases and a highly competitive trading environment in some of its markets. George will tell you more about that. Commissioning costs of the new yeast and bakery ingredients plant in Harbin were also higher than expected, and margins and ROCE suffered as a consequence. Primark took a conscious decision to forgo increased profitability in order to maintain its position as offering the best value on the high street. As a result, margins declined to 10.2%. I think I would remind you though that although the margin is down from 12.5% to 10.2% this year, the margin was 10.9% for Primark in 2009. The lower ROCE was also a function of an increase in average capital employed, which reflected both the higher stock holding and capital investment in actually a period of major store openings for Primark. Coming on to geography. Revenue increased in all regions. In the U.K., profit increased with the good performance of the grocery businesses more than offsetting the decline in Primark. Lower margin and profit in Europe and Africa are the result of the weaker performances by Illovo and by AB Mauri in Europe. The lower profit in the Americas mainly reflects a small margin compression at ACH. Finally, in Asia Pacific, we had that big improvement in China Sugar. To show the scale of it, that more than offset the profit decline at George Weston Foods, and pleasingly margins were maintained there. Thank you. On to Sugar, where we've seen another step change in profitability up 31% in the year on a near doubling over the last two years. This has been the consequence of the recent capital investment, in particular Zambia, that large expansion is fully commissioned and is running at capacity. The Cadiz refinery in the south of Spain is also fully loaded. We benefited in a number of our markets from strong world prices, particularly in China and in parts of Africa, not to such a great extent in Europe in the year just gone. We were affected by the weather in a number of areas. The U.K., for the first time since I can remember, we failed to produce quota. South Africa has had a drought that has lasted two years and has taken production in that country down very substantially. In southern China, it was dry as well, and we'll come back to the consequence, but I think we produced 415,000 tons there, probably about 100,000 tons less than we might have expected. Into the E.U. then, where profits on the back of that under production of quota reduced. We not only didn't make profit on the sugar we didn't make, obviously, but we also, in order to supply customers in this country, had to buy in sugar at extremely high prices to satisfy their requirements. Azucarera, though, improved significantly. The beet campaigns in the north and the south went well. Significant increase in the amount of cane sugar we produced from the refinery, and then pricing was good, particularly in the latter half of the year in Spain. Discussions have started on regime reform, which is the current regime runs through to 2015. I don't want to say too much more about that other than to note the commission's proposals, and that the discussions with the commission are underway. Finally, the bioethanol plant at Hull, we now expect to open for business spring 2012. In Illovo, the profit was lower, but is recovering in the second half. With the drought now over in South Africa, we expect to see a good increase in sugar output next year. Prices in the region have been good, reflecting increases in world market prices. As I say, the Zambia factory is now working extremely well. There's a second major expansion, which is now just complete in Swaziland. We've increased the capacity of that factory significantly. We've also installed power cogeneration. We're burning both the gas and also field waste in that power plant to produce electricity, both for the site and also for the Swaziland grid. That investment in Swaziland was 1.26 billion rand, so a very significant investment now complete. In China, we saw major improvements, again, in both revenue and profit. Both in the north and in the south, prices were much better. In the north, sugar beet production doubled. We produced 210,000 tons of sugar from sugar beet, against just over 100,000 tons the previous year. That was the consequence of an increased cropping area. We are gradually winning the confidence of growers in the northeast of China to plant sugar beet. Not least that's because we are achieving higher yields, higher field yields from the beet that they're now growing. Cane sugar was constrained at 415,000 tons, but as I say, at much better prices. Finally, the relocation in the northeast of a major factory at Zhangbei, northwest of Beijing, is well underway, and we expect to have that completed by this time next year. Just to give you a couple of facts on the area and the yield of sugar in the northeast. 