Associated British Foods plc (ABF) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Associated British Foods Pre-close Trading Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Bason, Finance Director. Please go ahead.

Thank you very much. Well, good morning, everyone, for the fourth time. So let me start with an apology and thank you, everybody, for your patience with the line dropped a couple of times. And then we had a power surge which knocked the lines out and also set off a fire along. So we thought it was in the best interest to delay the call to 11:00. So I can imagine you all have full morning, so thank you for reorganizing your time this morning. I'm going to make a few introductory remarks, and then I think the best value from this is a Q&A session. So this is a preplan statement, and it deals with the half year. The period has been very positive for us, and it's strong sales growth and generally good trading. The food businesses have worked hard to recover input cost inflation, and that's through both cost mitigation and through pricing where possible. Primark traded really well. And that was certainly in the run-up to Christmas, but also after the festive season, and we've seen that in particularly January, but also February of this year. And really importantly to me, we've seen that improvement both in the U.K. and the Europe, which I think really sets it aside from really our performance in the second half of the last financial year. So as a result, I expect the adjusted operating profit for the half year to be broadly in line with the same period last year, in other words, below, not least because Primark margin for the half year will now be above 8%. Turning to the full year. We're upgrading our expectations today for the group adjusted operating profit and adjusted earnings per share. At the close of the last financial year, we said that we expected adjusted operating profit and EPS to be lower than the previous year. We now expect both of those to be broadly in line, again, just slightly below where they were. So why is this? Our expectation for [indiscernible] is now better for 3 of our businesses. And so let's start with the food ones first. So at ingredients, we now expect profit to be well ahead of last year, certainly at the half year, but also in the full year. And that's really good recovery of input cost inflation at Mauri. But then it's really also strong trading both at Mauri and in ABFI with higher volumes. And I suspect a lot of that is about a recovery for the customers that buy ingredients from us. The second one is our grocery business. And I know there's been maybe some concern about the margin decline in our grocery business. And I've said really quite consistently for more than a year now, that you should expect that as pricing does lag the input cost inflation. Margin will still be down year-on-year, but we do expect better sales and that, that will lift the operating profit enough to bring the profit for the full year to again be broadly in landed last year. I suspect most of you had a few tens of millions lower profit before. And then, of course, we need to come on to Primark and trading certainly has been stronger than expected in the first half. It's very evident in the sales numbers that we're giving you and that was certainly driven obviously by promising, but very, very strongly by strong footfall in all of our stores. And that increase in footfall led to a higher number of transactions and of course, our volumes were up. I think for understandable reasons, I will remain cautious about consumer discretionary spending in the weeks ahead. And as we move into the second half, we also lap suffered comparator periods because certainly, the last few months, I think, have certainly benefited from softer comps, driven by the consumer reaction to Omicron. But we now believe that sales growth will be ahead of our expectations in the second half of the year. So not at the run rate for the first half, but better than we were expecting. And so as a result, and also with some lower costs, Primark's full year margin will now be over 8%. Let's talk about [indiscernible] sugar. So I think we updated you on the much lower crop sugar [indiscernible] in the U.K. I think I've said to you all that starting with the 7, I've never seen in my time at APS. So never say never that it won't come back again, but if I can characterize it as an unusual event, then that would be the way to do this. And so the adjusted operating profit for the full year for sugar, probably will be broadly in line, but I think probably now a bit below as last year. So those are the major movements in adjusted operating profit that are driving the upgrade. So it's primarily Primark, our grocery up the tab and then grocery up ingredients are the upper number of tens of millions for the full year. The thing I'd also like to address is the cash outflow. And the important thing here is to give you some of the main movements behind the GBP 900 million outflow. So compared to last year, I think I've really set out the key drivers of that. The first one to remember is that inventory levels at Primark this time last year were at low levels. You'll remember all of the supply chain issues that we were facing over the half year leading up to them, and our level of stock cover was below where we wanted to be. And partly, we have lost some sales as a result. Our stock levels are certainly back. And so the GBP 900 million outflow is certainly certain by that. The other thing that we've certainly seen is surprise if you've got positive working capital, then the effect of inflation on certainly your stock and the seventh creditors is also there. The other one about Primark is when you're looking at inventory, we've also got a store estate, which is some 5% bigger. So remember that the business is actually falling. So the other thing about the year-on-year movement is a higher level of CapEx than I think we've become accustomed to in the lead of COVID. So you'll probably remember that the CapEx level then was about GBP 800 million, GBP 850 million. It drops a little bit on COVID not surprisingly, there's a difficulty of getting things done. The numbers that I'm looking at for this last year is probably over EUR 900 million. And of course, I'm pleased with that. So that shows the pickup in investment in Primark and that not least given the acceleration of the investments in Primark stores, but then also IT and also the warehouses. And also, we've got some very big food projects, which are underway. So the statement really sets out, I think, the trading performance for each division, and I think shouldn't take up so much time on that. But -- just one thing I would like to highlight. Primark store opening program is really beginning to drive growth in a meaningful way. And so what pleases me is that at the half year, group -- the Primark total sales were up 16%, and like-for-likes were up 10%. So what's driving the 6 between the 2? Well, 5 of it is driven by the new stores. But interestingly enough, probably 3 and a bit of that is actually the increase in the average selling space. The other bit is better productivity in those new stores. I can't tell you that every store has opened with sales sensitives better than the existing state. But virtually all of them have and some of them in a very significant way. So we're back to that very meaningful contribution to our sales work coming through from that. Just maybe another comment about the abatement of inflation. So we've certainly seen obviously less volatility and in a number of areas, input costs going down. And so when you come to Primark, in particular, sea freight has gone back to where it was. The exchange rate is certainly better than where it was 120 against the dollar space were better than 110 that we were looking at, at some time last year. But the thing to remind you is that the benefits of that that will come primarily next year, next financial year, those higher costs are baked in to the stocks that are in the warehouses now and that will be sold through to probably about July of this year. We'll start to see those lower costs come through in August and September. And that's also the use or the site upgrade on that upfront for Primark today. So with that, [indiscernible] through there. Let me open to questions. And I think there protocol that you put the questions for us, and then I will call out to [indiscernible] question...

