Associated British Foods plc (OTCPK:ASBFY) Fourth Quarter 2022 Results Conference Call 8 November 2022 4:00 AMm. ET
Participating companies
George Weston-CEO
John Bason – Chief Financial Officer
Conference Call Participants
Alexandre Okines – BNP Paribas
Simon Irwin – Credit Suisse
Georgina Johanan – JPMorgan Chase
Richard Chamberlain – RBC Capital Markets
Clive Black – Capital of the Coast
Warren Ackerman-Barclays
David Roux – Bank of America
Adam Cochrane – Deutsche Bank
Anne Critchlow – General Society
George Weston
Well, welcome to this review of ABF’s yearly effects for the 52 weeks ending September 17, 2022. More of you have done so not only after some sort of pandemic, but also unsettling days and occasions you didn’t expect. Thank you very much for making this effort. We’ve been given quite a bit to go through, so I’m going to go through a few at a brisk pace, if you don’t mind. So that’s it, I want to say we’re delighted with the year we’ve had. If I characterized it as ABF is back, I wouldn’t be far off. Robust food delivery in a very challenging environment with a disruptive supply chain and masses of inflation. And then the retail functionality, the Primark functionality way ahead. 10% expansion in currency sales consisting of food showing valuable action. And then I think Sugar, Agriculture and Ingredients adjusted operating profit is way ahead, which shows the cost of diversity within the group. The grocery store has the clever task of recouping the monetary costs caused by inflation. The margin will fall and UK bakeries have been in the eye of the storm.
Primark’s strong recovery in terms of sales, margins and return on capital employed. UK industry has been strong and will continue to be so in the new year. Continental Europe recovered more slowly. Many parts of Europe emerged from the pandemic later than the UK. And then we did a clever task: build the store pipe. We will see the benefits this year with the opening of 27 stores. And then the virtual capacity was transformed, and I’ll show you that later. Gross investment going back to the days before the pandemic, £930m. And then the overall split ends with an 8% increase. And from the announcement we made, we’re glad we were able to make a £500m purchase at the same percentage price. This speaks to the money-making nature of the business and also the strength of the balance sheet that we can set back £500m to be consistent with shareholders while maintaining a strong and resilient balance sheet with firepower. So the economic highlights are that strong expansion in organization revenues up 22%, adjusted profit up 38%, consistent earnings flat 64%, and bottom line up 8%. , and John will handle all those lines. And net money before lease liabilities at the end of the year, £1. 5bn.
And with that, let me pass John.
John Basson
Excellent. Thanks Jorge. Group cash was 22% higher than last year at real exchange rates and on a reported basis of £17bn. Just a quick reminder for you, FY2021 was actually a 53-week business year for Primark compared to 52 weeks this year, hence the reported phrase. And Primark’s cash inflows were higher and reflected a more widespread consumption pattern as the pandemic receded in our markets over the past year. And compared to the previous year, in which 0. 33 of Primark’s available business days were lost. In our food businesses, combined sales increased 10% in constant currency, reflecting value adjustments and, in some businesses, volume increases. Group adjusted operating profit of £1,435m was 42% higher than a year earlier at real exchange rates. The biggest contributor to this build was the significant improvement in Primark’s operating margin, which rose from 5. 7% last year to 9. 8% this year. The average exchange rates used to convert the cash source into generated a translation gain of £15 million, mainly due to the strengthening of the US dollar, particularly in the current part of this year, and the weakness of the pound sterling against some of our currency markets. A table of year-end and average exchange rates for our major currencies is included at the end of the slideshow.
Adjusted operating revenue stream reflects underlying business functionality and excludes one-off items. This year there was an exceptional charge of £206m, which included non-cash impairments of assets in Primark Germany, in property, plant and equipment specific impairment of £72m and £134m in respect of assets. by right of use. Array As As you may recall, sales density in Germany has been declining in recent years leading up to fiscal 2019. After weaker-than-expected trading in the current part of this fiscal year, we believe it is a strong recovery of those sales densities is unlikely. Germany is also a much loved market to serve retailers. Therefore, our revised third class cash flow discount for our German retail establishments calls for the popularity of this deterioration. The group’s overall tax rate includes an exceptional rate of £63m, which you’ll see in a moment, of which £50m relates to the declining popularity of deferred tax assets related to impaired German assets . We intend to return our German operations to sustainable levels of profitability, and George will communicate those plans to you in a moment.
On an unadjusted basis, the legal operating advantage grew by 46% to £1,178 million. Loss on sale and closure of business amounted to £23 million, mainly similar to our North China Sugar business, which is now classified as held for sale. Net interest expense decreased due to the accumulation of interest earned on our money deposits. With the existing interest rate environment, this will be even higher. Other monetary source of income accrues due to the higher surplus of the group’s explained benefit pension plan in the UK at the beginning of the year, and will re-accumulate following the accumulation of this surplus at the beginning of the year. new year The pre-tax benefit was £1,076m, 48% more than a year ago. And on an adjusted basis, it was up 49% to £1. 356bn. Let’s move on to taxes. This year, the tax rate on the adjusted pre-tax advantage was £301 million, an effective rate of 22. 2%. Unsurprisingly, this rate represents a significant relief from the highest tax rates of the last two years, which were hit by COVID and Primark’s perks were particularly reduced. Primark has a reduced tax rate due to reduced tax rates in some of its operating jurisdictions. You can also see the exceptional rate of £63 million here, which I mentioned earlier.
Looking ahead, I expect upward strain on the group’s effective tax rate in the new monetary year around 25%. This includes accrual in UK corporation tax at 25% in April 2023, as well as a substitution in the distribution of profits through the tax jurisdiction. Let’s move on to earnings and dividends. Adjusted earnings consistent with constant percentage fell from 80. 1 pence to 131. 1 pence. The accumulation of 64% is explained through the significant accumulation in the income source adjusted or consistent with the reduction in the effective tax rate. Adjusted earnings consistent with a consistent percentage of 131. 1 pence of our pre-COVID cap of 135. 4 pence and that was, of course, in fiscal 2019. This year the board declared an interim dividend of 13. 8 pence consistent with a consistent percentage and has now proposed a final dividend of 29. 9 pence consistent with the consistent percentage, giving an overall dividend of 43. 7 pence for the 2022 monetary year. The dividends for this monetary year are 64% higher than the ordinary dividends for the year, which totaled 26. 7 pence consistent with the percentage, less than 8% ahead of last year if you include last year’s special. I like this painting. I mean, this chart shows the progression of our dividends. It gives you the image. Thus, the consistent period from 2006 to 2019 was obviously characterized by a progressive dividend. And the brown line shows you that the dividend policy was broadly flat at around 3x. In 2020, of course, we are suspending dividend and COVID-like bills and the preference to conserve cash. And then of course you can see the progress now over the last 2 years since then.
