Associated British Foods' (ASBFY) CEO George Weston on Q2 2016 Results - Earnings Call Transcript

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Associated British Foods plc (ADR) (OTCPK:ASBFY) Q2 2016 Earnings Conference Call April 19, 2016 4:00 AM ET

Executives

George Weston - Chief Executive, Executive Director

John Bason - Finance Director, Executive Director

Analysts

Jamie Merriman - Sanford C. Bernstein

Alex Smith - Investec

Richard Chamberlain - RBC Capital Markets

Graham Jones - HSBC

Fintan Ryan here - Berenberg Bank

Charlie Storey - Macquarie Group

Geoff Ruddell - Morgan Stanley

Charles Pick - Numis Securities

George Weston

Welcome to these, the interim results presentation of interim results for 24 weeks ended February 24. Our financial highlights then are these. Our Group revenues at a constant currency basis up 2% to 6.1 billion, adjusted operating profit up 5% to 486 million, adjusted profit before tax up 4% to 466 million. Our earnings per share are level at 46.1 pence. We are announcing an interim dividend up 3% to 10.3 pence. Our gross capital investment for the first half slightly higher at £348 million, and net debt reduced to £421 million at the half, a big reduction, consequence of excellent cash flows.

We are very pleased indeed actually with the progress across the business, it is widespread. Primark expansion continues space is up 7% year-on-year. And the expansion of the estate is backend loaded this year, as John and I will explain in more detail later on. A better result in our sugar businesses, those I think are the first stages only of improvement in sugar. I think the next 12 months, the next 18 months will be much better than we've seen for a while.

Our margin improvements continue in grocery and also in agriculture. Profits are well ahead. The recovery is still going strongly at ingredients. And then the strong cash flow, which John will explain in more detail, is also a characteristic or a feature of the year. Over to you, John.

John Bason

Thanks. So revenue at 6.1 billion was 2% lower than last year and when compared at constant currency it was 2% ahead. For most of the first half, sterling was much stronger than it had been in the same period last year with the exception of the U.S. dollar, which strengthened against sterling. These currency movements had a significant effect on our operating results. Transactional exposures had the most impact with the strength of the U.S. dollar against the euro affecting Primark's margins and the weakness of the euro against sterling reducing margins at British Sugar.

Sales and profit were also reduced when overseas results were translated into sterling. I've included a table of average and period-end exchange rates at the end of your slide pack for reference. Adjusted operating profit, which excludes the amortization of non-operating intangibles, and last year also excluded a profit on disposal of non-current assets and an exceptional item, increased by 3% to 486 million, at constant currency it was 5% ahead.

The unadjusted operating profit this year was 477 million. That was actually 35% ahead of the equivalent measure last year, which included a 98 million exceptional charge, which if you'll remember was for the non-cash impairment of the Group shareholder loans to Vivergo Fuels. The amortization of non-operating intangibles is considerably lower than it was last year, because most of the historic intangible assets have now been fully amortized. This charge now relates just to the most recently acquired brands. Last year's income statement included the 116 million net loss arising from our decision to withdraw from beet sugar operations in Heilongjiang in China. Profit before tax increased by 115% to 457 million and by 4% on our adjusted basis which excludes the reduction in intangible amortization and the distorting effects of the two one-off items.

So coming onto tax, the underlying half year tax rate is almost identical to last year. This half year includes the deferred tax credit relating to the stepped reductions in the UK corporation tax rate to 18%, which were approved after our last year end. The benefit of this was slightly offset by a slightly more unfavorable profit mix. I expect the tax rate for the full year to be in line with the 21.2% here, so that's probably a little bit better than you were expecting and will include the deferred tax credits relating to the Chancellor's recent announcement of a further 1% cut in April 2020 to 17% which should be enacted by our financial year end.

Last year's reported tax rate was unusually high at 41.8%. Well, this is because the total one-off charge in respect of Vivergo and the closure of the China sugar factories amounted to some 214 million, that attracted a tax credit of just 3 million, and the reasons I gave last year.

In July 2013, the OECD published an action plan to address base erosion and profit shifting or BEPS, and issued final reports in October 2015. This project targets tax planning strategies that use differences in tax legislation to shift profits to low or no tax locations. Changes to tax law, as part of the BEPS initiative, may result in an increase in the tax rate for some companies. We don't expect any tax increase or change to our structure following implementation of these proposals.

As we saw earlier, adjusted profit before tax was 4% ahead, and the underlying tax rate was almost identical. However, the results attributable to minority interests in this first half improved over the last year, and so as a result adjusted earnings per share attributable to our shareholders were level with last year, up 46.1 pence. Unadjusted earnings per share increased from 18.1 pence to 45.1 pence. The Board has declared an interim dividend at 10.3 pence, an increase of 3% on last year.

So turning on to the balance sheet, net assets increased over the last 12 months by £0.5 billion to almost £7 billion. Over this timeframe, currency translation had little net impact with the translation loss in the second half of last year being virtually offset by a gain in the first half of this year. Intangible assets were little changed, because most of this balance now is goodwill and of course that isn't amortized. Tangible fixed asset additions in the period exceeded depreciation giving rise to the increase of £180 million in PP&E and other noncurrent assets seen here. Working capital has reduced significantly and was £178 million lower than last year. That was driven by first and foremost a welcome reduction in our EU sugar stocks. But it was also driven by lower inventory at Primark as a result of good stock management.

