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Earnings Transcript for ASBFF - Q2 Fiscal Year 2018

Executives: George Weston - CEO & Executive Director John Bason - Finance Director & Executive Director
Analysts: Adam Cochrane - Citigroup Warwick Okines - Deutsche Bank Andreas Inderst - Macquarie Research Richard Chamberlain - RBC Capital Markets Andrew Hughes - UBS Investment Bank Georgina Johanan - JPMorgan Chase & Co. Warren Ackerman - Societe Generale Jeremy Fialko - Redburn Arthur Reeves - Societe Generale
George Weston: So good morning, and thank you for coming to this meeting, where we review the interim results for the 24 weeks ended the 3rd of March 2018. The financial highlights of the period are, these group revenue is up 3% to £7.4 billion; adjusted operating profit up 1% to £648 million; adjusted profit before tax also up 1% to £628 million; adjusted earnings per share up 3% to 61.3p; the dividend will be going up also by 3% to 11.7p per share; and it's been another period of heavy gross investments, £672 million; and we end the period with a net cash of £123 million. So profit growth very much in line with our expectations. Primark traded very strongly in the U.K. through the period and the selling space expansion, which is such an important part of Primark's journey, is well on track. In AB Sugar, in our Sugar businesses, further good progress to reduce costs, absolutely vital to our success in the future. And once again, we've taken tens of millions of pounds out of our cost base across all our Sugar businesses. We produced more sugar, both in Africa and also in Europe, and we've seen lower European prices. I'll come back to all three of those later on. I don't want to miss out the other parts of the businesses. Grocery, profits are up 9%; Ingredients up 11%; and Agriculture also up 9%. So robust performance for the group and results we're pleased with. John?
John Bason: Thank you very much, George. So group revenue of £7.4 billion was an increase of 2% on last year, and adjusted operating profit at £648 million was 1% down. With well over half of the group's revenues and operating profit generated outside the U.K., last year's weakness of sterling had a very favorable effect on the translation of our overseas results. This half year, sterling is slightly strengthened against our major trading currencies, other than the euro, and this led to a loss on translation in these results of some £11 million. The contribution from acquisitions and that's mainly a Acetum this year and Specialty Blending last year was £4 million. Our adjusted profit measure reflects the underlying performance of the business. You'll notice an additional item this year and that's £15 million for acquired inventory fair value adjustments. IFRS 3 requires a step-up in the valuation of inventories at the time of an acquisition from historical cost to fair value. The £15 million here relates to Acetum, where the number is particularly high, given the process of aging the balsamic vinegar in barrels over a number of years. We'll see an adjustment in our income statement for probably the next 2-or-so years, but that will be declining as the step-up is amortized. This year's unadjusted or statutory profit was £618 million, 3% down on last year. Just a reminder for you, last year's profit on the sale of businesses of £255 million that comprised the disposal of our U.S. herbs and spices business and also, the sale of the South China sugarcane business. Net interest expense reduced from £25 million to £18 million, and that primarily reflected a movement in interest rates and that's particularly on the borrowings in currencies that we've expected to weaken significantly against sterling over time, so that's particularly currencies in Southern Africa, and they've gone for us. Profit before tax declined from £867 million to £603 million, but increased on an adjusted basis by 1% to £628 million. The tax slide shows the makeup of the tax charge. The reported charge was much higher last year because of the tax on the gain on disposal of businesses. The underlying charge or the effective tax rate has fallen from 22.7% to 21.3%. The main driver of this is the benefit on the tax paid on our U.S. earnings, following the reduction in the federal corporate tax rate from the beginning of this calendar year. I estimate the benefit of that to be about 100 basis points for the current financial year, and we're, obviously, reflecting that at the half year. The rates also benefited from a change in the mix of profits by tax jurisdiction. Adjusted earnings per share increased by 3% to 61.3p. On an unadjusted basis, they declined 24% to 60.9p, but of course, that reflects, again, last year, the profit on disposal of businesses. The Board has declared an interim dividend of 11.7p per share and that's an increase of 3% on last year. Turning to the balance sheet. If we look at the equity shareholders' funds line, that's increased significantly, again, this year. So this year, the increase is £1 billion to £8.8 billion. The main drivers of this are twofold. So it's profit from operations over the year, but it's also, you'll notice, and it's this lined up right at the bottom here of £553 million improvement in the financial position of the group's defined benefit pension schemes from a net deficit this time last year to