ABF Performance Boosted by Weak Sterling

ABF’s Ingredients businesses are almost entirely located outside the UK and the translated results have benefited significantly from the weakness of sterling against the US dollar and the euro.

16/01/09 Associated British Foods (ABF) has reported that Group revenue for the first 16 weeks was 21% ahead of the same period last year. The weakness of sterling, particularly against the euro and US dollar, has been a major feature of the period with the main beneficiaries of currency translation being Grocery and Ingredients. The group revenue increase was 15% on a constant currency basis reflecting, in part, the flow-through of higher prices to recover input cost inflation last year.

Sugar revenues were 20% ahead of last year driven by strong performances from British Sugar in the UK and Illovo.  The UK business has had an excellent campaign and benefited from a much lower net energy cost.  Both the UK and Poland have also benefited from the strength of the euro and firmer pricing than expected.  Illovo’s profit increased again in the period but sugar volumes were lower than anticipated.  The second phase of capacity expansion in Zambia is progressing to plan.

Profitability in China will be significantly reduced by much weaker sugar prices resulting from over-supply in the domestic market.  The beet sugar business in the north east has been further affected by a smaller crop and lower sugar extraction.  However, the first major capacity expansion for beet, at the Yi’an factory, was successfully commissioned in late December.

On 15 December 2008, agreement was reached with Ebro Puleva S.A. to acquire the leading sugar producer in Iberia, Azucarera Ebro, for a value of €385m. Completion of the transaction is subject to regulatory approval and is likely to occur in the spring.  Following its agreement to renounce permanently some of its quota from October 2009, it will process beet at three factories in northern Spain and a factory at Guadalete, near the port of Cadiz, in southern Spain. To supplement the reduced beet quota, a cane refinery is being built at Guadalete which will have a capacity of 400,000 tonnes of sugar and is expected to start operations later this year.  The refinery will process cane raws which will be supplied mainly by Illovo Sugar.  Pro-forma results for the business acquired were revenue of €586m and operating profit of €44m for the year ended 31 December 2007.  Fair value accounting for inventory on acquisition will result in a small reported operating loss for this business in the current financial year but the acquisition is expected to be earnings accretive for the group in the 2010 financial year.

ABF’s agriculture businesses made a strong start to the year with revenue up 26% driven by higher prices, recovering higher input costs, and increased demand for specialist nutrition products.  Improvement continued in feed enzymes.  Frontier achieved good trading margins although, as expected, below the exceptional level achieved last year. 

Grocery revenue was 21% ahead driven by the benefits of favourable translation of the US and Australian businesses, the flow-through of higher prices and the acquisition of Jordans.  Allied Bakeries has continued to trade well with an improvement in profit.  In Australia, bakery margins have been impacted by consumers switching from premium branded to own-label products but the integration of the KR Castlemaine meat business is progressing in line with expectation.  The profit outlook for Twinings Ovaltine remains unchanged but the rate of growth of premium teas, particularly in the UK and US, has slowed.

Lower consumer demand has resulted in weaker sales to the foodservice sector, particularly in the US and to ethnic restaurants in the UK.  ACH has been further impacted by lower volumes of Mazola, the selling price of which increased significantly during 2008, and by long positions in vegetable oil futures at values above the current market.  These futures will have matured within the next few weeks but profits at ACH at the half year will be substantially lower than last year.  At Silver Spoon price competition has impacted margins.  Sales volumes of breakfast cereals are lower than last year but the merger of Ryvita and Jordans is progressing to plan.

On 28 October 2008 agreement was reached with Archer Daniels Midland Company, ADM, the global agricultural processor, on the creation of Stratas Foods, a joint venture for the manufacture, marketing and distribution of packaged oil products in the US and Canada.  ABF and ADM each hold a 50% share.  It will build on the sales and marketing expertise of ACH and the origination and processing capabilities of ADM.  The closure of ACH’s main processing plants was announced in December with production transferring to the ADM facilities in the joint venture during 2009.  A provision of some £50m for the asset write-down and cash expenses of closure, will be made at the half year, accounted for as a loss on disposal of businesses, and will therefore not affect adjusted earnings per share.

ABF’s Ingredients businesses are almost entirely located outside the UK and the translated results have benefited significantly from the weakness of sterling against the US dollar and the euro.  Revenue was 25% ahead but at constant currency was only 8% higher.  Our yeast and bakery ingredients business is trading well with higher volumes and improved pricing.

Trading at Primark was strong and over Christmas was ahead of expectations.  Sales were 18% ahead of last year reflecting the increase in retail selling space and very good like-for-like sales growth.

As previously highlighted, the group will not be immune from the worsening economic climate and particularly the pressure on consumer spending. ABF have budgeted for little change in net earnings for the full year and still anticipate results in line with that expectation.