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

Good morning, and thank you for standing by. Welcome to the Associated British Foods Trading Update Conference Call hosted by George Weston, CEO; and Joana Edwards, CFO. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to George Weston. Please go ahead.

Good morning, everyone. Thank you for joining this call. As you'll probably know, we've put back this reporting date, this trading update having not had it for a couple of years. We've done that primarily because it's -- we can give you more certainty about sugar at this date. We -- just before I get sort of into the meat of what I'm going to be saying, we've picked up that there's a bit of uncertainty about the -- why we've chosen the date for Primark reporting that we've done. I just wanted to head that one off straight away. The first thing is, if you go back to 2023, this trading update was earlier in June, and we didn't have the June figures at that point for Primark. We do now have the June figures, so we can report on them. And so rather than give you a trading update to a period 6 weeks ago, we thought it would be more helpful to give you something that was bang up to date. We haven't done that because June was a better month, and we're trying to flatter our figures. But because, as I say, our desire to give you up-to-date figures. If we take June out of the U.K. figures, though we were minus 1.1%, with June in, we're minus 0.5, that's U.K. across the rest of our markets, it makes no difference through that period. I hope that what that kind of covers off that issue. It was a resilient quarter of Primark progress, we think, has been solid as has grocery and ingredients. The businesses -- those businesses all remain on track. There's no change to the guidance, and I'll share some more color on all those sectors in a moment. But I do want to start about sugar. As I say, this is the reason for putting this reporting date back in is to give you a bit more certainty on sugar. In Europe, we've got visibility of the processing campaign. It finishes In spring. So by now, we know our volumes, the contract and selling prices are known and our production and beet costs are known. 3 months ago, we couldn't have said that. The profitability of next year's sugar campaign, which begins in September when we start processing beet, this is in Europe, can be difficult to assess at this stage. So we have to be just a little bit careful of being too certain about next year in Europe. The contracting round is underway. It typically runs for a few more -- the sales contracting, it runs for a few more months. So we don't have certainty about pricing going into next year. It's difficult to assess production costs for next year, particularly hard at the moment given the volatility in gas prices as a result of the Middle Eastern conflict. And I'll come back with some sensitivities around that. This time of year in Africa, our annual campaign has only just begun in the southern hemisphere, so things are upside down. It typically runs across until December. It straddles there for our year-end. And you get movement in profitability between the 2 years, depending on issues like when the campaign starts, how well it starts, how well it finishes. And the -- as I say, phasing of production and sales in idea can be affected by weather and by operational issues at the factory. We don't have full visibility of the African number until closer to the financial year-end. We have in Africa this year, 2 additional uncertainties. This is the year for '26. The first one is the pace of the ramp-up of the new Tanzanian sugar mill. So far, so good, but early days. And then secondly, it's quite an important issue about whether there's going to be a devaluation of the Malawian currency in this financial year or whether it falls into next financial year. And there's quite a big swing in profitability in sugar this year, depending on the timing of that devaluation. We're providing a range of outcomes for the operating loss in sugar because of these uncertainties. It goes from GBP 25 million to GBP 60 million. GBP 60 million take into account -- well, sorry, let me go through some of the uncertainties. First, gas prices into next year, this year, in Europe, we paid about 75p a therm for gas. It obviously spiked up to 160. It's now selling at around about 100. If it doesn't come down further, then we will be recognizing more onerous contracts in this year's number. If it comes down, we will be recognizing less. To give you an idea then into next year of the effect of gas costs, it's between GBP 600,000 and GBP 700,000 profit either up or down per penny of therm. So we're sitting at GBP 104. If it went to GBP 114, that would be down GBP 6 million or GBP 7 million. If it went down to GBP 94. It would be up GBP 6 million or GBP 7 million. That is -- obviously has an effect on next year's profit. It also has an effect on these onerous contracts into this year's figures. If there's a devaluation in the Malawian kwacha this year, the negative profit impact will be around GBP 25 million. That is included in that GBP 60 million bottom end number. And then thirdly, if the initial ramp-up of the new build in Tanzania is slower, this could impact profit again by kind of single-digit numbers of millions and you need to be aware of that. Looking ahead into '27, our expectation is there will be a further deterioration in the sugar result from that GBP 60 million potential operating loss this year. And that number assumes gas prices remain at the current year for the entirety of next year. Average sugar prices in Europe are not yet sufficiently known. Energy fuel fertilizer costs, not really known. Production levels in Africa, not really known in the split between '26 and '27, not really known. There is one other effect that we haven't seen having an impact yet, but we have seen in previous years, which is El Nino weather impacts, which typically reduce sugar production in Tanzania because it gets too wet and Southern Africa, South Africa because it gets too dry. As I say, we're not seeing that yet. But in the past, it's had a reasonably