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

Good day, and thank you for standing by. Welcome to Associated British Foods January Trading Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to the Finance Director, Mr. Eoin Tonge. Please go ahead.

Thank you, and good morning to everyone. I'll just say a few words, actually, because obviously, it's a relatively short trading statement before we kick into questions. Overall, we're happy with the first 16 weeks for our financial year in our food businesses, in particular, we've been trading well. A theme really of continuation of good, strong trading performance, particularly in our U.S. focused brands in grocery and AB Mauri in ingredients. Sugar has had a bit of a mixed performance across the different markets. However, the key point around sugar production and sugar crop in British Sugar, the indications are positive and strong. And in Primark, we felt that trading was very good. We delivered nearly 8% growth, which obviously is very strong. Like-for-like growth of 2.1% with it being strong in the U.K. at 3.8%, a little bit more mix in Europe at 1.3%. And the U.S. continued to drive very strong growth from store opening. And as you'll see, obviously, we give a -- well, not just a reinforcement, but an upgrade in our expectations around Primark margin and particularly driven around gross margin. So that's really the overall summary. I mean, obviously, we can kind of capture some of the questions particularly if there's questions around the Red Sea as well as we go through the Q&A. So with that, I'll hand you over to the Q&A.

[Operator Instructions] Our first question comes from the line of Warren Ackerman from Barclays.

Warren here at Barclays. So a couple for me. That 2.1% like-for-like, could you help us by splitting it between the volume and pricing? And maybe talk around some of the moving parts. It looks like Europe is getting weaker than the U.K. But I guess the key thing is around the volume outlook for the second half for Primark. If volumes are down in the first half, why would there be -- or why would you be confident? What are the kind of more positive moving parts around volumes for the back half? Because I guess that's going to be the key delta for where margins exactly land. So if you can give us an idea of what you're budgeting for volumes in the back half and what would be good and what would be bad that would help us. And then secondly, obviously, the inevitable question on the Red Sea. I know it's maybe hard to quantify, but can you maybe share with us any color that you do have and what you might think is a worst-case scenario and where we are in terms of kind of sort of inventory coming from the Far East? And have you seen any surcharges yet? I imagine it's only a matter of time.

Thanks, Warren. Good -- it's comprehensive good questions. And why don't I start off with the like-for-like? I think -- I mean we -- what we guided at the back end of last year that we were targeting modest like-for-like growth, and we've delivered modest like-for-like growth. We also -- I mean, what we said was that we expected the first half to be driven more from pricing and then the second half of the year more from volume. And the comparators will be stronger -- will be tougher in the first half and comparatively weaker and/or easier in the second half. So that's sort of the mix, right? So it's kind of important framework and just to remind everyone. And I think -- I don't think I feel any differently in terms of that guidance today than I did in November. In terms of the actual shape in the 16 weeks, it was -- we had modest volume decline, i.e., all of it came from pricing and a little bit more than that. And in the U.K. -- I mean -- and the pricing impacts across all the countries were similar. So it's not like there was -- I mean there's a little bit of mix change -- a mix change, but I wouldn't -- I think it's almost easier as a proxy just to assume that the price impact is similar across different countries. I mean, Europe -- I mean there is an interesting point in Europe in that a couple of our countries get impacted by -- I mean, the like-for-like measure, when you're in significant growth mode, gets impacted by new store openings. So that was very much the case, and as kind of new stores come into the like-for-like metric from being non-like-for-like and you have a kind of a sort of a natural decline because of the halo effect of the opening. And that happens in 2 countries, Italy and Poland. And I think that does have a bit of an impact. If I kind of go to sort of the major countries, I think Spain had a good performance and -- although it was probably most impacted by weather all the way through the period of time and it sort of ended stronger. But I mean -- it ended stronger. France actually had a pretty consistently strong performance through the period of time. Italy, as I say, was impacted by that halo effect in particular. And Ireland is probably soft, I would say. I mean the 2 countries that we would probably pick out of softish with more to do with comparatives and economic conditions will be Ireland and Portugal and so -- but overall, we'd be pretty good with this. So for the second half of the year, we've obviously budgeted for volume increase on a like-for-like basis. As I say, we have slightly easier comparators. But we have also -- we also feel we're in pretty good shape from a product perspective. And indeed, what we would get, there's quite a bit of excitement in that regard coming as you normally would expect it to be into the second half of the year. And so that's where we are. And so nothing has really changed in our outlook in that regard. I'm sure there's more questions on that, but I'll try my best to cover more -- all your bases there, Warren. On the Red Sea, look -- I mean, somebody asked me earlier, you guys seem quite relaxed about this. Look, I don't think we're relaxed about it. I think we have worked hard with our supplier, our shipper and so on to adjust the supply routes. And I think in some ways the -- we all have a bit of more of a muscle in this regard because of more recent disruptions to supply chain. So we are going around the Cape of Good Hope. It's adding 2 weeks to the timing of supply of stock. We're not particularly anxious about -- I mean we're anxious, but I don't think -- on a gross basis, we're anxious. But on a net basis, we're not anxious about stock availability. And in that, we will just adjust our timing. It probably will -- it depends -- I mean, this all depends on how long it goes on for as well. So we have to just remind ourselves about that. But if it goes on for longer, it will add to our stock levels. We will obviously have to have more stock on the water. And so it will keep stock levels a bit higher, but I think it's all manageable. From a cost perspective, I would expect some surcharges. We're covered in some parts obviously and in large parts and -- but I think for the remainder of the financial year, there is an exposure in relation to some surcharges, but I don't think it's material. I think the worst case -- type of scenario is probably circa GBP 20 million or something like that of additional costs. But we'll work through it. So that's going to -- I don't think we're relaxed, but I think we are net relaxed if you know what I mean like, but we have to work to get there.