Now let’s move on to balance. The group’s net assets of £11. 6bn were £1. 6bn higher than a year ago. There is a net conversion gain from the weakening of the British Pound against the US Dollar and at the end of the year also against the Euro, and this is between the end of the 2Array year and the amount is around £400 million. The main adjustments here are a build-up in working capital of £771m, a build-up in net pension assets of £821m and a decrease, as expected, in net money of £413m. pound sterling. Some £440 million of this current capital accumulation relates to the phase-out. This was due to Primark’s autumn/winter shares being gained around the end dates of two years, when £200m of shares came in later than the end of last year due to supply chain disruptions. of origin, which I’m sure we all remember, and £240m in stock was intentionally won before the end of this year to avoid higher transport costs. So our money in our new monetary year, remember, will take advantage of that £240 million. The higher working capital also reflects, as expected, the result of inflation, as well as, if necessary, higher degrees of actions to mitigate potential supply chain disruptions.
You will be more than aware of significant movements in interest rates and asset values in the months leading up to the end of our fiscal year. of scheme assets and, of course, a sharp accumulation in the reduction rate used to calculate the scheme liabilities, which decreased markedly accordingly. Investment for the organization increased particularly last year, and I think that’s really helpful for us for the foreseeable future. This is based on the announcement of our monetary policies related to leverage and liquidity, the explanation of the capital allocation policy and also the achievement of an issuer score A to S.
During the year, loose cash flow: Coming to cash flow now, loose cash flow was down particularly this year compared to last year. Building adjusted operating profit increased this monetary year to £394 million. So the relief in loose cash flow that you can see here was literally driven by the construction of working capital this year. Construction rose in working capital, and here excludes biological assets and assets held for sale at £729m, compared with just £43m last year. I have already explained that £440m of this increase was the result of Primark’s share synchronization, with most of the rest due to higher inflation experienced in the year. Primark’s spfinishing capital was pretty much flat year over year and spfinishing this year was really focused on generation and warehouse automation. Primark is aiming to build out its portfolio of new retail outlets this year. Therefore, a build on a new finishing shop will be very noticeable in our new fiscal year. The increase in capital investment for our food businesses of £105 million is primarily due to an increased number of ongoing capital projects. George will actually describe them in more detail towards the end of today’s presentation. I expect the group’s overall capital investment to increase in our next financial year compared to the total we had this year. The construction of money expenses related to the acquisition increased to 154 million pounds sterling this year. The acquisition opportunities came back post-COVID and the main acquisition we made this year was of course the Fytexia Group through ABF Ingredients. The split-end cash outflow of £380m was particularly higher than last year. And of course, this is the result of the resumption of the payment of the ordinary dividend and the exceptional dividend last year.
Now let’s move on to functionality through the business segment. Our sales increased in each of our food businesses and the combined total was 10% higher than last year at constant exchange rates. The grocery department experienced significant input cost inflation and several value increases were implemented throughout the year across all businesses. Unsurprisingly, the higher revenues resulting from value adjustments have inevitably been less than the inflation in input prices. And so the adjusted operating margin was down slightly and it’s a higher result than the maximum I was probably expecting, down to 10. 7% for this fiscal year. AB Sugar’s revenue was 18% higher than last year at constant exchange rates, due not only to higher sugar values, but also higher co-product values, namely Array bioethanol. , that is, our bioethanol plant in Hull, which is already operational. So I am pleased to say that the decline in average contracted capital advanced slightly, but still advanced 10. 3%.
AB Agri also had a smart year with cash inflow and adjusted operating cash source well ahead. And by the way, just to point out, I’m pleased to say that it was a banner year for Frontier, which is the joint venture that we created 17 years ago. And Ingredients, the specialty businesses of ABF Ingredients, performed very well. And there, there was volume expansion on the back of winning new business and post-pandemic consumer volume recovery, as well as strong value execution. All corporations are well placed to take advantage of the opportunities that lie ahead. The acquisition of Fytexia this year brought other high-quality ingredient businesses to the portfolio. AB Mauri’s cash inflows decreased this fiscal year due to lower yeast retail volumes due to high COVID levels and some delay in value recovery. Primark’s cash and adjusted operating profit increased compared to last year. Trading has taken a step forward in all markets as we come out of the pandemic. Trade was strong in the UK and the Republic of Ireland, but weaker in continental Europe. George will talk about our talk on ions in a few moments.
The operating margin advanced strongly this year to 9. 8%, reflecting the activity of the total period and, of course, the accumulation of sales densities with the return to a more generalized habit of the clients. The benefits gained from this generalization of COVID have, of course, been partially offset, as we have noted in the current part of the year through higher inflation and input prices such as energy and labor, and output prices . Higher purchases due to the significant strengthening of the US dollar against the British pound. and the euro Basic prices in our 2019 monetary year were £76 million. So why am I saying this? COVID has lowered those prices for the next two fiscal years. So this year’s core prices, which was £88m, I’d like you to compare to that base of £76m. And fundamentally, it’s about generalizing compensation, recruiting and resuming many of the business activities you’d expect, adding and assigning activities. There is a slide in the appendix that presents segmental research across geography.
Before I pass the word to George, I think it would be literally helpful to you how we see the main dangers of this new exercise. Of course, first of all, I must say that there is no replacement in our outlook for this new year. We expect the inflation of the entry charge to be higher than before, so this is only an indication of the point of inflation in the system. Replacement rates in commodity markets are again very volatile. But here I will define in general terms how consistent they are over the next fiscal year. We have smart visibility into our energy prices in the early part of the year, which are covered, or covered in the case of the UK, through government support. Hedging is weighted in the first part, but our exposure is particularly reduced in the current part of our fiscal year. But of course, sugar processing in the energy-intensive northern hemisphere has really been left behind in the current part. And, of course, we enter warmer weather when we enter the time part.
The electrical power load for Primark outlets will increase especially this year, and I think we talked about that in September. And our most productive vision has been included in the perspectives that we have already given. However, I would highlight, and George will come back to them, the movements that are underway. But when something goes up in value like that, gosh, don’t focus on lowering that number and it actually does. The strength of the US dollar against the British pound and the euro has obviously been a significant drag on Primark’s purchase prices. Only 10% of the existing year’s stock remains to be purchased. So our exposure to the US dollar transaction effect this year is obviously very small. And much less in a full year than the highest transaction prices, the organization will of course gain full year advantage by converting our profits into US dollars if exchange rates remain at this level. So I think as a band we’re pretty much covered on that. Of course, we’ll be expecting higher hard work prices this year, and they stand out. Commodity prices and freight rates remain at elevated levels, but many have declined from recent highs. And that is, of course, one of the things that we really have to look at is controlling that over the course of this year. So at Primark in particular, our freight rate prices are higher in the new fiscal year, and that’s essentially due to the nature of the contract that we had the year before. But, in fact, we expect to take advantage now, as freight rates have started to decline as the year progresses.
