Cash flow and funding
Operating cash flow for the half year is expected to be slightly stronger than last year with the benefit of increased profitability and lower capital expenditure. As previously indicated, a number of longer-term projects were completed last year and expenditure in the food businesses this year was lower as a result. The cost of store developments for Primark remains close to last year. Net debt at the half year is expected to be some £1.65bn.
In late 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, some of which will be used to refinance debt maturing next year, and will have the effect of further diversifying our sources of funding and lengthening our debt maturity profile. Subject to completion of investor due diligence, the funding will raise $526m with a range of maturities from 2019 to 2024. The 3.66% average fixed interest coupon on these notes is higher than the current variable interest rate on shorter term bank borrowings and will increase the group’s interest expense in the second half.
Profit from Sugar in the first half will be substantially ahead of last year driven by a strong increase in the UK, further improvement in Spain and a better performance from Illovo.
In the UK, the sugar campaign progressed well. Beet processing is now virtually complete and sugar production is now estimated to be 1.3 million tonnes compared with just under
1.0 million tonnes last year. Profit in the UK in the first half will be well ahead of last year benefiting from the absence of the higher processing costs associated with the harsh winter, a strong factory performance, high sugar content in the beet and higher prices.
In Spain, high beet yields, improved levels of extraction and record throughput are being achieved in the northern campaign while plantings are complete in the south. The refinery at Guadalete is operating at close to capacity and expects to produce some 360,000 tonnes of sugar this year. Profit will benefit from higher sugar prices and improvements in operating efficiency.
Revenues at Illovo benefited from favourable regional pricing and profit improved in all countries. Plant operations were satisfactory although sugar production is likely to be lower than last year, despite the increased area under cultivation, as a result of severe drought in South Africa and lower sucrose levels in the cane throughout the region.
Last year’s drought in south China reduced cane yields and the sucrose content is also lower. Sugar production will be less than last year as a result. Sugar production in the north east is expected to be significantly ahead again, as a result of the additional beet acreage under cultivation. Profit for China is expected to be lower than last year as a result of the difficulties in south China and prices which are below last year’s record highs.
Each of the agriculture businesses achieved good revenue growth in the period led by K W Trident’s strong sales of sugar beet feed and another excellent performance from AB Vista, our international micro-ingredients feed business. First half profit from the UK and Chinese feed businesses will be similar to last year. Frontier’s sales in the period were ahead of last year although lower grain prices have seen a fall in trading volumes and profit from this joint venture is not expected to reach last year’s very strong level.
Revenue in the first half is expected to be ahead of last year but Grocery profit in the first half will be substantially lower. This is driven by the cost of restructuring at George Weston Foods in Australia and at Allied Bakeries in the UK, and by margin declines at Allied Bakeries and higher than expected costs of operating the Castlemaine meat factory in Australia.
Twinings Ovaltine continued to perform very well with good growth for tea in the US and for Ovaltine in developing markets. The UK grocery businesses of Silver Spoon, Westmill Foods, Jordans Ryvita and AB World Foods traded in line with expectations and generated profit in the first half similar to last year.
In Allied Bakeries, Kingsmill achieved revenue growth but strong competition, driven by a high level of promotion, affected margins. The business has continued to invest, notably with a new bread line at the Stockport bakery. A rationalisation charge has been made for the closure of two smaller bakeries and the cost of further overhead reduction.
Trading remained difficult for George Weston Foods although recently we have seen some improvement in the Tip Top bread business. Although revenue in the period is expected to be only marginally lower than last year, the costs of operating the new Castlemaine meat factory remained too high but progress continued to be made in improving productivity. The half year result will also include a provision for the costs of reducing overheads and restructuring the business.
Revenue at ACH will be level with last year with oils pricing reflecting easing corn oil costs, and spice volumes affected by high price levels and customer promotion of private label.
Although revenue in the first half is expected to be ahead of last year, the difficulties experienced by the yeast and bakery ingredients business, particularly in last year’s second half, continued this year. Raw material cost increases and a highly competitive trading environment in many of our markets led to considerable pressure on margins and a much lower operating profit. Progress was made in improving productivity at the yeast extracts factory in Harbin, China which, combined with growth in enzymes, delivered a profit improvement at ABF Ingredients.
Trading at Primark started the financial year slowly as a result of the unusually warm autumn but, with particularly strong sales over the Christmas period and good trading since the New Year considering the economic climate, revenue for the first half is expected to be 15% ahead of last year, with like-for-like sales growth of 2%.
As expected, operating margin will be lower than in the same period last year reflecting the continued absorption of higher cotton costs. Cotton prices have fallen somewhat from their high point last year and we will begin to see the benefit of lower input costs in the second half.
Primark’s expansion has continued apace this year with nine new store openings in the first half. These included two in Spain, three in Germany, one in each of Portugal and the Netherlands, and two in the UK including our flagship store in Scotland which opened on Princes Street in Edinburgh just before Christmas. We also relocated the store in the Metro Centre in Gateshead to a larger site and extended the store in Bexleyheath. Two concessions were opened in Selfridges stores in Birmingham and Manchester in the period. At the half year we will be operating from 232 stores with 7.8 million sq ft of selling space, an increase
of 0.5 million sq ft since the financial year end.
We expect to open a number of stores in the second half, the largest number of which will be in Spain, and together with further store extensions our selling space will increase to 8.2 million sq ft by the year end. Capital expenditure on new stores and refits for the full year is expected to be similar to last year.