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, George Weston, CEO. Please go ahead.

Good morning, everyone. Thank you for joining Eoin and me this morning. The main purpose of the call, of course, is for you to ask Eoin and me questions about the statement we just put out. But before we begin, I wanted just to make a couple of brief observations. Firstly, I hope you found this to be a reassuring update. Compared with where we were a year ago, we see what we've done this year is something we would triumph. In food, the trading performance was similar to that of the third quarter. So there's continued momentum in Grocery and Ingredients, Sugar actually traded slightly better towards the back end of the year and beat last year. And so now we expect food overall to be strongly ahead of last year. Primark continues to trade well, although the fourth quarter was fairly tricky at times. Terrible weather, both in North -- right across Europe, Northern Europe, it was too cold and then it became too hot and Southern Europe was too hot. And despite that and despite the pleasure of being able to talk about weather for the first time in 3 years, we think despite that, whether we'll have 15% sales growth, like-for-like of 8% and market share continuing to grow. Primark margin is now expected to be around 8%. That's down a bit due to increased stock loss that's been well reported by others and also some one-off charges in Germany. Combining the Primark performance with Food for this financial year, we're ahead of expectation on adjusted operating profit margin. Next year, we expect to see substantial improvement in Sugar, the nonrepeat of the terrible crop that we have to cope with this year in the U.K. and then the start-up losses of Vivergo again, not repeating. And then Primark gross margin, we anticipate recovering strongly. Costs have fallen further and faster than perhaps we anticipated. So that's the shape of this year and some upgrades next year. And now over to you.

Thank you. [Operator Instructions] And your first question comes from the line of Warren Ackerman from Barclays.

Warren Ackeman here at Barclays. Two questions, please. The first one is just on the stock loss and the one-off charges in Germany. Can you maybe outline what those charges are in Germany? And on the stock loss, if you're able to quantify that, what's happening, maybe give some numbers and whether that continues into next year? And then you talked about a big improvement in margins in Primark next year. Are you able to kind of give us some of the moving parts to think about where the margin might land and the key sensitivities around that? That will be super helpful. And then on Sugar, obviously, you're seeing a substantial increase next year. Can you maybe kind of update us on what you think kind of what your Sugar can do in terms of profit contribution and where we are with the Vivergo losses into next year?

Okay. Well, I mean, I think I mean obviously, we originally had suggested that our margin in the second half of the year would be similar to the first half of the year. And the mix is down to first-time stock loss and then a small amount to the Germany restructuring costs. The Germany restructuring costs are just usual restructuring costs, people costs in relation to our closing stores and actually resizing some of the stores. It's a modest amount of charge. The bigger impact which brought the margin down below 8% is the stock loss. And as we've gone through the year, that sort of -- has kind of -- it's been ticking up as we've gone along, particularly as we sort of trued up the year, and that accounts for the sort of -- the sort of 50 basis points or so missed or so the bulk of that is stock loss. And we do expect it to keep high into next year -- we can talk more about some of the specifics. But it's not just a U.K. phenomenon. We see it in other markets. And we do expect it to maintain. So probably at the levels we've seen this year or there or thereabouts. And in terms of margin, moving parts. So obviously, as we've gone through this year, the moving parts being that we saw significant inflation in the first half of the year on supplier costs, including freight as well. The FX dollar was not much of an impact in the first half of the year, and pricing was it? We had some pricing come through the first half of the year. As we've gone through the second half of the year, we moved to a little bit more higher pricing impact. The FX impact has been tougher because of a lot of the hedging we did. I kind of really ran this time last year when sterling was particularly weak. And supplier costs started to come down, including freight because remember, we talked about freight starting to get the benefit of freight into our fourth quarter. And then as we go into next year, we start to -- we will continue to get the supplier cost benefit really across the year, actually, a little bit second half weighted. Freight will obviously have for the full year. And pricing will have a benefit in the first half of the year, which is a carryforward of some of the pricing into autumn/winter. And the FX, because of more kind of recent strength in sterling and euro, we'll start to see the benefit of that in the second half of the year. So they are the kind of moving parts, Warren, hopefully, that helps answer the question.