a net surplus of £350 million. So let me cover that net pension asset first. Much of this improvement was seen in the second half of last year. The U.K. defined benefit scheme accounts for some 90% of the group's pension liabilities. The latest triennial valuation was completed as of April 2017, and that showed higher investment returns than expected and also experienced gains, not leased more exits from the scheme than anticipated, and they were the main drivers. Not surprisingly, there was no requirement to agree a recovery plan with the trustees, which is obviously quite unusual for major schemes like ours. The further improvement this half year follows the decline in bond yields since the year-end. Going on to intangibles, the increase of £160 million is primarily the result of the intangibles and goodwill arising on the Acetum acquisition in October, less the amortization in the period. The increase in our fixed assets reflect the continued investment by the group, over half of which was in Primark and that runs ahead of depreciation. The growth in working capital is a result of the production of much more sugar this year, mainly in Europe, and George is going to make reference to this later on, but also, higher Primark inventories with deliveries accelerated ahead of the Chinese New Year, and that's the timing of Chinese New Year. You know people say, Chinese New Year comes every year, but it's the timing of it that affected us this. So the Primark inventory is expected to unwind in the second half, but I do expect higher sugar stocks this year-end than last year-end, which will reflect some rebuilding following the virtual depletion of stocks in the EU last year. Net cash of £123 million is broadly in line with the cash that we had on the balance sheet last half year, but of course, it's down from the £673 million of cash that we had on the balance sheet at the year-end. The half year cash flow, which I'll show in a moment, will explain the decline, but a reminder, half of it, of course, is the acquisition of Acetum. So let's come on to the cash flow. I think the thing to notice here is that in 2018, we've returned to our normal seasonal cash out flow that we normally see in the first half. And a reminder for you all, that's driven by the sugar campaign in the Northern Hemisphere. I emphasized last year that the cash inflow that we had was actually unusual in that year. I've explained the drivers of the working capital outflow already. Capital expenditure, you'll notice, was marginally down for Primark. So just to anticipate any questions, it merely reflects the phasing of spend, and it does not reflect any slowdown in our capital commitment for that business. The £195 million outflow on the acquisition line is virtually all Acetum. So including the debt assumed, the total consideration for that business was £282 million, and there is another £2 million, which is deferred. So now coming onto the segmental analysis. So revenue is ahead in Grocery, Agriculture and Primark and the decline in Ingredients is driven by translation. So Ingredients sales - because actually - virtually, all of our Ingredients sales are outside of the U.K., there were actually 5% ahead at constant exchange rates. The decline in Sugar is the result of the reduction in EU sugar prices. Profit growth by Grocery, Agriculture, Ingredients and Retail was offset by the expected decline in sugar. On margin, I would like to highlight that the Retail decline was only 20 basis points, so 10.0% to 9.8%. And there, the transaction effects on the - of the U.S. dollar on purchases being an awful lot more of that were virtually offset by better buying by the Primark team. George will outline our expectation that this half year, I think, really, will be seem to be a turning point for Primark's margin with improvement now in the margin expected in the second half. Return on capital employed, let's spend a moment on that. For the group, that's a strong number, 20.3% for continuing businesses. But I think if you look down the return on capital employed, these are annualized numbers by the way. You will see that, I think, they're strong for each of the businesses. And I think really is a reflection of over years the capital discipline that we've acquired - that's we've applied to our investment. I'd also say that sugar, even in the face of a decline in EU sugar prices will still give a return on capital employed of 11.9%. So by geography. Profit in the U.K. increased. Profit at British Sugar was broadly in line with last year and their increased sugar production offset the price decline. Primark's U.K. profit was ahead. And there, I think, it really was the remarkable trading performance of Primark in the U.K. and that more than offset a drag from lower margin, which arose from the currency effect. The profit decline in Europe and Africa is driven by the reduced contribution from sugar in Spain on the back of the lower EU prices. Profit in the Americas was ahead at constant currency. So the decline here was the result of, and just as a reminder, the U.S. dollar move on an average basis from $1.25 to the pound in 2017 to $1.35 this year. The profit improvement in Asia Pacific was driven by Ovaltine in Thailand, and a much improved performance at George Weston Foods in Australia. With that point, I'll hand back to George.