[Operator Instructions]. We will now take your first question -- and your first question comes from Grace Smalley from Morgan Stanley.

I have 3 on Primark, please. Firstly, on the Primark like-for-likes, could you actually quantify what level of growth you expect in the like-for-likes in the second half? And what that embeds both in terms of pricing and volume? My second question would just be on the U.S. I think it would be really helpful if you could comment on the U.S. expansion and the initial results you've seen from the recent acceleration in store openings. And then lastly on Primark margins. Clearly, you've given the guidance to say for 2023. As we look forward to 2024 and beyond, what do you think are reasonable margin targets for Primark? And how quickly can Primark return to double-digit operating margins?

Great. Thanks, Grace. Thanks for those first questions. So let me have the first one. So the second half, so those like-for-likes of 10%, I would expect to be lower in the second half and maybe 3% lower or 2 percentage points off or whatever in the second half. What would that be primarily driven by? I expect, obviously, a similar level of like-for-like from the prices. So remember, we moved the prices in August. And so the continuity lines also the increase there, and that will carry on into the second half, probably I would see a higher bit of pricing from spring/summer longer had raws on winter because I think probably a slightly wider part of the rent. Remember, not everything we saw price increases on, but I think certainly wider percentage of the portfolio will go through. So a bit more from pricing. The reason that I think the benefit from volume will be, I think we don't have those softer comps as we go into the second half. And I would aim up a little bit, but it would not surprise us if consumers on the volume front are just a little more careful in the second half. So that's where I'd be. But certainly, in any other year, strong like-for-likes, but less than the number we've got in the first half. U.S. expansion. So we've opened 3 stores, and they really are failing on and some of them are trading exceptionally well. So the comment that I made earlier on about the sales benefits in those stores are really good. And so Queens in particular. And you'll notice that the total sales that we're getting from the U.S. are up 12% compared to that 4%. So obviously, we've had a very strong sales, and that's from new stores, but as well as the underlying like-for-likes from the U.S. So how do we feel? We've actually signed really quite a big pipeline of stores now to secure that increase in the number of stores, remember, it's 60 by 2026. And I think this is really going to be a story that I think we all need to watch. Maybe some comments on the U.S. performance. They're saying, well, okay, well, it looks as there the underlying like-for-likes looks a bit soft. Certainly, in the lead up to Christmas, where we were lapping in the United States. The stimulus checks. So the stimulus COVID, stimulus checks at certainly should we say that lower demographic really were significant. Now that support came off as we came into this new volumes at the beginning of 2022. And actually, we've seen an uptick in singing up in our like-for-like, certainly because we have not the very tough comps of last year at the improved. So at the moment, yes, I'm excited by the Primark expansion in the U.S. Going on to margins. I mean, it's [indiscernible] the obvious that if we're starting this year with -- in 2023 with a margin in the 8 rather than the margin in the 7, then that target of at least 10%. We certainly look [indiscernible] I suppose, the length of the runway to get there and the deliverability of it looks better. And so what are the things in our favor for next year. I think currency as long as it stays where it is, there or thereabouts. So no massive headwind that previously we would have been thinking about. And then, of course, [indiscernible] back to where it is and energy costs lower. And then I think the position for our suppliers. So there was a massive amount before for goods from our suppliers. Well, maybe not surprisingly, a lot of that volume demand has gone down. And I think Primark will be well placed. So it really does to meetings like there are salable that could support margin expansion next year but obviously, I'll [indiscernible] giving you a feel for the number. Thanks, Grace.