2009/10 season, half a million mu, now there are 15 mu to the hectare, was planted to sugar beets, and this year 0.98 million was grown. The season just completed, that number was 1.4 million, and we expect our factories in the northeast to be essentially full on the back of the sugar beet, which is now being harvested in the northeast of China. Field yields then increased in the year that we've reported from 1.58 tons of sugar beet per mu to 1.94. This is a project that sits on the back of increasing field yields, and thus attractiveness of sugar beet for the Chinese farmer, and good progress is being demonstrated. On to our agricultural businesses. Operating profit was up 21% to GBP 40 million. It was a record year. We saw revenue growth in all the different parts of this business. We think that there is significant growth still to come here, not least in our specialty animal feeds business. The feed enzymes business is going extremely well, as are the specialty pig starter feeds and nutrition businesses, which are now an increasingly important part of our agricultural sector. We did undoubtedly benefit from volatility and high prices of agricultural commodities through Frontier. That volatility, I think, seems less likely to repeat this year than last. But a really fantastic performance from the agricultural business, which is now hitting a scale which is really quite significant. Then on to grocery. Very strong performances from Twinings, Ovaltine, and the U.K. grocery businesses. Evidently, a lower restructuring charge. The supply chain work at Primark is just about complete. Difficult trading for George Weston Foods in Australia. Then significant capital investment in capacity expansion, efficiency, and product quality. Capacity expansion obviously in Twinings, but also in the meat business in Australia. Efficiency, product quality, notably in the bakery businesses with projects completed at Glasgow and also at West Bromwich. Focusing then on Twinings, Ovaltine. Tea has had an extremely good year. Growth in major markets, good growth in the U.K., excellent growth in the U.S. and in Australia. The Chinese factory is working magnificently well. The new Polish factory is up and running, and the final part of the supply chain work is expansions and alterations to the factory at Andover, and they should be completed early in the calendar year. I think it was also a year. It is time to salute the excellence of the commercial work that has been done and the marketing that has been done in Twinings brand that has driven these growth rates. Essentially, we aim to produce the best quality tea. A lot of effort has gone into product improvement. The packaging has always been a great strength of this brand, and packaging is being refreshed and improved all over the world. Then the communications to the consumers has also, I think, reached a very high level. Ovaltine, finally, before I come back to a couple of examples of the communication within Twinings. We see a continuation of the trend that has been with us for a while, of strong sales growth in the developing markets, both in the Far East, also in Africa and South America. Let me show you a little bit now of communication work at Twinings. We have two tasting bars at one of each Westfield shopping center, at Stratford City and at Shepherd's Bush. The aim of this is to introduce the Twinings brand in an easy, accessible way to a wider audience. You can taste tea there. You can also, of course, buy it as well, and we have got good interest from there, from these two pop-up stands. We might well do more in other markets in the world. Now for those of you on the webcast, apologies you cannot see the ad. I think it is the soundtrack that is the important part of this. But I want to show you, I think, a very fine piece of advertising that has been developed alongside Abbott Mead Vickers BBDO. It is part of our Gets You Back to You campaign for Twinings. I know now just quite how my life and love might still go on. In your heart and your mind, I stay with you for all of time. If I could, then I would, I'll go wherever you will go. Way up high or down low, I'll go wherever you will go. Run away with my heart. Run away with my hope. I'll go wherever you will go. I'll go wherever you will go. Track which was rerecorded for the advertisement has gone to number 3 in the singles charts. It's been downloaded 1.13 million times in its first month, and that track has been viewed on YouTube 1.17 million times also in the first month. So a very, very fine piece of advertising created for and by Twinings. If I move on to the rest of the U.K. grocery businesses and start with Jordans, Ryvita. Ryvita in particular has benefited again from excellence in communication. We really do seem to have turned a corner on volumes, in particular for crisp bread. The premiumization of Ryvita brand continues, as does the expansion of the Ryvita brand into other savory snack areas. Jordans itself, much improved performance of that brand, particularly in Country Crisp and Frusli. World Foods then, we relaunched Blue Dragon brand during the year. A lot of work in both product positioning and the promotion of that brand occurred during the year. It followed on a year after we did a similar exercise for Patak's. Both brands now lead their sectors, so Patak's leads Indian and Blue Dragon leads Oriental in this country. Some very fine work done indeed. On to U.K. Grocery. Kingsmill traded well. Obviously, there have been tighter margins, higher promotional activity in the bread sector. I think Chief Executive of ABF has been saying that for 40 years. Two major bits of capital investment completed successfully on time and within budget at Glasgow and at West Bromwich. We're pleased with the performance of Allied Bakeries through the year. The reinvestment in the supply chain continues into this year as well, with an important project at Stockport. Silver Spoon grew both its margin in white sugar, but also in caster and icing sugar. We saw good growth there. Then home baking, particularly flour and bread mixes, we saw good growth there. ACH Stratas, we split the business a couple of years ago, you will recall. Stratas is absolutely on track now. A good profit improvement. The supply chain is streamlined, the management is in place and operating well. Food service, which this market and the stage which this business supplies, is still very difficult in terms of volume and price realization. But Stratas has had a good year. Very high levels of input cost inflation for