With that, I’ll pass it on to George.
George Weston
Many thanks juan. Before we take a closer look at Primark’s performance, I just wanted to say a few words about the high street and where we stand on it. Main Street, in fact, has gained more popularity in the last three years. The competition has long since fallen. The pandemic has hastened their demise. And much has been written about the complete death of physical retail. You know, we had another point of view. And today, we are increasingly sure of this point of view. We are more sure of being right. Today, it is Primark, and in many cases only Primark, that drives traffic in cities and shopping malls. The symbol of what this slide looks like is of our Bank Buildings flagship store in central Belfast, which reopened last week, after £100 million and 4 years spent restoring this indexed building to its former glory after it was devastated down a chimney in 2018. On the day it opened, consumers took cover for hours to get in and the lines have continued ever since. Slightly indulgent, but coming soon symbols of some of our favorite stores. George and John Bason’s 10 saneest, so to speak. But the point is serious. The Times Economist wrote last week, referring to our Belfast store, bricks and mortar is one of the most productive tactics for building an appointment with your consumers. We agree, it is very complicated to build a date online. That’s why we continue to invest in our store base, not just in the UK, but across mainland Europe and now the US, and that’s why we continue to invest in the in-store experience, providing more consumers more reason to stop by their local Primark.
So let me go back to a more general pattern. So the effects of these, a strong recovery in ad margin and return to capital employed, increase in visitor attendance, especially as the year progressed, and a return to a more general visitor habit, especially who go to downtown stores. The UK comparable price and sales market share is now broadly in line with pre-COVID. Well, I think we were right. Continental Europe was slower. They came out of the pandemic later, and I think there was more caution about long-term energy bills. There are more savings there. Good functionality in the UK. Repositioning in Germany, I’ll come back to this in a few moments. This will only be after review and consultation with our other stakeholders. And then the transformation and the virtual capacity, the paintings that we’ve done on the online page are transformational, a vital part, and I’ll come back to that. And then Click and Collect testing was done in the UK, all the hard paints, to be in condition for that pre-Christmas release. And then, as John mentioned, smart progress on building the new production pipeline.
Now, in the next section, I hope to be able to subtitle up to 3 years like the others. In the UK at the end of 2022 we are down 6% over 3 years from 2019. You can see the improvement in functionality over the year after that and then Q4 is well into it so with an acceleration in sales . Continental Europe didn’t see the same buildup in the fourth quarter, but year-over-year functionality was good. Ireland was looking to avoid a full reopening in 2021. Hence that minus 16%. We only compared outlets that were open during the hours they were open. And then the group, minus 10% total, plus one year, similarly for one year, then the fourth quarter plus 6%. Let me tell you about our two largest markets. Thus, in the United Kingdom, for 3 years, the market has increased by 2. 5% in value. The percentage online has increased from 27% to 40%. That’s where it is today. Buyers use either of the two channels. This is the vital perception. We’ve been saying it from the beginning, and that’s what we’re seeing. So we haven’t lost 13% of our customers. They just buy any of the channels.
In a market position position position expansion price, and this is recent Kantar knowledge, we are down 1. 1% over a 3 year period. Offline is down, high streets are down 14. 7%. Online is up 48%. We fell 1. 1%. And 6. 4% market position position position today versus 6. 6% in 2019. If we look back 1 year, the recovery has taken positions this year. We have highest through 14%. The total is up 7. 5%, offline 10% and online 2. 9%. People leave their rooms and go back to the department store or shop in their room and then come to Primark to buy other things. Then let’s move on to Spain, where similarly, in 3 years, the online market position position percentage has gone from 9% to 20%, and we’re at the same market position position percentage as market through the price we had 3 years ago. Matrix And then over a year, we went up 25%. The market position position position position position position is up 12% and the percentage online is down. We have now added 25% new space. Therefore, we expect an improvement in our market position position position percentage. But the good news is that they gave it to us.
IT’S OKAY. So those are, I think, reassuring pieces. Let me spend a little time on Germany, where we did this major asset writedown. We entered the market position position in 2009 and had a normal reception in the German market position position. This possibly would have wholeheartedly encouraged us to open more outlets and larger outlets than we would have had in a similar geographic area. And sales density started to decline in 2016, 2017. We had build reputation and market position position percentage in 2019, and then the pandemic hit. And we’ve taken another step back, and we’re in a position where we’re wasting too much cash on the German market. And so the impact. We see a real opportunity for Primark in Germany. It is the largest clothing market position at the moment in Europe and has a higher index to price compared to other market positions in Europe. We have our position there. We just have too high a load base and it’s this story, this legacy of retail outlets that are big and too close together. We want to go through a genuine era of open consultation with works councils in particular. But you can see where I think we’d like to go where we think we’re solving this business. And at the same time, we have invested in making lopass known and building loyalty.
We have much greater communication functions in Germany than ever before. There is still much to do, but we belong to the German market, but not with the charging base we have. Intervention on securities. So yes, we’ve implemented forced selective value increases in fall/winter stocks, in part. A little more in spring summer. The average value increased to single digits, and we said it in the pre-closing business update and repeat it here, we will not implement any additional value increases in this year’s diversity. We want to emerge from this era with our core proposition of daily affordability and dignified leadership intact, and we will. We also expect relief in customers’ disposable income, increase their value, we believe we will sell less. So, whether it’s for an attitude of profit and also for our logo and reputation attitude, we’re going to leave the values where they are now, having increased them very specifically and for the first time in nine years.
Let me tell you a little bit about the client and also what we are promoting right now. And the two pass together. Since the beginning of the year, we have seen very strong sales of bloodless weather products. Consumers leave central heating off and buy bloodless weather products to compensate. Snuddies, left, have sold double the amounts of last year in men, women and children so far this year. The most productive advertising models are Stitch from Lilo and Stitch and the Grinch license remains as important to our company as it has been. The Velvet fleece leggings, on the right side, we have sold 3 times more than last year, since the year began. And first, there is an indication that other people are dressed in more clothes. But secondly, we had our TikTok video maxed out, 7 million other people saw the little video that we made in plush velvet leggings over a 3-day period, I think that’s about it. We see that virtual driving brings other people to our stores. Click & Collect is becoming vital. What we’ve already done in virtual is part of why UK sales are as smart as they are. Christmas. Now, more than ever, I think other people are looking for wonderful prices when it comes to Christmas shopping. We introduced our Christmas diversity a month early. We think other people need to spread the burden of Christmas over more paydays. We have 45% more selection this year than last year and 90% of the diversity costs £10 or less.