George Weston: Thank you, John. Starting then, with Sugar, once again, we've seen very good operational improvement. The performance improvement program has now been running for five years, has taken a great deal of money out of the cost base. And looking into the future, we don't see any sign of those cost reductions - that rate of cost reduction reducing. Illovo profit was in line with last year. Behind that statement, I think, there is, we have growing underlying optimism about that business, and I'll spend a little bit of time on lllovo in just a moment. China, where we sold the cane factories last year, we still have two beet factories in the Northwest. They had their best ever year, and I'll go into a little bit of detail on that too. And then, of course, the significantly lower EU sugar prices, and I'll spend a little bit of time on that as well. Sugar operations. The cost improvement is still coming out of agricultural development, they're still coming out of supply chain, they're still coming out of process, and we are still finding ways of adding value to co-product revenues. We had a very good period of revenues from co-products coming out of South Africa in the period. British Sugar, as a consequence of heavy levels of investment over many, many years and the cost-reduction program is now safely the lowest-cost producer in the EU and by some way. In a world, where we are connected to world prices now post regime reform that's not enough, but it is comforting, therefore, that we believe, and LMC International is a consultant who looks at these things that we are one of the very most competitive sugar manufacturers in the world, in British Sugar. Illovo production was up, it's over 1.7 million tonnes of sugar on the back of favorable weather and improved crop management in a number of the Illovo markets. So if I can just take a little bit of your time to have a slightly deeper dive on the Illovo business than I have had before, and it's - I do so because Illovo is now over half of our sugar business, so very important. So sugar in the African diet, it's part of basic nutrition. It's consumed in relatively small quantities, but it is important and consumption is growing. We have access to not only the markets in which we produce sugar, those are the markets in green - sorry, in orange, we also have access to the regional markets in green. And if you combine the populations of all those markets, it comes to over 400 million people. Illovo used to sell a good quantity of its sugar into the EU, that is now - we're now placing that primarily back into our regional markets. We're growing - we're creating brands in order to do that. New packaging, different sizes of sugar, new routes to market, new distribution capabilities. There are loads of opportunities to build sales from the very low base into that growing market. So population is growing and consumption per head is growing. The pricing environment is also favorable. We are, in many of those markets, well protected by geography. We're also protected in some of the markets by importation rules. It's a business, as I say, that we have ever higher levels of optimism about. Moving elsewhere though, China, the best campaign, the best beet quality, the best processing of the beet that we've seen. It's been a lot of hard work over a number of years. That business produced a meaningful - quite a meaningful profit for us. We've also enjoyed a much more consistent and higher domestic price for sugar in China. In the U.K., we were blessed, in some ways, by record beet yields, the climate was just about perfect, the weather was just about perfect for growing beet last year, and we also grew - we also had a larger area planted for us. We had taken area down in the previous two years to get rid of the stock overhang that we acquired, I think, in 2013, '14. And so production, this year, went up from 0.9 million tonnes to 1.37 million tonnes. It was surprisingly high quantity of sugar that came at it. And then, in Spain, also, good weather produced a big sugar beet crop. Moving to pricing. You will all know by now that the EU sugar regime ended in September 2017. The ending of the sugar regime coincided with a lower - a low - a lower point in world sugar prices. The ending of the regime links European sugar prices to world sugar prices, and of course, we had to have the largest European crop ever in that early period of deregulation too. I guess, it's a good thing, but it did put pressure on prices. We've said that we knew that the price reduction was coming at us. We have to be honest and say, it came faster and went further than, I think, we'd been anticipating, when we were looking at very low sugar beet - sugar stocks in Europe in July last year. But anyway, we got this enormous crop and it pushed prices down quite a long way. For the gloomy - to reassure the gloomy amongst you, we think there always will be a domestic premium in the EU - in - sorry, in Europe over the globally traded London number five price, which is the white sugar, with the globally traded white sugar market. We think that, that premium is justified and required for the service levels and the product quality, which are both differentiated within Europe. And as you can see, at the moment that premium seems to be about €100 to €120 per tonne. Moving on then to our agricultural businesses. With the bigger sugar beet crop comes a big quantity of molasses sugar beet feed, which we sold through into the U.K. and all feed market very successfully. The Chinese business had produced much improved financial returns, well done them. And then the development of the specialty part of this business continues with the progress made on specialty proteins, in particular. If I move then next to Grocery, where we cut and paste the topline Twinings Ovaltine strong growth. It was another year of it. Also, we've remarked about improvement at George Weston Foods several times. Their improvement was good in the first half. We've made good progress in reducing Allied Bakeries loss, quite a lot of work still to be done, but at least, we're heading in the right direction. And then, we've enjoyed the first contributions from Acetum in the period. Twinings Ovaltine. Ovaltine brand globally did particularly well. The largest market is Thailand. We saw very good growth in Thailand on the back of some good new product launch, and also, government subsidies of food consumption amongst the poorer parts of the Thai population. Switzerland produced some - for a market where the population