We will now go to our next question. One minute, please. And your next question comes from the line of Clive Black from Shore Capital Markets.

Thank you for taking the questions in the presentation. 2, if I may, as well, just around CapEx. First of all, John, you talked about major grocery or major food projects. Could you give some color around that? And then second, given the elevated CapEx base you've touched about already. What about the returns you anticipate going forward from both Primark and in the food business, please?

Great. Thanks, Clive. So yes, I mean, it is obviously catch in the terms of the total expenditure for the group probably going up towards more the $1 billion over the next couple of years. So let's talk about food, first of all. I think what pleases me about the food capital projects, is it really is about capacity expansion. So if you look at our only extract business, we're looking at capacity upgrade in Hamburg. Our [indiscernible] business, we have spent some money on pilot plans and improvements to the facility there. And of course, a very, very big project is the new sugar mill in Tanzania. And let me spend one moment on Tanzania. That market is for me an exciting one in the sense that we have a really strong retail brand, but our volumes are constrained substantially, we can't get to the whole of Tanzania. We are building this new factory, actually, with the government as our partner. So they're very, very keen in terms of increasing domestic supply of sugar in Tanzania. And I think that will come through well. So I'm rather pleased that those projects in food are about increasing capacity going forward. If you come to Primark, then really, I think it's the last 3 areas. Obviously, the addition of the selling space so to get back up to the 1 million square feet that sounds quite said each year, but also IT. But so given the building of our digital capability and not least the start of the support for Click & Collect. And then also the -- I think, a very good takeback in terms of the investment in the warehouses. And so moving towards fully automated warehouses right across the piece. We're pretty well there in the Czech Republic. -- very soon we'll be there in Ireland, but we're still to go on some benefits. 5, the -- my benchmark for CapEx, and I think I've always said this before, is I'm looking for returns of over 15% as a pretax return on those investments, and that remains the case for this...

We will now go to our next question. And your next question comes from the line of Anne Critchlow from Société Générale.

And 2 questions, if I may, please. So the first one is about trading at Primark, which does look very strong through the half. I just wondered how volatile that's been week to week and whether you saw any big spike around the warmer weather in February and so on? And then secondly, just to talk a little bit about the website and whether you think the website in the U.K. has been driving footfall into the stores. I know it must be difficult to strip out, but perhaps you can track it somehow...

Great. Thanks. So one of the reasons I hate like-for-like over a short period is yes, they do paper for a variety of reasons. I mean, -- and if I can characterize January and February, actually, January was very strong for us. So that was very strong. And I would certainly say into February, that's still well ahead. But I would say after 2 periods that was the softer after 2. If I was looking at the trading from -- and I think this is quite constructive from September through to the end of the year, we were very encouraged actually by September, early October. Because if you can cast a mind back, that was the first spell really of cold weather. And so people will buy it cold out of water going out or for that matter, keeping them warm in sight. October was much softer. And so the like-for-likes have fallen back, and then it really accelerated and we had a really good November and December for the Christmas period. So that's really, I think, how I'd characterize the like-for-likes over maybe shorter periods of time. The second question is one about the website. The website is very exciting for us. It's got to be the basis for the -- that digital engagement with our customers. And remember, we're coming from a background where the website is best were say, if you like, a magazine showing some of the latest things rather than the place that we could go to sort of looking at comfort with your own home or wherever you are, let's to see what the whole love the primary range is. You're right, sort of measuring what people look at on the website going through to the actual stores is hard. But the thing that we really find most encouraging is, so if you look at the U.K., the traffic is certainly double we the number of pages that people are growing on is at least double what it was but it's the store checker, which is starting to really come through. So at least 1 in 5 visits, people going to the store checker. Well, you're not doing that just to fund you are planning a visit to the store. And I think in Ireland, I think actually the store tracker is possibly even higher, I think -- so for me, without the sort of the detailed diagnostics if somebody looked at the website and entertain side of the store, that use of that facility, I think, is probably to me one of the best indicators for this. Just as a reminder, the website is now in the public island. I mean they not fit in the first couple of weeks. So you have the sort of traffic was well up on the traffic for the earlier website. And of course, then we give told you the statement of what is going to go next. I think it's a very, very important building block for us. And obviously, we'll have more facility for that as we go forward.