significant impact on sugar production and therefore, profitability. On to European sugar prices, -- we expect that there will be a significant reduction in European sugar prices -- sugar production, sorry, in the harvest that will start in about September. So the European sugar data, which was published by the commission following its June management committee meeting, estimated a production drop of nearly 15% in this year's harvest. That's a combination of acreage, which will be well known and yield, which is estimated at this stage. They've essentially said, look, last year had great yield, let's just assume that the yield returns to its long-term average, which is 5% down on last year's yield. Now this hot weather has had some impact on plant health, both in this country and across Northern Europe. So we think that, that yield reduction is possible, but the crop has a long way to run. So big reduction, we think, in sugar production. That's great in a couple of ways. Firstly, in the supply-demand balance, there is a stock overhang that will mitigate against bigger price changes because of that on the back of production reducing or sugar output reducing. But I think in the longer run, it should give all of us confidence that there has been a supply side response and quite a big one to prices going down. I think there's been some skepticism about whether we'd ever see that, and we have. So that's good. The performance of the Sugar business continues to be one of our big priorities. We continue to look very seriously at how to lower our cost base going forward, particularly, but not just in Europe. Let's look then at the quarter performance in our other businesses. In Primark, total sales were up 3% in the context of challenging consumer environments in most of our markets. That's okay. We've continued to make good progress to strengthen our consumer customer proposition everywhere. As you know, the focus so far has largely been on the U.K. market and on womenswear. So in the U.K., sales grew 1%. Like-for-likes were broadly flat in the quarter. We continue to gain market share and do so quite strongly. Outbreak of the Iran conflict had a negative impact on consumer sentiment. April and May weather was up against really good trading weather the year before. And -- so not surprisingly, April and May were a bit soft. I've actually given you the number in the U.K. And then trading bounced back very, very well in June. We are seeing the benefit of our sharper focus on price and from the improved product offer, as I say, starting in womenswear. We're seeing the launch of some exciting new ranges. Our increased marketing is working well. We're really starting to see the impact of the digital investment, including Click & Collect, which has had a strong period. Like-for-like sales in Europe remained weak. We know what the challenges are, and we're beginning to take the required actions. It's still early days. We are seeing some green shoots from certain initiatives. We're investing more in our marketing and digital capabilities. We're more targeted on our core customer base. Other campaigns are still to come in Europe this summer. But we've seen the best of -- the first of an integrated marketing campaign, including a full advertising campaign in Spain. We've seen other good work, too. So overall, I'm really encouraged by what's already been achieved to improve Primark's customer proposition. I'm excited about what else we have to come over the coming weeks. New store openings contributed 5 percentage points to sales growth in quarter 3. The 10 new stores opened in the quarter included our first store in Manhattan, which has got off to a very, very strong start. And it's -- so the starting couple of weeks were great and it's been strong since. We expect the halo effect to be very positive for the brand in the U.S. generally and in New York State and Greater New York in particular. The franchise stores in the Middle East have traded exceptionally well despite the circumstances in that part of the world. We're now up to 4 stores in the region. We've got a good pipeline. There's no change to our guidance for the '26 financial year for Primark. It's a consumer -- a challenging consumer environment, and we still expect Primark to deliver an adjusted operating profit margin for the full year of approximately 10%. This expectation includes increased investment in initiatives to drive like-for-like sales and also increased investment in our technology capabilities. Food businesses then. In grocery, sales were up 1% with good growth across a number of our brands and businesses, including Twinings. U.K. oils remains a drag on growth this year. That is not new news. That's what we've been seeing for a while. We welcome the recent decision by the U.K. Competition and Markets Authority to approve our acquisition of Hovis. The combination of production and distribution activities of all bakeries of Hovis, and we expect to drive significant cost synergies that we can then use to invest in product innovation and the creation of sustainably profitable bakeries business. And we're working on next steps towards the completion of that acquisition. Ingredients, quarter 3 was broadly as expected, with sales up 3%. Growth came from both our yeast and our bakery ingredients business and from our specialty ingredients portfolio. We continue to support future growth with small acquisitions in the period. Then agriculture, sales were down as we'd expected. Following a customer loss earlier this year in our U.K. compound feed business, which has always been a low-margin business, we're adjusting our cost base. We sold one of our 9 compound feed mills during the period as a part of the process of adjusting that cost base. So across the group, we continue to take targeted actions and make investments to drive performance. Several long-term -- long-running projects have either recently completed or are nearing completion. The biggest one, of course, is that Tanzanian factory. And these investments underpin our confidence in the long-term growth prospects for the group. And with that, let me hand over to you for questions.

