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

Good day, and thank you for standing by. Welcome to the ABF Trading Update Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, George Weston, CEO. Please go ahead.

Good morning, everyone, and thank you for joining this call. This is our final trading update for the year, the final one before the results presentation in November, and it covers the year to September 14, our year-end. So we're not quite through the year, but we know -- we sort of know where we are. It's a year in which we've delivered good top line growth, very significant improvement in profitability, and alongside that excellent cash generation. Cash generation, even better than the profit growth. Overall, we're pleased with the performance of the business. Primark has been good. Most of our food businesses been good, and I'm optimistic about the outlook next year. There is one big, however, though, which is Sugar, both the expectations of profitability for this year, which although the year that we're reporting although well up on previous years is down on market expectations. And then we're telling you today that the profitability for Sugar next year on the back of much lower European prices, will be more in the range of GBP 50 million to GBP 75 million than the sort of GBP 200 million plus that we expect to see this year. We won't be able to mitigate the consequences of that decline in the total business performance next year. We do -- the good news, though, is we expect these lower levels of profitability in European sugar to be very short-lived. We expect to bounce back well in 2026. We've got good visibility -- the confidence from that is that we've got very good visibility of our beet costs going into '26 now, and we've negotiated significantly to lower our beet prices from our farmer partners for the year following the one that they're going to be in. Disappointing that we're not where we thought we're going to be for '25, but sugar is an agricultural commodity and we're paying the consequences of, I think, very good harvest across Europe, very big acreage on the back of high beet prices that the whole of the European industry have negotiated with their farmers for the year to come. The market is simply oversupplied. Moving on from Sugar to our other businesses. Primark, Primark sales are expected to be about up around 4% in H2. The profitability remains strong. And the reason that we've had declined in like-for-like growth in -- sorry, in total sales growth in the second half is like-for-like in the U.K. and Ireland. We believe that to be entirely the consequence of poor weather, particularly in April and June. Our European sales outside the U.K. and Ireland have been good, and the rollout has gone well in the states. We continue to look at on the question on rollout of new market opportunities we're announcing today, a franchise agreement that we reached with -- for the opening of Primark stores in GCC soon in the Gulf. The year in Primark has been characterized by strong margin delivery. We see no reason why next year's margin delivery shouldn't be good as well. Grocery continued to perform well in half 2. We've seen good demand for our international and regionally-focused brands, good growth in Twinings, World Foods and some others. We've increased marketing investment, particularly in Twinings and will continue at higher rates into next year. Ingredients, good. Yeast and bakery ingredients have seen good growth across most regions, and the Specialty Ingredients part where that sector has been under pressure from destocking. That destocking seems to have come to end. So the back half of this year are seeing volumes returning to more like normal in Specialty Ingredients. We're well positioned for future growth, Retail, Grocery Ingredients, Sugar, just reminding you that we look at our Sugar businesses in 2 parts: European sugar, which is where the problems for next year come from, but also Africa, where we are as excited as we've ever been about our prospects on that continent. We've completed our GBP 500 million share buyback, the second share buyback that we've participated -- that we've entered into. We finished that a bit earlier than we expected. We're just going to roll it through to November on the back of confidence in our cash positions. We will have more to say about our balance sheet and shareholder returns in the annual results announcement in November. With that, I know a number of you have got your hands up, though I can't see. And I look to others decide who gets to go first.

[Operator Instructions] And the first question comes from the line of Sreedhar Mahamkali from UBS.

I guess I got three questions, please, if that's okay. First one is Sugar. If you could just help us understand how much of the drop next year and the recovery year after in Sugar EBIT driven by the beet contracts versus obviously, sugar prices have been falling for a while, and we did know that. And you've also talked about signs of supply and demand rebalancing. If you could just press that out to give us a bit more confidence on that rebalancing, that's on Sugar. Secondly, if you could just help us on Primark second half price/mix volume dynamics and how we should think about it for FY '25? And thirdly, I think, George you talked about cash generation being very strong and a key highlight. But I guess the question would be, you've announced GBP 100 million incremental buyback. What held you back from potentially announcing a more further buyback plan for FY '25? Admittedly, this is trading update, but it would be helpful to just hear your thoughts.