We will now go to the next question. One moment, please -- and your next question comes from the line of Georgina Johanan from JPMorgan.

I've got 2, please. The first one was just in terms of the path back to a double-digit operating margin at Primark, just following on from Grace's question. I mean, am I right in understanding that with freight normalizing, that should be something in the region of 200-plus basis points of benefit minimum, potentially even larger. And therefore, actually, you could be back to a double-digit margin as early as fiscal '24? Or is there something I'm missing there, please, John? And then my second question, and thanks for the update in terms of the website. I was just wondering if you could provide a bit of color around how the click and collect trial is going. So are you seeing -- is that driving incremental footfall into those particular stores? What are you seeing on returns rates and so on and so forth.

Great. Thanks very much. Well, if I said yes to your first one. I think everybody, we're getting very excited that we're back to 10% next year. I think, unfortunately, the answer to that is I don't think that is the case. So what was the great contract that we had. So we had a fixed price contract for fiscal '22. And so we've really missed a lot of that very big increase in industry freight prices. We then came into this year and the first 2 quarters of this year are freight costs at higher but sort of below the spot for each quarter. And then for the second half of this year, we're back to [indiscernible] contract with us that would mean that we're really back to the pre-COVID levels. So I'm not quite sure where your numbers came from, but I don't think its 2 percentage points or 200 basis points. But let me put it this way. It is just an important improvement. But remember, it's for the first half of this year. And certainly, we weren't seeing the top of the market, but definitely a benefit and a significant one going into next year. Look, I mean its lower energy costs. It's lower freight. And I think, I suspect our supplier prices, but which should be sharper on those, not least because they're not so much in demand and also they've seen some of the commodity prices go on. Okay. And the second [indiscernible]

Phasing collection...

Okay. So the first thing to go is we're going to read these words so carefully seems what you are saying or you're not saying, but first of all, it's been running for maybe 10 weeks now. So I think the time really to come back with the diagnostics of what we're seeing and then also what our plans are, I think is in April at the half year results. And so let me hold my comments until then, because I think that's the time when we can give you a bigger feedback. And as you can imagine, there are some things which are great and then there are some things to go, "Oh, maybe that's not quite to expectation." So you want to look at take all of those things into account. So at this stage, Georgina, I'll hold it at that, but we'll give you a promise you a full review in April.

We will now go to our next question -- and next question comes from the line of Richard Chamberlain from RBC.

A couple for me, please. First, I just wondered if you can just comment a little bit more on the performance of recent store openings, how quickly they are, how they're performing and how quickly they sort of ramping up and whether you expect a sort of similar conversion to sales in the second half? I guess the space pipeline is going to accelerate? And then the second one was just on the U.K. labor costs for Primark in view of minimum wage and any cost efficiencies you're seeing there, please?

Great. Okay. Thank you right. Yes, thank you. So I think honestly, the ramp-up really does really does depend on where we're opening. So actually, one of the store openings was the best one I've ever seen and that the one in Naples, we were getting cues outside the store every morning after week after we opened. So not just for first morning -- so the Primark, it really is all about, I think, brand awareness and how strong that brand awareness is where we're going. So literally, I think, is really an amazing country for opportunity for us. They really do love us there and I think those ramp-ups are immediate. [indiscernible]. So here we go. So [indiscernible] in Romania and so on, really strong. So that comes through. I then would say to work like Poland, a lower then. And I think in parts of the United States. I think if we're moving -- no worries, what's very encouraging there is where we've got some stores established like the greater New York metropolitan area, we are increasingly known in that area. And we're seeing -- but still, it is a ramp-up that will take a couple of years. I think as we move into the sort of, let's say, the Carolinas or Maryland or start to move further west in the U.S. where we are less known, then I expect that ramp up to maybe take 2 or 3 years. So I think your comment -- your question, I think, is a good one that I think as we move into even more real wide space in parts of the United States, I think we should probably see maybe a lower initial productivity from those stores. In terms of labor, I don't want to say exactly where we'll come out. The -- in terms of the U.K., the increase is actually in April. But let me put it this way. We are very aware that a number of our employees, particularly in the stores are closer to living wage and minimum wages and I think recognize that at the very least, those people at that sort level are getting CPI is not CPI, slightly plus. So I think we'll keep a close eye on labor availability, which is still like we haven't eased totally. It's probably -- it's not as acute as it was, but I think it's certainly something to keep our eye on. You mentioned cost efficiencies, absolutely. So the automation in the warehouse is a key one where, obviously, we're talking about we've got much higher wage rates. But I think the thing that we are looking at is [indiscernible] anything in the statement, but it is some stuff checkout. So we are increasingly encouraged by that. And I think looking at really the capital costs of achieving it and how best to do that. And I think that's one to keep your ride out for it, if you like, a meaningful contribution to that in the coming years.