Our next question comes from the line of Sreedhar Mahamkali from UBS.

Maybe just to actually build on that question. And then another 1 on the current trading. So just to build on where Warren was going with it. I guess, in that scenario, I know it's probably too early, but on the say, could this be much more of a challenge for margins next year? I think you sort of talked about a midterm margin trajectory at Primark at the full year results in November. Does it put that in a bit of jeopardy as in next year's margins? Any very early thoughts? I know it's super early. That will be helpful if there are puts and takes we should be thinking about for 2025 margins. Secondly, I think in the statement, you talked about much improved recent trading with cold weather. I think in your answer to an earlier question, you also talked about Spain ending stronger. So at the overall European level, is the exit rate much more in line or even better than group like-for-like that you reported for 16 weeks? Any color you can give on that, that will be super helpful.

Yes, sure, Sreedhar. I mean, I guess, personally, I'd be -- I think it's more worrying if this situation was pertinent going into next year. But that's more a personal point than a Primark point, right? So I guess we don't know. There's a lot of obviously unknowns in that regard. I mean, yes, it would have a negative -- it would create negative pressure if it -- if you translate it into next year. It would all -- I mean it is a different stress scenario than COVID, right? I think in some ways, it's a lot easier to adjust from going to the Red Sea versus going around the Cape of Good Hope than the chaos where everything was getting stopped in different places at different times and so on and creating all the logjams, which were much more harder to manage. So in some ways, it's a bit of an easier adjustment. And, however, I would expect there to be upward pressure on margins. I don't think -- like I mean, freight is sort of in and around a couple of percentage of sales. It's not -- I think it's -- it will definitely be -- it would definitely impact next year if we kept on going. But I think the direction of travel on -- overall on kind of margins is good. We've had a bit more normalization of cost of goods. I mean FX -- I'm not going to want to call FX, but at the moment, it's been trending in the right way. God knows what an election is going to do to that. But I think in general, we're trending in the right direction from a margin perspective. So in puts and takes, even with that risk of freight, I suspect it's a positive trajectory rather than a negative trajectory. That was your first question. Second question, sorry, I got lost in the Red Sea there. Look, I think -- yes, I mean it's almost you need to do a little bit by country, but the exit rates are always kind of a little bit sort of -- I'm not quite sure they are that meaningful because the trading period of Christmas is very different to the trading period of January. And as it happens, January has been good because the cold weather has kicked in, and in general, that's been good because it's -- because the conditions for cold weather clothing hasn't been great, and it's been good in terms of clearing that cold weather stock. So it's sort of been good. But I would say we -- in general, I think most of the markets have kind of ended up stronger than -- well, I mean certainly. I mean, not -- the first period was a washout, I think it's probably fair to say. I mean, whatever the opposite of washout when the weather is good. Because everyone -- and obviously, the market experienced that. So that doesn't -- there's nothing kind of unusual, and particularly in Europe, where it was really hot, it wasn't that it was warm, it was hot. So I think we've got -- it's been a bit stronger towards the end of the period and into January. The one sort of caution on us is -- I mean, the consumer is still -- we think is still fragile enough -- consumer sentiment is still fragile enough. And we see that in terms of our units per transaction, which -- I mean we budgeted for negative units for transaction. So it wasn't like we were expecting it and it came through that way. So we shouldn't underestimate that, there's still some softness in the consumer. And that's carried through the whole period.

Our next question comes from the line of Warwick Okines from BNP Paribas Exane.

A couple of questions for me, please. The first is that in your opening remarks, you described the statement as a Primark margin upgrade. And you've talked about some of the -- or the direction of travel being good on margins. But could you -- can you just give us a bit more detail in terms of what's changed from your original assessment in November? And I know that you just flagged sort of potentially 20 bps of pressure from surcharges to GBP 20 million. And then the second question is just whether you could give us a bit more detail on the mix trading performance in Illovo. What exactly has been happening there?