doesn't go up, they had a great 6 months on the back largely of new product innovations. And if I just take you through these pictures from bottom to top. The bottom one, I would describe is a very superior pain au chocolat, the middle one is a milk drink with extra protein, and the top one is our version of the malteser. We had a debate last night about whether I could use the M word with you, but there you are. Twinings also is still innovating, new green tea ranges, new infusions in Australia and France. Good progress in the U.S. market, good progress in Italy. And we've launched a new [indiscernible] pack in front of you, new Superblends. Superblends are a blend of botanicals and natural flavors, which - here they are, very attractively packaged as you would expect and just launched in the U.K. market and will be rolled out in a number of the Twinings markets over the next few months. Allied Bakeries suffers from and benefits from a shift to own-label bread sales in the U.K. We are very well placed as a scale producer of bread to make high-quality own label for our supermarket business partners. And that Tesco's Toastie won the own label bread of the year last year. So it really is high-quality bread. We've made significant progress in reducing operating loss - losses, and we'll make more progress in the second half of the year, but as I said before, we're not there yet by a long distance. Kingsmill is back, advertising itself on the television. And I can't help but show you because it is so, I suppose politically incorrect, the world's largest doughnut line that we've installed in Wakefield. 50,000 an hour and that's before you add the sugar to them. We're also investing in a new factory to make Ryvita, just to reassure the health - more health conscious amongst you. That's going up at Bardney, it's also commissioning now. So Jordans Dorset Ryvita commercially good international growth. We remain a good place to manufacture food for export. And - in within the Ryvita brand itself, Thins continues to grow well. There is quite a lot of competition in crispbread, but particularly with the new line going into Bardney, we'll be very well placed to meet that. Integration of Acetum went well through the period, that's nearly complete. We have run into higher raw material costs for the - those of you who love wine, the harvest was very poor last year, and the Must, which is our raw material, was in short supply and prices went up. We think it's - we have no reason to doubt that it's a short-term event. We've launched Patak's paste pots within World Foods. We've supported them or Jamie Oliver has supported them very successfully. It's been a really good launch, and let me show you what Jamie has been doing for us. Enough Jamie, but a very successful launch, very successful support. He resonates, obviously, not just in the U.K., but also in Australia, which is an important market for Patak's. Staying on Grocery, but moving to Australia. We've had a good go at reducing overheads. The head office has been slimmed down during the period. Operating costs then in the individual businesses are also coming down. For those of you who don't know, labor costs are very high in Australia, and if you can get labor out, it repays you in spades. Bread volumes in Tip Top were good. And then, one day we will take this line of the slide. The Don KRC factory performance continues to improve. It made great strides, particularly in yields in the period. Mazola continues to grow in the States behind the plant sterols campaign, which will run and run and run, another good period for Mazola. And we are seeing the higher freight costs particularly down the Eastern Seaboard in the States, as economic activity, obviously, increases somewhat freight costs have gone up significantly. Moving on to Ingredients, which we manage in two different units. AB Mauri, which is yeast and bakery ingredients, good operating performance improvement in that business. We've been investing behind our bakery ingredients technology and manufacturing for bakery ingredients globally. And then, two important markets for us, North America is well ahead of last year; and South America, Brazil and the rest of South America, where there is quite a lot of economic pressure, our businesses there have remained resilient through that period of economic downturn. In ABF Ingredients, the specialty ingredients, good growth in specialty lipids. Those are fats and then cereal crisps, which we make in California and also, in the Midwest, increasing amount of food is being sold in bars, and we're an important supplier of the raw materials that go into those bars. Enzymes continue to grow. The new increased capacity in Rajamäki, in the enzyme factory is up and running and beginning to give us benefits. Here is a picture of Rajamäki, not in the snow, usually, it is covered in snow. For those of you with the historic interest in things historical, this is the site where the Molotov cocktail was invented in 1939. Right, Retail. 7% sales growth, so we're still growing well. We're still expanding stores and building space across almost all our markets, and I'll show you that in a moment. We're seeing increasing benefit from the digital and the social media. This is such an important part of our sales mix now. Margins are in line with last year, as John suggested, because we've offset the consequences of the stronger dollar with better buying. And as John has also said, we expect to see the benefits of then of sterling and euro strength against the dollar beginning to come through in the second half and then into next year. In a little bit more detail. U.K. sales were up 8%, 3% like-for-like growth, and our market share in all clothing are well ahead and it's not just a clothing story. It's, again, I'll illustrate later. Continental sales, Continental European sales were up 6%, which share growth in all 10 markets in Europe in which we operate. Like-for-like sales were down, however, for the 24 weeks. If you take out five weeks, which the four in October and the last week of the period, so the week that followed the 24th of February, we were actually up 1%. So having admitted that the weather was very good last year and helped us, I think, I'm in a position sort of to say that we had five bad weeks of weather and it hurt this year. The operating margin is where it is because of better buying. The stock model is much tighter than it used to be, at least a fewer discounts of the stock when sales don't come through. I want to spend some