[Operator Instructions] And your first question today comes from the line of Monique Pollard from Citi.

Two, if I can, please. The first was just on the ingredient sales. They were quite a bit better in the third quarter, as you mentioned, George, versus the first half. So just trying to understand whether the profit could also come in better, just given the profit guidance for the year is unchanged in that segment? The second question I had was just on -- if I look at Primark, the like-for-likes maybe have come in slightly better than maybe people were expecting. Just wondering if the like-for-likes are coming in better or worse than what you had planned and budgeted. And whether given that and given your reiteration of the 10% EBIT margin target, whether that's an indication that you feel that your price proposition is roughly in the right place, please.

Yes. Thank you. Two good questions. Ingredient sales, they've been more or less in line with where we had expected. There are a lot of different geographies and different sectors across our ingredients, different companies across the ingredients. The profit expectation, we've reiterated with a degree of, I think, relative certainty of where we're going to end up now. So I wouldn't write the profits up this year. In the longer run, we think we're well placed in the ingredients sectors for future growth. But this year, I think the profit guidance is pretty well placed. Primark like-for-likes, we're certainly pleased with the U.K. We're pleased with womenswear. We're pleased with the beginnings of the repositioning of kind of value -- or the resetting of value expectations. Major finds is important, reflagging price points in stores, that's done well. Some of the new products, particularly performance, really, really good. Primark at its best I think with startlingly lower prices for good relevant product in a growing sector. That's Primark at its best. I think if I were being honest, I would say that we're a little bit more -- we're more disappointed that Europe hasn't improved faster because we are working at price perception. We have started the full integrated marketing work in some of the markets. We remain convinced it's going to come, but it's maybe just a bit slower than we would have hoped. But U.K. good.

And Europe consumer environment is quite subdued as well. So yes, we are in a context which is difficult, too. Yes.

I think when we last spoke, we were very concerned about the consumer response in the U.K. to the situation to the war in Iran. And we are, I think, now a little bit more relaxed about that. We haven't, for example, seen a collapse in holiday bookings. And beach holidays drive sales in the back half of the financial year in Primark. So we're worried specifically about that. But I think we're okay.

Our next question today comes from the line of Frederick Wild from Jefferies.

So the first one is all about just decomposing what's happening in trading right now. I don't suppose you could give us an update on how you see overall consumer...

Frederick, sorry, we're having a bit of trouble understanding your question, sorry.

Just hearing it. Could you speak up a little.

Is this any better?

Yes, that's overcompensated. Yes, no doubt that we can hear you.