Yes. I think I might just handle the answer to the last question first. And just agree with what you said. It's not the time to be a trading update isn't when you said, we would typically announce the kind of shareholder returns to...

Yes. Yes, exactly. I mean I think that's right. It's Eoin here. Sreedhar, look it's just kind of a nice add-on given the fact that we finished our buyback early, but we'll give a full and fulsome update in November. And it didn't feel right to do anything other than that given its a trading update.

If I turn to Sugar, the -- we are paying -- and the harvest is about to begin. For the harvest is about to begin, we're paying the same price give or take, give or take, not much. GBP 40 is we did the year before. And so the profit decline really isn't about sugar beet prices going up, it's all about price of sugar coming down. For the year beyond, so beet that starts getting drilled in March, April '25 for harvesting September, October '25. We've negotiated a price much closer to GBP 33 per tonne. That's not much shy -- that's not much shy of GBP 45 million to GBP 50 million cost reduction for the following year. It's what gives us confidence that the profitability of this business is going to bounce back. The consequence of paying a very high sugar beet price and processes across Europe did the same thing as the acreage has gone up. And it hasn't been helpful. But at the same time, the acreage has gone up. We're looking into a very good crop in terms of field yields. So the supply has gone up because acreage has gone up, field yields have gone up. And then finally, quite -- [indiscernible] tonnes of Ukrainian sugar entered the European market at the same time. The European market is oversupplied, and there's been a price reaction, which we knew would come. We didn't think it was going to go as far as it did, but it's the best part of EUR 300 per tonne has come off the price. And that's what's driving these price declines. It happened quite late in the year. It went further and faster than we thought it was going to do both in the U.K. market also and in the Spanish. Do you want to take the price/mix question?

Yes, Yes. Look, I mean, as you know, we didn't have any price movements in the second half of this year. So the last price was in the first half of this year. We do have some mix benefits in the second half. Some of it's just kind of like what I'm going to call, good old fashion mix, right? We just happen to sell some categories which are slightly higher priced categories than other categories. And then some of it's to do with -- we have some higher priced items like the collaborations and some of the license activity as well. So we're -- we'd expect the latter trend to extend into next year, Sreedhar. It's not material. It's like it's kind of a subtle part of the proposition, if you will. And -- but it's still kind of -- there's some adds to the like-for-likes.

Got you. If I may just follow up. Is that part of your confidence in Primark margins for the year ahead, kind of mix and stable gross margins?

Not especially, not especially. That's not really factoring any confidence on that. I think it's just more that there's a bit more stability, I would say. I mean I know there's less stability in freight I'm sure we can come and about that. But apart from that, there's a bit more stability, I would say, in most of the gross margin components. And as we flagged a number of times, we are investing in our operating costs and -- so -- but it's less, I would say -- it's less about the mix point.

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

I've got three. The first one is obviously on Primark margins. You're reasonably positive on the external factors into next year, that you're investing in strategic initiatives to drive growth. Would you still see your kind of underlying store contribution margin increasing next year? And where are the strategic investments going? The second one is on the like-for-like, they weren't great, but margins were reasonably strong. Why didn't you invest more to get growth in the half? Was it just that you don't know any volumes out there in the elasticity would be great? And then the final one was, I think store openings were a little bit weak at 13, I think, in the half. You've got to open, I think, about 8 or just under 8 to get to your 530 target by FY '26. Do you see a big step-up from just around 20 per year to around 40 per year over the next couple of years?

On the store one, we'll get close enough to that 530. We have to -- we know that we deserve -- that you deserve a bit more clarity on where we go after the 530. But we think that we're going to be there or thereabouts.

I think we've always got to be careful about the pace of non-like-for-like. I think we're pretty confident about the medium-term outlook for white space and non-like-for-like but we're not going to rush to open the store because of that target. So sometimes you're just going to have slightly, slightly less active periods. But the underlying opportunity and the underlying pace of activity is still strong.