ACH. Obviously, in vegetable oils, where corn oil prices went up by about 75%, I think, but also in spices, where both garlic and pepper and various other spices also increased in price very significantly. Good work done through the whole of the year in recovering almost all of that cost price inflation. That really was their task for the year, and they performed it well. Australia, then we saw lower revenues and reduction in profitability. Two or three things going on here. Firstly, the whole Australian food manufacturing sector is struggling with two things. It is struggling with a high dollar, which is sucking in imports. So our cake business, for example, is competing with long life cake being imported from this country, being imported from Italy. The margins that we make on a lower volume in cake are down. The second thing that is going on is, despite good GDP figures, the Australian consumer is saving a lot more than she was and has traded down, encouraged by the retailers in particular, who have been driving the cost of staples down significantly. We have seen a significant shift from branded bread into own label, and the margin reduction that has followed on from that has really been very significant indeed. The meat new factory is commissioning now. In the second half of the year, though, we were still running the plant in Altona, as well as commissioning the new plant at KR Castlemaine, north of Melbourne. Altona is now closed. The commissioning in KR Castlemaine will continue certainly through the first half, and there will be significant cost associated inevitably with that commissioning. There is a new management team in place in George Weston Foods. They have one other major activity underway on top of trying to get margin improvement, mix improvement back to bread and commissioning the meat factory, which is a reduction in the overhead. We have just announced a reduction in the head office overhead of over 100 people. There will be a one-off cost associated with that. But we have taken significant head count out of the center. It is the right thing to do in a business where growth, I think, for a couple of years will be harder to come by, particularly in margin, growth in margin. In ingredients then, we have seen revenue growth in AB Mauri. Revenue growth in this business we have seen every year. We have seen every year a profit growth in AB Mauri until now. We had very sharply increased molasses prices in the year. We recovered those in most markets, most notably in Brazil, and I give the team there enormous credit. They saw the cost of molasses go from $200 a ton to over 500, and they got just about all of it back. The two markets where we did not get raw material cost prices back were China and also in Europe. The consequence of that was very substantial because the price rise that we did not recover, cost increase that we did not recover was very substantial. We also, as John mentioned, commissioned Harbin through the year in the first half. That commissioning is now complete but was expensive. The cost of that commissioning also affected AB Ingredients because the site makes not only yeast but also yeast extracts. Outside of that, in AB Ingredients, there was good progress, particularly in the enzyme business. The animal feed enzyme business, which is partly in ABFI and partly in agricultural business, is growing very strongly. Something over 50% growth in the year just gone with an expectation we will see something similar this year as well. But we also made good progress in bakery and also specialty, which is a sort of catch-all for everything else that is not food. On to retail then. 13% revenue growth. Profits obviously down as we invested in the margin. Like-for-like sales growth net of VAT were up 3%. We had growth both in the U.K. and in Ireland, and we continued growing strongly in continental Europe. 12% increase in net selling space, 7.3 million square feet we now have opened. We certainly maintained price leadership in the high street, which was our ambition, even with all the discounting that was also going on and continues to go on in the high street. An important work in the warehouse network, which I will take you through in a moment, and also store design development, which we've got another video on coming up. Primark margins, yes, down from 12.5% to 10.2% as John indicated. Lower than 2009, which was at 10.9. We absorbed the bulk of the VAT increases and also these higher cotton prices. We expect to benefit this year from the lower input costs, which will start to arrive in store from about January. So we'll see the benefit, I hope, I expect, in the second half of the year. And of course, it'll be on a business which is significantly bigger than it was previously. Sales have grown 25% in Primark over two years. It's a big number. Area, a little bit more detail on the selling space expansion. We grew space in the U.K. by 10% and now 5.1 or 5.2 million square feet. We opened 11 stores. In Iberia, we opened five stores, up by a third. We've now got 24 open. That's 20 in Spain and four in Portugal. Northern Continental Europe, Belgium, Holland, and Germany, we're up to seven stores. But they're big, 320,000 square feet. I'll show you some of the stores which are opening, actually in all regions, through the rest of the year. Onto the warehouse. When we started our continental expansion, we were supplying first Spain and then Northern Continental Europe out of our depot in Naas in Ireland. We've built a new depot there, which we own and which is now fully operational. It's no longer supplying Spain because we have two warehouses now side by side, just north of Madrid, which have full capability to distribute