Sure. Yes, no worries. And congrats for being the person to ask the first question on non-Primark. Sorry, about that. I'm joking. Okay. So marginal grade. I mean, look, we -- I think we've been sort of naturally, progressively positive on Primark margin, predominantly to do with gross margins. I mean all of my sort of kind of upgrading has come from gross margin, right? And that's been -- and that's always true with kind of passage of time as you particularly when you get your first quarter under the belt. But also as you lock in more and more, you're buying for the remainder of the year, at certain prices, you get more and more confident of your gross margin delivery. So I think we're -- that's really what's driving it. The shape of margin delivery hasn't changed in the sense that the first half is driven a little bit more by pricing and some cost of good reductions, but albeit impacted negatively by FX and OpEx inflation, whereas the second half of the year is there's no pricing and is more accentuated, cost of goods deflation. And you've got OpEx inflation offsetting that. So that's -- the shape hasn't changed as the magnitude of the cost of goods deflation has been higher as we've gone through the year. FX has got slightly better into the second half of the year, but I wouldn't say that's been a big driver of that. So that is the shape. So we -- the other sort of moving parts, stock loss, I mean, I think -- I mean, I've said at the end of last year I'm not expecting much improvement in stock loss. I'm not going to -- we're not seeing that yet. And although we're trying our best, it seems to be a tough -- sort of a tough problem for society. So they are the moving parts. And as I say, we just got more comfortable with Primark margins as we've gone through the -- it's gone through the year. And so then if I flip -- if I switch tax to Illovo -- well, maybe I'll talk sugar in totality. I mean, obviously, the 2 big moving parts in sugar -- in the sugar division were British Sugar getting back to a more normal level of production and Vivergo not having the losses of last year, particularly in the first half of the year. And then, on both of those things, maybe to slightly to a lesser extent, but still positive we're pretty happy about. So we're happy with the trajectory where we are in terms of the crop on British sugar. And Vivergo has had losses in that first 16 weeks, but nowhere near the losses that it experienced in the same period last year. Illovo being -- some -- the demand and the commercial side of things have been very, very good. All the markets are trading very well. And it's been all to do with production and predominantly to do with -- well, and currency, let me come back to currency in a second, and predominantly production -- weather-related production. If I take Malawi as an example, it had 2 years of cyclones that have impacted the crop, and in the end, worse than we had have hoped for, and that has impacted production. And that should come back, that should come back, but it's not going to come back this year. And that's probably one of the bigger -- that's one of the most dominating impact. Currencies have been a little bit challenging because there have been devaluations in both Malawi and Zambia, but we've recovered them through pricing. So it's been tricky, but we've been able to cover those through pricing. So that's what's happening in Illovo and that's what's happening in sugar in totality.

Our next question comes from the line of Clive Black from Shore Capital.

Can I ask about Grocery, please? You talked about some challenges in Asia with Ovaltine. But perhaps just more broadly, give us a feel excluding U.S. Ovaltine and Twinings, how you see Grocery, particularly post-inflation cost recovery and maybe more normalized trading conditions?

Yes. I mean it's been pretty good, I would say. I mean, obviously, our grocery business is quite -- they've got kind of a lot of different characteristics across the globe. I mean if I start with international brands, I mean, we've sort of called them out in the statements. Twinings is trading well, and obviously, its investment quite a bit is in the brand. But that investment in general has -- is going well, we think, particularly in the U.S., also in the U.K. The Ovaltine, as we called out -- I mean, China is a bit of a challenge for us, which is impacting the overall numbers. It's not going to have a massive impact on profits, but if it is, it's impacting the overall numbers. And we're a little bit -- we've got to just rethink our kind of go-to-market strategy in China post-COVID. And Thailand has been a bit more of a continuation of the kind of shift between powder and ready to drink. But our brand is so strong there, I think, it's going to -- it might take a little bit more time to readjust. But I think we're in good shape there. We've just got to readjust a little bit of that mix shift in the marketplace. And the rest of our global brands have traded pretty well. I would say our international brands traded pretty well; Jordans, Mazzetti, Patak's, Blue Dragon. The -- and then in the U.K., actually, it's been -- I mean, look, we're -- bakery continues the sort of the improvement that we saw in the second half of last year, and we've had good commercial performances across the space in the U.K. focused brand. The U.S. has been a standout. Mazola -- our brand positioning actually in the U.S. is very strong. Mazola, Fleischmann's. And that is -- and we are benefiting from that brand positioning being very strong. Australia has been a bit more of a mixed bag, I think, it's fair to say. They have been a little bit tougher -- been a bit more of a tougher marketplace, so -- but all in all, it's trading better than we would have hoped for, which is great.

And you are expecting -- you are experiencing more normalized conditions post the inflationary space. Is that a fair assertion?

Yes. I mean it is a fair assertion. Yes, it is. I mean, I think it's probably fair to say people are getting back to focusing on growth rather than on -- just on pricing, margin recovery and all that sort of thing. So I think it feels a bit more normalized. Is that -- I wouldn't -- I won't pretend that it's everywhere. But in most places, it feels a bit more normal.