We will now go to our next question. One moment, please. And your next question comes from the line of Paul Rossington from HSBC.

Can you just say whether we should expect any further working capital or inventory build in the second half of the year across the wider group? And then my second question would be to what extent do you think the Primark business is currently benefiting from customers trading down as opposed to kind of underlying market sustainability or stability?

Great Okay. So working capital. There's no doubt that we've seen a big increase in working capital. And I think -- let me put it this way. I think there will be a renewed focus on our working capital for the second half. And I think it will be one that we look at carefully. The working capital will come down in some areas. So remember that the sugar inventories will come down, which is that Northern Hemisphere build in the first half, but actually will come down. I think in terms of maybe safety stocks, by a number of businesses, which I think we're absolutely right to ensure continuity is not better pacing for some for the imports. I think we're not seeing really supply chain disruption. So I think those are the areas that I think we would look at as well as probably the number of weeks cover at Pinar. So I think it will be an area for focus for the second half. I wouldn't see it other than the sugar decline, a big for. But I think we can be -- I think, Paul, quite frankly, it should be now our focus for the second half. Trading down. It's the old [indiscernible], isn't it? So for Primark. And it's what not levels like around car market. I think you all know that and that trading down as a temporal feel about it. And when you get your money back, you go back to where you came from. I maybe -- I believe this because I'm probably not going through. But I think the loyalty we get when people come to [indiscernible] is huge. And I think what we are seeing at this time is our number of people who are making the choice because we're seeing people the switching data. I've seen shows people coming to us. I think that for me, what is not to like? I mean maybe you're into ultra-high fashion or whatever it may be. But if you're in stuff with all of us want, pilot got it from -- and it isn't just 1 or 2 ones, but it's the range. So it's great value. And clearly, people actually enjoying the experience of shopping in store. So yes, of course, because there always be so to go, well, it donate luck and maybe it's just fine that we'll do for me. I think the vast majority say this isn't a trade-off. And then Primark becomes, I think, a regular part of the repertoire. The switching analysis to me has now shown massive master switching. Thanks, Paul.

We will now go to the next question. And the next question comes from the line of Adam Cochrane from Deutsche Bank.

Just a quick one on the grocery, if that's okay. When you think about the catch-up of pricing versus input costs, as we look forward over the next 6 to 12 to 18 months, when do you think you'll be able to start to recover your EBIT margins in grocery? And as input costs come down, do you actually then get more pushback from retailers on trying to pass through the prices when they can see the raw materials coming down?

Adam, thanks -- thanks for asking about grocery. So I've been really very happy to talk about it. Look, I mean, the interplay between ourselves and the retailers is clearly going to be a dynamic as we look forward. So what phase are we in at the moment? That's basically very clear that we are still in the face of price increases going through versus are recovering the very big increases in input costs that we've seen to date. And although the inflationary increases are abated, many of them are still going up. So there's a difference between inflation and deflation and so and that will inform the comment about the retailers in a moment. So I think that we will see that that margin hit to grow some. Clearly, if I'm guiding to the full year profit being in line with last year, but it's going to be down in the first half, but then we are slowing that margin decline. So my expectation would be that we'll obviously have the full year benefit of the price increases were taken this year. And by the way, it's very evident that you can start to see those the full -- the effects of those prices come through, we're grossly up 10% compared to 9% when a few weeks ago. So clearly, it's more than that than those last few weeks. You said about costs coming down. So there are a number of things. Remember energy, which drives a lot of the input cost, it's still higher than pre-COVID levels. And so we may get to the place where some commodities are deflationary, but I'm not seeing too many of those at the moment. We do see fit I've seen prices coming back in a lot of these commodity areas. Well, I haven't seen them going back below where they were. So in terms of negotiations with the retailers, and look, it's a hot topic because the end consumer clearly is going to be resistant to the price increases, puts pressure on the retailer puts pressure on us. The things that I've dopes that we've still got a ways to go here in terms of our recovering the [indiscernible] we got.