Some very wise Christmas gift shops are no longer with us and we have a wonderful opportunity to take their place. So the sushi kit, you get chopsticks, a pod of ginger, £10. The Margarita Cocktail service kit, £16, is one of those over €10, obviously. From homewear to Christmas and then of course no Christmas would be complete without your new Fam Jams. And the Grinch is the big license right now on them. We are increasingly more exclusive collaborations to generate more sales. Kem does a wonderful job promoting wise men’s clothing. Paula Echevarria is passionate about Iberia, in particular, but diversity has worked with us and it sells well everywhere. And then Stacey Solomon does a fabulous job on the children’s levels that she works with us to develop. And this one is interesting. We are now in 3 outlets with a collection of antiques. Let me show you the video now. This is a TikTok video we made on. . .
[Audio/Video Presentation]
You can surely see, just across the state there, that we are attracting a new visitor to Primark retail outlets through the availability of vintage clothing in the 3 we have. We will go much further. It works very well. The attachment basket, just like Click
Just updates on 3 commitments we’ve made. On the fabric, we did very well. 25% of fabrics at launch contained recycled or more sustainably sourced materials. We are at 45% now. And then 40% of the cotton, compared to 27% previously, is made up of cotton that is organic, recycled or from Primark’s sustainable cotton development programme. Carbon emissions have increased. Again, we’ll just tell you what they do. We have a main commitment, I think, to halve them throughout the supply chain by 2030. As we said in the ESG meeting, most of the carbon comes from Scope 3. It comes from the supply chain. And putting formulas in place to reduce that takes time. So we will see the benefits of that in the next few years, but not right away. Meanwhile, on Scope 1, we’re doing a fabulous job. We believe that this year our energy consumption at Primark outlets and the supply chain we control will be minimized by around 30% thanks to moves that are not that difficult. So lots of low-energy light bulbs, a more complicated formula for making sure the lighting is right for the time of day. And finally, turn off all outdoor lighting fixtures after the outlets close. These movements, keeping the doors closed, undeniable things, very achievable, we will eliminate 30% of our energy intake. Obviously a massive monetary push back in this area, but also a very smart way to decarbonize Scope 1. The first report on ethics and sustainability with much more detail will be released later this month. There are two of them. There is one for food and one for Primark.
It is ok. Digital update. A true transformation of our virtual capacity. We have noticed a very clever reaction to the website. Traffic is nearly double what it was a year ago, up 83%, averaging twice as many pages consistent with session-consistent insights, and then 15%. of other people use the new stock checker. We think it’s a pretty smart indicator of intent to stop by and buy something. And the early knowledge we’re tracking gives us a pretty false clue that you’re driving sales is smart. to all markets until mid-year. So, until March, every market deserves to have it. Again, this could be one of the reasons why the UK’s functionality has been greater than European. And then in the Click test
Opening of new points of sale at the average time. That’s it, I couldn’t possibly live on it, and let’s go straight to the new store pipeline. We are still on track to integrate 530 retail outlets in the box by the end of 2026. The pipeline is well structured, with a specific focus on the pipeline structure in Italy, France, the Iberian Peninsula and the United States. This year we plan to open 27 new points of sale. Lay out 10 of them before Christmas and add 1 million net square feet of new retail space. So 4 media outlets in Italy, two before Christmas, one today in Turin. And 3 new points of sale in Spain and then our first access to new markets, two in Romania and a store in Slovakia. The great challenge in terms of new store openings, however, is in the United States. This is the year of escape. We almost doubled the domain of sales. Our 10 new outlets, with an average domain of 37,000 square feet. We open 3 before Christmas in and around New York. We are going to have a large organization of outlets, Long Island, Queens, Brooklyn, New York suburbs. But also, I’d like to draw your attention to this, we’re expanding the Sawgrass Mills store, the first 1 in Florida. It’s already too small and we’re adding a moments store in Florida. So we think there’s as much relevance in Florida to this lopass as there is in the Midwest. So we’re just passing through to open our store for now in Chicapass, Woodbox Mall. The premier of State Street, now that the pandemic is over, he’s changing his socks.
It is ok. Before moving on to food, a brief review of Primark. Significant sales expansion is expected this year from either cost expansion or sales space expansion. We only remember the resolution not to apply other costs. The margin will be where it is below 8% of the current part of 2022 accordingly. We don’t see any explanation as to why we took this business on time to an operating profit margin of around 10%. We take a look at the features in Germany, a year of escape to the United States.
It has been a year governed by inflation, especially energy, that the food system is discovered. It goes to the fertilizer load, it goes to the grain load there. It is put into glass bottles. It comes in the package. Everywhere you look in food, chain of origin prices have continued and led to a year where our own distributors have been in a tug-of-war for value recovery, but also our chain, the chain of origin of other people have been in their own fight against our suppliers to verify and minimize the prices of inputs. Supply chain disruption, we saw some of that the year, but less than the year before. So some of life, again, for other people in the chain of origin, in particular, has gotten a little bit easier. Strikes at UK ports didn’t help much, however, except for the little disruption in the supply chain than before. Valuing the diversity of the group, some corporations had their most productive year due to inflation. Last but not least, a set of food-relevant ESG reports will be found on the online page today.
Let me start with Sugar, who has had a smart year. Income is specifically higher. Increase in the value of sugar and intelligent contribution of co-products, in specific energy co-products. Here we have something more than a sugar business, and that has been demonstrated in Spain during the last year. Higher yield and higher sugar production in the UK. Last year we had ill health effects, we didn’t this year. Sugar production in Illovo unfortunately went down a bit, but we had some weather events that didn’t help. We have put the gigantic bioethanol plant back into service and it is working well. I have a slide on that later. And then I have to say hello to Dr. Mark Carr, who has led this company with wonderful skill for 15 years. He has taken retirement from him. We are lucky to have a very smart successor who has been in the sugar business for a few years. He has been in ABF even longer to take his place. Even the most productive are not irreplaceable. European and world sugar prices, once again, a significant divergence throughout the year between European prices and world sugar prices. After deregulation in 2017, they regrouped. In fact, European values are lower than world sugar values. There is less sugar being produced in Europe than before, and we have had this big discrepancy in value. I think it will remain for the foreseeable future.