all products in the Primark range to Spanish stores. So Naas continues to supply Northern Europe for the time being, but we will have a warehouse open by the summer of next year in Northern Europe. That then will allow Naas to become the supply chain center for just Ireland. If any of you have been down to Stratford, you'll see a store which has moved on in terms of being more contemporary, improved layout. Merchandising is better, and the windows have taken a great step forward. Rather than trying to explain this anymore, and again, with apologies to people on the web, but we've got a short video which we put together to explain what we've done. I could be your boy, and you could be mine. Three, two, one. I could be your boy, and you could be mine. Ooh, ooh. I could be your boy, and you could be mine. Wow. Wow. The layout is completely different than the normal ones that we see every day. Yes, it is so much and wow. In this Primark, it seems everything is more organized, in place, so you know where everything is. When I actually see a mannequin with something that I like on, I can see where the clothes are immediately. Well, good quality gear and good prices. Well, the customers have come in and said it is merchandised a lot better. They can see exactly what they are looking for. Yeah, they've really enjoyed the new layout, new decorations, new concept. We're always looking to innovate and improve our store environment for our customers. So it's been a really exciting couple of days to have two new stores opening with two new concepts, but in two different countries. You're all now ready to deliver the Primark culture ethos, and all willingly with a smile, with pride, and with quality service to our esteemed customers. Five, five, eyes. The customer will see an improved level of visual merchandising. They will see more mannequins, they will see more outfits, they will see more looks. There is also increased navigational signage. Made the stores brighter and lighter, and we have made a substantial investment into new fixtures, which allow our customers to shop and get the same densities, but shop in an easier way. The staff are working extremely hard today. It has been manic today, but it has been an amazing experience so far actually. It's setting the bar for more Primark stores that are going to be opening to reach this level. The team have really pulled together to make the new concept. A lot of people were involved in this. Everything that we've learned from these two store openings will be applied into any future store design concepts. We will just keep moving, keep staying one step ahead of the competition. The new concept will make sure that customers not only can get the basics from Primark, but also it establishes our fashion credentials. If you look at the videos, POS, all of that has got a much more fashion feel to it. The most exciting thing about our new concept stores are that they are inspirational. Unique. Affordable. Fun. On trend. It's amazing fashion at amazing prices. Just one big adventure. Okay, going on to the major store openings of the year. This won't be the complete set, but I wanted to give you an indication that there are some very important stores which have either just been opened or will be opened in the next 12 months. The top six we've got away on time in these first two months of the year. The reaction to them has been startlingly good. I'll show you some footage from Hanover in just a moment. Coming up, a 90,000 sq ft store in Edinburgh, which we've been waiting to enter as a city for years and years. That will finally be open December 10. Saarbrücken, then Berlin, and how we're looking forward to being opened in Berlin. The second store in Oxford Street, which we hope to be open in time for the Olympic Games. It'll be bigger than the one at the Marble Arch end of the store. Now, Hanover in just a second. There were 5,000 people waiting to get in on the first day. 100,000 people visited the store in the first three days. We had our busiest hour trading on the first day of any Primark hours trading ever. I know I share anecdotes on Germany, but with only five stores, I'm sort of slightly constrained on what else I can say. But again, sorry to the web people, but the noise is actually a major part of the impact, I think, of this short footage. This is as we opened the doors on day one. Reason for enthusiasm for Germany. Capital investment then across the group, if I move on to it now. Major areas spend over the last two years. You can see the increase in the cost of opening a Primark selling space as the rates of increase accelerates. Over GBP 300 million in the year just gone against GBP 200 million in the year before. I suspect that we will remain at that sort of GBP 300 million level for some years to come. You can also see the amount of investment that's been going into the sugar business, over GBP 200 million in the year just gone, after GBP 225 million the year before. I suspect that that number, particularly when Vivergo is complete, will come down somewhat. Completed during the year, just to repeat what John said earlier, Twinings both in China and Poland, Swaziland Sugar, Harbin Yeast, and the two bread projects. Expecting to complete in this year, Vivergo, the Australian meat factory, which is commissioned, as we say, and that list of Primark stores and a few more too. Quite an important number we have in just those three above, Vivergo, Australia, and the Primark stores, which we expect to open this year. We have got GBP 500 million or a tenth of the balance sheet in those projects which are not yet operating but will through the year. So just to summarize, a higher level of investment