So is it fair to say that it's taking you longer than you originally thought to get those price or maybe just the inflation has been higher than you anticipated? Because are we going to get most of the sort of recover margins or not of what sort of time frame is it 1 year, 2 years were hard to tell?

Look, I appreciate that question. I didn't like the first ask the question because the anticipation is it's about what pacing you've got and what do you see? -- what really has happened here, Adam, is it was the scale of that intention that I don't think added body was expecting when you were back in the back end of 2021 -- and so first talking to the market really about infection as January of '22. I think even then, I didn't expect the scale of it. So it is across our food businesses this year, you tally got the thick end of billions of higher costs coming through. And so it isn't like something you do on a Friday afternoon. I've got to in here. It is a management priority. And in some ways, you go -- well, actually, even with the [indiscernible] close to last year given the scale of the hundreds of millions that are affecting each business, and that's where it was. So I think not having seen the scale of this inflation to be where we are, I think, is good. And look, you're then into as well as it on price increase or is it a year, having gone from years where they were normal. So it's not over the inflation thing is over. And I suppose I'm giving a broad message there, Adam, which is you start to go, well, okay, well, price coming down now solver. Well, there are still are price increases, which are still planned for her. And you can be many, many months in the negotiation on the settlement of that. Okay...

We'll now go to the next question. And your next question comes from the line of Gary Martin from Davy.

Just a couple of questions there on Primark. Just firstly, on European trading in Primark. Has this reached pre-COVID levels do you think there's been any market share expansion in Continental Europe in H1, -- that's my first question. And then just secondly, just touching on labor cost, again, just bridging Primark operating profit from FY '22 to FY '23. Would you be able to provide an indication of quantum of labor cost increases or a headwind to margin in FY '23?

Great. Okay. So thanks, Gary. So the first one is the -- Yes, sorry, in Europe. So the like-for-likes in Europe are on a 3-year stack are a bit below pre-COVID levels. So we buy, I mean, that's so in fact, recent trading probably very low single digits. So that minus 16 that we had in the second half of the last financial year has massively improved -- that's where it is. Now what I would say, maybe you think you would say that anyway, John, is getting absolutely back to quick pre-COVID levels is what's needed. I -- of course, you would like that, but it's really filling all about the sales density. So putting Germany to one side, we've got sales densities in Europe back to where we need them for the profitability of the business. So rather than just here, here is a benchmark and everything is import unless you actually get there. I think getting close to the pre-COVID levels, but the almost really got a line under that closing recovery. And by the way, I think we really are seeing this year some of those volume increases against on the CORONA affected last year, particularly in Germany. I mean our German sales are year-on-year up 12%, and that's because there were government restrictions requiring COVID platforms' to get into the stores. And so that performance, I think, is good. You asked about market share. While the ones that look we're getting more data on the market. The Spanish market, in particular, will be one which would say that our market shares are over in line, if not slightly ahead. But of course, we've added some selling space. So I think we're into the U.K., which is probably way onto we're well ahead of pre-COVID levels now, just a bit below the content. I think it's going over as far as that's concerned. And this is a basis that we can move from. Sorry, sorry, just don't ask where the second question you got a Yes, let cost...

Just on labor cost, just bridging between FY '22 and FY '23 operating margin? How big -- what's the magnitude of labor costs there... Like?

Right. Well, I'm not to give you a number, but let's put it this way. In terms of our overheads, the labor cost is the major driver of that and not least in not just in Northern Continental Europe, where that is. So in terms of an inflationary increase, the higher percentage given the fact that we have a number of particularly store employees closer to the living wage and the minimum wage. I think we are seeing a higher inflationary number in that. It is significant, but obviously, we'll factor the same. But it's also why going back to Richard's question that the area of cost efficiencies in the stores and ways that we can mitigate that, I think it becomes even more important.

We will now go to our next question -- and your next question comes from the line of Nick Coulter from Citi.