So, the European market is not a global sugar market, and the evidence is on this slide. The sugar operations, then the crusade in the UK, and that really matters. The profitability was smart. At this time, sugar volumes will drop a bit due to drought. I still hope that all this rain and heat will exceed the current forecast a bit, but they keep saying no. We’ll see who’s right. And then in Spain, d functionality thanks to higher prices, intelligent production and intelligent sales volumes. And then in China, potato cultivation was subsidized through the state and sugar dominance fell, and hurt a little bit.
It moved to Illovo, where sales and profits were broadly in line despite higher market prices. Excessive weather events, one in Malawi, one in South Africa, did quite a bit of damage, although we very temporarily recovered from both. It’s kind of our main component of the weather update in the world. And we perceive here, better than other places, because the weather has been unstable, but what you want to do to be able to recover from a bad event, TCFD allows you to be waiting in a way, Illovo teaches us what to do to deal with them. Strong contribution from co-products, especially [sulfurol], which we produce in South Africa from significant progress in levers, surely lovely to see in retail capacity progression. We’ve built two new packing plants to make retail sugar, one in Malawi, which is this one here in Olivewood, and the other in Rwanda. So even though we don’t produce sugar in Rwanda, we pack it there and supply it to the Rwandan market. This temporarily transforms Illovo into a mass consumption company with a privileged distribution capacity to the final consumer. We are building the new sugar factory that we have talked about in the afterlife in Tanzania. This program is running.
So Vivergo charged us £33 million to put it back into service. It went well, not without problems, I wouldn’t expect that with a giant petrochemical plant necessarily after the most productive five-year cocoon component. But production is increasing. That’s the way capability is conceived, and it’s consistent. We constantly struggle before we seem to have solved this problem. Europe remains a deficit market for bioethanol. This will be the value of ethanol on the European market. It will be a successful business, we are convinced, but it will be volatile. Gains will be volatile as the price of wheat, gas and ethanol may move in other directions on the same day, but we are very happy to be back with Vivergo.
IT’S OKAY. Skip the sugar and then the edibles. Revenue benefits from increases in value. And the operating result was solid. We’ve had to win back a lot of access pricing from consumers who don’t like to give you value increases, and we’ve done that very well. But it is not finished. There is just as much increased charges in our pipeline today as there was last year. So if we think that food value inflation is yesterday’s story, think again, it’s been around for a while yet. Margin and, we expect this year to charge money like we did last year. margin and will take more time. Twinings, a decent year if it hadn’t been for China and Myanmar, the closures, the closures in China hurt us in our fastest developing market. And Myanmar, I think we all know that. However, Ovaltine had a smart year. Another retirement of a wonderful director within ABF, Bob Tavener, who was CEO, I think, for 22 years, and was an excellent leader of this company. We conducted an exhaustive search for his successor. We have someone in his position who we are extremely happy to have.
So inside the Twinings logo we sold more tea during the lockdown, inevitably sales went down. But we sold very little to Food Service and sales picked up. So it’s smart. Work is well under way at the Polish factory to remove the plastic wrap from most of the teas we sell. Only in markets where there is a problem of humidity, we will leave this plastic wrap. It’s the largest existing use of plastic at Twinings, and it will be largely gone sometime this year. Ovaltine, smart functionality in Switzerland, Thailand, Brazil and Nigeria. This logo still works very well for us. Elsewhere in the grocery store, inflation was a real challenge for World Foods, they buy a lot of glass. Pretty much everything they buy is up 50% or more, and they’ve done a great job of getting charging charges as smart as anywhere else on ABF. Westmill Foods basically supplies Indian and Chinese restaurants. Customers came back to them. They had a smart year. We also have enriched basmati rice. I believe we are the first logo to do this in the UK market. The flour has been fortified in the UK with minerals, and we have controlled the input into the rice for that component of the network that doesn’t eat a lot of flour, doesn’t fortify the flour. I think it’s a smart thing to do.
We have built beautiful very giant oak barrels to age biological vinegars at Mazzetti in Modena and the expansion of the Mazzetti logo has been good. Registrations in the UK, in particular, were one of the highlights of this activity. It will take years, but it is surely on the right track. And then the logo relaunches on Jordans and Ryvita were good. I have an announcement at one point, but inflation is very high in those companies. If you take grains and cook that, you have a double load inflation effect.
Let me show you the new Ryvita ad.
[Audio/Video Presentation]
We tried to do two things with the classic Ryvita. We are trying to attract a younger consumer. The average age profile of other people who use the classic Ryvita is quite old, and we are trying to introduce it to a younger generation. And then secondly, we’re going out to escape, not like Ryvita when I’m on a diet. It’s a glorious, healthy carrier of whatever you need to put in it, and we have to point that out. That’s what it’s about. Okay, some bread. So we were making decent progress. We cut two bakeries. We drove value hard and were getting somewhere. And then the Ukrainian war began. Wheat rose another 45%. The power has multiplied several times. We take flour, cook it, then distribute it. The base charge for input charge inflation was probably worse for bread than for almost any other product we are concerned with. Getting this back from indusattempt was very difficult. And in terms of utility, we went down, we didn’t move forward, despite the steps we took to decrease our load base, decrease our capacity, and that’s where we ended the year.
Other significant price movements are being discussed with our clients. We fully understand, have understood for some time, that pricing alone will not get us to an appropriate profit point, and I will avoid it. Stratas had a very smart year in the United States. They appreciated the lack of transparency in oil values and their margins, used it to increase margins in a high-volume, low-margin business, and the result was happiness, John. The benefits obviously ahead. And then ACH has done a very smart job of getting ahead of the edible oil price curve. So under the Mazola brand, we just value and revalue and revalue and revalue. Whereas in the UK and to some extent Australia we had kind of a grand prix and then six months later another grand prix. Somehow we set the price consistently in the US and it worked to process. There is also a wind following us as we have helped keep volumes of bakery items, which have blown up COVID, from returning to pre-pandemic levels. We’re promoting more yeast, more cornstarch, more corn syrup than before the pandemic, and that’s really smart. Thus, the custom of cooking at home has been maintained in some American families.