in Primark expected to continue. The other investments are expected to decline somewhat, not in the current year, but in the year ahead, the year beyond that 2012/2013. So looking ahead, economic growth in developed economies, I think I'm generous in saying subdued. I think it is clearly very difficult, as is the pressure on consumers' disposable income. In the year that we are in now, though, higher sugar pricing will be of significant benefit to us. Commodity costs do appear to be subsiding, so all those headwinds, all those conversations that all our sales teams had with their customers in the retail trade this year, I suspect we will be spending less of our time this year than we were last doing that. Then the returns on recently completed capital investments, we will start to see benefits from then. Looking ahead, I think we all look ahead eight weeks into this year with a fair degree of enthusiasm. If I stop there, John, you and I perhaps can take questions now. Thank you very much for your attention. Polly is the first one with her hand up, so I think you get the microphone first, Polly. Yeah. Thanks. Good morning. It is Polly Barclay from JP Morgan Cazenove. Could I ask a question on Primark, please? Perhaps you could explain whether we will see all of the lower cotton price come through and benefit Primark's margin in the second half of this coming year. Perhaps you could make some comments on potential price investment also for us. Thank you. Do you want me to jump up on you? No, you've been talking all the time. Oh, right. Your turn. Look, I think that it really does depend on the retail environment that we'll be looking at when we get into 2012. Very clearly, the input prices are going down. I think it's important to say that we would like to take some margin from those lower costs as we go into next year. But I think the sort of guidance that we've been given is, don't write it up just yet. The high street is a very competitive place. Over the autumn, we've seen lots of discounting, which has carried on from the summer. We just need to have a look generally at what retailer behavior is out there. James. Yeah. Hello. This is James Edwardes Jones from RBS. Three very quick questions if I could. Why did your depreciation fall for the year? It looks like it was down from about 2.5% of revenues to 2.2%, which seems at odds with the rise in CapEx that you are talking about. To what extent did Allied Bakeries benefit from the mishaps at Hovis, and what sort of trend should we look for there? Finally, can you just give an idea in, say, five years time, how you think the footprint of Primark will look geographically in terms of store size and so on? Let me have a go, and then, John, you chip in anything more. In the year 2010, we accelerated the depreciation of a couple of big Primark stores because we were redeveloping them. So the depreciation charge in the prior year was a little bit higher than it would naturally have been. On bread, Hovis is one of our competitors. We have many others, too. As I pointed out, Kingsmill has put on share, Allied Bakeries has put on share. But not a huge change in that business. The third, oh, the Primark footprint. Footprint. We will keep on going as we are. We would like to open stores in Germany as the sites become available. Holland is an excellent market. Belgium is starring. Spain, we are not on any high street yet. We are just in shopping centers. Whether we enter new markets, I think will depend slightly on the rate at which we can find space in the existing markets. It would be much easier to grow fast in existing markets where we have got an infrastructure than create that infrastructure again in new markets. But we are open to other opportunities in Europe, having said all that. Jeff. Yes, Jeff Stone. John, you sort of implied when you were talking about tax that the proportion of profits outside the U.K. would increase this year. Just given what will be happening with British Sugar, I am a little bit surprised at that. Can you add any sort of color around that? Thanks. Sure. Look, it really is just looking at the mix of profits of where we are. I think there was the benefit in the year of some closing out of some of the open year assessments, so there was some sort of benefit from that in the year. So that won't recur. I think we are looking, obviously, at growth in profits outside of the U.K. So that really was the indication. So 26.5% is the sort of feel we've got for the underlying tax rate in the coming year. But you're not seeing the net sugar rebate outside the U.K.? No, we're not. But, in terms of the other countries, some countries you've got really quite high tax rates. You're going at 35. The U.S., if you look at it, is 40%. So it's a sort of an increased mix of those that actually is driving it. Jeremy. Yeah. Morning. Jeremy Fialko at Redburn. Couple of questions. First one on Primark. You have spoken about this new store design and layout. The chap on the video said that you are getting the same sort of sales densities, but is there a much higher CapEx cost that goes with it, or is it just you found a better way of organizing the thing? Secondly, on China Sugar, you are at about 200,000 tons now. Where does that go over the next year, in the north of China, that is? Thanks. In the north of China, I suspect we will be up 240,000 to 250,000 tons in the year, in the campaign that we have entered. The CapEx cost of that new store design is not significantly higher than the existing. With a lot of the developments that we are undertaking, the bulk of the cost is in infrastructure. It is in escalators, it is in wiring, it is in all the basics. That is what drives the spend at the