Our next question comes from the line of Adam Cochrane from Deutsche Bank.

A couple of questions, please. In terms of the -- talking about the Red Sea quickly, the freight agreements that you have, can you just run through what the mechanical impact is in terms of if current freight rates are up 100% or so, when that might have an impact in terms of timing? And then secondly, on your commentary about confidence over Primark margin, can you elaborate a little bit on what exactly you mean by this? So we went from towards 10% to comfortably above 10% to now confident of being even more comfortably above 10%. Just a bit of a chat on what you're talking about with regard to that margin number because it feels a little bit opaque right now. And then, third point is in terms of looking at your increases in gross margin and maybe the volume weakness in the market, how much would some of these benefits coming through, have you thought about trying to trade some gross margin for volume across the business?

Yes. Yes, let's see. I am going to take all those. I mean, look, it's not commercially savvy for me to talk through the ins and outs exactly of the -- of our contract and our contracts with, particularly when we're having questions about them. But we're in -- we have that cover in relation to our freight. And that extends through a good part of this year. I think there is a difference between the spot rate and the contracted rates, as you know. And the contracted rate, I'm excited to say, I'm expecting some surcharge on the contracted rate because I think you wouldn't -- and I think it doesn't -- sometimes it doesn't matter what your contract is. But I think in some ways, you're in a sort of -- we're in a slightly different world here. So you kind of expect some surcharges almost regardless of how you're contracted. And so I think we would -- as I said, we would expect some -- we expect some upward pressure on -- this year. And 20 bps, as Warwick said, is probably a bit -- is as good indication as ever -- as I have. I don't think it will be that much, but that's probably the exposure. So that's where we are. Where we -- it just keeps on going for longer, will there be a structural shift in contracted rates for freights? Yes, I think there probably will be. I mean -- but there's lots of ifs and buts there, right? So it's hard to know if this would be structural, really, and it's hard to know. And generally, if anyone on this call knows if it's going to be structural, I'm more than all ears. So that's why I'd say I'm gutsy. I mean, on the margin percentage, yes, look, I think it's progression of time. I think we've always been sort of, as I say, positively -- we've been always positively upside, but cautious. And as time has gone by -- and when George grabbed the mic in the September call and he -- and talked about we'd be comfortably above 10%, certainly that -- what he was saying was we hope to be more than 10%, but we didn't know. And now, we do know. So that's really where -- what it is, Adam. We've always been confident or comfortable that the business is going to bounce back to sort of pre-COVID-type percentage margins. We've always been confident. And we stated that from -- well, as long as I've been here, we've stated that. And the pace of getting there is faster, which is good. So I think that's -- I'm trying my best not to be opaque, but I think that's the best -- I think the best way I'd describe it. And as I say, I think the trajectory is positive. Like -- obviously, in the second half of the year, we're getting more benefit on product COGS. So I think it's positive and reinforcing that we should be able to get to those types of pre-COVID levels and maintain. And the gross -- yes, I mean that's -- look, we probably spend every day of our lives in Primark worrying about whether we've got the right price points, and we think we have. We look at it -- as I say, we look at it on a daily basis, not just on a monthly basis. But I think we feel we've got the right price points, and it's -- the balance is okay, I would say, in terms of price versus volume. Yes, it's a fragile consumer. Maybe there's an argument to say that consumer is going to get stronger as the year goes on as kind of real wage inflation kicks in. So we'll have to see how that goes, and that will all feature into everyone's decision on pricing. But I suspect pricing would probably have been -- as I've said before, and I still maintain, I think prices would be benign for a little bit longer -- yes, longer still.

Our next question comes from the line Gary Martin from Davy.

A couple of quick ones for me. I think a lot of it has been clarified already, but just -- maybe just to dial into U.S. growth on Primark, up 45%. Obviously, the majority of that would be new store rollout. But it will just be interesting just to get a bit of color on what you're seeing on the ground out there in terms of store densities and just general sales, particularly just on the newly established store, that just would be quite interesting just to get a bit of color there. And then just second, just on ingredient. It sounds like you're a bit more constructive on AB Mauri. It seems to have persisted a little longer than expected in terms of positive performance. I suppose if you see a bit of a contraction in destocking. I think the current forecast is for a modest decline in profitability in Ingredients this year. But I suppose, are you in a better position now to maybe say that could be closer to flat? What's your thoughts on that?