Sure. I mean, firstly, let me tackle the burger where we had really quite significant startup losses through this year, which we don't expect to see again at all. Vivergo is actually trading profitably at the moment. So we have every expectation that we won't see any losses next year at all there. And then Sugar really has been -- the biggest moving part is our expectation of a much more normal crop. We ended up processing -- producing in the U.K. only about 720,000, 730,000 tonnes of Sugar last year. And this year, there's still risk to the crop in the lifting of it, but we would expect to be closer to 1 million tonnes. You get better, obviously, better factory recoveries and you have more Sugar to sell. I think we would expect Sugar profitability to be returning to the levels that we would have seen before the Sugar regime shocks of 2017 or even a bit better than that. So good recovery in U.K. Sugar. Africa, we expect to stay high. The profit increase this year in Africa has been very strong, and we expect another good year.

We will now go to our next question. And your next question comes from the line of Grace Smalley from Morgan Stanley.

I'm just following up on the question on Primark margins next year. Thank you for the detail on the moving parts. Could you maybe just help us with overall where you'd expect those moving parts to net out and the magnitude of margin expansion you expect the Primark margins next year? And any further detail you can give us on the time you would expect to recover to double-digit or 10% margins at Primark. That would be very helpful. And then my second question, as you think about Primark margins next year and the margin bridge, could you just go into a bit more detail on what you're assuming on pricing? And you mentioned maybe some more price increases still coming through in the front half, but just anything you're building into the margin bridge of potentially pricing rolling over or price decreases next year?

Okay. So I think that we would expect, based on what we can see at the moment, and we've got quite a lot of these lower costs are in the goods, which we're now selling. So we would expect margins to be safely north of 10% next year. How far north, we don't know. But full recovery of margin through the year. It's -- the only cost that -- the significant cost is not obviously going to come down again is labor where we had significant labor cost increases last year. And I think we'll see fairly significant, although I suspect lower labor costs, again, in the year to come. But these reductions, freight is a very big one. We were paying anything up to $8,000 a container. You can see what the spot rates now, they are in the 2s. Cotton has halved. Other fabrics, Polyester is well down. About 60% of the fabric we use is cotton if that helps somewhat. And we -- what other big bit? Energy is well down as well. Eoin, would you add anything?

Yes. I mean I think you're right. I think the reason why our confidence level is high as George said that most of the inputs were sort of locked in or most of -- we're locking in at the moment. So that's all helpful. So obviously, the big driver becomes where the volume pitches. And we're not giving guidance a lot today. That's where the sensitivities will be around our percentage margin.

Then on pricing, we've announced that we're bringing down kidswear fairly significantly. Everything else -- there will be some carryover pricing from price rises taken this year. Beyond that, we will react normally on pricing will remain the lowest price seller of our clothes. So yes, we'll trade as we always do.

Thank you. We will now go to our next question. And your next question comes from the line of Clive Black from Shore Capital Markets.

Two, hopefully, relative quick ones from me. Can you make a comment on finance income given that interest rates have materially risen year-on-year, and that's a trading statement, but I will be interested to know whether that's a feature to look forward to in November? And then secondly, also maybe just give a little bit more about the quantum of the swing in Vivergo year-on-year. George, that would be helpful in understanding its mix within the [indiscernible] business.

What -- Eoin, why don't you do the -- it's a finance income mostly.

Yes, no new news on finance income. I mean we're effectively -- I mean, I think you can pretty much double the first half, I think, of the year for the full year performance. I'll just double check that. But on Vivergo, I mean I think what we've talked about before is tens of millions of loss. I mean I think if you go back a year, obviously, it was a sort of perfect storm really in terms of Vivergo, all of the inputs were going against us. High recourse, high energy, low ethanol pricing. So the margins were very, very tough and then we also had some kind of start-up issues as well. So at the moment, operationally, we're going okay, and the margins have recovered to somewhat approaching more normal levels. So we're not expecting huge outperformance necessarily, but we're not expecting to repeat of those significant losses.

Okay. So several tens of millions swing year-on-year with the prospects of the [indiscernible] long ago. Can you give a -- another way of answering my first question then, Eoin, sorry, can you give an indication of nonlease cash balances at the year-end roughly?