moment. A lot of these German stores that we are opening, we really are stripping back to bare walls and then kitting out from there. Let us take Martin from the back and we can hear another microphone. Thank you. Martin Deboo, Investec. Couple of questions within, in sugars, gentlemen. On Vivergo, my understanding is Ensus, the other big bioethanol plant, is mothballed indefinitely. So can you just talk us through, are you comfortable opening Vivergo? Are BP comfortable opening Vivergo? Just some color around that would be helpful. On sugar, clearly things are going very well, but there is a cloud on the horizon. George was saying outside it is cane processing in Europe, where the former Tate & Lyle look like they are going out of business. So can you run Guadalete profitably? What about your plans to refine cane at Cantley? Just where is your sort of European cane strategy? We can run Guadalete profitably. Obviously, with very high cane prices the profitability is squeezed to some extent but is still positive. On Vivergo, yes, we will open it. Yes, it will be profitable at the current mix of wheat prices and ethanol prices and feed prices. That is the other dynamic. I do not know any great detail about Ensus, but I think they have issues beyond simply that mix of ethanol and Wheat input prices. Sorry, your third one? Cantley. Oh, Cantley. Plans to do cane at Cantley. I mean, is that still viable or has that definitely changed? Sorry? Remains an option. Yeah. It remains an option, but it is not underway at the moment. I think things like that have to wait for more certainty on regime reform. Let's kick off this side. Alex at the front here, and then we will move over to the other side here. Thanks. Good morning. It is Alex Smith from Nomura. I just wonder if you could talk a bit more about your comments on favorable pricing for sugar. I guess I am particularly interested in Europe, if you are able to put any quantification on the magnitude of pricing we should expect in the coming year versus next year. How we should think about it in the years to come. I mean, presumably looking at the world sugar price, we will expect the price to ease as we go forward. Are we talking about going back to 2010, 2009 levels? Should we look at something in between? Maybe talk a bit more about the global supply and demand structures. Is that benefiting ABF structurally? Are you in quite a good place or not? There is an excellent report on the long-term pricing scenarios for sugar that was produced by Czarnikow. We could probably send you a copy of it. I think that there are a number of things going on in global supply. Clearly, demand is still increasing at about the same rate of a couple of percent a year. Brazil have failed to invest in crop renewal in the last few years, and their production shortfall recently, this has so shocked the world. India, no one is ever quite sure how much sugar they are going to produce from one year to the next, or even in the year in which they are in, how much they are going to finish with. There have been surprises on the upside in production, particularly from Thailand, actually last year. This year, Europe and Russia have produced a lot more sugar than people would have anticipated us producing. I suppose I have a view on most agricultural commodities that the supply chain is surprisingly resilient. We see world wheat stocks at the highest levels in 10 years. I am not sure that 18 months ago many people would have anticipated that. Generally, I think that where you see very high prices, you usually see a supply chain reaction. Sugar in the longer run is a marvelous precursor chemical for industrial plastics and all sorts of things, and demand for sugar may come out of that. So I think in the long term, I agree with Czarnikow that the demand for sugar and the price of sugar will be higher than in the past. But in any given year, once the sugar is grown, it is grown and the price will move to clear it. I can keep mulling for as long as you want, really, but I think in Africa, we are well-placed. In East Anglia, we are very well-placed both for reform and also for here today. I think we can produce sugar, we can grow sugar, and we can process it much more cheaply than most areas of Europe. Africa, clearly we have access to some of the best sugar growing land in the world. And in China, we are protected by government regulation and import tariff, and I think that is likely to remain in China. Are you able to put any quantification on your expected levels of pricing, just roughly? Look, I think if you read reports, every year people default back to, well, it is sort of 22 cents. But I don't think that is any more necessary result than any other number. It is probably the marginal cost of production in new land in Brazil. But that won't set the price in a given year. It may set it in the long run, but it won't set it in any given year. So I am always skeptical about trying to call the future sugar price. I meant your pricing to customers in Europe, just so we get a- Our pricing to customers in this negotiating round has gone up. John, do you want to be any more specific? Some hundreds of euros over the reference price. I mean, clearly it is customer pricing, so we have got to be sort of careful on that. I will also make cautions. It was looking good last year, and then we had this frost and it took GBP 60 million off us. Yeah. I bought a piece of It was a wood splitter from someone who promised me that it was going to freeze hard in October. So who knows? I mean, we did get badly hit by the frost last year, and it may happen again. It hasn't happened before for a while. The crop looks absolutely magnificent at the moment, but