time, again, just going through the progress we're making in the social - digital and social media and our engagement with our customers. We do continue to engage very effectively with our customers. Website visits are up on average 8% on the same 6-month period last year. We're now safely over 8 million visits per month. We have 11.4 million people following us on the various social media channels. The most important of which is Instagram. It's the place for brands, in particular. It's a very good place for Primark to showcase what it sells. And then, video remains a key format, and we're using video more and more. So here are some examples of Instagram posts. We've highlighted or we've increased the size of the likes. It shows that it's not just fashion that sells - that - sorry, where social media engagement is important, home is the top left, fashion is top right, then beauty on the bottom left, and once more, the thing that works best is Chip and Mrs. Potts on the bottom right, 155,000 likes for a range that we introduced last year, not this year. We are using Instagram, in particular, to drive traffic to the website very deliberately. You can see that link across the Primark.com, in this case bridal. If you click on that link and that link changes from day-to-day and actually, within days, it takes to different parts of the Primark website. But if you do click on that one, it takes you to bridal pages of the website. We're also using Instagram stories. It's a good way of getting messaging out to consumers. This is an example of Instagram story. It's being used to promote retro gaming t-shirts. I apologize for the irritating soundtrack, but here we go. My goodness, that stopped. We are also using online influences more. This is Alice Liveing, helping us launch our new workout categories, high-performance workout gear. Very successfully launched earlier this year. These are Instagram shots actually from Primark's channel, but they also featured on hers as well. And here is another example of a beauty tutorial, I showed you last time, how to make yourself up to resemble a mermaid, and here is something else you can do with the Primark ranges of beauty. So it's on the Primark YouTube channel. That is CC Clarke, and she's been watched 176,000 times so far. So if that's our communication, this is then what we're selling. The left is a hooded puffer jackets. We also did one of these for £15, which was equally successful. Mustard has been one of the colors of the season. Mustard puffer jacket at £20 as well. And then we had a very good period at selling fashion denim and also basic denim. Of course, the fashion denim, in particular, was strong through the period. If you go into stores now, you will see slogans across our both clothing and accessories for men, women and kids. You will see license on sliders, those are the shoes. We actually sold 230,000 pairs of feather sliders through winter in the U.K. alone at £6 a pair. And then the newly launched Nudes range of beauty, also going very well. For fashion, we're using Glamour Magazine and also, GQ to announce fashion ranges for Spring/Summer. We are very confident in these ranges. With the weather improving, we think that we will see a great reaction to our fashion ranges, and there is a lot of confidence in the communication. You'll all be very relieved to know that inflatables are back in the summer. We introduced some new designs. This toucans for £12 is may be a must. Mermaid tail rings for those of you that don't like the toucan and hamburgers, both rings and cup holders, so inflatables in large quantities. If that then is the products, new stores that we've opened during the period include Charlton on the - in London on the left-hand side. It's a lovely store. It illustrates, I think, that there are still locations even in London, which we can trade, but haven't had sites in until recently. Portugal is a great market for us, so we're delighted to get another store opened there. And then Metz in France opened very successfully during the period. We opened seven stores in the period. There were three locations in the U.K., all of which were important to us. And over the last 12 months, we've opened stores in 9 of the 11 markets, in which we trade. We expect for the full year to open 1.2 million square feet of selling space. In the second half, there are some really important stores to open their doors, and here is the list. Toulouse will be a great store for us, Antwerp, Valencia, Westfield White City. When Westfield first open, they didn't want Primark in there. They have now for several years, and I think June or July, we'll get the Westfield store open. And then Brooklyn in the USA., which I think, again, will be a great location for us. Moving then just for a moment to an update on the U.S. We continue to refine the operating model in the existing eight stores. We continue to refine the ranges to get them more appropriate for each of the eight different locations in which they're trading. We are, as you know, reducing the size of three of the stores down to 35,000 square feet. We think that, that is a very interesting size for us to be trading in this less-dense environment. And we've announced just today that we will be opening a store. We expect to reach agreement soon to open a store in Sawgrass Mills in Florida, opening late next year. There is a lot of redevelopment of the existing store to occur before we can move in. We can supply from the existing warehouse. And once again, that 35,000 square feet space, which we think will be great. Sawgrass Mills, then, is a hybrid model. So it's a mix of discount, I think [indiscernible], and also full price. We haven't traded in any of - any equivalent mall in the States, and we'd like to test it. Sawgrass is the second largest tourist destination in Florida, after Disney World. So 45 million people come through it, very high traffic, very high footfall more. And the shoppers come from all over the place. 110 nationalities last year visited Sawgrass. So it's another test, it's another initiative, and I think, the good things and learnings will come out of it. So outlook then into the second half finally. Acceleration of profit growth in Primark with - through margin, continued growth in Grocery, Ingredients and Sugar and the combination of those four and more than offsetting the decline of profitability coming from our Sugar businesses. So as a consequence, we expect to see operating profit and adjusted earnings per share going up in the second half. Thank you very much.
