Associated British Foods plc issues the following update prior to entering the close period for its full year results, 52 weeks to 12 September 2015, which are scheduled to be announced on 3 November 2015.
Our expectation for the full year results is unchanged.
Operating profit at constant currency will be ahead of last year for Grocery, Agriculture, Ingredients and Retail. As guided in the interim results, the decline in operating profit in Sugar and the net adverse impact on the translation of overseas results arising from the strengthening of sterling, which is now some £30m, will give rise to an overall decline in adjusted operating profit for the group.
The net interest charge will be lower than last year with the benefit of a lower average level of borrowings. The underlying tax rate will also be lower than last year and in line with the rate used at the half year. Our earnings expectation for this financial year continues to reflect a modest decline in adjusted earnings per share for the group for the full year.
The group is diverse and multinational with operations and transactions in many currencies, and as a result has both translational and transactional currency exposures. During the current financial year, against a basket of currencies, sterling and the US dollar both strengthened and the euro weakened significantly. Since our half year, and particularly in recent weeks, local currencies in our emerging markets have weakened significantly.
If current rates persist we expect an adverse effect on adjusted operating profit next year. The translation impact will be at a similar level to the current year but the transactional impact will be greater.
Another year of good cash generation will see a further reduction in net debt from last year’s £446m. Capital expenditure will be lower than last year, although still well ahead of depreciation, and we expect a working capital outflow.
At actual exchange rates Grocery operating profit is expected to be ahead of last year with an increase in margin, and revenue will be lower, largely driven by commodity price deflation.
Twinings Ovaltine grew market share in a number of regions and generated a strong profit increase. In the UK, where the market for mainstream teas saw some contraction, Twinings’ sales of premium black tea, green teas and infusions all grew. Australia also had another successful year with the relaunch of the English Breakfast range supported by advertising and in-store promotion. Ovaltine sales in Thailand, one of its most important markets, were lower than last year on the back of economic weakness, but growth was achieved in its developing markets, particularly south east Asia. Strong factory performances delivered lower manufacturing conversion costs and overheads were also lower benefiting from cost reduction initiatives.
Sales volumes at Allied Bakeries increased over the financial year. However, the UK bread market has continued to be very challenging and lower bread prices resulted in a reduction in profitability. The Kingsmill brand was relaunched in May and revenues from Sandwich Thins have continued to build following last year’s launch. We have completed our major capital investment programme and this year have reduced waste, further improved production processes and manufactured products of a consistently high quality.
Silver Spoon’s cost reduction programme has substantially improved operational efficiency. Commercial success this year included the securing of two supply contracts with major UK retailers. Since its acquisition last October, Dorset Cereals has traded ahead of our business plan and its integration with Jordans Ryvita has gone smoothly. Jordans continued to perform well, but Ryvita crispbread sales were lower in a competitive market.
At AB World Foods, Patak’s and Blue Dragon maintained their positions as the leading Indian and Oriental ambient brands in the UK but lost some non-core business leading to lower revenues. An improved sales mix drove an overall margin increase and operating profit will be ahead of last year. The UK ethnic restaurant and take away market has seen some improvement after several years’ of decline, with increased consumer expenditure on out of home eating. Westmill achieved margin improvement with its Chinese catering brands performing particularly well driven by strong commercial activity.
Revenue at George Weston Foods in Australia will be close to last year in local currency but profit will be ahead. Bread margins were lower as retailers featured bread in their drive for lower prices with heavy price promotion activity which more than offset the benefits of a cost reduction programme across all bakery sites. Margins in the Don KRC meat business improved markedly in the second half with higher volumes and much improved production efficiency. As expected raw material cost and quality were substantially better in the second half.
At ACH in North America, Mazola achieved strong volume growth following increased investment in advertising and marketing which highlighted the cholesterol-lowering benefits of corn oil.
Revenue and adjusted operating profit for AB Sugar for the full year, at both actual and constant currency, will again be substantially lower than the previous year driven by the further decline in European sugar prices. Further benefits delivered by our ongoing performance improvement programme, including significant reductions in overheads, made an important contribution to reducing our ongoing cost base. However, these could not compensate for the impact of lower prices.