I will talk very softly. Yes. So the first question is just about understanding the current dynamics in the market and your trading. I suppose if you could give us your sense of underlying consumer health outside of things like weather swings and calendar shifts and all that sort of thing. And I guess beyond that, how trading in July has proceeded and whether we should think about maybe a bit -- a few more products going into sale. And the second question is, I know you talked previously about really expecting to start to see some of the impact of the actions you're taking in Primark coming through in either the Spring/Summer '27 collection or even into autumn/winter '27. Is that still the right way to think about the cadence of improvement in Primark like-for-like?

We've been managing stock levels very tightly and through spring/summer because well, we just have to in this environment. I think we saw in the first half a higher markdown percentage than we would have seen in prior years. And I think you can assume in the second half, we'll have something similar. We think it gives us an opportunity into next year, the high levels of markdowns we would have seen throughout this year. As to trading, I don't want to get into a week-for-week commentary. We've got you up to date to the end of June, and we'll see how things go from through July, August. I wasn't -- the second question, what are we doing in -- for autumn/winter. If -- come back if I haven't answered the question, but the product improvement will continue and broaden beyond womenswear, which is what I've been saying for a while is where we started. We haven't done -- and similarly, the focus on price perception will broaden beyond womenswear, too. So for example, we haven't done a major find outside womenswear yet. And I think we will begin to see that sort of activity either combined with womenswear or taking its turn with womenswear. So relentless focus on price perception, relentless focus on value. And I think a relentless search for just fantastic product like the performance ranges. Anything you want to add to that, Joana?

No. But as you said, Frederick, the focus into next spring will be improvement and George mentioned it, it's unashamedly being womenswear, it will expand. Kids is massive for us, but we need to get that moving in the same way as we have womenswear. So that's something to be expected going into spring/summer next year and for that matter, autumn/winter 2027, as you said, men's likewise. And the investment behind it, which I don't know if it was where your question was going to, will continue because the focus is on driving that like-for-like growth and continuing that improvement that we are definitely seeing now in the U.K., and we want to get moving into Europe.

Your next question today comes from the line of Richard Chamberlain from RBC.

A couple for me on Primark, please. Just in the statement, you make reference to sharpening the focus on the key target customer base in Europe ex U.K. And I just wonder what you mean by that comment? And then second, in the U.S., I wondered if you can just give a bit more color on trading performance by region and maybe update as well, if that's okay, on number of openings for the rest of this year and next year, please?

Okay. So both in the U.K. and in Europe, we have some tremendously loyal customers, customers that spend the bulk of their clothing purchases with us. And we're refocusing down on them, what they need, what they expect of us. And that, I think, is where some of our U.K. performance is coming from, reengagement with our core customer base of loyalists. Now across Europe, we've got the same characteristics. We've just got fewer of them. And so -- but we think that what will inspire our loyalists in Europe is what will inspire should be, could be loyalists in Europe as well. So people who share many of the same characteristics with our loyalists who are nonetheless not yet shopping with us to anything like the same extent. They may already be coming into our shops. They're just not buying into the whole portfolio, the whole offer. U.S. trading has been -- has bounced around a bit. It is -- let's say, New York has got off to -- or Manhattan has got off to an absolute flyer, and that's great. Elsewhere in the states where the brand is still much less well known, so we opened a store in Memphis, one in Nashville. They have been, quite frankly, disappointing, but we shouldn't be too surprised by that. We have a good customer franchise with particularly Hispanic populations in the U.S., starting in New York, but Florida and Texas coming through. Those populations are really struggling. Their consumer expenditure is well down. And even where we are well known to them, there, their shopping -- their purchasing power is just really squeezed. So that, I think, is driving some of the softness in like-for-like sales where we are known. And yes, some of the -- so some of the store openings is good, where we're opening into brand knowledge, where we're not, it's been not so strong. I can't remember, do we have a number for new store openings.