Yes. Well, I mean, we haven't given an update on this, Clive, sorry, I might not give you the right answer to the first question. But the -- because we're still just working through that as we speak. I'll give a fuller update on that at the year-end. But I mean, I think in terms of the moving parts, obviously, we will have had a step-up in CapEx size. Working capital is probably a little bit more sluggish than we'd like. I think the trajectory is in the right direction in terms of people reducing stock levels. But I think we'll get more of that benefit into next year than necessarily at the end of this financial year. So we're just working through that. So I think people have roughly just a little bit north of $1 billion in terms of cash balances, I'd expect maybe a little bit lower than -- a tiny bit lower than that.

Okay. But for FY '24, finance income should be a little bit of a tailwind for you.

Sorry, sorry, yes. Yes, final I think it should be a tailwind. Exactly it should be. Yes, because obviously, we'll have cash balances from higher interest rates as well.

Perfect. No, that's very helpful.

Thank you. We'll now take your next question. And your next question comes from the line of Gary Martin from Davy.

Just a couple of quick questions from my side. Just firstly, on Primark volume in Q4. I know you said explicitly that you wouldn't forecast into FY '24. But just on Q4, did you still see a positive overall volume across the Primark estate? I mean -- and is that a healthy run rate into FY '24. That's my first question. And then just secondly, just on the U.S. rollout of 4 new store rollout during the period. What kind of trends are you seeing just in that market? And what kind of densities are you seeing in those stores?

I mean on the first one, Gary, the -- I mean it's all price. Actually, volumes back a little bit actually in Q4. I mean I think the -- like what we saw actually is that our unit for transaction were actually a little bit better than previous quarters, which is a good positive sign. But transaction levels were quite volatile, and that was largely driven by weather. I mean, I know a lot of people kind of -- it's easy to judge the weather, but the correlation of poor weather in different markets is very evident on the transaction level. So in some ways, I think it gives us sort of a little bit of confidence in that unit for transaction and sort of holding up. And hopefully, that trajectory goes in and the transaction levels normalize a little bit as we go into kind of hopefully, a more sort of normalized weather pattern and into autumn/winter. So -- and we'll see how that goes. Obviously, like currently, current trading is tricky, right, particularly in the U.K. because it's far too hot. Last week was not good, it's far too hot. We need to transition because most of the clothes now are heavier weighted. So that's how we're saying it. But there's nothing -- like we -- we feel pretty -- we feel in good shape going into next year and our products, we feel are set up well for autumn/winter and then in spring/summer. And the new stores, it's been one of the -- one of the sources of real satisfaction this year has been that the sales outperformance compared to the average of the new stores. So like-for-like -- sorry, sales densities in the U.S. stores have been nicely ahead of company average.

Thank you. We will now go to our next question. And your next question comes from the line of Ann Critchlow from Societe Generale.

I've got 2, please. So first of all, in Ingredients. I just wondered whether you're seeing entirely structural growth this year? Or is there a cyclical element that we need to take into account perhaps losing some of that recovery next year? And then secondly, on Primark, about the Click & Collect trial. I understand it's just 1,000 lines and womenswear to start with. I wondered if that was just the start because it's a trial or whether you're going to take a different approach in womenswear compared to children's wear, where I think you put the entire range online.

Sorry, just on the Click & Collect kidswear, we didn't put the entire range online. We put some entirely new products and some which previously were only ranged in the largest stores. So we never put everything on Click & Collect in kidswear. So in that regard, what we've done in womenswear is very similar. Where we don't have close range in smaller stores, we put them online. And -- but on top of that, there is also some items which are available only on Click & Collect. Ingredients, we don't think in yeast that it is cyclical. We think that there's been some recovery in low inflationary costs that have gone on for many years. And I think the industry has had the opportunity of recovering years of small rates of inflation. We're not seeing any significant reduction in pricing at this stage. I could be proven wrong, but I think it's been a structural -- well, it's been a shift in expectation of margin in yeast.

Thank you. We will now go to the next question. And your next question comes from the line of Richard Chamberlain from RBC.

A couple from me, please. On Primark. I mean, I wondered if you could just comment on the net space outlook for next year and whether you see any more restructuring coming through on that? And then I guess also on Primark, how are you thinking about sort of operating leverage for next year? Obviously, you indicated 10% margin target at least for next year. But how should we think about operating leverage within that? I mean my sense is that Primark has been running its stores with slightly less staff since the pandemic. Do you see a need to have to now sort of return or put more staff into stores?