Net debt has fallen by £380 million over the 12 months with strong cash flows both in the second half of last year and the first half of this. In this context the proposed investment in Illovo, which is some £260 million, is clearly well within our capability. The new accounting standard for leasing has now been released and requires adoption by our year ending September 2020. Recognition of Primark's lease obligations together with the related right of use assets will have an effect on our balance sheet and I expect that figure to be of the order of some 2 billion. I referred last year to the components of other net financial assets. This comprises two main elements. The first is the mark to market value of the forward currency cover taken out by Primark in its normal course on U.S. dollar sourced garments to be sold mainly in the second half of this year in sterling and Euros. The euro or dollar contracts you'll remember had a considerable value last year.

And that followed the weakening of the euro in January and February 2015. That clearly isn't the case this year, and so that's the major contributor to the 75 million reduction that we see here. The second relates to currency swaps on our U.S. dollar term debt into Euros and the value of that hasn't really changed. In aggregate, our defined benefit schemes were in surplus at the half year, better than the position 12 months ago as a result of small improvements in discount rates and assumptions for future inflation. Non-controlling interests in our balance sheet arise mainly from the minority shareholdings in Illovo and its subsidiaries. The reduction seen here was primarily due to the significant weakening of exchange rates of the African countries in which our sugar businesses operate.

Cash flow, we generated a free cash flow of 14 million in the first half, and that compared to last year's outflow of 8. The biggest driver by far of this improvement was the lower working capital outflow of 192 million. And this compared with 365 million last year, and again for the same reasons, lower EU sugar stocks and inventory at Primark. Capital expenditure was higher than last year both in the food businesses and in supporting Primark's expansion. The reduction in the other caption is driven by much lower proceeds from the sale of PP&E in 2016, and the significant exchange rate movements giving rise to a larger increase this year in the fair value of growing cane in Illovo, which because it's a noncash item is adjusted out in the cash flow here.

I'll remind you that the main acquisition last year was Dorset Cereals. So coming onto Illovo, we recently announced that we've reached agreement with the Illovo board to make an offer for the minority shareholdings that we don't already own in Illovo's South African parent. The price has support from a majority of the minority shareholders and notably include Allan Gray, Investec and Kagiso. No regulatory approval is required and final approval for this will be sought at an extraordinary meeting of Illovo minority shareholders in May. At the exchange rates prevailing on the date of the announcement this is a £262 million investment. Our offer is for the shareholding of the Illovo Holding Company. And I wish to point out that the minority shareholdings in its subsidiaries elsewhere in Southern Africa will be unaffected. George is going to outline the rationale for this investment later.

So coming onto the segmental analysis, all of the food businesses generated lower revenues than last year in the first half. The reductions in sugar and ingredients were actually the result of currency translation. So without the currency move, sales grew in these two divisions at constant currency. Commodity price deflation, which has really been a feature of our industry for a few years, was certainly a feature here but more for grocery and agriculture.

Primark revenues increased in line with the selling space, which was 7% at the half year. Now that increase we expect to increase now during or the 7% goes higher during the remainder of the year because the Primark openings during the financial year are weighted towards the end of the financial year. Grocery profits and margin increased mainly driven by much improved trading at George Weston Foods in Australia.

After the profit declines of recent years at AB Sugar, it really is pleasing to note, albeit it small, the improvement achieved in this half year with advances in Spain and China more than offsetting a decline in British Sugar where margins were really affected by currency. Both ABF Ingredients and AB Mauri contributed to the strong improvement in ingredients, and delivery of a much more respectable return on capital employed which is 11.8% as you can see in the half year.

At this time last year we outlined the margin reduction that would arise this year in Primark as a result of the euro weakness against the US dollar on garments purchased in US dollars. The margin reduction, as you see, has come in at a reduction of 90 basis points. So it's not as big as feared. And that really is a result of the excellent work by the Primark buying team in mitigating the gross currency impact. Remember the margin decline would have been way, way bigger if it had been just on the basis of currency.

Having opened our first store in the US in September 2015, retail profits in this first half also include the operating cost of the US head office and warehouse, which currently support just two stores. Now clearly that will improve as we open more stores. Group return on capital employed increased from 16% to 17.6%. By geography profit increased in all regions except for the UK where British Sugar with a weaker euro and lower production was the main contributor to the decline. The profit improvement in Europe and Asia actually was by our sugar businesses Azucarera in Spain and Illovo.

In Americas, the profit improvement achieved by our ingredients businesses was partly offset by the net cost of establishing Primark in the US. In Asia Pacific the substantial improvement in profits was driven by much improved trading at George Weston Foods, a much better result for the two remaining big sugar factories in China and the benefit of last year's closure of the two uneconomic factories in Heilongjiang. Now I'll hand back to George.

George Weston

Thank you very much. And I start as usual with our sugar business where we've really got a much more favorable outlook, we've seen some improvement on profit but I think much more to come. It's on the back of two things. Firstly, the signs of EU prices strengthening, we expect that prices will rise significantly in the EU in the next negotiating round, and secondly, the cost improvement in program are still contributing. So we've been taking tens of millions of pounds out of our supply base for the last few years and that rate of cost reduction continued through this period. The Illovo minority buyout has been the other major feature of the first six months.