we're six weeks into the campaign. I think on that note, Warren over there wants to- Before I tell anyone else I'll be fired. Warren Ackerman over there. Yes, I can see him with his hand up. Good morning, guys. It's Warren Ackerman here at SG. John, I heard your comments on working capital and CapEx for the current year, but would you expect free cash flow, which was very negative this year, to be actually positive next year? That's the question. Yes, I do expect it to be positive. So net debt, absent anything major, I'd expect net debt to edge down from the levels at the end of this year. Okay. Thank you. Just a couple of others. You said that profit would be second half weighted this year. I guess that's mainly because of the lower cotton kicking in as of the second half. Is there any other factors holding back profitability in the first half of 2012? Yes. I mean, the other thing that George mentioned is we'll be taking a one-time charge which will not be treated as exceptional, so it'll be within adjusted operating profit for the cost reduction in Australia. To give you a feel for that, it's in the tens of millions of GBP. So you just need to factor that into your grocery number. So it's that one-time cost. Quite frankly, Primark's profit in the first half of the coming year will be pretty flat on the first half of last year with the growth in Primark profit coming in the second half. And just finally, on Australia, you said in your comments that Australia was disappointing. Just wondering whether you can outline what profits did in Australia year-on-year, and are you expecting any improvement in Australian profits for the current year? And for George, how much patience do you have with Australia? Clearly, there is a lot of invested capital that has gone into that market with Yeah. Yeah not much return. Look, there are three things we have got to do in Australia. We have done one already, which has reduced the cost of the central overhead. The second one is that KR Castlemaine factory needs to be commissioned. Now that will take some months, but will give us a cost base, which is well below the one that we have had before in the meat business. And the third point is that we need to improve the mix and the pricing in bread again. And that is hard work with our retail customers to persuade them of the merit of increasing their branded share of their offering. Fix all three and Australia will be in great shape. Then look, come in. I will give you. The profit reduction in Australia this year was, let us say, around the GBP 25 million mark. And absent restructuring costs, we would expect to see a little bit of recovery in that in the coming year. Obviously, restructuring costs will take it down from there. Graham, yeah. Graham Jones from Panmure. John, just to follow up on Warren Ackerman's question about the phasing. Just to clarify, you are not suggesting that H1 profits overall for the group is going to be flat? No, no we are not. Okay. I think maybe people have certainly seen in the Chairman's comments the phasing into the second half. No, I am not trying to indicate that the group as a whole will be flat. We think we will get profit growth clearly from the other businesses. But it is obviously some of those, particularly the Primark weighting and the Australian one-time costs would sort of weight the first half. Okay. No, it is not a negative outlook on the first half by any means. Okay. George, just on Illovo, do you expect the crop to bounce back to the 1.8 million tons we saw in the previous year? I think it could. Maybe not all the way back, but significantly back. There has been a lot of very good work done both by state and national government and also by ourselves on repairing some of the damage that the drought has done, in particular in supplying working capital into the grower base. I think there is a good chance that South Africa will bounce right back to perhaps not the heights it reached sort of three or four years ago, but much better than the existing level. We should also get growth outside South Africa. Okay. Finally, can you talk about the outlook for profit recovery and ingredients? What is happening to molasses prices? Yeah. Is the Harbin factory now running efficiently? Yes, Harbin is now running well. There's potential to reduce the costs there further, and that work is well underway. Molasses costs in China remain high. With the greater availability of sugar beet in the northeast, the amount of corn syrup that we're having to put through that Harbin plant will reduce and therefore the substrate cost will come down somewhat. Just to give you an indication, molasses prices traditionally in China have been about 800-850 renminbi per ton. They got up to 1,400 in the north. We're looking at 1,200 now. So it's come off a bit, but not back to where it was. So I think the recovery in China will take a little while. Molasses prices in Europe have come off again somewhat. But there's further work to do on top of the margin that comes back with that. Yeah. Yes. Yes. Rosie Edwards from Goldman Sachs. Just one quick one on Primark. Wondering if you could just give us some color on the like-for-like in current trading, i.e., the first two months of the year, in line with the previous year, i.e., sort of flat to 1%? Or have you seen a boost from the store openings? Look, I think we're very disinclined to really give like-for-like trading over a short period of time. I don't think it would surprise you to know that trading just at the beginning of the new financial year was certainly very weak, particularly with the very warm weather here in the U.K. I think it's best to say that we're actually trading really well at the