Going to your question about where the investments are going? It's in a number of different places. It's in product ranges, collections, there's good momentum in collaborations. We want to see more, there's good growth in licensing. We're putting more cost into the digital engagement, the website, the store checker. Paid marketing is working very well for us the Click & Collect rollout. There's more refits going on now as we catch up on the 3 years we put in them during COVID that comes along with some incremental non-capitalizable costs. And then we're investing in the brand in 2 markets, in particular, Germany and the United States. Germany to improve brand perceptions, and in the states to improve brand awareness. Those are the big ones, there some other IT non-capitalizable costs in there too.

And I think that's where we think the store contribution on the lines or contribution comes from where. Just to your final point in terms of investing more, I just don't see -- I mean, we kind of -- we always reflect back and so on. I don't think we would have done anything differently. I mean our price point position is strong. It is very good and I think just fundamentally, the period was sudden and we don't -- we typically think a lot of our shoppers just didn't shop during that period of time. And I'm not sure us investing would have made a huge amount of difference there.

I'm sorry. I was just going to follow up on the store margin piece. So you think that the underlying store margin will continue to expand next year, but you're choosing to invest some of that into other activities?

Correct. Yes. No I just wanted to reassure you that despite the -- rather despite the fact we haven't reinvested -- sorry, invested back into increasing sales, our stock levels are good. We're in good shape going into autumn/winter.

The next question comes from the line of Gary Martin from Davy.

Just a few questions from my side. Just maybe starting with Primark in the U.S.A. I mean it's a good performance just due to the uplift from the store rollout. But I guess, can we get a bit more insight into the trajectory of profitability in that region and how it's kind of pairing up relative to the overall group average? And I know you mentioned that you saw profitability was increasing into next year. It would just be good to get a bit more color on that one? And then just secondly, just on the Ingredients piece. I mean, it sounds like it was obviously a very solid year for FY '24, but I guess maybe into FY '25, what's the expectations there? Is there an expectation of continued improvement. I guess just as a further follow on, are you expecting any more inorganic investment in that particular area of ABF?

So no new news on Primark USA. We're pleased with how the year has gone. We're pleased with the trading of the new stores. Particularly, we think we've got a good brand campaign running. Thrilled by the opening of the second store in Florida, where we had 1,500 people queuing up. We're on a good track. Now with only the number of stores we've got, the -- I'm just repeating old news, the overhead absorption is less good than it is in more mature markets, but we're growing into our overhead at some pace. The Ingredients, year '25, we expect to see further improvement. We expect to see volumes continue to recover in Specialty Ingredients, perhaps particularly first half on first half. And we'll let you know about inorganic investment. It's always been part of the toolkit for Specialty Ingredients, and it remains so, but we've got nothing more to say on at the moment.

That's really helpful. If I could just actually have one additional question just on the Primark side. I just thought was interesting on the statement. And in your prepared remarks, you mentioned your expansion into or your agreement with the GCC just into expansion to the Gulf. I mean can we actually get a bit more information around that and some of the moving parts and the opportunities out there?

Yes. Okay. The partnership is with a well-established player in the Gulf called Alshaya. And we're excited by the potential in the Gulf. It's a big market. It's a market, quite frankly, we relate to. We've been courted by players in the Gulf for years and years. But we'll see how we get on, which will be the answer I would give to entry into any new markets. We'll get on with finding the right sites and getting trading through Alshaya. I think it's evidence that the geographic rollout hasn't come to an end. It doesn't end in the U.S. There are plenty of new markets for us to go into. This is the next one.

I mean -- and just one thing to add, Gary, I mean it's a franchise arrangement. So it is our first franchise structure. So that's kind of obviously going to be interesting. That's a pretty well strong partner in the Middle East as you probably are aware, we think the returns are attractive. And it obviously just gives us another interesting angle from an operating model perspective.

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

I just got three quick ones, please, if that's okay. So on the Primark margin outlook, I just wondered if you can give a little bit more color on the external factors looking out to next year, how you're seeing those, particularly freight, I guess, versus FX in the back half? Also, George, maybe you just want to give a little bit more color on Illovo, how you're seeing the prospects for that business for -- particularly for the medium-term prospects for growth for Illovo? And then anything more, I guess, on the U.S. Grocery would be helpful. How you're seeing the pricing there evolving and demand for Mazola and the other big U.S. grocery brands?

