ABF Profits Continue to Tumble as Strong Currency Hits Bottom Line

04 Nov 2015 --- International food and grocery retail business Associated British Foods has announced that group revenue for the year to September 12 fell 1 per cent, while at constant currencies, revenues for the year were up 2 per cent. Retailer Primark continues to prop up the company as commodities struggle to break even.

In a statement, the company said: This financial year has been characterised by continuing investment in businesses with growth opportunities and a relentless drive for improved efficiencies and cost reduction. The two major challenges facing the group have been well flagged – food commodity deflation and substantial movements in currency markets. A key influence on our food businesses has been deflation in many of our major commodities, making growth in revenues difficult to achieve. The most notable examples are the substantial declines in both the EU and world sugar prices. We have also experienced significant movements in exchange rates with a strengthening of sterling and the US dollar, and a weakening of the euro and emerging market currencies. These movements had a negative effect on the translation of overseas results but also, and increasingly as the year progressed, on transactional exposures. Against this background a 2% decline in adjusted earnings per share is all the more creditable and the group continued to generate strong cash flows and reduce net debt significantly as a result.

This year has seen growth for a number of businesses. Primark expanded its retail selling space by 9% this year with a major increase in its presence in Germany, Belgium and the Netherlands and at the end of the year it opened its first store in the US. 

Brand development at the Grocery businesses included a major relaunch of Twinings black teas in the UK, growth for Mazola driven by strong advertising of its cholesterol lowering benefits and commercial success for the Don meat brand in Australia. The enzyme business went from strength to strength and was a key contributor to the profit increase in Agriculture and Ingredients. We continue to position our businesses to enable them to maximise revenue growth opportunities. 

The EU sugar price has stabilised in the latter part of the year. However, the significant fall both in EU and world sugar prices has put considerable strain on the world sugar industry and has sharpened the focus on securing the long-term profitability of the business. As one of the lowest cost producers the company has always sought to reduce costs and maximise production efficiency. Significantly, this year, it have secured lower future beet costs for the EU sugar businesses and closed two uneconomic factories in Heilongjiang, China. 

Cost reduction was not confined to the Sugar businesses. The substantial profit and margin recovery in Ingredients and margin improvement in Grocery were also driven by wide ranging initiatives in these businesses. 

The company continued to invest for the long term with gross capital expenditure on property, plant, equipment and intangible assets of £613m. Over half of this was spent on Primark’s expansion where, this year, ABF added 20 new stores and almost one million square feet to the estate. It expects next year’s increase to be even greater. ABF also increased the scale of Primark’s distribution infrastructure to support this growth by extending existing warehouse capacity and opening new facilities in the Czech Republic and the US. 

The focus of capital expenditure within the food businesses was directed at expansion of capacity-constrained facilities and on improving production efficiency. Cash flow was again strong this year despite a working capital outflow driven by higher sugar stocks. Net debt at the year end was £252m lower than last year at £194m. With the group’s cash generating ability, the lower net debt and the committed borrowing facilities available, we have the capacity to meet our growth ambitions.

Charles Sinclair, ABF Chairman confirmed the company’s outlook: “The good underlying trading achieved by our businesses in 2015 is expected to continue. We intend to maintain investment in expansion opportunities, most notably for Primark. After three years of large profit declines for AB Sugar, we expect greater stability in profit next year ahead of EU quota removal in 2017. However, the substantial moves in exchange rates last year, notably the weakening of the euro and emerging market currencies, will have a significant influence on the results for the coming year. At current rates the translation impact would be at a similar level to last year but the transactional impact would be greater and will be seen primarily in Primark and British Sugar. At this early stage we expect the currency pressures to lead to a modest decline in adjusted operating profit and adjusted earnings for the group for the coming year.”