Sugar prices in the EU have now stabilised and with quota stock levels reducing back towards historic norms, we expect to see some price recovery during 2015/16. Prices in China increased during the year, as a consequence of lower domestic production and reduced imports leading to lower inventory levels, but they are still at a premium to import parity prices. World prices declined with recent pricing below 11.0 cents per pound which is the lowest for more than six years. This has led to an increase in low-cost imports into Africa which has held back some domestic prices.
UK sugar production of 1.45 million tonnes was driven by very high beet yields and excellent factory performances. The UK crop for the 2015/16 season has made good progress but, with a reduction in the contracted area under cultivation in excess of 20%, and a return to more typical beet yields, sugar production is expected to be just short of 1.0 million tonnes. This will lead to a fall in our quota stock levels. Delivered beet costs for the 2015/16 campaign will be some 20% lower than the current year with a further substantial cost reduction now secured for the 2016/17 campaign.
In Spain, all factories performed well. Total production will be ahead of last year at 709,000 tonnes of which 414,000 tonnes was from beet and 295,000 tonnes from refined raw sugars.
Illovo is expected to produce 1.69 million tonnes in the year to September in line with last year. The effect of drought on cane growth in South Africa was largely offset by strong production volumes across all other countries of operation. Zambia achieved record sugar production and further development at the factory is now planned which will increase sugar refining capacity and create new sugar conditioning and storage facilities to enable the supply of higher quality sugars to the regional market. The Malawi sugar market has been seriously disrupted by the country’s continued economic difficulties and sales volumes and prices reduced as a result. Across the group we continue to focus on domestic and regional sales to mitigate the effect of lower world and EU prices.
In China there has been some recovery in market prices and profitability has improved as a result. Following the sale of the Yi’an beet sugar factory in Heilongjiang in February, we completed the sale of the BoCheng factory in August, so bringing to an end our involvement in sugar production in the Heilongjiang region. The final cost of ceasing these operations was £99m all of which was a non-cash charge. Subsequent to these disposals we have commenced the relocation of most of our management team from the head office in Beijing to the operating sites in order to provide maximum focus on our remaining facilities.
We expect another record year at AB Agri with strong performances across all businesses. Adjusted operating profit at actual exchange rates will show further progress, on lower revenues than last year as a result of softer commodity prices. Continued investment in more energy-efficient manufacturing and distribution reduced overheads and contributed to our commitment to reduce energy use.
UK feed volumes held up well despite continued pressure on the UK dairy sector where AB Connect’s range of ruminant feed products offered a cost effective way of maintaining or improving milk yields and quality. In Speciality Nutrition, the recent expansion and modernisation of the UK pre-mix and starter feed plant at Rugeley enabled the business to meet higher domestic demand. Frontier Agriculture, our joint venture arable operation, traded at similar levels to last year and, after a slow start, sales volumes of crop inputs improved. Currency changes and geographical influences added complexity to grain trading operations, and lower than normal protein levels in domestic wheat increased the demand for quality wheat imports.
AB Agri China delivered a strong result driven by good procurement and a favourable product mix. The new feed mills are performing well with Zhenlai delivering substantial cost savings to its major customer and Rudong, which was built to supply feed exclusively to a major international processor, already performing to plan.
AB Vista, our international feed ingredients business, continued to deliver strong growth in both sales and profit, driven by further success for Quantum Blue which achieved significant market share gains in the phytase market.
Ingredients’ revenues will be ahead of last year at constant currency but, with the strengthening of sterling and most of our businesses being located overseas, sales at actual rates are expected to be in line. Operating profit at actual exchange rates will be substantially ahead of last year and, as a consequence, margin will be much improved.
AB Mauri, the bakery ingredients and yeast business delivered a second year of significant profit recovery. This was driven by its operations in the US and Canada and, despite difficult economic conditions, Brazil and HispanoAmerica also made good progress. Cost reduction and improved plant utilisation resulted in a better operating result at Veracruz in Mexico. Our newly integrated milling and bakery ingredients business in Australia and New Zealand achieved volume growth and a good result despite a challenging market as competitors drove significant price pressure. AB Mauri’s smaller, speciality yeast business operating in non-bakery markets achieved significant growth particularly in alcoholic beverages.