Turning to the UK we've enjoyed a lower beet cost and stronger factory performance. The profit impact of those has been offset by the weaker euro that John mentioned and also the smaller crop that was grown for us. We wanted this smaller crop because we wanted to get through some of these stocks that were in the system as a consequence of last year's extremely large harvest. Prices in the UK through this year have been very similar to those of last year, in other words still quite low. In Spain the operating result improved significantly in the first half. We also enjoyed lower beet costs in Spain, but with production that was actually up and not down.

And then there's more spot sugar business, spot pricing for sugar in Spain than there is in the UK, and so we are further on, on the pricing curve in the Spanish market. We are seeing higher prices. It's one of the things that gives us confidence that prices are indeed rising across the European market.

In China, the closure of the two uneconomic beet factories in the north of that country obviously wasn't repeated and the benefits of the cessation of the losses from those factories came through. Prices also increased both in the North and the South. Factory performances in the remaining two factories in the north were actually very good, on a par with some of our performances in European beet factories. Agricultural yields are also very good. We saw lower production in the South. That was consequent almost entirely on a very wet growing season. Rainfall in the south of China has been little short of spectacular and that has reduced sugar contents in particular in the south of China.

Vivergo has seen more consistent operating performance, enjoyed higher bioethanol prices and lower wheat costs and the consequence of all those three things has been a favorable profit trajectory for Illovo. Moving then to the buyout of Illovo, it's one of the world's lowest cost sugar producers. John mentioned the currency moves in parts of Africa, Zambia and Malawi in particular major growing areas for us. The reduction in the kwacha in both countries is very helpful for our cost base. The Southern African markets are still growing. We think that we can capitalize on that domestic market growth in years to come. We think complete ownership of Illovo will allow us to accelerate the commercial development, and particularly the route to market work that is underway to increase sugar penetration in Southern Africa.

And then the delivery of performance improvement, again we think we can accelerate that with complete ownership. We think there is a lot of cost opportunity in the Illovo factories, and we think we can get at that more effectively owning the company directly. The last thing to mention is that we've over the 10 year relationship with Illovo, we've come to understand the complexities and the sensitivities of doing business in Southern Africa to a much greater extent than we did when we first invested in the business back in 2006.

If I move then onto agriculture where inevitably we've seen lower revenues with commodity prices coming down, we've seen margin improvement in the business though and this has been driven by change of mix within the agricultural businesses, strong growth in AB Vista, particularly our enzymes business which is doing well still. And then other specialty feed areas. The growth of specialty feed ingredients is important to our future. We still have very good commodity trading and commodity supply businesses, but the specialty feed businesses with the higher margins they attract is a feature of the last couple of years, and I think the next few.

Moving onto groceries then, grocery portfolio where we've seen food commodity price deflation again. We count our two milling businesses, flour milling businesses in the UK and Australia in the grocery sector. And prices of wheat obviously have fallen and that's been part of the contributor to lower revenues. Meat prices have come down in Australia. That's a very good thing but has also led onto lower revenue growth. Trading in Australia is much improved. The turnaround in that business continues, and I pay tribute to the teams in Australia who have led that turnaround.

Dorset Cereals we bought last year, it's our largest last major acquisition, first full year with that of ownership with that business has been a really good one. And obviously we've seen overall a further increase in the net margin through the grocery businesses. Drilling down a layer than and starting with Twinings Ovaltine, Twinings brand in particular is going well. We've seen significant share gains in the UK, in Italy, in the US and Australia, all major markets for Twinings. And then in Ovaltine a better performance in Thailand, that market has returned, which is Ovaltine's biggest market, has returned to growth. Good progress in Vietnam, obviously a neighbor of Thailand.

And then brand extension has driven growth in new categories. A significant quantity of the product we sell with the Ovaltine name on it is not either powder or milk or ready to drink Ovaltine, it is other categories. Ovaltine Crunchy Cream is a wonderful product as far as I'm concerned. But we also sell biscuits, ice cream and chocolate all with a malt flavor and branded as Ovaltine. Those brand extensions have a long way to run, and are doing well. Inevitably some of the markets that we supply, in particular, Brazil and Nigeria, have had a more difficult time with GDP declines in both those countries, and constrained consumer income.

Allied Bakeries, I say every year that trading is tough. It really was this year. Something like £300 million of value has gone out of the bread supply industry to consumers. Bread is an ever more bargain source of nutrition for the family. Allied Bakeries though we saw substantial increase in sales volumes, having completed the rebuilding of our network of bakeries in the UK we've now filled up our capacity. Kingsmill has grown through that as well as own label supply.

We mentioned, I think last time or the time before the installation of the sandwich thins line in Glasgow bakery. That line is now full and we are commissioning the new line in Stockport. We have a range of sandwich thins including a variant under the 50-50, with the 50-50 recipe which is such a favorite of families up and down the country.

Our Jordans Dorset Ryvita, as we add brands to that portfolio so the name becomes ever more unmanageable, has had a year of good international progress. Dorset is now listed and selling well in Australia. We are premiumizing that brand. Again we've returned to the iconic packaging that the previous owners moved away from and as you can see in this picture raspberry and white chocolate muesli shows that we are adding indulgence again back into the brand.