So the net space outlook, I think next year, we'll open about as much new space as we have this year. There will be some continuation, I would expect of space reduction in Germany, but that is -- I remind you, we -- that's in consultation with the works councils. So I'm not going to forecast or anticipate in any of that, but...

But the net number should be similar.

The net number, as Eoin said, should be similar. Operating leverage, look, there are a number of places where we see it. There's leveraging in purchasing volumes still in the states. The increase in store numbers is now feeding through to leverage on the -- on depot cost and there is some operating leverage elsewhere. There are still some areas where we're investing in central costs. So there's more cost to go into digital and other IT. So I think net-net, not a significant increase in operating leverage next year.

Yes. Yes, exactly. I think -- we continue to get the benefit of the fact that we've got new store, so new space openings. But on the flip side, we've got inflation, and we've also got the investment. We've got to continue to invest.

And lower store operating debt -- so lower manning levels in stores is driven really by 2 things. Firstly, it's the increasing importance of self-checkout. And secondly, it's sort of in-store operating disciplines improving.

Okay. I was wondering whether the increase in stock loss shrink that you've seen, is that partly related to self-checkout and you might need more leasing of that going?

No. Look, we have enough self-check up trials or exemptions of checkout to be fairly clear of the consequences of self-checkout on stock loss. It's not what's driving stock loss. And I say that with a great deal of certainty. We will be putting more security hours -- security people, security hours into the stores where we have a particular issue. We will be investing further in CCTV coverage, remote monitoring has potential for us and then body cams and such like. So actually, probably more capital cost to tackle stock loss than operating, but some operating as well.

We will now go to your next question. And your next question comes from the line of Simon Irwin from Credit Suisse.

Just quick one from me on Primark. Given the better performance of the -- particularly the like-for-likes over the last couple of years, what do you think has changed? I mean, obviously, you could argue that, that the positioning -- price positioning through an economic downturn might have helped. But do you think that there has been kind of genuine improvement in the offer giving you increased market share in key markets through better collections in the performance of the digital? Or what do you think have been the kind of key elements to the better performance that you've seen?

I think probably the biggest one, I'd say without any kind of true certainty has been the website. That has -- with a 1% to 2% like-for-like improvement as a consequence of the website, which is now rolled out across all our markets. So that's a big one. Destruction of competition through COVID has helped. I think in certain categories, in particular, we can see what we've picked up from Debenhams. I think the disappearance of Top Shop has given us more of an opportunity to get into more expensive, more higher price point womenswear in the edit, that has -- that's been performing extremely well as have the chem ranges. So higher price points, menswear. I think both connected more to loss to competition than anything else. Supply chain working much better. A year ago, we had problems with the stock levels in Spain because the depots weren't working properly. The shipping wasn't working properly. The ports weren't working properly. That's been our benefits. And I think sure, pricing. I think people in many of our markets when they go look in the value come into our stores. And either for the first time or to buy a bigger proportion of their repertoire with us. But it's not just that. It's not just that. It's a bunch of other things as well led, I think, by the digital investments.

[Operator Instructions] We will now go to our next question. And your next question comes from the line of Georgina Johanan from JPMorgan.

I've got 2 questions, please. And the first one, just following on from your previous comments around all the initiatives and external factors that have been supporting recent like-for-like performance. Do you -- is this something that you're expecting to actually continue to drive positive performance into -- for year '24? Or do you see a lot of those factors, so the kind of the distraction of competition, for example, now being fully in the space and perhaps we should have more moderate expectations into next year? I'm mindful that like ahead of the pandemic, on average, your like-for-like was trending sort of flat to slightly negative. That was my first one, please. And my second question was just around the margin outlook for Primark on more over midterm basis? Because I think previously, you talked about how it might take a couple of years to fully recapture and get back to that margin that you were doing before. But of course, now, as you said, like a lot of those input cost pressures have now fully reversed. And whilst there is some wage inflation in the OpEx base, of course, your pricing is higher and you're not talking any deflation. So should we be seeing this is now like a 1-year recovery rather than a multiyear recovery in the Primark margin, please?