We actually, Herald Square, Manhattan, that you just mentioned, George, of our 43rd store. We're hoping to have 47 by the end of this year. So definitely a year of strong store opening, but benefiting from that halo effect that the marketing in New York should be bringing. I think we're now up to 6 stores around that region, which is very encouraging. We have seen an uplift in trading linked to the tax refunds in March and April. But it is volatile, and it does talk to what George just mentioned, which is our reaches into that population that is still quite impacted by the general economic context. Is that helpful, Richard.

Yes, that's very helpful.

We will now go to the next question, and the question comes from the line of Warwick Okines from BNP Paribas.

Two questions, please. The first is a bit of a multipart one. I just wanted to pick up on your comments about markdown in Primark, George. You said there might be an opportunity for margin recovery in 2027. My question is, could you actually decide to put that into price reality rather than price perception? In other words, sort of swap markdown this year for lower prices next year. What other puts and takes are there like raw material pressure. And should we think of you having an ambition to improve operating margins in Primark next year? And then my second, I think, shorter question, although it's probably a complicated answer, is how are you thinking about the prospects and possibilities for home delivery in your online channel?

Right. Look, this is a trading update rather than a kind of competitive or strategy session. The -- to your first question, as we've been saying for a long, long time, the net margin is something that we arrive at either having traded well or badly throughout the year. We don't target it. We're comfortable with where it is at the moment. It's been significantly higher other than COVID times. It's rarely been much, much lower. There are some following wins next year. That markdown is an opportunity. Currency is a following wind. Having said that, raw material costs are higher. Freight is under control, but you never quite know where that's going to go next. And on what we're going to do with price, well, I'm not going to flag anything about price other than to say we know what our key customer wants us to be. And we've delivered on those expectations in the first half much better than we have the previous few years. And that's where we -- we've rediscovered who we are. That is -- and then I don't have any update on home delivery to share. I think we've said that on -- we'd love to have Click and Collect across Continental Europe. It's going to take longer because the -- whereas in the U.K., we could repurpose the customer service desks. We never built them in the first place in Europe, and we need a supply chain solution in Continental Europe as well. As you know, we've been looking for better supply chain solutions for Click & Collect in the U.K. as well.

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

Thanks for the geography lesson on the Sugar business. In terms of -- I think there's not much I can add to what you've already said. I just wanted to clarify, when you're talking about the EBIT in '26 coming in between 25 and -- minus GBP 25 million and minus GBP 60 million, you said that FY '27 would be worse than the minus GBP 60 million. Is that minus GBP 60 million or worse in '27, irrespective of what you do in '26 within that range, it will be worse than GBP 60 million loss.

Yes. That's our central assumption. The biggest part of it is an assumption that whereas we were paying 75p a therm for gas next year, we'll be paying 105p. Now that's just -- we just picked that number because it's what it is today. I think there's also a possibility -- well, it depends on where the South -- sorry, the African sugar profitability ends up this year. The flip side of this year's under or overperformance will be in next year. So that we don't know at the moment. We don't know about the impact of El Nino, but we fear it. And although the pricing round in Europe has started with -- and again, I have to be careful that I don't give away commercially sensitive information. We are really encouraged by that reduction in sugar output that we think is going to be a reality into next year and the year after.

If I may, just the last one, which George already mentioned before is the starting point on the GBP 60 million is also because even if the Malawian kwacha doesn't devalue this year, which would bring us, if it does not, then it would be closer to the GBP 25 million. The assumption is it will next year. So you already got GBP 25 million in there. And for that matter, the onerous contracts, which is the other big piece into the GBP 60 million, even if we don't materialize some of that, they will materialize next year that the own onerous contracts is the shift between the 2 years. So the 2 biggest pieces that takes us from the GBP 25 million loss to the GBP 60 million loss are going to happen. It's just more of a timing. I would like to point out that those are not cash items into this year, both of those. Hopefully, that's helpful.