The Jordans pack on the right-hand side is actually the French pack. Sales of Jordans are strong in France and they're also growing internationally. So a good year for Jordans Dorset Ryvita and a particularly good first year for Dorset where the integration has gone extremely well and is all but complete. As I say, the commercial moves back towards premiumization both of content and also packaging are in place.

AB World Foods, the business includes Patak's and Blue Dragon, it's had a strong year in the UK, a good strong year. They're so confident of their new products that they insisted that we give some of them to you. That's what was sitting on your chair. I think they're great, and I hope you do too. That business is also expanding internationally. We've launched in Mexico successfully, and early days in Brazil also very encouraging, so the international capability of that business is beginning to demonstrate itself.

Westmill, which supplies both retail and also catering markets in ethnic sectors, Chinese and Indian in particular, has had a good year on the back really of two different things. Firstly, casual dining is increasing again in this country. Sales through Chinese restaurants and Indian restaurants have come have been under real pressure from 2008. But that pressure seems to be easing and we benefit on the back of that. And then two brands which have done particularly well, Lucky Boat is a noodle brand. If you go to a Chinese restaurant and eat noodles you're likely to be eating Lucky Boat noodles. Our market share is very strong and noodle sales continue to increase and then Elephant Atta which is the leading chapatti brand, it's a retail brand rather than a restaurant brand, but their sales have done well as well. That's a business we bought probably three years ago now and has done well since we've owned it.

Moving across the Atlantic to ACH and Stratas, very strong performance by Stratas, just remind you it's our joint venture with ADM for particularly own label and foodservice bottle oils. Foodservice is also increasing in the States and Stratas really is in a strong position in that market. Vegetable oil markets have been unkind to Mazola which is our corn oil brand, retail corn oil brand in ACH. The spread between soy which our competitors are made out of and corn has opened up quite a long way and that's given us margin pressure. And then in Mexico where we own the Capullo brand, a leading premium oil brand, margins have been under pressure because of weak, the weak peso. The canola that goes into that product comes from Canada.

Australia is much improved, trading is improved, costs are down. Don KRC our meat business has enjoyed higher sales or won higher sales, lower procurement costs, better factory performance, everything heading in the right direction there and then Tip Top, which had a difficult period last year when prices came down, has had a much better time of it in the last six months. That completes grocery.

Then onto ingredients where the strong improvement continues, I think we are probably now onto year three of improvement and it's coming from both AB Mauri, so the yeast and bakery ingredients business, and also ABFI. In Mauri it's both yeast and bakery ingredients where we are seeing improvement, and we are seeing progress across all global regions. So it's not just a part of the business; it's all of it.

And then ABFI now under new management, we've seen good strength in enzymes. We are underway with expansion of our enzymes factory in Rajamaki in Finland are also functional excipients which we make in the U.S. that market and our participation of it is increasing well. And protein extrusions which come from the West Coast of the States that business has also had a really good year.

From protein extrusions to value clothing, so I want to talk about the first six months in two parts. First one is the continued rollout of Primark, the continued expansion which has gone well. And I think it's actually been quite a significant period of time. So 7% increase in retail selling space doesn't sound great, but as John said its backend loaded this year. We'll open something like 1.4 million square feet which will I think might be a record through the course of this year, certainly a record since we bought Littlewoods.

And then secondly, new markets that we've entered, the U.S. which is encouraging, and I'll come back to it. And then Italy which fell outside the period that we are talking about, but it's been so good in the first five days I thought I should throw it in. It's been every bit as good so far as our opening in France was December the year before last. Currency related margin decline obviously has been then coming onto the trading and the margin in this business has been a feature, it's been less of a feature than we had feared as John has said a consequence of good buy and well managed stock. Like for like sales are down a 1%, and I'll go into that in a little bit more detail in a moment. Staying on trading, the pattern of the year so far was a strong start, and then a weak Christmas which I think was a consequence of difficult weather, very warm, very wet.

I think probably ideal weather for an online trader but people stayed away from the high street because I think weather was so unpleasant. If you take Netherlands and Germany out though and I would take them out because we are still at the tail end of the cannibalization that I talked about a year ago, then the like for likes are up 1% across the group, which I think is okay. By country, France continues to be extremely strong. We've opened two new stores which I'll show you, and they've been received as well as any of the first six. Spain has been good. You'll remember the very strong like for likes last year in Spain. Well, we opened Gran Via in the period. It's probably as important a store to us as Oxford Street.

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And one of the delights of Gran Via has been that it hasn't cannibalized the other Madrid stores nearly to the extent that we thought it was going to, so Spain remains positive, similarly Portugal which is good. Ireland is well ahead of last year. And then the UK retail market is obviously challenging. That has been well reported. It remains challenging now. I think when the weather warms up we'll know whether the high street has a real problem or just a consequence of an unhelpfully early Easter and cold weather. There has been little to tempt people back on to the high street to buy spring summer clothes yet. When it warms up as I say, we'll see what's really going on. But at the moment, I think there's this huge masking effect of the climate.

