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

Welcome to the Associated British Foods Trading Update Conference Call, hosted by George Weston, Group Chief Executive Officer; and Joana Edwards, Group Chief Financial Officer. [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, and thank you for joining this call. This morning, we published a trading update for the fourth quarter of ABF's 2026 financial year. If I were to characterize it, it was a quarter where trading was okay, but one which we also took some important strategic steps in both Primark and in our food businesses. And as a result, there's a lot to cover in this morning's update, and I'll take a few minutes now, if I may, to give you color. While the financial year hasn't quite finished, but we now have a good sense of how the results will land. And starting with Primark, our sales in the fourth quarter are expected to be up 2% and up 2% for the full year in 2026. In a consumer environment that remains challenging in most of our markets, Primark like-for-like sales are expected to be down 3% in quarter 4 and down 2.6% for the full year. trends in quarter 4 were very similar to the previous 3 quarters this year. So we remain encouraged by good results in both the U.K. market and the women's wear category across all markets. This, as we've said in the past, is where we -- is the area we've unapologetically prioritized both our focus and our investments. We've sharpened prices. We improved our product offer. We've increased investments in marketing and strengthen our digital capabilities. We are seeing the benefits and there's more to come. I'm particularly pleased with the recent launch of our iconic value campaign. This is a strategic investment. It is an important investment to introduce new lower prices across hundreds of items across all markets and categories. Primark is redefining value and not just through price but also in our continuous improvements in quality styles and the store experience. It's early days, but the initial volume reaction has been encouraging. Our good execution of new stores contributed around 5 percentage points to sales growth in quarter 4 and is expected to contribute around 4% for the full year. We're very pleased with the initial success of our franchise stores in the Middle East, our first stores in Bahrain and Qatar due to open shortly. And we're now expecting -- we've now expanded our franchise agreement to include Saudi Arabia. We've also signed a franchise agreement with a new partner to enter the large and important Mexican market in due course. In terms of profit, we continue to expect Primark to deliver an adjusted operating profit of approximately 10% for the 2026 financial year. Looking ahead, we're excited to announce that Primark will offer U.K. home delivery in the future. Importantly, this will be a profitable channel for growth that complements, doesn't replace it complements our store. Let me say a bit more about why we want to move with the home delivery and why now, particularly given our strong resistance to doing so in the past. We've always known that there's an incremental customer segment, the Primark who reached by operating home delivery. Historically, though, there just wasn't a way for us to make money from providing that service. We've monitor what we watch the online channel closely. And over time, we've seen the economics of home delivery market evolve, including the introduction of returns policies and increased fees. As a result, there is now an opportunity to drive profitable incremental growth through this channel. The other thing that's changed over time is that we've built strong digital capabilities in Primark, which maybe 2 or 3 years ago, really didn't exist including in digital marketing and click and collect. This means we're well positioned to maximize the potential of home deliveries and to use it to accelerate our digital flywheel, which complements our store model. That's why now is the right thing to take this step. And having made that decision, we've acquired, and you have seen the announcement this morning, a highly automated depot in Sheffield in giving us the capability to offer U.K. term delivery and it gives us the capacity to continue to grow Click & Collect. It's a good deal for us. We're not setting a timetable for home delivery today, and we're not providing any financial data at this stage. But this really is an attractive growth opportunity. Moving to our food businesses. Grocery sales grew in the quarter. Overall trading in timing, though, was below our expectations. The extended hot weather in the U.K. and Europe impacted hot-tea consumption, particularly black tea. In Ovaltine, there was a phased impact from a change to a new distribution model in Thailand, which will save us money from next year, but gives us an impact this year. As a result of all these short-term impacts, we now expect grocery adjusted operating profit to be slightly below our previous expectation for the full year in 2026. We are very pleased that we've completed the Hovis acquisition and that we're well underway with the integration we expect. This transaction delivers significant synergies