Yes, sure, Gary. Okay. Well, look -- yes, look, I think the U.S. -- I mean, look, you take a stand back and you kind of go, okay, you're growing at 45%, that's the -- and that's the mode we're in as a business at the moment. It is an expansionary mode, and that's good. In general, I would say new stores are working well and the densities are good, not completely uniformly. So we've got some stores that aren't trading as well as we would have liked, and there's all reasons for that. But in general, the new stores -- new store densities are good. The -- there's a little bit of cannibalization in the Northeast that it's kind of rolling through, but kind of coming to an end. The -- look, I think the market backdrop, I mean, it is hard to call the market backdrop. And in some ways, our numbers aren't very indicative of the market backdrop because we've got such new store openings, so much of big new store openings that our like-for-like measure is a bit of a sort of a nonsense. So it's a hard one for us to really -- our numbers don't really tell the story of the market backdrop. So it's more anecdotal to guess in terms of market backdrop than anything else. And it just feels a bit mixed actually in truth. And certainly not positive. I would -- it feels relatively subdued, the apparel market in the U.S. So yes, look, so -- I mean things are going all in the right direction. I think we do have a bit of a momentum on our store opening format at the moment in terms of slightly smaller stores and kind of more mall-type locations. I think we've got a -- I think we've got a model that's working, which is good. So I think they are the key themes at the moment. And we still got work to do in terms of brand awareness, et cetera and so forth. I mean that will be a multiyear project, but I think we've still got work to do in that regard. And on Ingredients, yes, look, Mauri -- I mean, the story of last year was very much Mauri just continuing to beat our forecast, and it's keeping on doing that. And in some -- I think we're believing now that there's a bit more of a structural change that has happened in our -- in both yeast and bakery ingredients, which means the margins and -- should be better for longer. So I think that's -- I think some of that performance that we're going to see this year should go into next year as well. And the destocking we're seeing is more on the specialty ingredients side of things. This is a theme we saw all the way through the last 6 months of last year, first in enzymes, more recently in the pharmaceutical part of our Specialty Ingredients businesses. It's all going to have a massive impact on profitability for our overall Ingredients division. So that will be more dominated by AB Mauri. So although we were expecting there -- well, we thought there might be a call back in the Mauri performance because that's not happening. We're not expecting a pullback in Ingredients performance in totality.

Our next question comes from the line of Grace Smalley from Morgan Stanley.

Just coming back to the Primark margin upgrade. Should we expect Primark margins to be closer to 11% this year? And if so, what level of like-for-like for the year would you need to reach 11% Primark EBIT margin this year? And then I appreciate the comments on the different drivers in the first half versus the second half. Taking it all together, is it fair to think, therefore, that margin should actually be at similar level in both the first half and second half?

Yes. Yes, I think -- I mean there is -- it is definitely possible for margins to get to 11% and probably a little bit more than -- kind of more than sort of the higher end of modest like-for-like to get to there and very limited impact from Red Sea. So it is definitely possible to do that. I think -- but I mean, look, it's -- I mean, I'm naturally cautious, so I'm probably a little bit nervous, but not wanting everyone to go there yet, if you know what I mean, but it is definitely possible. And actually, the first half is probably going to be a little bit stronger than second half in terms of margins, but only marginally. So we obviously have the pricing benefits. So -- we know where we are today on most of the first half margins. So it's probably a little bit stronger in the first half and the second half as we stand today. But it's not like -- it's not massive swings between the 2, albeit the route to get there is quite different.

Our next question comes from the line of Anne Critchlow from Societe Generale.

I've got 2 questions, please. First, on British Sugar. So just wondering how the sugar beet harvest managed to avoid all the flood damage in the east of England, whether that was down to timing of harvest or perhaps just beet just a more resilient crop than we thought it was? And then secondly, on Primark Germany, I mean the market does seem to be quite weak there and possibly weakening. Just wondering if that's putting back your hopes on profitability this year in Germany.

Yes. Yes. I mean, beet, I guess, is a bit more resilient, but I wouldn't say I'm an expert on this. It is definitely -- it is going to cost us a little bit more to harvest beet. It's not material in the grand scheme of things, but it costs us a bit more. The beet is -- that's coming out of the ground is bigger. The sugar content isn't as strong as we would like, but it's bigger. So it's going to cost a little bit more to process. But again, it's not material in the grand scheme of things. So yes, it has been hard work -- heavy work to get these out of ground in large parts of the country because of the wet weather. But we've been able to do it. So it had been a worry for us, but the indications -- most of it is out of the ground now, but the indications are very good, and so that's that. Germany, actually -- look, Germany has been tough from a -- as I say, market backdrop perspective. But we've sort of traded -- we traded quite well. In the grand scheme of things, we traded quite well. Germany will turn an okay profit this year. We're not -- I don't think it's pushing us back too much really. I mean the work we have to do in Germany is pretty clear to us. I don't think the market backdrop changes our approach that much. As I said at the back end of November, all the physical work we've largely done in terms of closing stores or rightsizing stores. And we're kind of sort of -- I don't know, kind of almost kind of getting back to normal in a kind of -- in one way. But we also recognize we've got some brand work to do, and we'll be doing some of that this year. So I don't think it's really -- the market backdrop is not -- it's still a bit like the U.S., the market backdrop being a little bit negative it doesn't really alter and change our plans. We're here for the long run.