Ranges in store, when people come back on to the high street, I think are looking strong and the pricing is as attractive as ever. So the cami lady on the left hand side, £11 sorry, £8 or €11 or $13. The drawstring joggers, £10, $12 sorry, £8, $12, €10. Our children's wear which is strong at the moment, sales are well ahead in children's wear. The denim jacket, the girl on the right, £10, €14, $17. And then menswear, you can see short sleeved shirts, the printed T-shirt underneath, and the chinos are all attractive well priced merchandise for when people decide, at least in this country that it's time to go shopping again. Just a bit more insight into the U.S. where we've described our reaction, that we're feeling encouraged by what we've seen so far. We've got two stores now open in very different areas. Downtown Crossing in the center of Boston and then King of Prussia in a big mall south of Philadelphia.

Lots of early learning's about range, about operating, about trading patterns and let me just give you some anecdotes on all those. The starting with trading patterns, the variability of trading pattern we knew was going to be bigger than we'd seen before but we didn't expect the extent of it. Particularly when it snows in Boston, you may as well shut up shop and go home because no one comes shopping when it's snowing. But on the busy days we are incredibly busy. We were told that Downtown Crossing wouldn't trade well at the weekends, it's traded exceptionally well at the weekends. In the importance of Thanksgiving can't be underestimated.

Sales in Thanksgiving were very strong and then died away spectacularly on the Monday following. We've never seen anything like it. So first trading patterns, we're pleased that we've established the store standards that we're used to in Europe. We thought that would be hard work to achieve. It was, but we're there. So we can run with the same standards in the states that we achieve in Europe and that's important. And then just some anecdotes from the ranges. What sells well? Outerwear, menswear, strong women's outerwear, really strong. Dropping down into detail, I've never seen a store sell as many candles as Downtown Crossing sells. It was almost as if they don't have electricity. But flannel pajamas they have no interest in at all. So we've shipped our flannel pajama stock over to Spain where they still love them. Menswear, men's underwear, black and white are about the only colors they're interested in. All those nice European colors they're not interested in, but so lots of learnings. That's why we've described our first nine stores as a trial. We've got a lot of things to learn, we're learning very quickly.

Brand awareness started at a very low level, lower I think than we'd anticipated. I think particularly in Philadelphia, Boston was okay but Philadelphia, very low level. And that, the reasons why we use, why we're encouraged are twofold. Firstly the brand awareness in the Philadelphia store is growing very rapidly, so it's doubled in a kind of 15 week period and the second one is once people do come into the stores, they are very, very attracted by them. So nearly 80% satisfaction rates in among shoppers in the stores a lot of repeat business, both in Downtown Crossing and also KoP.

The most commonly used word amongst people we survey is overwhelmed, whether that's kind of American use of language I don't know, but clearly customers have responded very favorably to the value of money or the value for money, to the extent of the product range and for the store environment and it's going well. So on to the expansion. So 300,000 square feet of new selling space has been added in the period, 133,000 of that as I say was to the Gran Via store in Madrid and here is a picture then of that second store, King of Prussia. It's quite important.

Firstly, a very bold facade to get us noticed, left hand side. Secondly, a number of features which we've introduced first in the States but are now introducing into new stores and refits in the UK. More seating areas, they have been very well received or they're very well used by people either having a rest or sorting out their haul before they take them to the till. Also Wi-Fi, again well received and going into stores and then the bottom right, I think shows you some of the efforts we've made to turn what was potentially a difficult space, so it's 80,000 feet odd of, on a single floor into very attractive navigatable area through this imaginative use of LED screens. It's a lovely, lovely store. If we move on then to the expansion in the half, first the 300,000 square feet and one more store in France in the period, one more in the Netherlands, two in the UK, one in Spain, Gran Via and three more in Germany. Hence the continuation of the cannibalization effects in Germany and Netherlands.

Since the half year, then we've opened a further six. Two more in the UK. I think it's Broughton Park and Birmingham Fort, they're both out of town centers. I think they illustrate an important point, which is the scope for further expansion in the UK still, that there is still scope for us. We obviously have the very major Birmingham redevelopment that will come along in a couple of years, but we aren't out of road or close to it in the UK. Then two great stores in France. Cagnes-sur-Mer is equidistant between Nice and Cannes and has had a rapturous response to its opening recently as has Toulon. Almada Forum is our ninth store in Portugal and it's trading as well as any of the rest of them. Leipzig I will show you the happy news about Leipzig is that it's a long way from any other store and therefore the cannibalization effect is rather reduced and then Arese, the new shopping center northwest of Milan, rather wonderfully on the site of the old Alfa Romeo factory, or on part of the site of the old Romeo factory because the site was enormous. Some pictures for you. Again Leipzig is quite a statement store. Other people have statement clothes, we have statement shops.

Then on to Milan, Arese. This is the store before we started opening. Clearly it's very noticeable in what is a really attractive shopping center; we absolutely dominate one corner of it, and then the in-store looks quite similar to others you would recognize. So the jean shop, jean kitchen, on the left-hand side and also the map of Milan on the right-hand side, which already has people staring at it. What do I mean by good opening? Well, here we are on day two, with the store absolutely full and people having to be held outside. It then, that was on the Friday, It opened on the Thursday, this was Friday. Saturday and Sunday, sales were 50% higher than the Friday. It's absolutely trading its socks off.