Okay, let me pass over to Eoin on the margin outlook for Primark and then I'll come back and do all over on the other two. Yes.

Yes. I mean, I think I'm just trying to think kind of just broadly on external factors. So let me deal with freight firstly. Obviously freight volatility is concerned for everyone. I mean I think we, when we switch to going around the Cape, rather than going through the Red Sea it seems a bit stabilized, but it just does demonstrate that there's still a little bit of inherent volatility, which we're seeing, particularly as people kind of ramp up for peak. So we're navigating through that. We don't think it -- we think we can kind of navigate -- I mean I don't want to use the expression, but we think we can navigate through it next year in such a way that it's not a material impact on performance next year versus this year. So -- but it's still higher than what it should be if you will. Because I mean, fundamentally, the costs to go around to Cape of Good Hope is higher. And also, I think, as you say, as you know, this is a little bit of inherent volatility goes in. But it's not something -- it's something we're kind of we're taking on and we're managing. The FX -- actually, we got to say -- I mean, actually, it's really -- we get a tailwind into the first half of next year. And even though in the second half of next year, just the way our hedging has gone, and obviously, theoretically you should get a benefit actually into the first half of FY '26, but that's sort of it. That's where the way the FX is working. And then just on the -- I mean, the other external factors just quickly just to kind of cover most of them. It does feel like raw material prices and sourcing has kind of stabilized certainly come kind of the volatility over the last number of years. And Bangladesh for now is calmer and it will cause a little bit of delay in terms of stock, but we don't think it's going to have a material impact on sales. So I think they're all the external factors.

Illovo, then we remain excited by the prospect of Illovo. I think there are sort of three sources or three reasons for that. The first one is we -- these markets are still growing, both in terms of population and also in terms of consumption per head. We have -- so that's the kind of market situation, it is sort of unique. The second one is that we think there's a lot of self-help available to us. We can increase field yields. We know how to do that. We can improve factory performance. We think there's good profit potential and simply doing what we currently do better, will reduce costs, will increase availability of sugar. And then the third one is that there are -- yes, there are any number of potential growth projects beyond what we currently do that we will judiciously look at. The first one is the expansion of sugar production in Tanzania, which will be done by sort of June next year. But we are -- we have opportunities to produce more possible alcohol in Africa. We have the potential to produce more electricity to sell. There are other coproducts too. So there's just lots of different things that we can do good places to deploy capital, but we'll do that carefully in a sustainable and sensible way. The bit in the short run, I think I'm probably most excited by is the self-help part of getting the factories working better and getting cane growing better than it has been for a couple of years. And then U.S. Grocery. U.S. Grocery is really good. Now we said, Eoin said at the half year that we're expecting some of the Mazola margins to come off. And we're seeing that. Now we're seeing them a bit less and a bit later. And I think the competitive positioning that Mazola brand is stronger than ever be. So I would expect margins to remain higher in the future than perhaps they would to be a couple of years ago. And then the bakery ingredients, our portfolio in the Grocery business is really very good. We've recovered entirely from the COVID effect. We've seen a good increase in domestic yeast consumption as people continue to bake more bread at home that was a habit they got into in the states like everywhere else during COVID. Going across to Twinings, we're absolutely on a roll in Twinings a very high single-digit growth rate. Brand advertising, which absolutely works, product development, which is doing really well, and trade collaboration very strong as well. So Twinings is really, really good. And then finally, World Foods, which has been growing in double digits in that country albeit from a low base. But we've seen another year of really good growth there in Patak's and Blue Dragon, and we expect more of the same in '25. I think that covers most of the U.S. grocery businesses.

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

I've got two very quick questions and then one slightly longer question, if that's all right, please. The first one was just in terms of your comments on the space outlook, and I appreciate it can be slightly higher one year or slightly lower another. But just thinking about it from a modeling perspective, I think consensus is a few for about 5% base contribution to Primark in fiscal '25. Would it be sensible to understand your comments that, that should probably nudge down a little bit? That's my first one.