If you could quantify or talk to the price volume dynamic in the half. I guess if there's a mix impact in there as well? And I have a couple of follow-ups on Primark, if I may, please.

Right. Okay. Look, the -- so I suppose, yes, Nick, I mean, you're talking about growth. So first of all, let me just comment on ingredients, if I may. There, we've not only had price increases, but volume increases, and that's why that's why the ingredient segment is doing as well as it is. In terms of the grocery segment, then, yes, there is some volume decline on some of our brands. So it will surprise you that we have to see some in some categories trading down or for that matter to own label in some of the others. And so I think whether you go from bread through to cereals, then we have seen some volume offset there.

And do you think that volume switches at some point this year or is it into next year that you see a flat or positive volume dynamic?

I certainly don't expect that. I mean, look, there is sometimes there's initial reaction to price increases. And actually, in some categories, we saw some initial quite big ones, but then they've actually come back. So I would expect the volumes to reassert themselves as we go into next year.

Great. And just a couple on Primark, please. Firstly, just to come back on the new stores or space impact, specifically in the second quarter. I mean it looks super strong, like double-digit strong. But should we continue -- should we expect that to wrap around? Should it continue for the stores already opened? And then secondly, apologies, another one on pricing, if you're able to share the level of pricing that you achieved in the first half, please?

Right. Okay. And that's pricing in prime, you asking that...

Yes, please.

Yes, okay. Look, I mean, in terms of the stores, I mean, our experience is that when stores open well, they continue, okay? We don't see a massive drop -- so those that are trading their socks off. Actually, I expect them to continue. So -- and then the question is, how will the other stores that we opened in the second half, how do they contribute to that. But I think a lot of the locations that we're looking at, I think, should be trading well. So I think a strong new store contribution to the sales increase, I think, should be a feature that we're looking at on an ongoing basis.

It's the same level as the second quarter, John? Or should it take because it's very strong in the second quarter or it seems like...

Look, I wouldn't say quite that second quarter because I hate it's extrapolating sort of 8 weeks make across the fines, but still strong, okay? But I will let at...

And then pricing, if you would.

Yes. Okay. So look, I'll give it to you. So the average price increase that we're looking at in the first half, maybe some 8% to 9%. Price realization are a little lower than that. And so what we have seen is probably 1 or 2 percentage points of negative sales mix. And so that, to me, is not surprising where somebody is going into it that's then going in to buy short going for the lower price short on the high wall. So I think price realization, maybe about 7% in the first half.

We will now go to our next question. And your next question comes from the line of Anubhav Malhotra from Liberum.

I've got a couple on [indiscernible]. Firstly, on the margins, maybe if you could help me differentiate a bit between the U.K. and Continental Europe in terms of the extent of margin declines you have been seeing in both those markets. And will it coming out of the fact that there are very different like-for-like that you are seeing and maybe a slight different in the cost pressures in both these markets also. And then the second one was on Germany. And if you have any update on the review of the store portfolio there.

Right. Thank you. Okay. So yes, I mean, the effect of the like-for-likes and you're [indiscernible] it does, given the better like-for-like performance in the U.K., that means that the U.K. margins are very strong and absolutely back to where it were driven by the sales sensitive. Now of course, what you have got is you've got that decline in the gross margin, which, of course, is affecting all of the stores across the state. So the bigger effect on the margin is that on the net margin is that decline in gross margin, which we're seeing whether it's Europe or the U.K. The second order effect then is where the sales entities have come back to, and it's better in the U.K. than in Europe. But that's very much the second order effect. So I think the number of your question is a recovery of margins in Europe. I would expect them to recover to very good levels as we improve the gross margin. And the like-for-like has been a little bit below pre-COVID levels, I think, is very much a second marker effect. It's only driven by those gross margin in cover. And that's going back to exchange rates, and it's going back to the sheer and all of the costs that go into that. Just coming on to Germany for a moment. I mentioned earlier on, that we've got a good sales level in Germany overall. -- the fact that I mentioned that sales are up year-on-year, 12% was really to indicate to you that it's not a one-way trip, but there was a real effect and probably a bigger effect in Germany as a result of the restrictions related to COVID. And obviously, this year, we're recovering from that. But our sales densities are lower than we should have, but really to give us a decent net margin. And to give you a feel, sort of deep average German service density is probably half what it is in France. And so the fact that we're looking at the number of stores that we've got and then also how big the stores are existing, we're looking at both of those things. Again, I'm going to put it off into April and just want to give you a further update. But I think by then, discussions with landlords are not these work counts we should have a clear view that being -- the direction of travel...