So through the rest of the year, we'll have opened, we expect 1.4m square feet of new selling space through the year. We'll have seven more stores, we have seven stores to go in the UK as part -- the U.S. as part of the trial three will be opened by the end of the financial year. Two more stores in Italy, one of which will open this financial year. And then last but not least, there's been a major project to increase our warehousing capacity across Europe. That project, which comes with all sorts of perils is just about complete the last stage is to move into a new UK warehouse at Islip. That will happen in August.

Right, summary for the first half and Primark expansion continues. The new markets are really encouraging. Sugar is turning. Grocery margins continue to increase as they do in agriculture the recovery in ingredients is still coming and has reached a good level. Our cash flow performance has been really good. The underlying trading through the rest of the year, the outlook is unchanged. We've made progress in all our businesses it has been a tough period, both with commodity price deflation with the lack of developing market growth and with currency challenges in the eurozone in particular and so I'm really pleased with how it's gone in the first half. Thank you very much.

Question-and-Answer Session

Q - Jamie Merriman

Hi, Jamie Merriman from Bernstein. I have two questions about Primark and both about the U.S. actually. So first question is just can you talk about what kind of volume density you're seeing from the stores so far. I mean I know one of the questions about going into the U.S. was traffic, so what are you seeing at this point? And then the second one is you talked about the operating costs of the U.S. being fully in the numbers now we see the actual leverage as you expand stores. Can you just give us a sense of what kind of impact that had for the margin in the first half and how we should think about it going forward?

George Weston

The sales densities is good. Downtown Crossing, we'd expect to be good because it's such an iconic part of Boston, such an iconic store. But they are good we are pleased with them. They are where we expect them to be. KoP has been has had periods of softness but it's building well. And as we've got into nicer weather and spring summer selling, it's building quite quickly. We opened KOP the day before Thanksgiving so we missed a good chunk of the season. And so I think it shouldn't surprise us that some of the sales in the early part of the year, we were always looking forward to seeing what would happen spring summer and spring summer is great. Do you want to do the operating cost leverage?

John Bason

Yes, I think without giving too finite a number but it's last year, we probably had in the half year, probably well for the full year about £10 million of cost. We're going to be above that this year because obviously we've got the head office and the warehouse. So probably full year cost may be getting more towards the 20 million mark.

George Weston

Alex, yes.

Alex Smith

It's Alex Smith from Investec. Maybe just to follow up a little bit on those questions particularly around margins. How should we think about the full year outlook for Primark? I think in your release you said you had good visibility on the exchange rate kind of things. Should we think about margins being down that, sort of similar to that 90 basis points for the full year? And then I don't know if you want to make a comment about how we should think about margins going into next year. Presumably you'll say uncertainty with sterling and Brexit is obviously a variable there. But if we…

George Weston

You've certainly got my line down.

Alex Smith

If we unrealistically hold that as a constant, what are the other sort of moving parts around the margin should we think of looking at gross margins, operating margins for the next year?

John Bason

I think the fixing of dollar euro in the margin for the second half isn't going to move around too much. And I think this first half is probably not a bad indicator for margins for the second half. We've clearly got sterling having weakened against the dollar, so there's going to be a little bit of negativity of that coming through in August and September. So I think probably the 150 basis points that we started with for the full year, I think is obviously much less. So going with 90 or 100 for the full year I think is there or thereabouts.

Next year, the weakness of sterling against the dollar is going to have a further effect, but it's not as much as the dollar, euro coming into this year. If you think about the scale of the move of the euro against the dollar last year, sterling against the dollar is less than that. But it will be negative. So I would take margins down by some tens of basis points next year. But I think we've got to see where the exchange rate comes out because it really has moved around all over the place.

I mean sterling has weakened by 10% over the last three months or so. So those would be the things. I think in terms of inflation in the supply chain, not really much of it. So there's nothing that we would call out as being a negativity other than that exchange rate move.

Alex Smith

Can I just quickly follow up on the densities question? I noticed you shied away from giving us a number. But you said Boston was trading quite well, should we infer that densities are in line with the Group average?

George Weston

I think the reason you worry about this is you think, well, I'm giving you is an annual density on the basis of stores that have been open for half a year or whatever. But I would say that Downtown Crossing, the densities there are about the Group average. They're not at the level of the real blowout densities that we're getting in new ones in France or whatever. But they're certainly adequate.

Richard Chamberlain

Richard Chamberlain, RBC. A couple more on Primark please, I just wondered if you can comment on Primark's inventory position and commitment as we're looking out to autumn winter this year. And has recent trading or shift to online affected your thinking in terms of the buy going forward?

And then just a question on Italy, obviously starting with the north of Italy, how many stores has Primark set up in terms of warehouse capacity? How many stores could that support? Can you go to the whole of Italy or would you need additional capacity for that?

George Weston

[Indiscernible]. As we've entered, the only place where we've led with the warehouse is the States. Everywhere else we supply from an existing warehouse. We don't like that overhead cost sitting on the back as we go into new markets with the uncertainties of new markets. Typically when we've got -- I think it was in Spain, we were probably up to a dozen stores or so before we put in the warehousing capacity. And if we were to in Italy, it would be -- if we were to install that capacity, it would probably be modular and it would be with the intention of supplying the whole of Italy.

Richard Chamberlain

Okay.