in both production and distribution. This gives us -- this will give us the ability to create a sustainably profitable bakeries business supported by investment in marketing and innovation. You will see Hovis is already back on there. In 2027, we expect grocery adjusted operating profit to be slightly ahead 2026. While Hovis is significantly dilutive to grocery profit next year, it's expected to be accretive to profit in subsequent years. And so to ingredients, both our yeast and bakery ingredients businesses and our specialty ingredients portfolio delivered good growth in quarter 4. Our full year expectation for 2026 is therefore unchanged. And for 2027, overall ingredients profit is expected to be broadly in line with this year due to start-up costs in our new yeast facility in India. In agriculture, adjusted operating profit this year is expected to be in line with our previous expectations. We've taken a decision to focus on our higher growth segments and higher-margin segments, and to exist and to exit our U.K. compound feed business. We've already invested 2 of our 10 mills during 2026, and we expect to finalize the future of the remaining mills by the end of 2027. These are now within our disclosed and closed operations. We expect agricultural profits to grow next year. In sugar, the adjusted operating profit loss in 2026 is expected to be towards the higher end of our previous guidance range of minus GBP 25 million to minus GBP 60 million. Since July, we've increased the level of onerous contract provisions taken this year main reason. One, we now expect a small U.K. crop, and this has a negative impact on overhead recoveries next year. And then secondly, natural gas costs, as you all know, have risen significantly, and this increases production costs. We remain cautious on the outlook for sugar for 2027. We expect the operating loss to be below this year or will be worse than this year and to be in the range of minus GBP 70 million to minus GBP 170 million. But there are a number of factors that could materially influence the outcome within this range, either positively or next. In particular, significantly higher gas costs lasting for longer, production levels in Africa, which may well be affected by El Nino weather impacts and then currency movements notably in the Malawian Kwacha. But looking ahead, we've seen a recent turn in European sugar prices, and there are 2 reasons why this trend should continue. First, European sugar production, which is starting now is estimated to be significantly lower this year than for the previous few years. Back in June, as I said last time, we went together. The European Commission estimated the -- European tribute consumption would drop nearly 15% in this year's harvest, partly due to lower plaza acreage. And since then, the very hot and dry summer that's affected us has affected the many other European sugar producers and Northern Europe, in particular, has significantly reduced yield estimates. It's too early to put a hard number on that because the harvest is only just starting. But I think the German number was to be down 24%. A more significant deficit in European action this year for all these effects, our overhead recoveries will allow the industry to work through the surplus inventories in the system much more quickly than we previously feared. And then secondly, so in summary, supply and demand has altered significantly in the European market and the depth and the stock overhang will be worked through the system quicker. Secondly, and also supportive world sugar prices have risen sharply in the last only 6 weeks. And if they remain at these levels, it's less likely the cheap imports will fill the gap in the domestic supply. In 2027, though, we won't see the benefit of these higher European prices in our results, especially not in the U.K. because we've already -- we are already a long way through this year's customer contracting round. However, higher prices should benefit future years. We continue to look very seriously at our cost base, both in Spain and also in the U.K. And in the U.K., this includes the announced closure of Cantley, which is 1 of our 4 production sites in the U.K. This will enable us to meet existing customer demand more efficiently and will support sustainable profitability over the long term. And then finally -- I'm sorry, I've gone on for quite a long time that there's been a lot to say. Finally, an update on the demerger of Primark from ABF's food businesses. We are making good progress towards being demerged already, and we expect the demerger to take place in December 2027. This gives us time to build the systems and processes necessary to operate both businesses on a stand-alone business. And this is important. It also gives us time to explain more about the businesses about our businesses, particularly in food to the market. We're not going to rush that. As well as separate Capital Market Days, we will run a series of smaller investor education events for the different components of our food businesses, many of which I believe are less well understood. So thank you for your patience. And with that, let me hand over to you to questions.

