AB Foods Boosted by Sugar, Ingredients Revenues Struggle

Ingredients’ revenues will be similar to last year but operating profit will be sharply lower reflecting restructuring charges and the continuing operational challenges faced by AB Mauri, the yeast and bakery ingredients business.

14 Sep 2012 --- Associated British Foods plc issues the following update prior to entering the close period for its full year results, 52 weeks to 15 September 2012, which are scheduled to be announced on 6 November 2012.

The group’s adjusted operating profit for the second half will be substantially ahead of last year and in line with expectations. The income statement will include a non-cash charge of some £100m for the impairment of property, plant and equipment at the meat factory in Australia. This is an exceptional charge which will be excluded from the calculation of adjusted earnings. Net interest expense in the second half will be a little higher than last year. The underlying tax rate for the year will be slightly lower than that used in the interim results, reflecting the further reduction in the UK corporation tax rate, but higher than last year. As previously indicated, both adjusted operating profit and adjusted earnings per share for the full year will be substantially ahead of last year.

Investment in new stores for Primark increased in the second half and will be ahead of last year for the year as a whole. Capital expenditure for the group will be lower than last year as a number of major, long-term projects have completed. Continuing projects include construction of the relocated sugar factory at Zhangbei in China and a new yeast plant in Mexico, both of which are progressing in line with plan. The new yeast plant at Yantai in Shandong province is now complete.

In July we completed the acquisition of Elephant Atta, the UK’s leading ethnic flour brand, for a consideration of £34m and regulatory approval was granted on 6 September.

The cash inflow before financing in the second half will be much better than last year with the benefit of higher profit, lower capital expenditure and a higher working capital inflow. Taking into account the recent acquisition, the level of net debt at the year end is expected to be below £1.2bn compared with £1.3bn last year.

Sugar revenues in the second half have been well ahead of last year reflecting the strong commercial environment in Europe and to a lesser degree Africa. In China, prices have continued to fall since the half year and revenues will be lower as a result. Profit for AB Sugar for the full year will be considerably higher than last year with the benefit of European and African revenue increases and a strong operational performance.

In the EU, profit from British Sugar will be ahead of last year reflecting the excellent campaign and the absence of the weather-related challenges of the previous year. 1.3 million tonnes of sugar was produced compared with just under 1.0 million tonnes last year. In Iberia, after a successful campaign in northern Spain, Azucarera’s southern beet campaign benefited from higher than forecast sugar content and extraction levels.468,000 tonnes of sugar from beet was produced against a quota of 378,000 tonnes. The Guadalete refinery again increased its output and, combined with sugar refined from cane raws at the beet factories, 376,000 tonnes of sugar was produced.

Profit in the second half will be ahead of last year at Illovo with higher sugar production and prices. Sucrose content of the cane has improved to more normal levels and production in our financial year is expected to be 1.8 million tonnes compared to 1.6 million tonnes last year. Following the devaluation of the Malawian kwacha on 7 May 2012, local sugar prices were increased which, together with higher export earnings, will more than offset increased operating costs in local currency terms. However, the devaluation will result in an overall small negative impact on profit when translated into sterling.

As announced in July, Illovo’s £15m investment in pre-project expenditure in Mali has been written off and charged as a loss on closure of businesses in the income statement. This charge is expected to be largely offset by the realisation of deferred profit on the disposal, in November 2009, of the group’s Polish sugar operations.

In China, further progress was made in the north with sugar volumes increasing from 210,000 tonnes to 287,000 tonnes. Volumes in the south were level with last year at 405,000 tonnes. However, profit in China will be considerably lower as a result of weaker domestic selling prices.

Agriculture’s strong performance has continued, with revenues ahead and profit expected to be in line with last year.

Our UK feed business benefited from higher volumes of sugar beet feed but saw some margin erosion in the pig and poultry feed markets reflecting another difficult year for the UK livestock industry. Premier Nutrition increased its UK market share in broiler and ruminant premixes but suffered margin erosion in Eastern Europe. AB Vista delivered strong sales growth driven by the Quantum phytase range and particularly the recently launched Quantum Blue.

Progress was made by our business in China with increased compound and sugar beet feed sales volumes together with new products for the feed ingredients market. Agreement was reached recently with a major customer to build a new feed mill in China to service their local poultry feed requirements.

Frontier continued to trade well. Earnings from grain trading were at more normal levels which reflected less movement in wheat prices during the year. High crop prices underpinned good farm profitability and Frontier benefited from continued high demand for fertiliser, seed and crop protection products.

Grocery revenues for the full year will be ahead of last year. Adjusted operating profit will show a decline reflecting restructuring costs at George Weston Foods in Australia and Allied Bakeries in the UK, margin declines at Allied Bakeries and the difficult retail and competitor environment in Australia.

Twinings Ovaltine, our most profitable grocery business, maintained the momentum of the first half achieving sales growth in tea in the US and a number of international markets, and strong growth from Ovaltine in Thailand and its developing markets. The recent investment in new production lines enabled further improvements to be made in tea packaging.