Yes. No, just quickly doing that one, I nudge it down a little, not much.

It's not much. It's thereabouts really to be honest with you, Georgina. Yes.

Second one, just the clarification on freight. I appreciate that costs are kind of higher than those normal levels still, but for fiscal '25, are you actually expecting your average freight cost to be higher than fiscal '24? And how far through the year, are you like locked in for, like how confident are you and how much sort of visibility have you got on that?

Yes, we are expecting freight to be higher across next year than this year. And I don't really want to sort of go into sort of contractual sort of arrangements that we have, but suffice to say that we feel pretty confident with our current contractual arrangements for most of next financial year.

And then just finally, just sort of appreciating your comments around, if I understood correctly that you sort of attributing some of those U.K. market share losses to kind of channel mix effect due to weather effectively, which makes sense. But obviously, Click & Collect has been in place in a number of stores for some time now. That rollout is being extended and in fact doesn't seem to have helped over that period, therefore, it is that just because it's kind of still to be sort of fully rolled out? Or actually, does it -- does the experience in H2 perhaps make you reconsider whether Click & Collect is the right strategy? Just interested to hear your thoughts there, please.

No. Nothing about the second half has made us reconsider the Click & Collect strategy. We know exactly what it's there to do essentially, it's there to drive people to our stores, to be profitable in its own right, but also to drive profit into the attachment basket. It's -- but if people don't want to come to the high street because it's raining and they don't -- and they're feeling a bit miserable about summer clothes then whether it's Click & Collect or more traditional retailing, it's not going to happen. So -- but we're delighted we got it. It will be a good part of the year before the year '25, before it's rolled out into all the U.K. stores. So into this year, yes, we've expanded Click & Collect into a number of stores, but we're probably only 1/3 of the way through the rollout through the rest of the U.K.

Yes, it's still not -- it's just still not kind of up to scale, Georgina, to have the effect that we wanted to have. It's just not like -- remember, they were trial, it wasn't even the full categories as well. And it was only in London, in the Northeast as well -- Northwest, sorry. And the rollout is only just really just be kicking in now.

I don't see anything. Yes. So just to reassure you, we didn't see any significant movement in the metrics that we watch for Click & Collect. So nothing to effect the profitability of it going forward. So it remains a good thing, the right thing to do, but it's suffers from weather, too.

That's really clear. Just a follow-up, if I may then. Am I right in understanding though that you are attributing those market share losses to not having like a broader online offer because of kind of the weather? Or do you think there is some other dynamic going on in the U.K. market at the moment, but perhaps adding competitive pressure a little bit?

I think the market for clothes in general is being soft. I don't think the U.K. consumers recovered he's and her confidence quite as quickly, as we might have thought they're going to a few months ago. Weather then is the big bit, it drives the decision to economize on summer clothing, and it drives people online. I have every confidence that both will improve as we get into '25.

There's no more kind of dynamic that we think like our price position is still very strong. We're not seeing sort of switching from -- to other players of any significance. It appears during that period of time, a lot of our shoppers just didn't shop.

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

Apologies, I've got three as well. Thanks for the puts and takes on the full year '25 gross margin for Primark. Is it fair to interpret from your comments that the gross margin should actually be up a bit, and it's that which should mitigate the step-up in investments that you're talking about? And that's the first one. Second one, on Grocery. Is the outlook that your absolute profits in million should increase? Or is the growth in sales being that you expecting mitigated by or offset by margin weakness? And then thirdly, I appreciate it's just the trading update, but any sort of comments on where the CapEx is rising in the year ahead would be helpful as well.

