Associated British Foods Says Group Trading Remains “Strong”

Trading for the group since the half year has been strong resulting in an increase in adjusted operating profit for the second half compared to last year. Although the interest charge will be substantially higher.

8 Sep 2009 --- Associated British Foods plc issues the following update prior to entering the close period for its full year results to 12 September 2009, which are scheduled to be announced on 3 November 2009.

Trading for the group since the half year has been strong resulting in an increase in adjusted operating profit for the second half compared to last year. Although the interest charge will be substantially higher, we now expect some progress in adjusted earnings for the full year.

Expenditure on acquisitions in the year, including debt assumed, will amount to some £370m, primarily comprising the Iberian sugar business, Azucarera Ebro, and a sugar cane farm in Zambia.  Proceeds from the disposal of a number of small businesses amounted to £14m.

Net Debt

Further progress in working capital management in the second half will result in an outflow substantially lower than last year, more than covering the increase in capital expenditure.  Advanced consideration of some £120m has been received in respect of the sale of the Polish sugar business which will complete later this year subject to regulatory clearance.  Net debt for the group at the year end is now expected to be close to the level at the half year.  The rights issue announced by Illovo in South Africa will complete early in the group’s new financial year which will result in a further reduction in the group’s net debt of some £100m.

Sugar & Agriculture

Sugar profit will be substantially ahead of last year driven by growth in the EU and Illovo which more than offset losses in China.

In the EU, our UK and Polish businesses delivered good results with solid operating performances, robust sales, the benefit of a strong euro and favourable energy costs.  We acquired Azucarera Ebro, the leading sugar producer in Iberia, in April this year.  This was followed by the announcement in August that we had reached agreement to sell our Polish sugar business, the country’s fourth largest producer, to Pfeifer & Langen Polska S.A.  Completion, which is subject to regulatory approval, is expected in late 2009.  The combination of our leading position in the UK with that of Azucarera Ebro in Iberia, together with access to the sugars of the Least Developed Countries provided by Illovo, gives us a strong presence in the EU market.

Illovo will deliver an excellent operating result driven by strong sales and currency translation gains for the operations outside South Africa, and by recovery of the world sugar price.  However, sugar production was lower than expected, particularly in South Africa.  During the year the doubling of capacity in Zambia was completed as well as smaller scale expansion projects in Swaziland, Mozambique and Tanzania.  Streamlining of the South African business continued with the sale of the Umfolozi and Pongola mills and creation of a new joint venture at Gledhow.  Illovo expects to raise successfully, rand 3bn of additional capital through a rights issue with proceeds being received in late September.  The Zambian business has completed a US$50m rights issue.

Our businesses in China had a very difficult year with the significant sugar stock overhang from 2007/8 depressing prices during the first half of the year.  A reduced crop in the North, with exceptionally low sugar content impacted operating costs.  Sugar prices have rallied in the second half driven by government purchases, a smaller crop this year and higher world sugar prices.  Importantly for the price outlook, consumption exceeded production in China by some 1.7 million tonnes in 2008/9.  Looking forward the cane sugar business will be strengthened by the commissioning of the new mill at Jinchengjiang and by the beet sugar business focusing on the development of agriculture and production in seven of its 12 factories.

Agriculture had another very strong year continuing to perform well above expectations in a market that experienced lower commodity prices.  Growth was achieved in the UK and from the international operations, driven by good market experience, trading and nutritional expertise and excellent performances from new business streams.  Frontier produced exceptional results having anticipated the correction in the value of the global grain markets and the increased demand for seeds, fertilisers and crop protection products.

Grocery

Grocery achieved good revenue and operating profit growth in the second half which was driven by progress in Allied Bakeries, Twinings Ovaltine and our business in Australia.  Performance at ACH in the US has steadily improved during the second half with higher Mazola volumes and the full utilisation of the high priced corn oil contracts that depressed first half profit.

Good progress has been made with the integration of the foodservice, speciality food ingredient and retail private-label bottled oils business in Stratas in the US.  The major cost savings expected from this joint venture will be captured from the closure of ACH’s commodity oil processing facilities which are now expected to be in Spring 2010.  In Australia, profit for the year was ahead although margin pressure was a feature in the baking and meat businesses.  The rationalisation of the meat business is progressing to plan with construction of the new factory in Castlemaine now underway.

The UK grocery businesses made further progress led by a strong performance from Allied Bakeries with increased margins from further improvements in operations.  Twinings Ovaltine continued to deliver growth, particularly from Ovaltine in its developing markets, and from high consumer demand for Everyday tea.  Silver Spoon benefited from increased demand for home baking ingredients which, combined with distribution gains, resulted in higher sales and market share across the Silver Spoon sugar and Allinson flour ranges.  Closure of the Newark packaging plant and transfer of operations to an expanded plant at Bury is on plan to complete in the Autumn.  The ethnic foodservice sector in the UK continued to suffer from the effects of recession which has impacted sales by Westmill Foods and its profit will be lower than last year as a consequence.

Ingredients

The Ingredients businesses continued to benefit from the weakness of sterling against the US dollar and the euro.  The yeast and bakery ingredients business of AB Mauri performed well, with good progress made in yeast in South America and in technical ingredients in the Americas, but with tough trading conditions experienced in India.  We recently ceased production at our small yeast facility in Ireland and transferred the operation to Hull in the UK.  We also completed the sale of the Gilde Bakery Ingredients business in Iberia and our manufacturing plant in Portugal in accordance with the agreement reached with the EU Commission.

ABF Ingredients had a difficult year with lower sales volumes and pressure on margins as some commodity prices fell.  Feed enzymes performed well with good growth generated from geographic expansion and new products.  The enzymes capacity expansion in Finland is complete and expansion of the Chinese yeast plant in Harbin and construction of an adjoining yeast extracts facility are on schedule.

Retail

Sales and profit at Primark will again be well ahead of last year.  We expect to have opened six new stores in the second half of the year, two in Spain, one each in Germany and Portugal, and two in the UK.  We closed two smaller stores in Bristol and Tooting when the new stores were opened there.  This will bring the total number of stores to 191 by the year end.  We will be trading from 5.9 million sq ft of selling space which is an increase of 9% since last year end.  Like-for-like sales growth of 7% is expected for the full year driven by a very strong performance in the UK.  This performance was achieved through Primark’s strong competitive position, its highly appealing merchandise and better weather than last year.  Our stores in Continental Europe have performed well although it is early days for Germany and Portugal.  Operating profit margin is expected to be lower than last year, impacted by the increased fixed overhead of the new UK distribution centre, as was the case in the first half, but also by lower gross margins as a result of the effect of sterling weakness on the cost of goods priced in US dollars.