ABF Ingredients delivered excellent growth in sales and operating profit driven by a highly successful year for its enzymes business across the feed, detergent and pulp and paper sectors.
Sales at Primark for the full year are expected to be 13% ahead of last year at constant currency mainly driven by an increase in selling space of 9%. Sales on a like-for-like basis are expected to be 1% ahead of last year reflecting a strong performance across a number of countries. Very high sales densities were achieved by stores opened in the last 18 months and especially by our stores in France, which has been our most successful new market entry to date. As a result of the weakening of the euro against sterling, sales are expected to be 8% ahead at actual exchange rates.
Like-for-like sales in the early part of the financial year were impacted by the unseasonably warm autumn followed by strong trading across the important Christmas period. Spring trading was held back by cool weather followed by strong trading in the fourth quarter. Spain, Portugal and Ireland all performed very well throughout the year and the UK delivered a positive like-for-like performance. The success in these markets was partly offset by the impact that the opening of new stores in the Netherlands and Germany had on existing stores in that region, albeit that this effect has reduced in the fourth quarter. As new stores opened, sales in existing stores declined as customers chose to shop more locally rather than travelling the long distances that we saw in the early days of trading in these countries.
The operating profit margin is expected to be close to that achieved in the first half. As anticipated, this will be lower than last year as a result of the higher level of markdown and the effect of the stronger US dollar, at the end of the financial year, on purchases for the new autumn/winter range.
Primark sources much of its merchandise in dollars and as already indicated, the US dollar’s strength, particularly against the euro, will have an adverse effect on margins in the new financial year, especially in the first half. However, a good proportion of the impact has been successfully mitigated by our buying teams as they firm up orders for next year.
During this financial year we will have opened almost one million sq ft of selling space bringing the total estate to 293 stores and 11.2 million sq ft at the financial year end. 20 new stores will have opened including relocations to larger premises in Northampton and Murcia, Spain. We closed our store on The Headrow in Leeds, following the success of the much bigger store opened in the nearby Trinity shopping centre in December 2013, and we also closed two very small stores, one in Margate and another in Naas in the Republic of Ireland, bringing the net additions in the year to 15. These new stores include 77,000 sq ft at Downtown Crossing in Boston, our first store in the US, which will open on 10 September. Significant new space was added in the Netherlands, Belgium and Germany with an additional six stores in Germany of which the largest were Dresden, Braunschweig, Krefeld and Weiterstadt.
We have an extensive pipeline of new stores to be opened over the next few years with some 1.5 million sq ft scheduled for the new financial year, the major elements of which will be in the northeast US, the UK and Spain. The US will comprise seven stores, totalling 0.4 million sq ft, most of which will open later next year; Spain will include a flagship, 132,000 sq ft, store on Gran Via in central Madrid; and following our success in France this year, we will open in Lyon, Nice and Toulon. We will also open our first Italian store at a new shopping centre in Arese, northwest of Milan, in early summer.
We have made a significant investment in our warehouse infrastructure during the year with further expenditure planned next year which, in total, will have increased our warehouse capacity by two thirds. Our existing warehouse in Torija in northern Spain was doubled in size at the beginning of the year, we increased the size of the facility at Mönchengladbach in Germany by 60% and a new warehouse in Bethlehem, Pennsylvania is now fully operational. We have also recently opened a new warehouse in Bor, on the western border of the Czech Republic. Next year will see the relocation of our Magna Park, UK warehouse to a larger site at Islip in Northamptonshire, close to our existing warehouse at Thrapston. There will be some dual running costs for a short period.
For further enquiries please contact:
Associated British Foods
John Bason, Finance Director
Flic Howard-Allen, Head of External Affairs
Tel: 020 7399 6500
Citigate Dewe Rogerson
Chris Barrie, Shabnam Bashir
Tel: 020 7638 9571
Tel: 07770 321881