AB Foods Reports Sales and Profit Growth Despite Market Pressures

Ingredients achieved a revenue increase of 5% over last year but operating profit fell by 46% as a consequence of significant raw material cost increases, a highly competitive trading environment in many markets and substantial commissioning costs of the new yeast factory in China.

Nov 8 2011 --- Associated British Foods has reported another year of progress for the group. Revenue increased by 9% to £11.1bn and adjusted operating profit was 1% ahead of last year at £920m. “These results were achieved in a difficult trading environment which was characterised by substantial increases in many of our commodity costs and a weakening of consumer demand in developed markets as disposable incomes reduced,” the company reported.

Adjusted operating profit increased by 1% to £920m and movements in currency exchange rates had no material effect on this result. This profit benefited from lower restructuring charges compared with the previous year, particularly in Grocery. When the 2010 result is adjusted on to a 52 week basis, year-on-year profit growth was 3%. In calculating adjusted operating profit, the amortisation charge on non-operating intangibles and any profits or losses on disposal of non-current assets are excluded. Together, these items amounted to £78m this year compared with £90m last year.

No profits or losses arose on the sale and closure of businesses this year compared with a profit of £28m last year on the disposal of the Polish sugar operation in November 2009. These profits are excluded from the calculation of adjusted earnings, and revenue and profit from disposed businesses are disclosed separately in the segmental analysis.

There were a number of highlights this year. AB Sugar achieved a significant improvement in profit driven by the company’s Chinese and Iberian businesses and AB Agri had another record year. In Grocery, Twinings and Ovaltine achieved excellent revenue growth and Jordans Ryvita and AB World Foods delivered on the investment in recent years with growth and much improved margins. Like-for-like sales growth at Primark was notable when most of its high street competitors showed a decline. Investment across the group was substantial this year with a number of projects completed or expected to complete next year.

“We have made a major investment in our sugar businesses in recent years with the acquisition of Azucarera in Iberia, the development of our presence in China in both cane and beet sugar and capacity expansions in Illovo. It is pleasing to report the growth in profit for this group, now named AB Sugar, driven by our investment in Azucarera and in China. In the UK, British Sugar worked hard to meet its supply obligations, albeit at some cost, after the production shortfall arising from the effects of the harsh winter on the beet crop. Looking ahead the combination of an increase in production, a further improvement in our operations and higher sugar prices are expected to benefit our business,” the company reported.

Grocery’s major challenge during the year was the mitigation of the effects of rising commodity costs and consumers seeking ever better value. “All of our businesses improved their consumer offering and management has delivered on investments made in recent years, contained costs and achieved price increases. The reported reduction in profitability in Australia was, however, a major disappointment. To address this, we have appointed a new management team and a programme of cost reduction and the full commissioning of the meat factory will be their focus for the coming year.”

The AB Sugar group performed very well this year with revenue ahead by 10%, operating profit up 31% and an increase in margin to 14.8%. This was achieved with a significant increase in Chinese beet sugar production, an improvement in Iberia and the benefit of strong world prices. However, it was affected by weather-related poor harvests in South Africa, southern China and the UK.

The Ingredients segment comprises AB Mauri and ABF Ingredients. AB Mauri has a major global presence in bakers’ yeast, with significant market positions in the Americas, Europe and Asia, and is a technology leader in and supplier of bakery ingredients. It operates from 49 plants in 25 countries. ABF Ingredients markets enzymes, yeast extracts, speciality proteins and lipids worldwide and has manufacturing facilities in Europe, the US and China. Ingredients achieved a revenue increase of 5% over last year but operating profit fell by 46% as a consequence of significant raw material cost increases, a highly competitive trading environment in many markets and substantial commissioning costs of the new yeast factory in China. “We nonetheless remain committed to our investment in building capacity and developing a sharper and more differentiated offering for both yeast and bakery ingredients. Profit improvement is expected as molasses costs begin to subside in some of our markets.”

The AB Mauri yeast and bakery ingredients business achieved revenue growth throughout the year, driven primarily by good performances in Asia and South America. However, difficult market conditions in Europe and North America and substantial raw material cost inflation in a number of key markets saw operating profit sharply lower. The European yeast market was extremely competitive all year and weakness in the bakery industry in North America led to lower sales of wet yeast. Full recovery of higher input costs was consequently challenging in these markets.