George Weston Foods, masses of COVID-related disruptions, especially hard work shortages. For much of the year, we work each and every day with around 20-30% of our workforce absent, which is literally tough. But we do have some wonderful businesses, whether it’s within Tip Top and Don’s in Quick Service Restaurants. We are a leading supplier of bread or rolls and bacon. And those have bounced back nicely over the year in Australia. Several occasions of bad weather did not help. Again, Australia has been characterized by random weather conditions, but recently this year we didn’t flood Don, but we had a landslide that destroyed the electrical power supply system. It’s back, but it was a challenge for a while. IT’S OKAY. And then Agriculture, which had a good year, especially trades. We are now looking to expand the specialty component of this business. We do moderate work. Just each and every once in a while you get a chance, trading companies have a chance to make a lot of money, and this was one of them. Again, the volatility led Frontier to post a record profit. We do sell a lot of farm inputs, and with a higher wheat content, farmers bought more farm inputs than they normally would, but it’s still a smart source for UK raw cloth, as well as mill of animal feed. We bought a wonderful company, Greencoat, which sells more specialized horse and puppy supplements.
And then in the ingredients, and we start with Mauri, where we have fallen behind in the inflation of the input charges, basically because we have annual contracts and we have to wait for them to arrive before we can change the price. The price change is already done. It will be redone. But we’re kind of a preview of that stuff about fee inflation, which is wonderful. Yeast retail sales worldwide were down, not back to where they came from, but down from last year. And then a new primary yeast factory in North India, where the structure is underway. The star of the show, however, was the specialty ingredient business. Record coins in, record coins in throughput, volume growth, new contracts won, strong recovery in input charge inflation. Enzymes and Ohly, the two biggest pieces of… not quite true, two big pieces of the specialty ingredients portfolio have had record years. And then we bought a wonderful company, Fytexia, that specializes in the manufacture and sale of phytonutrients, which go into types of health-related supplements. Regarding the supply of force, we expect that this year the general benefit will be greater. It will be led by Sugar, who may not have that £33m Viverpass streak. Ingredients and agriculture will be broadly aligned. There are more coins in investment in ingredients this year than last year. And then inflation will continue to squeeze grocery store margins even though we will recover money prices from higher input prices.
Before I move on to the perspectives of the organization, let me put this slide in place. £930 million is a lot of money to spend. Includes £160m in acquisitions. And then the finished projects, back left, almost finished projects, they’re all meant to be profitable in the long run. And I think we have confidence in all existing projects. At Primark, we are gearing a bit more towards spending on new retail outlets next year. We’re also. . . those energy-saving soft bulbs, we’re actually going for it. This year alone we are going to spend £66m on soft, energy efficient light bulbs. That’s a lot of shit. But in food, this new plant in Tanzania is important. Surely the yeast extract factory in Hamburg will be rebuilt, and so on. So we continue to reinvest heavily in the business, while returning £500m through percentage buybacks. Right. Group perspective. I will have to remind you, with all our enthusiasm, that the outlook remains unchanged from what we presented to you in the pre-closing business update. But the organization is well positioned. Primark has shown its resilience. Surely it has momentum. And then Food continues to take advantage of diversification. We have some other year of inflation rate higher than input us. Sales will increase, especially due to inflation, but also other growth spaces.
We expect the decline in the source of adjusted operating income towards which we have guided you. Cash generation will be much higher this year due to the non-repetition of Primark’s time issues John went through. And then, even after the buyback percentage, we have a solid balance to give us resilience, to give us firepower. Finally, live from the front, we open Turin today, and here’s a video we controlled to get here in record time.
[Audio/Video Presentation]
I agree. Another 450 people were waiting to get in when we opened the door on the first day. Primark has as much relevance as it has been. And openings, whether you move to Belfast or Turin, as well.
Thank you very much.
Q&A session
A-John Bason
It is ok. Then we have time for some questions and answers. There have been other people who are online. But we may only answer questions from the audience. So we can pass here. We even have microphones. So why not go straight to the front and get started?Let’s move on to Warwick.
Alejandro Okines
Warwick Okines, BNP Paribas Exane. Two questions, please. The first is that he said he expects Primark to experience comparable expansion this year. in the next year? And, in particular, do you think continental Europe can make significant progress towards this point in 2019 under similar conditions?And secondly, it communicated about its actions and some of the gradual effects, but it has more than 50% at the point of organisation from one year to the next. So could you just reassure us about Primark stocks, i. e. spring/summer residual stocks and average stocks?
George Weston
So let me answer that first. The actions, we are convinced, are well controlled. And the fact that it’s up this much year over year reflects the fact that our stock levels are very low at the beginning of the year and then intentionally outperform at the end of the year. year. While 50% is explained through those two alone. We have smart stock coverage. We don’t think, we don’t see any explanation why we should care about our stock titles.
John Basson
Oui. Et, I think we’ve talked about that before. I think, compared to some U. S. retailers, they are not able to do so. In the U. S. , where other people are involved in stock levels, I don’t think it’s a challenge for us.
George Weston
And then, in comparable terms, I think we’ll have even more recovery or improvement in Europe, but it’s incredibly complicated to say where the customer will go. I mean, we’ve talked about a squeeze in customer revenue, and we’re seeing it in some of our customers. Of course we are. But the truth of higher energy costs has not arrived. So I think we have to wait carefully. We think Christmas is a smart opportunity, because last year was very depressing with Omicron, number one. And secondly, we have much greater diversity, much wider diversity than we did a year ago. And in the UK, in particular, we have less competition. But I think it’s pretty hard to predict what sales will look like in the spring/summer of next year.
John Basson
But I think in terms of overall sales, I’d be surprised if it wasn’t a double-digit year-over-year buildup for Primark. A large component of this is clearly the value of accumulation. in that one. Maybe a small delay in volume of maybe 2%. But then, of course, we’re adding sales space. So I think it will give us the most productive finish of 3%, 4% added to sales. So that would be the kind of addition Thank you. Let’s move on to Simon.
Simon Irvin
Three fast. George, can you tell us whether Wittington will sell shares from the buyback or not?
George Weston
I’m going to take off my hat, hat ABF. No, I can’t.
Simon Irvin
Is there any – will we ever know?
George Weston
You have to touch them and see what they say. Just for the regulatory base, I am the managing director of ABF and they are shareholders.
Simon Irvin
Can you give us an update on self-service payment at Primark?
George Weston
I am fine. Therefore, 60% to 70% of buyers seem to prefer to use it and the unknown discount point is controlled and there are hard work savings.
Simon Irvin
And finally, the pension surplus is now quite a staggering figure. I’m old enough to retire. Are we close to it?
John Basson
Therefore, the time you relocate contributions is the time you review the evaluation. The next triennial evaluation will take place in April next year. And, in fact, we’ll take a look at this. One of the things to say is that the design of the pension plan is that the DB and DC plans are under the same plan. Then we are in a position to consider, I think, cutting or, if not saving, contributing money, either for DC and DB in the future.