[Operator Instructions] And your first question today comes from the line of Clive Black from Shore Capital Markets.

Just 2 for me, if I may. First of all, can you just give a little bit of color how the balance sheet may have looked at the year-end? And then secondly, a little bit of a left field question, but just in terms of ingredients, which is quite a profitable business. What is the magnitude of the investment in India? And in that respect, how is that influencing the FY '27 outlook?

Okay. Let me hand over to ask Joana to answer the first question, and then I'll come back on the cost of the yeast factory in India.

Thank you for the question. I always like those questions on balance sheet. We haven't yet closed the books. We still got a little bit of trading to do in Primark. But as you've seen, we've done quite a lot of investment in this last few months including the investments that we've made today on the Sheffield warehouse. What I can say at this point in time is that we will be around the leverage levels that just above the 1x. So priority from a capital allocation has always been investment, and that's what we've been doing this last quarter.

Can I just come back on that, Joana. Just George mentioned restructuring in agriculture. And also, clearly, the Cantley closure in the U.K. Should in that respect, we be anticipating elevated impairment or exceptional items or restructuring costs in the balance sheet in November?

Yes, there will be some the same way as there will be below the line, you'll see also that started the transaction costs. We have not got all of those into FY '26 bearing in mind that some of the announcements on restructuring have just taken in place. But yes, we will be seeing some of those reflected in the balance sheet. There's also, as we mentioned, the mills, [ ADM ] restructuring. So there is -- there will be a few puts and takes in the below the line.

Clive, but just -- just as a reminder, looking forward into '27, there will be a fairly significant working capital unwind as we sell the feed mills. So that will help next year's balance sheet and even in some of the restructuring charges hit this year. On to ingredients, well, yeast and bakery ingredients investments in India, about GBP 100 million between 2 different plants. The bigger number is the yeast plant in [indiscernible] in the north of India and then also the BI factory, which is now up and running. The yeast factory is commissioning. There are commissioning costs to these plants, I think we're getting on with it in the yeast factory, in particular. And -- but the -- as we build volumes for the yeast plant, we will have some stranded overhead until we've built that and up quite a big facility.

Underlying, George, are you anticipating that the ingredients business, excluding India will make good profit progress then?

Yes. It's early days, and the specialty ingredients businesses are feeling particularly well placed at the moment. Yeast is quite a big energy user. So we worry about some of the input costs in that part of the business.

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

Three for me, please, if that's alright. I just wondered if you could -- in the light of this acquisition then of the Sheffield DC from who given an idea of sort of Primark expectations for the coming year and whether you still need additional click and collect warehouse capability in addition to what has been provided on the home delivery side. And then again, on Primark, what sort of reaction are you seeing to marketing investments? Should we expect more of that impact to come through in the coming year in terms of sort of brand halo and so on. And then finally, just on the sugar side. I wonder if you can just give an update on what -- on energy costs, what you're assuming you're going to be paying for gas and so on compared to what you have been paying in the last quarter or second half of this year?

Yes. So the Sheffield DC will I remove the need to do anything on Click and Collect warehouse investment. Part of the business case to give Click & Collect all the growth space capability that it needs. We expect that Click & Collect will move into that Sheffield site first and then followed on with home delivery thereafter. Marketing investment returns. Well, in the U.K. in particular, we think we've got the marketing mix about right. we are driving incremental sales. Now there's a lot more beyond simply above the line advertising going on. But the brand metrics in particular, have benefited from the advertising and ailing that we specifically advertised are selling well. We've seen a good reaction in Spain to the first full marketing -- integrated marketing campaign that gives us confidence. And in France, too, where we've started the marketing journey, again, good reaction to that. Sugar energy costs, we are forecasting somewhere over a pound of firm into next year. Now we do have though some uncovered energy needs. We won't know exactly how much until we know how much crop we've got to process. But when I last look, which was yesterday, spot gas prices were about GBP 1.90. So there is exposure there. I see where we'll just have to see whether that goes.

And we're taking some of that exposure into the onerous contracts this year as we flagged as well.

I mean we had the 2 big gas saving projects. So firstly, Cantley closure accounting will save us on gas usage. And then we have, I think, it's the U.K.'s largest onshore renewable -- sorry, energy reduction program carbon reduction program, which is stem drying up [indiscernible] which will turn on with the new campaign. So we are taking 2 big steps to reduce energy use, but we will remain large energy users despite that gas bridge uses despite those 2 steps.

The benefit of Cantley will be in FY '28 rather than this campaign likely we'll see on the side of the cap.

Your next question today comes from the line of Jon Cox from Kepler.