Great. And then on Primark, 2 bits. You talked increasingly about womenswear and the U.K. Would you be able to give an idea of the outperformance of womenswear versus the overall U.K. performance that you've seen. And then secondly, in terms of the -- on geography, across Europe, you called out Spain briefly there. Are you seeing big divergences in the European performance between countries? And where you've taken some of these integrated marketing actions, et cetera, are you seeing a sales uplift on those actions that you're taking?

Yes, good question. I'm not quite sure how much I'm allowed to give away on U.K. Womenswear performance, but it is good. So if we're at minus 0.5 for the -- minus 0.1, it's kind of mid-single-digit positives in the U.K. Yes, there is a divergence in performance across Europe. Iberia is better than France and Italy, which have been 2 difficult markets. East Europe, Eastern Europe remains good. As I say, the Middle East isn't in the like-for-likes, but is really good. And Northern Europe, we've seen this before when consumers get nervous, shopping kind of grinds to a bit of a halt. So Germany, Austria, Netherlands, soft.

Yes, I mean womenswear is definitely very strong in the U.K. Actually, womenswear positive overall for the quarter for Primark. And as George said before, unashamedly so it is our course.

And with regards to when you've done some actions in some of the European markets that you obviously haven't done in all of them, are you seeing a positive reaction to the actions that you're taking?

Yes, we are. Yes, we are. As I said earlier, would I like to have seen it go further? Yes. But no, it's certainly having a positive impact.

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

I've got 2, please. The first one was just if you could give any color in terms of the full price sales mix at Primark in the quarter and how that's changed year-on-year or perhaps the full price level of like-for-like growth. I guess where I'm coming at it from is just thinking about, you mentioned the markdown opportunity for recovery into next year, George. But I'm just wondering actually if it's going to be quite difficult to get back into positive like-for-like territory given that there will be kind of a large proportion of markdown sales that you're comping against? And just how we should be thinking about that and how you're thinking about that in your buy-ins, please? And then my second question was just a very simple one. In terms of the current OpEx base of Primark, is it possible to just give us a kind of high-level rule of thumb, I guess, in terms of kind of what percentage is fixed and what percentage is variable with sales at the moment, please?

So you're making us work hard. We don't track full price sales. So I've got no data set to share with you. The markdowns, yes, 2% greater expenditure on it. I think we can -- look, if your question is, are we only getting good sales performance because of markdown, the answer is no. Most of the womenswear outperformance is not markdown.

And they were -- sorry, they were good to make sure we manage the inventory levels, but they were at much lower price. So yes, higher volumes but lower price. So the impact on the actual like-for-like is more marginal than the actual performance in some of the big categories, which is womenswear. Don't forget, we did a lot of markdown on seasonal items, particularly in January, and those needed to go at the price that is right. OpEx versus -- shall I take that one. OpEx fixed versus variable. I think this is going to be an interesting part of going into the demerger where we'll -- we will be giving more detail around the P&L. Of course, we have got staff in stores and then we will have all the cost of running stores. But we have not given the breakdown of those 2. The majority of the costs are fixed as it would be in a retail business, hence, the importance of getting that leverage with the like-for-likes. Sorry, I'm not trying to avoid the question, Georgina, but I think we will be coming back to it in the next few months.

No, that's very helpful, and I look forward to that extra detail. And maybe just in terms of thinking about the buy-ins for next year in terms of buy-ins for positive like-for-like next year. Is that -- should that be our assumption?

Yes. I mean I think -- sorry, Georgina, just a little bit of color on that. I think we've got to be more cautious around heavyweight outerwear. The autumn/winter season seems to be starting later and later. And it's a bit of a mug's game to be providing people with coats 70% off in January.

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

A couple of them, please. I think you referred to Iberia and Iberia clearly has been a strong market flow for you for a while. But is it -- do you put that down to market or something Primark is doing now that's different to what you're doing in France and Italy.

Sorry, which...

Iberia, yes. Exactly. And I think then on France, you have in the past flagged some strong competitors in the value segment. Is that still a main driver of your challenge in the market? That's the first question. And secondly, on Primark margin, I mean, George, you referred to markdown opportunity. I think this year, we're down 160, 170 basis points, much of which we are assuming to be markdowns as you've signaled in the past. But you were previously also signaling that headroom was to be used for driving like-for-like growth when you head into next year rather than seeing it as a margin recovery opportunity. Is that not necessarily the same case anymore?