George Weston

So we've expanded, so for example, we've expanded Terica in Spain twice to support the growth and that's I think how we would, having started off supplying the Spanish stores out of the Nice warehouse.

Richard Chamberlain

So you could have a dozen or so supplied by Czech.

George Weston

By Czech from -- by Terica, yes.

Richard Chamberlain

Yes.

George Weston

And then the inventory position is this year has been tighter. As we sit here with uncertain -- sorry, has been tighter particularly in the UK. With uncertainties still on our mind about the UK consumer, it's no surprise that we're thinking about being reasonably tight going into next year too.

Richard Chamberlain

Okay, thanks.

Graham Jones

Graham Jones from HSBC. Just in terms of the full-year guidance, you reiterated the view that the EPS would be marginally lower which is what you said in February. The first-half results were a bit better than expected. There was a few of the positives in there with the currency translation being more positive and the tax rate being lower. So I was just wondering what the compensating offset was to holding the guidance level or is that just your natural cautiousness about the…[multiple speakers].

John Bason

No, I think we've got to be cautious. I don't think it's anything about the underlying trading here. I think it really is about where the currencies go and we're all aware of the uncertainty around that.

Graham Jones

Okay. And then a couple of follow ups, I'll try and ask some non-Primark questions. So in terms of sugar for the UK, you talked about the lower crop this year to get the stocks down. That looks like it's been very successful. What's the current crop in the ground looking like? What's the planning for next year in terms of volumes and particularly in terms of expanding your thinking about it as we run towards the end of the quotas in 2017?

George Weston

The crop is not fully in the ground yet in the UK so it is a bit late which would make you think that the crop will be smaller, that the yield will be smaller. And it's late for the same reasons. You can't get onto the land in some areas. It's sown in the lighter soil, but the cold weather has held back growth so far. The acreage is down a bit on this year so we expect another small crop.

John Bason

So probably less than 1 million tonnes, probably for next year.

Graham Jones

Okay. And then on grocery, I think constant currency sales were down 1%. Obviously you pointed to quite a lot of price deflation there. I just wondered if you could give any feel for what the volume growth was because there was obviously a lot of positives in terms of growth in grocery. And constant currency profits were only up marginally as well and again there's lot of positives that we talked about. Is that really sort of the squeeze on margins at Mazola you talked about with the corn soya combined with UK bread?

George Weston

Yes, UK bread is the big one on margin squeeze. Volume growth has also been good in UK bread, so there they go together. And the next largest volume increase would probably be done in Australia.

John Bason

Yes, it's very difficult to give an aggregate volume number because they're quite different businesses. But I would say, I'd say the volumes are ahead by a few percent really. So it's probably pretty good there. I think it's really the UK bread prices being down which is probably the thing that's really holding back the value change.

Graham Jones

Okay, I guess final question and just to follow up on that. Obviously you've invested sort of several hundred million pounds in your factory efficiencies in UK bread over the last sort of five, six years. Are you confident that you're still going to be able to get a return though? I'm sure you're not just sitting there hoping that the trading environment gets easier because as you said it's been difficult for a long time now. So what's the are you still confident in delivering those returns on that investment?

George Weston

Yes, we are.

Graham Jones

Okay.

George Weston

The effect on our cost base of that investment has been transformational. We are significantly cost advantaged we believe and in the long run, we will get the returns for that investment through that cost base advantage.

Graham Jones

Thanks.

Fintan Ryan

Good morning. Fintan Ryan here from Berenberg. Just going back to sugar, what type of spot prices are you currently seeing in the market? And by the time we come around to the next campaign, do you think prices could get back up to over €500 per tonne?

George Weston

I would hope they would get up to over €500 a tonne and the spot market varies a lot by geography. We're seeing prices well in excess of that in parts of the spot market.

Fintan Ryan

Okay. And then next question just in terms of the CapEx spend, I'm wondering could you talk more about what was behind the increase in the food CapEx spend for the first half and where you think the full year CapEx for this year can go and sort of a look into next year, given the expansion within Primark?

George Weston

The largest part of the CapEx spend into food this year is it's sugar and it's dozens and dozens of small scale projects supporting cost reduction. The next one would be the enzyme factory in Finland.

John Bason

Which is capacity building.

George Weston

Which is capacity building and also utilities improvement. Those are the two big ones. And then lots elsewhere in support of cost in particular but capacity in some cases. So bread, bread's been about the expansion of the thins capacity.

Fintan Ryan

And in terms of guidance for the full year, for total CapEx?

John Bason

Towards the 700 mark.

Fintan Ryan

Great.

George Weston

Okay, Charlie.

Charlie Storey

Hi, Charlie Storey from Macquarie. I had two questions from me please. Firstly on Primark, you mentioned children's wear sales well ahead of last year. I guess that you're therefore losing market share or sales are down in women's wear. Just to ask what is maybe driving that and what if any actions you're taking to resolve the weakness there? And secondly, enzyme market is extremely hard to crack into. Sounds like it's going very well, especially with your expansion there. How are you growing market share? Who are you taking from? Just a bit of color there would be great.