A couple of questions from my side. Just in terms of Primark and you're looking ahead for FY 2027, you talked about aiming for like-for-like growth. Just any initial thoughts I think the -- today's figures in Europe looked a bit worse than people are anticipating maybe hoping for some improvement there. Just wondering how long do you think Europe will take? You've said, obviously, clearly, the focus is on the U.K., but I thought some of the practices in the U.K. were already being rolled into Europe. And clearly, Q4 was worse than it was in Q3. Second question, just on the home delivery, you talked about profitable growth but just bear in mind what you said historically about the cost of delivery and your average ticket size, do you think the profitability of that business will be below your high street business? And then the last question, just on sugar, you seem to indicate in the last statement, all options are open with regards to that sugar business. The losses seem pretty dramatic now in the next financial year. Is that really because we decided, look, the shape of the sugar business, you want to maintain, and it's really getting to grips with the various issues. And really, just on the size of that loss, you're talking about for FY '27, you seem to allude it's a U.K. crop, which is the issue, like the bad weather, well, the hot weather means that your production is low. And as a result, that's the main drainer you think in FY '27 or is it part of that Europe -- sorry, part of the African business, you mentioned El Nino and Malawi and currency movements. If you could talk a little bit more about that because the headline size of that loss looks pretty dramatic.

Yes. Why don't I handle sugar first and then you do Primark like-for-likes. So yes, the increase in onerous contracts into this year is a U.K. issue, and this is a combination of our current best assessment of the likely size of the U.K. crop and therefore, the likely overhead recoveries. And then it also has some very realistic/miserable assumptions about the cost of processing that sugar. We -- looking into next year, we have taken -- within that range, we have taken some account of possible volume impacts from El Nino, but we just don't know. You learn about El Nino really after the event. But I think it would be irresponsible of us not to include the likelihood of some weather effects. In the past, El Nino has often led to early and heavy rainfall in Tanzania and then -- but dry weather in South Africa. The hot weather, sorry, Spanish beat is irrigated. So there isn't a crop risk in Spain. Obviously, you mentioned the U.K. one. The -- I think the issues in European sugar really are limited to 2, energy prices, gas prices in the U.K. and then sugar prices across all Europe. I think there is, I think at this end, we're feeling more optimistic about the direction of sugar prices than we have for 2 or 3 years. If the Europe, we think, will be -- well, we're fairly sure there will be a significant deficit of sugar production in Europe. And significantly, because it will be significant I think Europe will get through the stock overhang quickly, as I said before. So looking forward into 2027, I think there are reasons for optimism both in pricing and then you wonder how long we can all sustain, [indiscernible] gas prices. So I think at some point that those will come down. Africa, lots of reasons for optimism looking through weather events. So in Tanzania, the factory is -- the new factory is well on the way to commissioning. Malawi, good. Zambia, good. There's been a problem on pricing too much imported to coming into South Africa, which has affected pricing in South Africa and [indiscernible] Those they remain well-placed businesses. So Africa, yes, weather threat and Europe, I think, looking rather better in the medium term.

Like-for-like, so for Primark, we have been saying that the focus is driving that top line growth. But as we noted in the statement, and you picked up the 4.3% down in Continental Europe or the like-for-like for the quarter. We do note that the consumer confidence remains weak. So thinking that we go from that into positive like-for-like is quite a leap. And we are very worried as well that but we need to manage stock and inventory. So yes, we are continuing to focus on gaining market share, but we are aware that the consumer sentiment is still not quite turn and certainly, that's impacting us in quite a few of our markets. You had asked about some of stability as well and whether that was [indiscernible] Do you want to take that one?

Yes. I mean the -- what we think we can do is, firstly, offset some of the cost of home delivery. So the market really has come towards us in terms of pricing for delivery to people's homes. The depot gives us -- will give us a good pack and dispatch base cost base. And then the trick is to make sure that the bulk of the home delivery sales are incremental, not substitutional. And we think that we've got the tools to help us along to achieving that.

Okay. If I could just come back to the like-for-likes for FY '27 in Primark. So we shouldn't expect necessarily to go positive in Europe in the current year, but maybe the U.K. will be slightly better. So we'd get somewhere close to flat like-for-likes. Is that the plan?

Yes. I think that we will hopefully see the like-for-like starting to improve, but we need to put that in the context of the consumer. It would be unwise to do so, as I said particularly in terms of stock management.

Just in terms of all the initiatives you're doing and you're talking about the new range and the volumes look good and just something for us to hold on to in terms of an improvement at Primark.

Yes. And we should continue to see the improvement. And George talked about the iconic value campaign, which started very well and which we've rolled out in all the markets. So we should be seeing an improvement. But it's going to take time and as I said, we do have to take a view on what the market will do and market performance overall.

Your next question today comes from the line of Frederic Wild from Jefferies.