So the -- really, the only differences in the competitor set Spain versus France are that in Spain, we've had lefties to compete with for quite a long time. And in France, we've got more action stores and -- who are just in little bits of the clothing sector and then more Kiabi. And it's Kiabi who I think have upped their game really significantly in the last few years. And I think we understand Kiabi and their capabilities much better than we did previously. But those, I think, are the differences. I think the Spanish consumer is in a better place than the French consumer. And I suspect that that's the biggest driver of the differential performances across those 2 markets. Markdowns -- look, I don't -- I'm just reluctant to flag too much about how we're going to trade next year. So yes, you've seen a greater emphasis on price perception and demand creation and price investment this year on top of the markdowns. You're going to see a lot more of the same next year.

Sreedhar, on the markdowns, I think that we talked about this a little bit before. Yes, that tailwind going into next year. George mentioned it the same as we've got FX. The principle still remains that we will continue to invest to drive that top line growth. So the different initiatives that we continue to do, which George just mentioned, will continue. We have that as one of the levers that we can use to support that investment as well.

Your next question today comes from the line of Matt Clements from Barclays.

A quick question on the U.S., if that's okay. So brand awareness has been a long-standing issue. How certain are you that new space is the answer? Are you thinking about changes to your location strategy at all? Or are there less capital-intense levers you can use in the U.S. to raise brand awareness, maybe targeted marketing or even if it's new space, maybe franchising?

So I mean, the great thing about the U.S. market is you can -- about marketing in the U.S. is you can target it really to individuals. It's amazing how much detail is available -- targetable detail is available on the bulk of consumers in the U.S. We use that reality across the U.S. grocery business as we use it in Primark too. So advertising or marketing can be very, very efficient in the U.S. We think that the -- we invested heavily in brand awareness around the opening of the Manhattan store. And we have -- and I think that's been absolutely the right thing to do because we have a strong cluster of stores within range of people who are now walking to Penn Station past our store, they can get to our stores in many of the other suburbs of New York. I think some of the learnings that from store openings in good locations, but locations where we have -- where there's no reason for us to be known, I think we are going to pull back on that to some extent in the future. We're also having a good hard look at the offer. In places, it's really, really attractive for our core customer. In other places, we're very much a kind of me-too player. So I think we can sharpen the offer up too. Franchising in the states, no, thanks.

Your next question today comes from the line of Darren Shirley from Shore Capital.

A couple of questions on the food side, if you don't mind. First of all, on the grocery, you're talking positively about sort of momentum across a number of brands. But U.S. oil, which has been a headwind for some time now around margin and it looks more like sales at the moment. How is that trending that sort of headwind from U.S. oil? How do you anticipate entering 2027? And is this going to be something that's hanging around for a while?

Yes. Okay. The -- we are a bit miserable about retail oil sales in the States. And I think there are 2 or 3 things in play. The first one is that our predominant consumer again is -- and our heavy use consumer is that Hispanic population in the Smile regions who are under financial pressure, who are under pressure from ICE and are feeling a bit miserable. If you are not entertaining with food, then you tend to reuse oil one more time. So typically, they would have been -- that population will be using oil maybe 3 times before they throw it out. We think it's gone to 4 in many cases. We don't think that, that's going to change into '27. We think also that we've got a very good joint venture in Stratus, which supplies a lot of food service oil. We are undoubtedly seeing the consequences of GLP-1s on food service demand, particularly for fried food. So again, oils, lovely businesses, very strongly branded in Mazola case, but with significant headwinds.

But as you pointed out, Darren, there are some of the other brands in the grocery segment that are doing well. And where we're seeing some of the headwinds from GLP-1, we're also seeing tailwinds within that segment, which is the beauty of having so many different businesses. So Twinings we've highlighted. George, you talked about Fleischmann.