Our next question comes from the line of Georgina Johanan from JPMorgan.

Two for me, please. Just the first one in terms of the Primark margin longer term, and I think you said that the pace of getting back to that as well as quite -- has quite clearly accelerated. But when we think about that longer-term margin, I mean, just to sort of clarify, I assume you're referencing in excess of 12%. And I guess from here, what are the drivers that take you there? Is it purely leverage? And is that leverage from a like-for-like perspective or actually, is it adding space and just leveraging that fixed cost base in the business? That's my first one, please. And my second one is, could we just get an update on Click & Collect trial and how that's going from a sort of cannibalization perspective or not as the case may be? And any profitability metrics that you could share, please?

Yes. So I mean -- well, I don't know where you got 12%. I didn't say it. Look, what I said is kind of getting back to sort of pre-COVID margins. And there's no reason to believe we couldn't get into that. I think 11.5% was sort of the actual pre-COVID margin. But -- and I mean, we are -- I mean, Adam is right, we are a little bit opaque on Primark margin, and maybe that's something we need to think about as to whether we give more of a kind of a target. But the -- I'll say what we've said a few times before. I mean this is a double-digit margin business, and there's plenty of levers to get comfortable on that. I mean, obviously, gross margins have been all over the place in the last 5 years, FX being one kind of sort of big component, actually, particularly if you look in the pre-COVID back to today in terms of dollars versus where it used to be. But -- and then obviously, we have no price in the system, which we didn't have pre-COVID, which is very, very helpful fabric as we kind of come back to somewhat pre-COVID level. So sort of -- that's a sort of a net kind of win on gross margins in terms of where we are. We obviously had quite stock losses higher period to period. How to know if that's structural for the remainder of time? It's highly unlikely it's structural for the remainder of time. And then, obviously, we have quite a bit of OpEx inflation that we are -- we either try and offset through cost efficiency or through leverage as you rightly say, and it's both. It's both like-for-like and non-like-for-like. Non-like-for-like, I mean the most kind of stunning example of that is the U.S., and we carry quite a lot of fixed costs there as we grow that marketplace. And the more stores we have, the more we leverage those -- that overhead. But it's also -- you also have to maintain your store densities on a like-for-like basis to keep your margin healthy. So I don't think like our position on Primark margin hasn't changed, like we're still confident that the trajectory of getting back to those types of margins is good, and the lever is to keep it there, sustain this and continue to invest in price are there. But I'm not giving a target, and I haven't given a target, so -- just so we're clear. The Click & Collect -- yes, look, I mean, I don't know if I've got much news on Click & Collect. It's too small to kind of say there's cannibalization. I mean, if there's cannibalization, that's a bit of a problem. Because the whole point we are trying to demonstrate is incrementality actually. And it's incrementality which will help us make our decision around whether we roll this out more broadly and how we roll it out more broadly. So I think it's going well. It's still going fine. The metrics are still pretty good, and the expansion of the categories and the expansion of the stores has given us the data now that it is allowing us to kind of think about where we go next, which we will be kind of thinking about over the coming months. And it's just not a big impact on overall sales at the moment because it's still a trial.

Our next question comes from the line of Richard Chamberlain from RBC.

Just a couple of follow-ups, please, on Primark. I think in your sort of opening remarks, you referred to this sort of halo effect in markets like Italy and Poland. Is that a sort of new development you're seeing in those markets and then sort of sales of existing stores being impacted by new openings there? And then also, I wondered if you're still seeing a sort of digital boost across the board for Primark due to a broader range online access to the stock checker and so on. What you're seeing in terms of that impact?

Yes. Yes. No, I don't think it's a new feature. I think that what's happening here, of course, is that the rate of pace of which we're opening stores is -- has increased again, right? So it's a feature that used to exist that's come back to us. So there's 2 effects that happen actually is one is you have a halo effect of when the stores open because there's an excitement feature, et cetera and so forth. And when they kind of go into like-for-like, the initial comparison isn't as -- it's hard to kind of have like-for-like growth on that halo effect. So that's one thing. And then there is what -- the second one is cannibalization where when you open a new store and if it is in the same region or city, it will have an impact on like-for-like because it impacts the other stores, again, that's -- there's nothing new there. And in fact, actually, every store we open, we project like the level of cannibalization. We tend to get that pretty right. It's not -- it's quite a data-driven kind of exercise. So there's always, to a certain extent, those effects that you have to kind of -- you just have to put a bit of cautionary around like-for-like as a measure when you're in a growth mode. So just -- but in the case of Italy and Poland, what we really are talking about there is the halo effect rather than the rapid cannibalization. And the -- on digital, I mean -- like Italy, in the period just gone, had particularly strong non-like-for-like growth, as did Poland and as did the U.S., right? So the -- on digital, yes, look, we're very -- I'm very positive on I think the impact digital is having on the overall customer engagement. Look -- I mean, I know, I've said this before, but I mean I know we're kind of playing a little bit of catch up here, but it has come on very strongly. We get -- in terms of kind of -- in terms of the hit rate to the size and then in terms of use of stock checker, which is always a good indicator of conversion, has been very strong. The international sites have caught up with the U.K. We did have record user levels over Christmas, which demonstrates that it is a research online and buy in store is -- as a model is working. So I think we're very positive. There's a lot more we can still do in terms of harnessing the -- our digital footprint, particularly when you think of social media. But at the moment, it's in a good trajectory.