John Bason: Okay, great. So we can open it up to Q&A. Andy Hughes.
Q - Andrew Hughes: It's Andy Hughes from UBS. Couple of questions on Primark, if I may, to kick off with. On the margin at Primark, so hovering around about 10%. Historically, you've been up at sort of 13% or so. It sounds like markdowns are lower than historically they have been. Would you be reasonably confident of getting back to 13% at some stage particularly with, well, I'd say, what looks like a lower structural markdown position there? And I'll save the second one.
George Weston: Yes, sure. We expect to see, as I said, margins going up. We don't target the net margin. It's always just the consequence of how well we trade. So we've never set 13% as being good, bad or indifferent. The net margin is the last thing that happens in the business, but there are tailwinds coming through.
Andrew Hughes: Yes. And looking at the like-for-like in the first half, obviously, you've given us the U.K. figure and the group figure. I mean, the back out for Continental Europe 6% may be even little bit worse than...
George Weston: No, I don't think so. I mean, it's - the group's minus 1.5% and we've given the U.K. as plus 3%. So it's probably about minus 4%, minus 5% for Continental Europe.
Andrew Hughes: Within the various markets that you comment on, and I think, you said Spain is still very strong, France is good, Italy good. It feels like Germany and some of the surrounding markets was worse than the average. Do think we are past the worst in terms of that trend? And what you're doing to...
George Weston: I mean, we're never going to be equally good in all the 10 markets. Southern Europe was very robust, but also had this awful October. It was probably worse than the U.K. We know that there is work to be done in the German market in particular, but it's been a very difficult - it's been a very difficult market. Having said that, and our market share has increased there as well. But - yes, and that's been the most difficult market for us.
Andrew Hughes: When you say work in Germany, is it more local products coming in to try and differentiate...
George Weston: I think, yes, it's a little bit more local products. And I think it is more work to justify cheap clothing. Cheap clothing doesn't require people to buy lots of clothing. It just requires them to save money on the clothing they want to buy. And I think, we could do a better job of communicating that reality to German consumers who are, I think, at the moment, probably, rightly concerned about ways to recycling and sustainability.
John Bason: Good. Andreas at the back there.
Andreas Inderst: Yes. Andreas Inderst, Macquarie. Just a question on Germany and a follow-up here. Your pricing is around 10%, 15% higher in Germany. Is that an issue? Or is it really what you...?
George Weston: No, euro pricing is flat across all the markets.
Andreas Inderst: Compared to the U.K., it's roughly 10%, 15% more expensive. So is it...
George Weston: I think we might quibble with that. I think we might quibble with that.
John Bason: I think we would quibble with that. Maybe it depends on where the exchange rates are, but that is not - you said to this, Andreas, like it's a policy, and so it's not the case at all.
Andreas Inderst: Okay, fair enough.
George Weston: Okay. Maybe I'll talk to you afterwards, and maybe see where you have your data from, but that isn't our intent at all.
Andreas Inderst: Okay. And maybe a question on the U.S. market as well. So how is underlying trading going on here? Maybe you can elaborate?
George Weston: Well, it's early days with the number of the stores is still less than a year old. We're still - we are still learning lessons. There are reasons for encouragement. Our experience in two of the stores where we reduced space has been very encouraging, but that's all the five weeks trading. So I don't think I've got much more to say other than there is reason for encouragement, but it's a - but we're still in this phase of learning lessons.
John Bason: Okay, thank you. So well, let's get Jeremy in the middle of [indiscernible].