George Weston
I also the chancellors who were looking for money, looked avidly at surpluses, pensions and went up, and so we will remain cautious.
John Basson
It is ok. Super. Thank you. Georgina
Georgina Johanan
This is Georgina Johanan from JPMorgan. Two from me, please. First of all, a few words about Alemania. De memory, I think the German loss a few years ago was of the order of about £40 million. So if you can give us an update on that, John.
John Basson
Well, I’ll give it now, smaller than that, still a lot. So there you have it, between 0 and 40 million pounds, yes. It’s lower than that.
Georgina Johanan
But in double digits?
John Basson
Two figures, yes.
Georgina Johanan
And the timing of the consultation was, I perceive it’s only been a few weeks since the last update, but obviously things are turning fast, some external points have gone in one direction, some have gone in the other. Generally speaking, in terms of this Primark orientation of a margin of less than 8%, while we were sitting here today, would you say you feel a little more positive than a few weeks ago, or not, depending on the case perhaps?Any useful color, please?
John Basson
Look, I think, I’d like to say that, in fact, the variability that I think we were in in September, I think has decreased. So, for me, that would be key. It’s just that at some point you see a variability of £100 million in each direction. And I think it’s very low. So I think our visibility, and indeed our confidence, so to speak, in the recommendation we’ve given so far, is where it is. Let’s do a little more trading and see where we are. are now. It’s true. It is ok. Ricardo Chamberlain.
Ricardo Chamberlain
Yes, Richard Chamberlain, RBC. Je will ask some questions, please. We believe that Primark’s expansion in the U. S. It’s critical. How do you see the infrastructure now for some kind of additional phase of expansion?And how do you plan to adapt the supply chain, I guess, only in the U. S. ?But also to the input load pressures at the organization level or Primark?
George Weston
At some point, it will be mandatory to charge a deposit for the moment at the source, especially in the south. If we expand very temporarily in Florida, it’s far from the Pennsylvania reservoir and the reservoir fills up anyway. Then it will be: a deposit at the moment is not so planned, but in reflection. And then the source string, a smart question. We try to download more source, especially products with short delivery times from central South America. That’s the big change. Thus, what Turkey is for the European market, Central America tends to be for the North American market.
Ricardo Chamberlain
And only one quick, John, in technique. As for the tax rate, I think he discussed that, I mean, obviously, corporate tax in the UK is not reduced. It remains at 25, it is 25. . .
John Basson
When it’s 19, we have six months.
Ricardo Chamberlain
But what effects are you talking about. . .
John Basson
So, I mean, that’s Primark’s profit point again. So, I think if you look at the indications that we give about Primark’s margin, it would mean a lower profit than this year’s profit, because Primark has a lower tax rate and that’s because of the jurisdictions in which it’s located, adding the United Kingdom, in fact, among others, as well as Ireland. This means that the combination will be negative. And that’s what, let’s say, would make it work a little bit. Yes. Clive Black.
Clive Black
Could you give us an indication of the return on investment in Primark’s new outlets and how it compares to residual wealth?When do you think Germany will break even?And also, there, I say, Allied Bakeries? And finally, I can’t wrap my head, Bason’s circle of relatives at Fam Jams at Christmas. . .
George Weston
I will have to repeat that adjustments to the domain in Germany will only be made after consultation with our other stakeholders. Therefore, I cannot give you a concept of when, because I cannot prejudge the final results of those consultations. And then Allied Bakeries, John, do you need to take care of this diplomatically?
John Basson
Well, yes. I mean, look, what’s in the perspective, as we have it now, is clearly the kind of pricing and so on that we have and the pretty significant costs that will appear in this new year of monetary scenario, which will also reduce additional costs. And I think in terms of the business as it is, it’s literally as far as I think we can go.
George Weston
If energy costs and wheat costs fell significantly, they would do so tremendously.
John Basson
Clive, you asked about the return of the capital contracted through the new Primark stores. So, we’re a little intrigued about why you’re asking this question. I don’t think I will see a decrease or a higher return. erosion in terms of the return of the contracted capital for the Primark company. I was very happy to find the return of the contracted capital above the 12% that we have noticed here with this return. So I hope to see the continuation of a It’s healthy to get back to contracted capital while looking at the new stores. That’s great. So yes, go, Anna. Do we have questions online?
Operator
[Operator Instructions] The first comes from the lineage of Warren Ackerman.
Warren Ackerman
A couple of me. The former is back at Primark. In light of Germany, is Primark worth worrying about in France? Just note the comments about the lack of recovery in Parisian stores. Can you give some numbers in France, what you see, does it have an effect on your type of implementation program in France? And maybe at the same time, if you could say something about the industry in the Benelux, because I don’t think I noticed any comments about Holland, Belgium, that would be helpful. The moment is right at the grocery store. What kind of inflation do we see for the current year, John? It’s notoriously remarkable, you say it’s superior year after year and 22 was already a great year. So, I was wondering if maybe you could give us a concept of the leap quantum, the delta that you’re looking for in the grocery store. And after all about sugar, can you say something about the contribution you expect Vivergo to make in the new financial year of minus £33m, and maybe help us a bit on your average EU sugar value compared to a top guy? of the value of EU sugar?
George Weston
So we’ve noticed a recent smart improvement in store sales in France and we have a transparent concept that. . . I mean the challenge with the Primark logo in France is much more than other people not knowing there’s something negative related to it. So it’s smart. We are very careful to locate the new outlets at a certain distance from the existing outlets. And this, in our opinion, will reduce the danger of cannibalization on the French market. We are very aware that we will have to maintain maximum sales densities to pay our expenses in the French market. We don’t think we have any sales challenges at the moment. We have a load challenge, namely when it comes to power load inflation. Retailers in France are not as opposed to energy value inflation as they are in the UK, and our energy bill is rising especially in the French market. If this is the case for France, Vivergo, I can’t tell you in the long term, and it’s volatile. We take a look at what we would have made if we had raced like we do now last year and made £14m. But it is a volatile image. I don’t see us doing £14m over the long term again or anything else, but that’s what we would have done last year. Where we go?
John Basson
So if I had to point to a number, it would be millions in single-digit earnings for Vivergo, and that pretty much compares to the charge we have for the current year. Our e-book on British sugar values.
George Weston
Want to take that one?
John Basson
I mean, let me put it this way. I think the average pound, increased from €600 to €700 a tonne, is probably where we are for British sugar. , however, I have never liked the spot market because, obviously, these are smaller volumes. But, obviously, it is a much bigger front than last year.
George Weston
So, from a margin perspective, we don’t think we have a problem. It is this relief in volume that worries us. If there is a relief in the crop, where it will come from, the relief in the length of the crop.