UK consumers have continued to seek value from product choice, promotions and price as there has been little easing of the pressure on household incomes. The market remained intensively competitive for Allied Bakeries with promotional activity reducing margins. The recent increase in wheat costs will place further pressure on margins. However, good progress was made in reducing its cost base with the closure of two small bakeries and overhead reduction. Jordans and Ryvita performed strongly with both brands responding well to effective advertising. The transfer of crackerbread manufacture from Stockport to Poole was completed during the year.

Silver Spoon has had a good year but volumes and margins have recently come under pressure from increased competition in the consumer sugar market. Truvia, the stevia-based sweetener, was launched in January and has built a leading position in the sweetener category. AB World Foods operated in a competitive trading environment throughout the year with volumes supported by increased promotions. Although the ethnic food industry remains weak, Westmill’s sales of noodles have been strong and the recent acquisition of Elephant Atta, the UK’s leading ethnic flour brand, will complement its other ethnic brands including Tolly Boy rice, Rajah spices and Tolly Boy noodles.

At ACH in the US, vegetable oil volumes increased, benefiting from a recent price reduction, while home baking and spices volumes were level with last year. In Mexico, a weaker peso and continued competitive pressure resulted in lower volumes and trading profit. Stratas made further improvement in margins with better oil procurement and lower overheads.

In Australia, the difficult retail and competitor environment experienced by George Weston Foods will lead to lower revenues. Restructuring charges and poor trading in the meat business will lead to a substantially worse operating result. A restructuring charge was taken in the first half for the cost of reorganising sales distribution and warehousing and a general reduction in administration costs. Some further cost for restructuring was charged in the second half.

As a result of the difficult trading conditions and low volumes, the carrying value of the assets in the meat business is no longer supported by our forecasts of its discounted future cash flows. An impairment charge of A$150m has been taken representing almost half the value of the property, plant and equipment in use in this business. Accounting standards do not permit the inclusion, in the impairment calculation, of cash flows that are expected to be generated from the future sale of former meat processing sites in Western Australia and Victoria. These are being redeveloped and the net cash inflows are expected to be substantial.

Ingredients’ revenues will be similar to last year but operating profit will be sharply lower reflecting restructuring charges and the continuing operational challenges faced by AB Mauri, the yeast and bakery ingredients business.

The European yeast market has continued to be extremely competitive and our margins remain constrained by an inability to recover fully raw material cost increases. In Asia, sales volumes in China were disappointing and key raw material costs, primarily molasses, remained at a high level. Progress was made in improving productivity at the recently commissioned yeast factory in Harbin, making this one of our most efficient plants. Our plant in Vietnam was reopened in the second half following completion of operational improvements. In Brazil, margins were affected by competitor activity and raw material price pressure. Continued growth was achieved by bakery ingredients globally which benefited from our investment in resources and technology.

Capital investment in the year included the construction of new yeast plants in Mexico and Shandong province in China together with the expansion of dry yeast capacity at Xinjiang in China. The plants in China have been commissioned and the Mexican plant will be operational during the first half of next year.

ABF Ingredients will deliver growth in sales and profit. Growth in feed, bakery and speciality enzymes was driven by new product launches and in response to this sustained growth, the enzymes factory in Finland, which is now approaching capacity following its expansion in 2009, is to be expanded further. High lactose and whey protein prices and volume growth of extruded ingredients drove an improved performance in the US.

Sales at Primark for the full year are now expected to be 17% ahead of last year at constant currency which, with the recent weakening of the euro, will be 15% ahead at actual exchange rates. This excellent result was driven by an increase in retail selling space and like-for-like sales growth which we expect to be 3% for the full year. Trading this summer in the UK was particularly strong and sales in continental Europe remained buoyant. Trading in newly opened stores exceeded expectations and the opening of the new store in Berlin in July saw our most successful first day’s sales ever. Early sales of the autumn/winter range have been encouraging.

Operating margins in the first half were lower than last year reflecting the absorption of high cotton costs which we chose not to pass on to customers. Margins in the second half increased, following the fall in cotton prices, and we therefore expect margin for the full year to be close to last year’s levels.

The pace of store and retail selling space expansion increased this year. By the financial year end we expect to have opened 19 new stores and added 0.9m sq ft of selling space bringing the total to 242 stores and 8.2 million sq ft. Seven new stores have been opened in the second half to date including Berlin and five stores in Spain bringing the total there to 28. Two more stores are planned to open before the end of the financial year with one in each of Spain and the UK. Our second store on London’s Oxford Street, which has 80,000 sq ft of selling space over four floors, is scheduled to open on 20 September, just after the year end.

A new, purpose-built depot in Mönchengladbach in the west of Germany was opened in August with 400,000 sq ft of warehouse space. This adds to the footprint of our existing depots in Ireland, the UK and Spain and will enable a more flexible response to the needs of our customers in northern Europe.