George Weston

Let me start with the enzyme market because we've talked so much about Primark and I might hand some of that to John. The enzyme marker is in growth itself, I think there is 5% to 10% growth in the enzyme markets, maybe slightly lower than that now. We have particular strength in the animal feed enzymes, particularly phytase. Phytase sales are growing strongly. We've got a nicely developing position in detergents. Bakery enzymes not surprisingly are good and we're seeing growth there.

So the enzyme market is very big. It's very segmented and we've got particular strength in certain technical areas in certain markets. We're obviously much smaller than Novozymes and DuPont globally but in specific niches we have real strength. The women's wear share is okay. I think in the last little while since Christmas, having a tight stock model has perhaps cost us a little bit in market share in women's. But it would have been they would have been profitless sales or even loss making sales so we're quite cool about that, quite relaxed about that. Overall, the women's wear business is good across the piece. Participation in women's wear in Italy last week was great.

Charlie Storey

What was the loss making part, out of interest that you're not so, you don't care about losing a bit of?

George Weston

It's simply it's discounted ranges. It's discounted autumn winter as you get into March, February or March where we have less stock cover of autumn winter than we would have had last year.

Charlie Storey

Okay.

George Weston

Is that okay, in the middle.

Geoff Ruddell

Hi, it's Geoff Ruddell from Morgan Stanley. Obviously with the Brexit vote coming up, let's assume for a second that we did Brexit. How would you run the business differently in the short term? I mean clearly the long term implications would be huge and uncertain. But for example you were talking about a lot of CapEx in food being sugar related. I imagine your sugar business would be very severely impacted by a Brexit vote. So would you be cutting back on those CapEx plans in the short term?

George Weston

No, not in sugar. It's all about cost reduction and whatever the future, a cost reduction in a commodity business like sugar is just essential. We don't know what the future of the sugar industry would look like if we were outside the EU, whether we'd still held it out, would there be a barrier put up against French sugar, in which case the boom times will [indiscernible] to the rest of the world, where we're going to be anyway come 2017 because that's the consequence of the reforms.

The points we were making today and through the Chairman's comments about Brexit too, I'd just remind you which is that, really twofold. Taking looking at this Group as a whole, we've got a really nice, largely accidental currency hedge between euro earnings and sterling earnings, so the euro/sterling exchange rate doesn't worry us all that much and then secondly, because of the nature of a lot of what we make and how we operate, our supply chains tend to be in the markets in which they are supplying so we haven't got a lot of cross border trade. We're not exporting a lot of food products to Europe and we're not importing a lot of food products from Europe as part of our own supply chain. So that's not going to affect us either. Taken as a whole, I wouldn't say that we're indifferent to Brexit but we would survive it. Sugar might be more difficult, it might be not, there may be opportunities, might be cost, we just don't know.

John Bason

I think the key thing about sugar in the UK is really around pricing, because remember that virtually all of the sugar we produce in the UK is sold in the UK. So again it's this sort of cross border trading. So it really then is what are the other influences on the sugar price which is uncertain.

Geoff Ruddell

Thank you.

George Weston

Yes, Charles.

Charles Pick

Thanks very much. Three questions please, I'm afraid. Will the cannibalization factor with Primark in respect of Germany and Holland fall out of the frame completely next financial year do you think? Second question, on the FX front, it looks as though the translational hit in the first half to EBIT was about GBP12m. Can you quantify what the transactional hit might have been for the Group in that first half period? And third question, had the Illovo deal been complete at the start of the last financial year, how much lower would your minorities debit have been? Just…

John Bason

Let me start with the Illovo one. So, the reduction in the adjusted minority which is the key thing to get to, the adjusted earnings per share, £17 million or £18 million reduction. So they will go down by that. So that's obviously the reason that we think that it will be really quite accretive to EPS for the Group going forward. So that's the first one. Right. Next one, Charles, go on [Multiple Speakers].

Charles Pick

The cannibalization factor, whether it just completely vanishes next financial year in respect of Germany and...

John Bason

Not completely but largely. And then your other question --

Charles Pick

The transactional...

John Bason

The transactional one is we had the debate internally particularly around Primark, how much was the gross effect, how much was it after mitigation. Look, I'm going to give you a very, very broad number, but the transactional impact I think on the first half year was about £50 million on profit. It's huge, very, very big. So we're bearing that in those first half year numbers. But you know I'm, it's got lots of caveats around because I can give you a bigger number or a smaller number than that. But it's the scale of that that we've overcome in these numbers that I think is important.

Charles Pick

Just one final one if I can. On the changed buying patterns with Primark, can you perhaps give us a bit of a flavor there please?

George Weston

The, let me answer what I think part of your question might be getting at. The stock levels have come down because buying timing, so really shipment timings have moved to be in line with demand patterns. So whereas in the past we might have held more of the year's stock for a certain item in one of our warehouses, now we're running a more just-in-time model. Not on everything, but where we can. We're balancing line efficiencies in the factories against changeover times, against stock cost. But we're running with less stock in stores, less stock in the warehouses as well and more just-in-time delivery.

Charles Pick

I was thinking more of the sourcing in terms of mitigating the [Multiple Speakers].

George Weston

I think there's, I think the trends that everyone is seeing which is probably a reduction in the shift out of the China that is still going on, where's it going to. Other countries in Southeast-Asia particularly Burma although that capacity constrained and Bangladesh is still growing strongly.

John Bason

Thank you, everyone.

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