We will now go to your next question. And your next question comes from the line of Sreedhar Mahamkali from UBS.

Just a couple of questions. One to follow up on the previous question on Germany, please. Just in terms of expectations in April, looking and we likely to get a clearer picture in terms of the number of stores and space. And how we should think about profitability from the repositioning exercise? Or is that a little bit too much to expect already in April? And the second one is on the U.S. Given your expansion there and the comments on sales densities earlier in the call, can you also share any thoughts in terms of how we should think about profit contribution from the U.S. this year and perhaps going into next year? Any color there would be so helpful.

Right. Okay. Thanks, Sreedhar. I think it is the full picture for Germany, Europe, I think you'll be disappointed [indiscernible] because you've got multiple counterparties set really to discuss with. So not [indiscernible] cancer per store and obviously, landlords group. One, I think, you will guess probably is certainly a very clear picture on where [indiscernible] we've got the freeholds of store. So what's in our gift and so I think we get quite a clear picture on that as well as likely weather are downsizing. I think that will be a full picture. So I think suit will probably stop a little bit short of really that full picture that probably you would like. But let me say the following. It's not [indiscernible] at the edge on this one. So it is -- it will be an important restructuring. And so for a business that is close to breakeven at the moment, then I would have every expectation that we should be getting maybe not double-digit net margins internally, but certainly higher single-digit margins from it. And I think that's very possible. It's really taking out overhead to actually fit the sales entities that we've got. In terms of U.S. and the profit contribution, this is a key year in terms of we're having a lot of selling space. And of course, we're not opening any warehouses yet. So in other words, we are amortizing the overhead from that. I can tell you that every store we open, and that's what the model is talking about is will give a positive store contribution. So it should be a leverage thing. So I think looking over -- probably not achieved this year because we've got quite a -- when you sign a lease, the cost starts to come through the P&L, even though you saw is an open, and then we can have a number of months before still open. So there's a lot of, if you like, preopening costs that are still than the P&L. But you should be expecting a really quite a steady climb in the net margin. Certainly, we're getting to 2024. And I've got no reason to see why in the long term on margin from our U.S. business in line with the -- is entirely possible.

We will now take our last question for today. And the last question comes from the line of Warwick Okines from BNP Paribas.

Two quick ones, if I may. The first is a clarification on Primark sales and this risk as being a bit of a stupid question, but you bridged most of the 6 percentage point gap between constant currency revenue growth and like-for-like. What was the other -- what was the other 100%? Is that some space reopening after lockdowns? And then secondly, on Ingredients, you're clearly still seeing a lot of growth when others in the market are seeing destocking at their customers. Why do you think that is? Is that geography or product category within ingredients?

Yes. Okay. Great. Well, thanks, Gary. So yes, so let's have a look at the bridge between the 10% and 16%. So you're right. So the -- and thanks for pulling it down. So I think probably about 1% is the fact that last year because the reaction to [indiscernible] in the Netherlands and also in Austria, meant that the stores closed down, not for a long period, but for maybe some weeks. And I think that really is contributing above 1%. So you've got 10, 3 average selling growth to store productivity and then one for the stores that we closed last year, okay? So that I think is An ingredients, I think what's happening here is we've got a number of specialty ingredients. And you can imagine, it's really all about the formulation of the product by our customers. I think we're all aware that really the FMCG clients mostly at our customers. So that's far as well. But a lot of new formulations were really put to one side. So it's concentrating on the higher-margin stuff. All of that's come back and it's come back in Spain. So we're seeing a much higher level of product innovation. And I think our teams have been very focused on that. I think at some point, Chris, Chris, with me. I think really a deeper dive into our ingredients businesses is worth one. We'll get to a level of profitability here, [indiscernible] put to point the point so we won 2 in front of it, it would be a few hundred million. I think it's well worth really spending a bit more time with you guys on that because we've got -- particularly in our specialty ingredients area, by the end is, if I may call a name one of our Chief Executive, is a very capable, very focused set executive and the has always been focused on the front end. And I think it's paying off in Spain. So I think we've got some highly performing commercial teams in that area that's coming through. Okay. Well, thank you very much. So listen, we're over time and worried, thanks for describing it as a marathon. So hopefully, not all of you are capping and planting at the end of this. But hopefully, you thought that was an efficient way of dealing this this morning. Thank you very much for your time.

This does conclude today's conference call. Thank you for participating. You may now disconnect.