Some of the performance improvement this year has been kind of one-off -- sorry, a step-up which will maintain, but you won't see a second step. The website has only been across most of our markets in the last few months. So I think there will be benefits from that into next year. I think entry -- successful entry into these new categories, new higher levels of fashionability and so forth. I think we'll continue to get growth out of them from -- now we're now known as somewhere that you can go for a higher price point, but still great value womenswear and kidswear. And that's rolling out some of those ranges to more stores and more of those stores, so a significant rollout of the edits through new stores. And we would have high expectations or some expectations that we'll be using Click & Collect for those sorts of products in womenswear into next year's trial. Margin outlook, I think we've recovered to -- well, how I answer this one? I don't think it's a one-off improvement that will go away again because I don't think the competitive dynamics have changed significantly. There has been a shift in supplier power. If anything, the competition has got easier for us. And -- so to the extent that the kind of strategic realities have reasserted themselves in a way that resembles pre-pandemic, I think these new improved margins should -- we should be capable of maintaining them.

Yes. And indeed, I would say there are still some levers for us to pull. We've still got some efficiencies to go after in supply chain. We still got operating leverage. We're currently heavily investing at the moment in digital, in a lot of our expansions. So eventually, we will get leverage on that as well. So I think we're not going to give the median -- what we've talked about be wanting to be over 10%, we're not giving a medium-term target at the moment. But we don't -- we feel that the model supports, say, over 10% margin. Obviously, it will get impacted in times by currency as currencies move, but it should be -- we should be able to maintain it.

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

Most of my questions have been answered, but I still ask on the decision to go into womenswear in Click & Collect? And maybe just explain that we think for that? Is it just an experimentation like with kidswear? Or are you seeing positive results from kidswear that you think can apply to womenswear also?

Okay. I mean it's our biggest category. So it's one we have to explore with the Click & Collect trial. We used the Northwest for our early learnings and also to iron out any bugs that might have been in the operation of Click & Collect. We've now expanded to London. I think that gives us more data points for analysis of the margin consequences of Click & Collect. We were always going to try womenswear at some point and that some point has arrived. We have to learn all sorts of things that return rates, cannibalization rates, et cetera. And we need to know them for our biggest category, not just kidswear. So it remains a trial. But put it this way, if kidswear had been a really nasty experience, we wouldn't have expanded to London, we wouldn't have expanded into womenswear.

We will now go to our next question. We will now take our last question for today from the line of Sreedhar Mahamkali from UBS.

Really a couple of quick ones, please. First one, I guess, can you give us a sense of how you're thinking about growth in Primark and perhaps how your sort of volume of buy for the year ahead compared to the year you were just finishing? And second, that's connected, I guess, is like your view on industry level inventories in the U.K. and Europe? And how do you see the promotion of the markdowns sort of environment over the next year? Those 2 would be very helpful.

Okay. So we are -- we're expecting to buy more units next year than the year just gone. We'll open another kind of 3% of space, [ 10 ] million square feet of space in the next year. And we expect to see some like-for-like growth as well, particularly in some of these new categories -- sorry, these new ranges like the [indiscernible] -- and so forth. Industry-level inventories and the markdowns, really hard to get visibility of I don't think -- there's no indication that the state has got the same level of stock levels had a year ago. I was in -- if it's an indicator, I was in Bangladesh just recently, where suppliers order books are okay, unlike a year ago where the Americans in particular switched off orders. So it feels more normal.

Yes, I think that's right. I think that's more normal, yes. I mean, certainly, I mean, we're focused on our own kind of inventory. I think markdown levels are fine and have been fine this year -- our energy level is probably a little bit higher. That's more kind of we're just carrying a little bit higher inventory than we'd like. But that is coming down and will hopefully continue to come down into next year. But it's not a markdown risk. It's more of a financing point than anything else.

The really obsessive about -- amongst us, and that includes me. The speed of the ships has gone back to normal. Some of the extra stock was being caused by a slowdown in shipping speeds and then an acceleration of shipping speeds. That bump, which fed through inventory has -- is in the past.

Thank you. I will now hand the call back for closing remarks.

No. I think we're -- thank you for doing that. But I think we're largely done. I don't want to waste your time by repeating what I've already said. So thank you all very much, and see you at the full year.

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