Jeremy Fialko: Jeremy Fialko at Redburn. So question on the sugar side of things. We're seeing that some of your competitors are making some thumping losses in their European sugar businesses at the moment. So are there any signs of capacity exiting the market and just what your prognosis for that is from a kind of supply standpoint over the next couple of years?
George Weston: Yes, and that's a good question. The capacity will be determined by farmers' willingness to grow sugar beet at the prices that the producers are willing to pay for it. I think the - there is no notable reduction in sowing intentions across Europe at the moment. There may be a reduction in actual sowings because of this very late cold weather.
John Bason: Yes, Warren Ackerman.
Warren Ackerman: So Warren Ackerman at SocGen. Couple of questions. First one on Primark. Any chance that you could comment on current trading. You've, obviously, told us the last week was enough to drag down the like-for-like by 50 bps relative to what you said in the preclose.
John Bason: Yes.
George Weston: Yes.
Warren Ackerman: Is March looking as bad as October?
George Weston: So that last week, just to remind you, Ireland was shut for three days, parts of the U.K. shut for two days, and the consequence was the consequence. We had a better Easter than we'd anticipated given how poor the weather was for Easter, and trade from Easter has been okay. We've been waiting for this warm weather. I mean, ask the same question in a week, and I think, we'll have a better answer for you. But we're - I think, reasons for optimism that go beyond some of the stores looking great.
Warren Ackerman: And then secondly, just on the margin. Obviously, you're talking about the currency benefit in the back half and an inflection on that. Maybe if you could, a, quantify that? And secondly, could you maybe talk about in regards to sourcing in Bangladesh, in particular, what percentage is now Bangladesh? And is there any concerns around Bangladesh given the FDR score this week talking about credit concerns in Bangladesh?
John Bason: Well, let me hit the margin first. Not surprisingly, I won't give you an exact number. What I have said is, I think, we'll see margin expansion for the year as a whole. So if we had a 20 bp decline in the first half, then the second half will be more than a 20 bp improvement, so some tens of basis points. So I think, we're reasonably confident, and I think, certainly, the margin outlook for the second half is looking better. Shall I say Bangladesh percentage? Yes, Bangladesh percentage is getting on for about 20% of what we are buying.
George Weston: So it's important markets. We published the names and the locations of all the suppliers. One of the things, I think, that makes it slightly different to your point about credits is, we pay our suppliers quickly, and we pay them regardless of whether we sell their product or not. I, sort of, wish that if everyone else - I, sort of, expect that everyone else paid as quickly as we did, some of these credit issues would be reduced.
John Bason: Richard?
Richard Chamberlain: Richard Chamberlain, RBC. Just one on Primark, if I can and then, maybe just touch on the dividend. So Primark, talked about the digital strategy. Does that vary much in the U.K. versus internationally? Do you think you're also getting very strong traction on social media, Instagram, et cetera, outside the U.K.?
George Weston: I mean, the website - yes, the website is published in all the languages in which we trade. Instagram, I think, is a more important channel in some markets than others and social media engagement is a more important part of the mix in some markets than others, but it's important to all of it, and we do try to tailor as well as we can. We can always do better. But yes, now we understand that these are local markets and what we post in the U.K. shouldn't necessarily be what we post in The Netherlands.
Richard Chamberlain: Yes, Okay. And just on the dividend. I think it was up 3% for the first half, and I guess, in the context of strong balance sheet, you could have paid more. But what was the sort of rationale for that? Are they just broadly in line with kind of earnings that kind of...
George Weston: Yes, I think it's broadly in line with earnings. The dividend went up significantly last year. We improved the dividend cover through doing that last year. So the dividend cover is very - is in a comfortable place for us. We want to maintain a strong balance sheet. It's in the nature of the company to do that. And...
Richard Chamberlain: We've got some leases coming on, I guess.
George Weston: Earnings per share up 3%, dividends up 3%. It sort of...
John Bason: Yes, it sort of reflective of the adjusted earnings growth at the half year. Great. Adam at the front.
Adam Cochrane: It's Adam Cochrane, Citi. Couple on Primark, please. In terms of the numbers, can you quantify the cannibalization impact that's ongoing within the European state? Is it - if you can't quantify it, can you sort of give us a feeling of how much less bad it's getting within those numbers?
George Weston: Sure. It's still there. The cannibalization tends to be at its highest in the new markets. So France, we think it's probably over 5%, 6%. Italy, when we start opening new stores next year, we'll be heavily cannibalized. Germany, just the maths of now having sort of 25-odd stores, the cannibalization of a new store is little bit less, but it's still there.