Well, I talked about at the half year. That home baking trend continues. So good volume and value sales increase in home baking. The reality, though, is that the oils business is very big. And so negative like-for-like sales -- volume sales in that sector flow through to the bottom line in quite a big way.

But a sense from what you say, and this isn't sort of an issue that you're going to annualize and then stabilize, it's likely to be a feature for some time, a headwind for some time. Am I reading that correct.

Yes, we haven't seen a slowdown in the market decline in oils yet. It's been running -- in the old days, you would have said oil would -- oil volumes kind of tracked population and population growth. And now we're running at -- we'll be running this year at kind of mid-single-digit volume declines in the category.

Okay. And then on a more positive on the Hovis, getting that through. I've been looking at that potential merger with someone for 25 years. I mean, how do you see the time line of that? I mean I understand you haven't got a hold of it yet, but what do you think the length of the integration process will be? And when do you think you'll get that sort of a very positive inflection point from a profit perspective in 12, 18 months out?

Look, we've done a lot of planning around the integration process. A year, inside a year, now we haven't been inside a Hovis bakery for -- well, we haven't been inside of Hovis bakery. So we're not quite sure what we're getting. So I have to just leave a little bit of uncertainty about that integration program because there may be things that take us more time. There could be some that we can go quicker with. But we have a target date for when we can put -- where we can process one order for all the business and put it on one truck. And that is -- that's in the first half of next year. .

We're hoping to give you some more detail.

Yes. So we didn't really want to divert too much attention today onto a business we haven't bought yet. But there will be -- we will share more if and when we complete.

We will now take our final question for today. And the final question comes from the line of Anubhav Malhotra from Panmure Liberum.

Just 2 from me. The pound has weakened a lot recently. And given the ongoing changes in the U.K. politics, there's risk for further deterioration. Maybe if you could give us where you stand currently on FX hedging for Primark into next year? And at what sort of rates have you hedged compared to this year? And then secondly, on the Click & Collect performance in the U.K., it's been more than a year since you extended the rollout to all U.K. stores. Are you happy with the performance of the stores that you did in the second wave of completing the rollout. And has that performance been tracking in line with what you had been seeing in the testing phase.

Yes. Let me answer the second one and then give Joana the first. So Click & Collect is going well. And we measure it in a number of ways. The sales through that channel, sales, which we believe are new sales or new customers through that channel and then attachment rate, size of basket, which drives economics. Against all those measures, Click-and-Collect is outperforming our business case. And it's still growing just as -- when did the final store get it? .

May.

May. So it's going quickly, and we're really pleased with this. Pound levels.

Well, you are right to talk about our hedging strategy because we are already hedging for next year. And as we sit here, I don't think we tend to give you our average hedging rate, but we still see FX as a favorable effect for next year. Yes, we'll see what happens to the pound with all the uncertainty and turmoil on U.K. politics, but we still see that as we stand here with the level of hedging as a positive.

That was our final question for today. George, would you like to say any final words?

Just very briefly, we do think that momentum is building in Primark with lots left to do, important new leaders are coming into the business over the next few months that will accelerate both the commercial progress that's already started. It will also reinforce the capability to undertake this -- the demerger work, which is a lot of work. I don't think -- the demerger work so far is not distracting us from other -- from the day job at Primark, and that's quite important, but it is a busy period. What else? Sugar, we've got another -- we think we've got another difficult year coming our way. But there's just a lot of uncertainty around the cost base. I take quite a lot of comfort from these commission production estimates that we've seen recently, they bode well for the future. Anything else that I've left out.

So I think we have started doing this Q3 trading update again. And hopefully, it's not a teaching, but the more in-depth level of granularity around sugar, particularly, but which will extend to the other businesses is something that is beneficial and certainly as we go into the demerger.

I think those of us who continue to cover food after the demerger, this trading update is going to be a really important one for sugar. Okay. Thank you. Thank you all for joining this call, and see you in a few months' time.

Have a good summer.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.