So my first is on just about -- they're both really about the external environment, I'm afraid. The first is on whether you are seeing any extra cost pressures and merge within Primark from the macro environment, whether they be from and whether there are any offsets to that from, say, sourcing of availability in Asia and how that impacted your FY '27 margin guidance for Primark? And the second question is there's obviously been a lot of changes in the last few months in terms of de minimis exemptions ending in Europe. I just wanted to see whether you've seen any change in the competitive landscape emerging from that.

Primark costs, lots of puts and takes, really. So dollar helps us. Freight is sort of okay. We've had some material cost -- so fabric cost increases, but we don't really see those until the second half. So taken all together, there is some cost inflation in the Primark supply chain, but not much.

And the team is continuing to work on driving efficiencies because there is also inflation in salaries, et cetera, but compensated by working through the cost base.

We're still -- I have to say this is not answering your question on de minimis. But we're still grinding our teeth rather that everyone else can get steps in place on de minimis to remove the tax advantage apart from the U.K. We are -- I haven't had any conversations with the Primark team where they've suggested that they're seeing a change in consumer behavior because of the de minimis exemption. I don't know, do you want [indiscernible]

I mean it comes out in the media, and I think that there's been quite a lot of talk about it, but it's going to take a bit of time for customers to go like, "Oh, I wanted to use Shino, it's going to cost me a lot of money, so I'm going to go to Primark instead. So it's hopefully something that will filter through.

And could I just -- sorry, ask a quick follow-up. Does base your comments on cost, does that imply maybe some more cost headwinds in FY '28 emerging from this?

Well, I think we just have to see where these energy costs go. It's too early to talk about 28% on fabric costs.

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

A couple of questions on Primark, if I can. When you're thinking about your flat EBIT margin for FY '27. And you sort of mentioned briefly about the limited like-for-like maybe expectations within gross margin, you're doing some investments into pricing, but you've got some benefits from FX, et cetera. what are the moving parts to get to a sort of flat EBIT margin if you don't have much in the way of like-for-like, you've probably got some cost inflation just naturally coming through. is it you've got a large cost efficiency plan. Can you just explain how you get to a sort of flat EBIT margin. It seems quite a good performance on a flattish like-for-like. And then secondly...

Yes, sorry, you said you had to. Yes.

So in terms of the volume uplift that we're seeing from the iconic value ranges, are you also seeing a halo effect that customers coming in to buy those products are also buying some of your other products as well? Or is there primarily just coming in to buy the iconic value ranges? Is there a chance that you have to broaden that investment to more of your categories? And then final one is really quickly, on the online home delivery, I'm assuming the answer is going to be no. But does it have any change in your view of the long-term store expansion potential in Europe, given that you can access some of those customers or a different channel potentially as you roll out into Europe in the future?

Yes, good question. The flat EBIT margin has several parts within it. We've talked about the cost base where as I said, there's not -- sorry, the kind of commodity cost and labor cost, there's not much net news in there. Some of the cost-saving initiatives are quite large, and we'll start to see them coming through. But the one that we haven't really mentioned is except tangentially, the markdown percentage this year will be higher than last year. And going into next year, we -- well, we've taken steps to address that. And that's a -- and if we successfully do so is we think we will, that will contribute to margin maintenance as well. So offsetting, I think the cost savings there. We've got significant investments in price going on. And I suspect -- I think that, that leads me to the second point about [ halo. ] We know that we're doing this because we know that our reputation for unbeatable value was framed, and we're putting that right at pace. We are a volume retailer, and we, therefore, the right thing to do to invest in price wherever there's an opportunity to do that in order to drive volume. The volume uplift in the promoted prices have been good, and we're watching the overall brand reputation around value for money closely. But it's important to repeat what I said in my opening statement, that this repositioning or this kind of shopping of value goes beyond simply price and also goes into range and fabric and fit in a number of categories, starting with womenswear.The quality of what we're selling, the durability, the fashionability, the sizing accuracy has all taken a step forward, and we'll continue to do so. So it's more than just price. It's also the other components of value. Home delivery across Europe. No. The -- we expect -- we intend that the introduction of home delivery in the U.K. will actually drive same-store sales as we attract more people into the brand. And we would expect if and when we get on to home delivery in Europe, the same thing to happen. It's -- one of the things that we are interested in Europe is getting the brand better known outside areas where there's a store. So No, I don't think it does affect long-term store expansion plans.