Okay. Look, in reverse order for the fun of it, CapEx will rise a little, but not significantly. And the split between Primark CapEx and food will remain approximately the same as we expect. Grocery absolute profits, we expect to be off a little next year, largely on the back of Mazola profitability reducing from the very high levels that we enjoyed this year. And then I think that bread will step backwards a little too. We had a contract to supply bread with one of our competitors, couldn't supply after a fire. They're back up and running. So we lose a bit of volume there. And then as Kingsmill, Hunter's and Tesco's the -- we've lost Kingsmill business and Tesco is on top of that. So we expect bakery to step backwards a bit. ACH to step backwards a little. Good growth in the rest of the grocery portfolio globally.

And like what that really means for kind of numbers were in our case like you say, as you see we think we'll actually do a little bit better this year, largely because the kind of correction in U.S. sales has gone -- hasn't really happened until later in the year, if you know what I mean, but we wouldn't expect people to really change the numbers in the next year that much. And then the question on the gross margins. A little bit better next year. As were saying, and then we're going to get the continued benefit of growth in terms of leverage, which also a combination of those two things offset the investment and operating cost.

[Operator Instructions] And the next question comes from the line of Adam Cochrane from Deutsche Bank.

Apologies, only two questions from me. Firstly, when you talk about the -- I think the success of your marketing spend both in Germany and the U.S. Could you just give us any flavor around how you think that's going? What it's doing? And is there any scope for that marketing to be introduced in other markets if it proves to be more successful than you hope to help Primark sales in other areas? And secondly, I know you talked -- that you're happy with where your price point is. But as you are seeing the mix impact, the movement to the licensing products and things, is there any risk that the consumer is -- it's feeling like the more expensive products in Primark? So it doesn't feel a good value for money. So on average, as they look at the store rather than in absolute terms, maybe the pricing still is attractive?

Yes. Look, two very good questions. It's too early for the marketing analysts to have come back to us and said, this is what the marketing campaigns have done. Anecdotally, Germany is good. The German performance this year has been one of our highlights. And is that connected to the marketing or to what extent has it been, we don't have a read on that. And we'll have something to say in November. And in the States, it's only kicked off in the last couple of weeks. So again, much too early. But marketing is always going to be targeted. I mean we know -- we started in these two markets because we know we have a brand reputation issue in Germany, and we're trying to address it through marketing. And we know we've got a brand saliency issue in the states, and that's what the marketing there is for. We won't simply advertise for the sake of it or hopefully can drive sales forever. They're always going to be targeted. That's that question. Product -- perception of price, we're very alert to this. Paul in particular, is very alive to it. We don't think that we've got an issue. But every time any of us go into a store, we do look to see what the first -- what the windows tell us about who the store is for and what the layout tells us. We know that the more that we succeed in selling high price points, a higher price point, great value products under retail or the edit or license, the more that we have to call out the fantastic fashion on the entry-level price points and we do. In anticipation, it was a good note that the Deutsche put out the other day. 85% of all our units are still under GBP 10. So the reality is that we're not seeing -- we're very pleased with the performance of the higher price points and the expansion of the price architecture, but we remain still fundamentally a great value retailer for everyone. But trust me, having seen other retailers lose their way in this very -- on this very issue, we are all over. But we don't think that, that has been what's driven the like-for-like -- the disappointing like-for-likes in the U.K. it's been weather.

As there are no further questions, I would now like to hand back to George Weston for any closing remarks.

Thank you. It is -- in some ways, I expected you to give us both a harder time on Sugar. It's very disappointing the profit is going where it's going. It's going to go for a short period of time. And then we both got a lot confidence that it's going to bounce back again. Primark have really had a good year for all that the U.K. has been wet and disappointing through the summer. Europe really good. The performance in Northern Europe, very reassuring. The rollout in the states are really good. That continuation of good margins, which remind us all that there was a disbelief that we could ever get back to the sorts of margins. And here we are about to enter the second year of those sort of normal historic margins. So all good there. Lots of investments confidence, I think, in the balance sheet with the continuation of the buyback. And we feel great going into the next year. And it put it slightly more crudely, we're pissed off about what's happened in Sugar, but it remains both in Africa and also in Europe, a good business over a 5-year period. We've made a lot of money and a lot of cash out of European sugar. Now we've got a bad year and then we'll be back on track again. Let me stop there, and we'll talk to you in November. We'll talk to you in November. Thank you.

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