Our next question comes from the line of James Grzinic from Jefferies.

I just had 2 or 3 follow-ups. The first one is just to clarify. So you're saying 11% on creating margin of Primark global this year, and it should be more front-end loaded to the summer space. And thereafter, we can get to 11.5%. My first question was just to clarify that.

I did say all that. Yes. I did say a lot. But I don't want to kind of remind all the kind of caveats and all that sort of thing that we have to have here. We still got to deliver volume going into the second half of the year. But the trajectory is good. The trajectory is good.

Okay. And when I think about the moving parts, how important is the mix of product to gross margin? Because quite clearly, if I think back, there's a lot more linen this past summer that I've been used to see in a Primark store. I'm just wondering how much that mix development has been important. And secondly, can you help me understand the mix of markets because you are going to a much more of a least model, by definition is less and less of the spaces in Ireland and the U.K. So I'm trying to understand how comparable the 11.5% is relative to history given that a lot of the space that you're opening is lease-based? And I guess the last question, I guess, over the past 2 or 3 years, you had a very helpful dynamic in terms of efficiencies from the new system rollout, I think, probably very important in terms of really sharpening labor scheduling. Has that -- how much more is there to go in terms of that tailwind, please?

Sorry, on the last one, what was it -- sorry, just making sure I got the significant first part of it.

Yes, yes, in terms of systems. I think it was rolled out 3 years ago, and I think one of the historic areas of potential in the business have been labor scheduling and the ability to do that much more effectively and that the systems were going to help you do that. I'm presuming that's been a meaningful driver over the past couple of years, and I wonder how much is there to go from that.

Yes. Okay. And I mean, mix -- yes, so mix and -- well, I mean, I think it is helpful. But look, I think it's helpful. I think it's -- it will be helpful on a like-for-like as well. I think expanding out the edits and collaborations in licensing in general is positive to mix. The -- and -- I think we're thinking a bit more around sort of like -- I mean, a bit more classic, what I'm going to call price architecture, albeit the -- like we're still going to be the lowest cost, right -- lowest price. That's still our kind of -- that's still our mantra. So I do think the mix is -- it's a good question. I think it is a theme of how we think about our margin. It's definitely moderately helpful. I think it's moderately helpful than massively helpful, James, right, like adrenaline. So I think that's where I would -- the way I would think of it. I mean the lease question, I mean I'm not sure our lease position has changed that much. I'm just trying to -- like we've always been leasing. So I'm not quite -- I'm not looking around. I mean we've got maybe a little bit more shorter leases, so that's probably one theme. So arguably, that means -- it means that the lease cost on an absolute basis should be higher, but also the market -- generally, the markets have come back a bit. So I'm not sure it's a massive impact on the overall percentage margin. I'm looking around the room, but I don't think it's a predominant number.

Maybe you could clarify because they're starting -- the Irish and the U.K. businesses are 60% to 70% freehold structures compared to 10%, 20%, I think, internationally, just simply the mathematics of the mix of openings being virtually all international really. That's what I meant.

Yes. But I think that -- I wouldn't say historically, I mean I think that's just been happening for quite a long time now. So I mean -- so I think there is a -- I think, over time, there has been a shift, you're right, about how they impact percentage margin. I might have to come back to you as to whether there's a mathematical set -- what that is mathematically in terms of impact. But it's not something that's sort of like it's -- that I'm spending a lot of time in analyzing on. So as a result, I'm probably being weak on the onset. Systems, yes, look, systems is a big part of the Primark growth plan. We have done quite a lot of work in systems over the last 5 years or so, but we still got a lot more to do. So we've got the -- like -- so I mean, basic infrastructure is pretty good. But as you continue to grow and you grow into new markets, the demands on your systems infrastructure become greater and greater. So it's -- for example, it's an area that I spend a lot of time on with the Primark gang. And we have quite a step-up in investments actually in systems in this financial year embedded in that margin narrative that we spoke about before. So I think with -- so it's quite -- still quite a bit of work to do there. I think there's still quite a lot of opportunity in terms of P&L around stock flow, stock flow management. We don't have a lot of sophistication in terms of product optimization by country, by store, et cetera, and so on. So I think there's -- over the next 10 years, I think there's still opportunities in relation to improvements that can come from systems.

