Associated British Foods plc issues the following update prior to entering the close period for its full year results, 53 weeks to 18 September 2010, which are scheduled to be announced on
9 November 2010.
Trading for the group since the half year has been strong resulting in a substantial increase in adjusted operating profit for the second half compared to last year. The net interest expense in the second half will show improvement on last year’s charge but the financing costs of the group’s defined benefit pension schemes in the second half will be higher than last year in line with the increase already seen in the first half. The underlying tax rate will be higher than last year but broadly in line with that used at the half year. As previously indicated, earnings for the full year will show very good progress.
Investment and capital expenditure
The higher level of capital expenditure reported in the first half has continued as planned, driven by new stores for Primark and the construction of the new meat factory in Australia, the Vivergo biofuels plant in Hull and the sugar capacity expansion in Swaziland, all of which will be commissioned next year. The sugar factory capacity expansion in Mozambique is complete and yeast and yeast extract capacity expansion at Harbin in China is in the process of commissioning.
The strong cash flow achieved in the first half has been sustained throughout the year with further progress made in working capital management. Net debt for the group at the year end is now expected to be around £800m. In July we negotiated a new £1.15bn five year revolving credit facility with a group of twelve banks. The new facility replaces our existing $1.2bn and £320m facilities that were due to mature in October 2011.
Sugar profit will be substantially ahead of last year driven by further growth in the EU and a strong improvement in China.
In the EU, our UK business will deliver a very good second half result, following an excellent first half campaign. Our Spanish business, Azucarera Ebro, has had a better second half having sold the high-cost inventory that had been brought forward from the prior year, in the first half. However, as previously reported, rainfall was unseasonably heavy across the country earlier in the year, resulting in a reduced beet crop in the south and a lengthened campaign in the north. Both of these factors will constrain the full year performance.
At Illovo, profit has been affected by the impact of a weakening of the currencies outside South Africa on the translation of results; the impact of lower world prices and the rand’s strength on South African exports; and the effect of a weakening euro on exports to the European market. The start of the new season has been slower than planned with continued drought in South Africa impacting crop volumes and continued rain in Mozambique and Malawi impacting crop harvesting and sucrose levels. The expanded Zambian factory is running efficiently following completion of commissioning in the first half.
Following a difficult year last year, the profitability of our businesses in China has improved significantly. Although production volumes were lower than last year, the business benefited from the recovery in local sugar prices in the first half which was sustained for the rest of the year. Yield remains the largest challenge for the beet business but good progress has been made this year by training farmers in chemical usage and control, the use of appropriately designed machinery and irrigation.
UK feed revenues remain ahead of last year in all sectors except sugar beet feed although even here, good progress has been made in the second half and full year revenues will be close to last year. Adjusted operating profit for the full year will not reach last year’s exceptional level which was achieved against a background of volatile commodity prices. Improved volumes in sugar beet feed and a good result from our specialist nutrition business more than offset the impact of continued tough market conditions in China where demand for both pig and poultry feed remains below last year. Grain trading markets have been benign for most of the year although a recent increase in grain trading activity will help Frontier finish on a strong note.
Grocery will report modest revenue growth in the second half with good results from our UK businesses being partly offset by a disappointing performance from George Weston Foods in Australia. Adjusted operating profit for the full year will be well ahead of last year, largely due to the first half recovery in our US bottled oils business and the benefits of the restructuring work undertaken last year partly offset by the cost of providing for the manufacturing reorganisation at Twinings.
In the UK, Allied Bakeries has enjoyed considerable success with its Little Big Loaf, which was launched last autumn. The market has remained very competitive in the second half with high levels of promotional activity, and much higher wheat costs seen in recent weeks will put pressure on margins next year. Twinings Ovaltine has maintained the sales and profit growth achieved in the first half with particularly encouraging progress made in North America and the UK. Ovaltine continued to build on its success in Thailand and has achieved strong growth in developing markets.
Silver Spoon benefited from increased demand for home baking ingredients and has seen improvement in operating margins following the packaging plant rationalisation completed last year. Westmill Foods increased profit, despite continued declines in the Indian and Chinese restaurant trade, with improved market share in the UK ethnic food market. At AB World Foods there has been margin recovery following last year’s adverse commodity and currency movements. The volume growth achieved from the Patak’s relaunch in the first half was sustained into the second half and Patak’s and Blue Dragon export volumes have also shown positive momentum. The first half improvement in trading at Jordans Ryvita has continued into the second half, particularly for the Country Crisp range.
At ACH in the US, profit will be well ahead of last year with the absence of losses on vegetable oil futures incurred in the first half last year. Greater stability in the oil markets enabled some margin recovery for Mazola in the first half but some erosion has been seen in the second half as corn oil costs increased.
In Australia, our bakery business has had a good second half on the back of operational improvements and new product launches in the first half. However, the meat business continued to experience difficulties, with further revenue decline and a consequential impact on margins.
The yeast and bakery ingredients business of AB Mauri will deliver a good result driven by a strong performance from bakery ingredients. Highlights include development of technical ingredients in the Americas and new product launches in Brazil. In Europe the yeast business in Germany made good progress. Commissioning of the new yeast and yeast extracts plant in Harbin, China is underway. ABF Ingredients has had a much improved year with strong revenue growth from enzymes and speciality lipids in the US and a good recovery in the proteins business.
Sales and profit at Primark will again be well ahead of last year. Like-for-like sales growth of 6% is expected for the full year driven by a very strong performance in continental Europe and continued good growth in the UK. Sterling’s relative strength against the US dollar in the first half benefited the cost of goods sourced in dollars and sold in the second half, easing the pressure on gross margins experienced earlier in the year. Economies of scale, as revenues increase, have also contributed to an improvement in operating margins in the second half and margins for the full year will be higher than last year. Higher cotton prices and freight costs and the increase in VAT, implemented in Spain in July and planned for the UK in January, will put pressure on margins next year.
We expect to have opened eight new stores in the second half of the year, three in Spain, and five in the UK. We relocated our stores in Braehead, Scotland and Waterford, Ireland into new, larger premises and extended a number of existing stores. This will bring the total number of stores to 204 by the year end. We will be trading from 6.5 million sq ft of selling space which is an increase of 10% since last year end. In August Primark entered into a conditional contract to lease a second store on London’s Oxford Street, occupation of which is expected by June next year with opening planned before Christmas 2011.
The new 220,000 sq ft freehold warehouse in Naas in Ireland is now operational and the former leased premises will be vacated at the end of 2010. The 200,000 sq ft leasehold warehouse at Torija in Spain is also now operational, providing regional distribution capability for southern continental Europe.
For further enquiries please contact:
Associated British Foods
John Bason, Finance Director Tel:020 7399 6500
Citigate Dewe Rogerson
Jonathan Clare, Chris Barrie, Nicola Smith Tel:020 7638 9571