Warren Ackerman
Can you also tell us something about the upper burden of meat?
John Basson
So, I mean, let’s stay in the brain that the overall benefit of buying groceries is rounded up, say, to £400 million. An amount of millions is the inflation that we are seeing, once again, in this new fiscal year. year. I mean, the explanation for why we say this is that in some tactics you feel good, but you probably have a peak of inflation, and that’s us. But certainly, what we mean here is that there is a kind of wave after wave of inflation. And I think George discussed that, especially for corporations where maybe a lot of their hedges fell and they felt the need to move the raises. So, for groceries, £200 million to £300 million of inflation, and I would bring it forward from last year, probably around £50 million or so. But that’s its scale and persistence, which I think is what we’re really standing out. Does that cover the problem?
Warren Ackerman
He did it. I only need to temporarily return to sugar very briefly. Would you say that the costs of the EU currently, I only mean [indistinguishable], communicate figures of 800 €, 900 € consistent with the ton?And is it still fair to think that about a third of your e-book runs on those with costs on an annual basis?
John Basson
So they’re moving parts of the e-book, Warren, and that’s precisely what you’re referring to. So maybe you have a third of the e-book or more at last year’s prices. And they are much closer to the € 500 mark. That gives you a concept of where you are. Therefore, it is evidently an average over the total room, deceived by the absolute type of place, because it knows that we do not like it because they are looking to tear down. So we can move on to the next question, please.
Operator
[Operator Instructions] And the next one comes from the lineage of David Roux of Bank of America.
David Roux
The first is just a follow-up to feedback on ROCE for new outlets that are not other than those in the existing fleet. John, do you mean the 12% ROCE for Primark or the 30% point rate before the pandemic?And so my inquiry at the moment is just about Primark product prices in dollars. Could you give us an update on the trend of the value of new orders in recent months, just to see if we are beyond the peak and if they are falling?
John Basson
So the return of contracted capital, the 30% you’re looking for is probably earlier, wait, IFRS 16. So we had a return of the contracted capital in the most sensible 20%. The application of IFRS 16 has caused it to fall widely, widely. I think the reformulation would probably have brought us to around 15%. So the 12% we’re looking for reflects the return of around £750m in profits we’ve made now. Does that explain this? Therefore, it is an accounting reformulation. I have noticed that the return of the capital contracted through our retail points of sale is really very buoyant. And, therefore, it is not remotely a challenge as follows from this reduction.
David Roux
Oui. Je refers to ROCE in 2019, which I guess was adjusted for that, but that’s okay. So, John, does that mean retail outlets would be closer to 15%?
John Basson
We didn’t do the retrospective or anything, which we adopted, which means you didn’t retire in previous years. So I think 2019, I’m sure I’m right about that, still on the previous basis. And then 2020 in IFRS 16. So, it hasn’t been restated, just to be clear.
George Weston
Cost of the recently purchased product. I think the big movement is money. So, compared to 120 to 130 against the British dollar, we are at, let’s call it, 110, 115. And that’s what it quotes instead of anything else.
John Basson
Let’s move on to the next question, please.
Operator
[Operator Instructions] And the next one comes from the lineage of Adam Cochrane of Deutsche Bank.
Adam Cochrane
Just a few questions about Primark. First, how important is the comparable outlook for the next monetary year to Primark’s margin assumptions in terms of less than 8% compared to other points? Turns out your other spots are sometimes pretty well covered by the noise of things. So what if comparable knowledge remained variable in the forecast? And what does the same rise or fall mean for the margin? And then secondly, he spoke before and the pandemic about the poor performance of some of his biggest retail outlets. Can you give us an update on the trend over the last three, six, 12 months in terms of larger retailers versus out-of-town retailers and so on? And then thirdly, maybe a more general question. Your pricing policy turns out to hopefully give you a competitive advantage. How are you going to make sure that all of your consumers are aware of this? Is there any publicity etc you can do to let other people know that your value position can improve compared to your peers?
John Basson
George, why don’t you answer the latest on pricing?They are very worthwhile. That’s not true.
George Weston
Yes, as John says, our consumers are very worthwhile. This makes things very clear to them, but we also do a lot more work through the communications team informing the press about our pricing policy. We did a vital interview the other day in France, for example, where we presented to bloodhounds the truth of our value frozen in children’s clothes. So no more communications, but our consumers know very well our values and our relative values.
John Basson
What about retail branches where we underperform?
George Weston
For a year, supermarkets have risen between 15% and 30%. So, not quite in 2019, but on the way. The challenge with retail branches is less about sales and more about the availability of hard work. Europa. No we have enough staff. The city branches are back. When I showed them some of those photos, it was with some certainty that sales are much higher than they were before. So what was the challenge? The pandemic and its early aftermath are no longer a problem.
John Basson
And I like it, George, do you need to comment on that?
George Weston
Yes, it’s the biggest mobile part. And that would give us our merit or our demerit is now comparable. What I don’t have in my brain is leverage to expand sales. But that trickles down quite a bit into gross margin.
John Basson
So, Adam, one of the things I was saying about the recommendation I gave for this year is that there’s an expectation in that number of some drop in volume. These are essentially other people who manage the budget. So, the big bite is transparently 8%, 9% that is worth accumulating during the year. Then you have a drop in volume and then you have the quantity. So I think I’ve incorporated some. But he’s right, it’s transparent that if volumes fall a lot more or rise a lot more, the margin and profits that come with it will be transparent. I think, for the sake of time, I think you have any other questions, please. We can take this online.
Operator
[Operator Instructions] And the last one comes from the lineage of Anne Critchlow of Société Générale.
Ana Critchlow
Just a question, please, from me about Primark Warehousing. So, just to remind us where your services are and how you invest in them. I think they discussed what you’re going to invest this year, and what’s the point of automation?
George Weston
So we have significantly automated Rosendal and the assignment to be made, Bor, is in Holland. Czech Republic Bor, which includes the Italian markets, and the easternmost component of our portfolio, this allocation will be completed in the year. Automation of the tank. The big task we are executing at the moment, which I do not think will be completed in the year, is New Bridge in Ireland. It is a complete automation. So, whether it’s the pallet garage and also the handling of individual boxes, however, that’s the next step. As I said, sometime in the not-too-distant future, we’ll be adding capacity, though probably not automated, in the southern United States. We went from Rosendal to the Spanish deposits. Then we will automate them. I think in five or six years we will have a warehouse park where maybe 60% of what we get to the warehouse will move through an automated warehouse. This is the point of automation we will achieve.
John Basson
Thank you so much. Thank you all very much. Thank you.