Our next question comes from the line of Anubhav Malhotra from Liberum.

My question is around the national living wage increases. Since you last reported, the government has announced -- the U.K. government has announced around 10% increase. If you could just tell us was it above what you had budgeted in your numbers and if you could in some way quantify what sort of an impact it had on your margin expectations for this year? And my second question is around the sugar business. Where are you with contracting on the sugar business? And what sort of prices are you expecting, especially given the recent decline in the spot market prices for sugar?

Sure. Yes. I mean it was a little bit above what we were touching for, but the net impact is not that material in that. I mean, obviously, there's a huge amount of labor inflation already in the system. We had already -- sort of we were projecting quite a lot of labor -- a lot of inflation on rate. Obviously, with the impact of the national living wage, you do have to -- you look at your differentials a bit more and that does put a bit more pressure on the overall labor bill and the labor OpEx inflation. But it's not going to have a big impact on -- I mean we will provide some guidance if we thought it was a bigger impact on guidance, i.e., what we budgeted for, it's not a material impact. The sugar, well -- I mean, there's a couple of things to say on sugar. I mean, firstly, the world price is one indicator, but it's only an indicator. The European price is more interesting to British Sugar, and even then, it's got its own dynamics because we're somewhat isolated, more isolated in the island of Great Britain and in -- over recent years. And the -- so it doesn't -- it's an indicator, but it's only an indicator. In terms of contracting, et cetera, and so forth, we're pretty well contracted. So it's -- even if it did have an impact, it wouldn't have an impact and certainly not for this financial year. And even the dip that's happened in world prices, most peoples read, but it's -- that is quite technical. I -- it's temporary. It's going to come back again. So not particularly anxious about pricing at the moment.

Our next question comes from the line of William Woods from Bernstein.

Just a quick one on Primark. Are you able to give me in terms of the situation in Bangladesh at the moment? And then the second one is we're seeing much more positive on the gross margin. Are you able to give me what is moving within gross margin that is making you more confident [indiscernible] production? Are you evaluating any of the products more? What exactly is driving that gross margin actually?

Yes, sure. Yes, I mean, it appears things have settled down in Bangladesh. There is an election this year, which means that there might be some disruption in and around that. But the period -- it has settled down. Obviously, we've -- a lot of people on the ground and a lot of people are worrying about all of our countries on a regular basis. So it's something we keep an eye on closely, but it would appear things have settled down at the moment. Gross margin, yes, I mean, it's a bit -- it's a little bit of everything, actually, William. The -- sorry, it's not value engineering. Sorry, so when I say it's a bit of everything, it's not value engineering or at least not that I'm aware of. It's not because there's nothing -- there's no -- we've got no particular new sort of fund annual thing that we're doing in terms of product. It's a combination of cost of production and fabric cost itself. So it's really those 2 things that are driving both the reduction.

Our next question comes from the line of Nick Coulter from Citi.

Two quick ones, please. Firstly, could you comment on the price volume mix you're seeing in grocery, particularly in the U.S. and the promotions that are coming into play? And then secondly, I know it's a trading statement, but with regard to consensus EBIT, where do you see that presently? And if you could talk to the considerations or puts and takes from this morning's update, particularly in the food businesses or non-Primark as you call them?

Sure. Yes, sure. The price volume -- yes, I mean it's been pretty -- actually pretty equal, actually, price volume impacts actually across our grocery business, which is very good. We've seen a little bit more promotional activity. Yes, actually, pretty much across all the markets, including the U.S.

So volume positive in grocery.

We're volume positive in grocery, yes. It's the only sort of, I would say, one where we're not is Ovaltine, which is what we called out. So -- yes, so it's a pretty -- I mean, it's a pretty healthy picture in terms of volumes. I mean, obviously, the U.S., in particular, is, as it has been, good. I mean, we called it out. So it's been good actually, and it hasn't just been good in the U.S. focused brands, it's been very good in Twinings as well, so -- which is -- it's not -- it's an international brand. So yes, the U.S. has been good. And so we -- that's been more about gaining market share than category, yes, volume growth, which is good. So we're -- the volume contribution has been very pleasing in grocery, and I would say, particularly probably in the U.S. Your next question on EBIT consensus, yes, as you say, it's a trading update, but I would actually tell you that the EBIT was -- for group was [ 1, 840 ]. Look, we -- I'll just go back to what we called out. We think the Ingredients, Grocery, and Primark will be a bit better for the reasons that we said before. So I suspect those numbers will creep up a bit.

There's no watch out. There's nothing in there that we should think about it in the other direction, just positives from Primark and Grocery.

Well, none that we've called out, no. I think that might be the final question, actually, so.

So we have now reached the end of the question-and-answer session. I'll now turn the conference back to Eoin for closing comments.

I don't know what to say. Thanks for all the calls this morning. All very good engagement. And look, we'll be speaking to you again at the half year, and thank you again.

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