John Bason: Holland as well.
George Weston: Sorry, and Holland, of course, is being cannibalized heavily by the news that Damrak in the middle of Amsterdam has cannibalized the stores around it. And that new store in Antwerp will have - will also have a cannibalizing effect.
Adam Cochrane: And then in terms of two more theoretical ones, how is the sort of thinking about click and collect coming along? And then when you look at that European like-for-like performance, if you don't see an improvement, would you think about investing some of the FX benefit in pricing, promotion, et cetera, to start moving it forward?
George Weston: Well, I mean, in terms of how do we think about pricing, we're going to be the most competitive on everything every day, and we'll invest whatever it takes to be there. And I think we've demonstrated over the last couple of years that we will retain that position. I think we need to be just careful to work out what it is that has subdued some of these European markets over the last period of time and that we're pulling the right lever to get sales growth going in those markets.
Adam Cochrane: And so have you done much sort of larger scale advertising, if your price is in the right place, is it about getting the brand awareness, the credentials, et cetera, to the people?
George Weston: I think the brand awareness is pretty good. And no, not advertising, but social media engagement, I think, is our model. So you'll hear more of that.
Adam Cochrane: And click and collect?
George Weston: We're keeping an eye on it.
John Bason: Any other questions? Yes, Warwick in middle.
Warwick Okines: Warwick Okines from Deutsche Bank. Two more on Primark, please. Just talking about the tens of basis points improvement in the second half of the year, is that assuming flat prices? And if so, does that mean that the currency benefits from the significant currency move really fall into the next financial year? And then the second question is on availability. George, you told last time about availability not being quite where you wanted it to be in stores. Any update on that, please?
George Weston: Yes, okay. So for the margin point, you want to take that.
John Bason: Well, let's say, the margin point - yes, I mean, for the - look, for the second half of this year, I mean, we're pretty well sort of locked and loaded as far as prices are concerned. So it's - there is the assumption of no change in prices there. And I think it's very clear that our price position is actually very good in the market. I think when we come into next year, it's too early to give any sort of feel for that other than knowing that the tailwind is, obviously, a very significant one for next year.
George Weston: And yes, we're obsessed about availability. It's not just availability in the wider supply chain to what's in the depot and what's in the store. It's also at times of day a busy trading periods where the stock has got to, so can we get stock back after changing rooms quicker along to remerchandise quicker than we've done in the past. So there's a lot of work going on through it, and you know, it's good work.
John Bason: Simon in the middle.
Unidentified Analyst: Judging by our goodie bags, you're still giving bread away. I mean, I know your comments about lessening losses in bread, but can you see a route to breakeven in bread?
George Weston: Yes, yes.
Unidentified Analyst: And what would that take?
George Weston: It will take, in the end, higher average pence per loaf. So our cost base is well controlled as a consequence of the investment and all the attention of our cost that's going on in it. Our volumes are pretty good. So it's mix and price.
John Bason: Yes, Georgina.
Georgina Johanan: It's Georgina Johanan from JPMorgan. Just a really brief one please. You've talked about return to a more normalized level of markdowns sort of on a comp of very low levels. Just given the weather...
George Weston: In the second half.
Georgina Johanan: Yes, absolutely. Just given the sort of unfavorable weather that we have had, presumably we are going to see high levels of malts in the market overall. Have you sort of effectively already accounted for that in your H2 guidance? I.e., has your expectation changed versus several months ago?
George Weston: Yes. I mean, we reforecast internally, I'm not going to present you for the second half.
John Bason: Okay. Yes, Arthur.
Arthur Reeves: Arthur Reeves, SocGen. I see that GSK has put hoardings up for sale. I'm not expecting you to tell me you're going to buy, but would it fit with the Ovaltine brand?
George Weston: Look, it's a milk modifier, and we've got a milk modifier brand. So yes, probably. I don't think that's the only thing to consider.
John Bason: Valuation is maybe the thing to look on.
John Bason: Okay, I think that probably is it. Okay, thank you. Listen, before everybody goes, the - you can imagine that Investor Relations here only works smoothly. If there is somebody very good behind it all and the external face of ABF over the years has been Sue, come up here, Sue. So very sadly for me and for us, Sue has decided that she is going back to - come up here now, going back to Scotland. So look, certainly on behalf of ABF and there's going to be lots and lots of thanks on behalf of us internally, but I'm sure on behalf of everybody in this room, we'll miss you very much, Sue. Great. Thank you.