moment. So I think like-for-likes are fine. And I think George has said that we're really doing well on these new store openings. Now, that obviously won't be reflected in the like-for-likes, but they really are flying at the moment. Right. Yeah, Dirk, I think they're here. Yeah. Thanks. Hi. It's Dirk van Vlaanderen from Jefferies. Just a quick question on the Primark expansion and the margin implications for growing and expanding in Europe. How should we be thinking about that? With the new distribution plans coming on stream, would that be beneficial to margins, et cetera? Thanks. Yeah. Not surprising, the labor cost in Germany is higher than it is in the U.K., and the distribution changes will take substantial supply chain costs out of our supply into Germany. I don't think I want to quantify either, really. Do you, John? No. No. Fine. But no, beneficial in- Yeah. What we are benefiting from Germany is extraordinary store densities, sales densities. Yeah. Paul. Paul O'Sullivan. Morning. Paul O'Sullivan, Merrill Lynch. Just to put the context around the guidance, we have got profit growth in first half, second half weighted, though, in terms of full-year delivery. Tax rate is a bit higher than this year. 10% of balance sheet yet to really contribute returns. When I think about that consensus post today's beats around +15% on EPS, is that a level that we are comfortable with? How do we think about that? Sorry, it was probably slight use of the word. What was the beat? Sorry. There is a 2% beat at adjusted EBIT today. Yes, for the current year. For the current year. If I flow that through to the base, consensus was looking for around 18% EPS growth according to Bloomberg. I think it is not really for me to comment on the consensus. The thing that I would say is that you should have heard words here to very much support, I think, the outlook for Primark, for Sugar. I think probably the new news for you is we have got some costs coming through in Australia that you probably need to factor through. Look, without saying anything more, I think those are the major factors you should think of, Paul. Okay. Thank you. Alan at the front. Thank you. Alan Erskine from UBS. Just two quick questions. One, John, can you quantify what the commissioning costs at Harbin turned out to be for the year? And presumably then that is an add back for- Yeah, look, in terms of the sort of one-time costs, mid-single, high single digits of millions is the sort of cost that we had coming through. Then just in Spain, where you have stores that have been open now for a year, two years plus, what sort of like-for-likes are you doing in those sort of mature stores at the moment? Mid-single digit positive. It is still going well. Remember, that builds on 20% like-for-likes or so for last year. I think still really quite strong. Maybe just with the time, should we just take maybe one? Yeah. Yeah. We will take Melissa now. Thanks. It is Melissa Forrey with Collins Stewart. Just three quick questions. One, in the Sugar division statement today, you talk about operational innovations that helped you to mitigate the shortfall in beet production in the U.K. I wonder if you could elaborate a little bit on what those were exactly. Secondly, your outlook for real estate availability in continental Europe for Primark store expansion, how you see that shaping up over the next few years. Just finally, if you could remind us on Vivergo, where exactly that is going to come through, which division that is coming through into. Is that Sugar or Animal Feed? Is it your proportion of the overall JV, or is it just the animal feed products that you will be booking? Thank you. Okay. If I answer that last question first, it will come through AB Sugar, but there will be benefits to AB Agri. We will be supplying the wheat into that plant, and we will be disposing of the co-product animal feed ourselves. So we will have our share of the joint venture profits coming through in AB Sugar, and the rest will come through in AB Agri. Ooh, the technical stuff about what we did in response to the damaged beet. We processed, and this is one of the reasons why profitability came through strongly in the second half. We did a marvelous job at processing much more contaminated soil and other non-sugar contaminants of sugar syrup than we had ever managed before. It took a lot of innovations around cleaning filters using enzymes to get this stuff through that we did not, quite frankly, back in March, think we were going to be able to process at all. So we extracted much more sugar from the sugar syrup than we had thought. There was also very good work done, not least in conjunction with the Farmers Union, on getting the processable sugar into the factories when the freeze and thaw occurred. So we completely rescheduled the delivery of beet into the factories through that period, and that was probably as beneficial almost as the work done in the factories. In terms of availability of space, I think you can anticipate the rate at which normal store acquisition work the property teams can source stores at. I think you can probably say in Germany it is a bit better because there is more big space on high streets than there might be in this country, and certainly there is in Spain. What we cannot anticipate is when blocks of stores might become available in any of the markets in which we operate. Big stores on high streets are almost impossible to find in Spain. They are very difficult in the Netherlands. They are very difficult in Holland. Germany, there are some. Then there are shopping center developments that has been at the center of our expansion in Spain to date. If that gives you some sort of flavor, then