ABF Results to Show Mixed Fortunes
Net debt for the group is expected to be in line with forecast at the half year. Although capital expenditure was higher than last year, better than forecast working capital performance will result in an improvement in operating cashflow for the period.
24/02/09 Associated British Foods plc has said in a trading update that its interim results will show good growth in Sugar and Ingredients with a better than forecast result in Agriculture. Primark will again deliver excellent results. Grocery will show a decline on last year with a substantial margin reduction at ACH and the impact of consumer downtrading on a number of the company’s businesses more than offsetting good performances by Twinings Ovaltine and Allied Bakeries.
Adjusted operating profit for the group for the half year will be slightly lower than last year. For the full year, as previously highlighted, the company have budgeted for little change in adjusted earnings over the previous year and still expect this to be the case.
The income statement will include a loss on disposal of businesses of some £60m which is excluded from adjusted earnings per share. This charge reflects the closure of ACH's main commodity oil processing plants following the creation of the packaged oils joint venture with ADM in North America and the closure of the loss-making milk protein factory in Norfolk, Nebraska. Of this £60m, asset write-downs will amount to £43m and the cash cost of these closures is expected to be £17m.
Net debt for the group is expected to be in line with forecast at the half year. Although capital expenditure was higher than last year, better than forecast working capital performance will result in an improvement in operating cashflow for the period. The positive impact of this on net debt will be offset by the effect of currency translation on US dollar and euro denominated borrowings.
In early March we expect to complete a private placement of senior notes to a number of UK and US institutional lenders. This issue will add to the financial strength and flexibility of the group. It will provide funds in addition to our existing committed bank facilities and will have the effect of diversifying our sources of funding and lengthening our debt maturity profile. The funding will raise some $600m with an average maturity of 6.7 years. The fixed interest coupon on these notes will be higher than the current variable interest rate on bank borrowings and will increase the group's interest expense in the second half.
Profit from Sugar will be ahead of last year with progress from our European businesses and Illovo more than offsetting a decline in China.
In the EU, the UK business has had an excellent campaign and the sugar crop, estimated at 1.2 million tonnes, is higher than expected. The operations set new performance records and profit benefited from a much lower net energy cost. The Glinojeck factory in Poland again performed well but total production was lower than last year at 165,000 tonnes with disappointing beet yields. Both businesses benefited from the strength of the euro and firmer pricing than expected. On 15 December 2008, agreement was reached with Ebro Puleva S.A. to acquire the leading sugar producer in Iberia, Azucarera Ebro, for €385m. Completion of the transaction is subject to regulatory approval and is likely to occur this spring. Early estimates of the fair value accounting for inventory on acquisition indicate an adverse, non-cash, adjustment of some £20m which will be excluded from adjusted operating profit. The acquisition is expected to be earnings accretive for the group in the 2010 financial year.
Illovo's profit increased again in the period. Sugar volumes this season are lower than anticipated following dry spells particularly in South Africa and Tanzania. 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 the high level of sugar stocks in the industry that were brought forward from last year's record crop. This year's crop is likely to be more in line with the average and recently the price has firmed slightly. The sugar business in the north east has been further affected by a smaller beet crop and lower sugar extraction. The first major capacity expansion for beet, at the Yi'an factory, was successfully commissioned in late December.
Our agriculture businesses had a strong half year with higher prices, recovering higher input costs, and increased demand for specialist nutrition products. Improvement continued in feed enzymes and Frontier achieved good trading margins, a little below the exceptional level achieved last year but better than expected.
Grocery profits in the first half will be lower than last year. A substantially lower profit at ACH and declines in Silver Spoon and George Weston Foods in Australia will outweigh progress elsewhere.
Allied Bakeries has continued to trade well with higher branded volumes and an improvement in profit. In Australia, bakery margins have been impacted by consumers switching from premium branded to own-label products and the integration of the KR Castlemaine meat business is progressing to plan. Profits at Twinings Ovaltine improved again with strong growth from Ovaltine in developing countries but a slowing of the rate of growth of premium teas, particularly in the UK and US. Price competition has reduced margins at Silver Spoon and sales volumes of breakfast cereals are lower than last year. The merger of Ryvita and Jordans is progressing to plan.
ACH has been impacted by weaker sales to the foodservice sector, lower volumes of Mazola, the selling price of which was increased significantly during 2008, and by taking long positions in vegetable oil futures at values well above the current market, but which have largely been exhausted in the first half. Profit at the half year will be substantially lower than last year but some recovery is expected in the second half.
On 28 October 2008 agreement was reached with Archer Daniels Midland Company, ADM, on the creation of Stratas Foods, a 50% joint venture for the manufacture, marketing and distribution of packaged oil products in the US and Canada. It will build on the sales and marketing expertise of ACH and the origination and processing capabilities of ADM. A provision for the costs of the closure of ACH's main commodity oil processing plants will be made at the half year. It will be accounted for as a loss on disposal of businesses and will therefore not affect adjusted earnings per share.
Our 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.
At constant currency, the yeast and bakery ingredients businesses of AB Mauri made good progress in the half year. Yeast in Europe and South America benefited from increased volumes and prices, North America had particular success with its technical ingredients but yeast volumes were softer in China and India. In ABF Ingredients, growth in enzymes has continued and the increased production capacity in Finland is expected to be fully operational in the spring. Speciality whey proteins were further impacted by margin compression.
Trading at Primark has been strong and over Christmas was ahead of our expectations. Sales in the first half were substantially ahead of last year reflecting the increase in retail selling space and a 5% increase in like-for-like sales. As expected, the cost of the new distribution centre at Thrapston in the UK, which has been in operation throughout this period, increased fixed overheads and will be reflected in a lower operating profit margin.
At the end of February we will be operating from 187 stores and 5.6 million sq ft of selling space. Since last year end we have opened six new stores: Oviedo, La Coruna and La Gavia (Madrid), bringing the number of stores in Spain to 12, High Wycombe and Corby in the UK and our first store in the Netherlands, in Rotterdam. Initial trading in Rotterdam has been very encouraging. We expect to open a further seven stores in the second half, in Bristol, Cambridge and a resite in Tooting in the UK, two stores in Spain and our first stores in Germany and Portugal, in Bremen and Lisbon respectively.
