AB Foods: Primark drives first-half growth

London / UK. (abf) Food, ingredients and retail group Associated British Foods PLC (ABF) announced its interim results for the first half 2013 – the 24 weeks ended 02 March. Highlights: Group revenue up ten percent to 6’333 million GBP; Adjusted operating profit up 20 percent at 496 million GBP; Adjusted profit before tax up 25 percent to 452 million GBP; Adjusted earnings per share up 22 percent at 41,9 GBPence; Dividend per share up ten percent to 9,35 GBPence; Net debt 1’337 million GBP after net capital investment of 334 million GBP; Operating profit up 21 percent to 459 million GBP, profit before tax up 26 percent at 415 million GBP and basic earnings per share up 23 percent to 38,9 GBPence.

Chief Executive George Weston: «This is an excellent set of results with adjusted operating profit up 20 percent, a stronger cash flow and a year-on-year reduction in net debt. We are committed to the long-term development of our businesses through investment. These results have been achieved through a focus on generating good returns from the investments we have made over recent years».

Charles Sinclair: Chairman´s statement

I am pleased to report an excellent set of interim results for the group which exceeded our expectations at the start of the year. This out-performance was driven by very strong trading by Primark. Our food businesses remained on track with a much improved result from Grocery, a big increase for Agriculture and some stabilisation in underlying trading at Ingredients. After last year´s record performance from Sugar, the result this half year proved to be resilient.

Revenue in the first half grew by ten percent and adjusted operating profit increased by 20 percent. Net financing costs in the period were lower than last year´s first half, resulting from the lower level of net borrowings and a strong first half cash flow. The underlying tax rate of 25,7 percent was little changed from that reported last half year. Adjusted earnings were 22 percent ahead at 41,9 GBPence per share.

Our Sugar businesses delivered an underlying profit increase this year. The weather-related challenges faced by the European operations are being well managed and Illovo has made good progress with a record production in Zambia following our recent factory investment. The current EU sugar regime is in place until October 2015 and although, in October 2011, the European Commission proposed the abolition of internal sugar quotas in 2015, the European Council and European Parliament have recently proposed extensions of existing quota arrangements to 2017 and 2020 respectively. A three-way negotiation process is now under way and an agreement, acceptable to all parties, is expected in the late summer. Much lower sugar prices in China resulted in these operations making losses in the period. We are working hard to reduce costs and have mothballed our two smallest beet sugar factories in the region. A non-cash charge has been taken to write down the carrying value of the associated assets.

The Primark success story continues. Trading in the period was very strong, the profit margin was much improved, customers in continental Europe have taken enthusiastically to the Primark brand and there is very real momentum in the addition of selling space. Encouraged by this success, capital investment will continue.

Grocery profit improved substantially and benefited from the non-recurrence of restructuring costs taken last year. Twinings Ovaltine and our UK and US businesses performed well. Although George Weston Foods in Australia has some way to go to achieve an acceptable level of profitability, the emergence of positive signs in this period is encouraging. Agriculture again delivered a strong result with a good performance from UK feeds and a further demonstration of its successful focus on the value adding areas of the business. The headline profit at Ingredients includes the one-time cost for restructuring our European dry yeast capacity but on an underlying basis the performance was in line with last year.

For the second successive year, the cash outflow before funding in the first half was lower than the prior year with the benefit of the higher profit and a lower working capital outflow. Capital expenditure, including new stores and extensions for Primark, was in line with last year. Payment of deferred consideration on the acquisitions of the Jordans and Patak´s businesses, net of a deferred receipt on the disposal of our former sugar business in Poland, resulted in an outflow of 30 million GBP in the period. The increased level of profit led to an increase in tax payments, with 109 million GBP paid in the first half of which 67 million GBP was paid in the UK compared with 42 million GBP last year. The recent weakening of Pound Sterling, particularly against the US Dollar, increased net debt since last year end by 57 million GBP when foreign currency borrowings were translated into Pound Sterling at the half year. Net debt nevertheless fell by 255 million GBP from last half year to 1’337 million GBP at the period end.

On 05 March we repaid 120 million USD of the private placement financing which carried a coupon of 6,3 percent and in July the 150 million GBP British Sugar 10,75 percent debenture will be redeemed, both of which will substantially reduce the group´s future average cost of borrowing. There is no immediate need to replace this financing as the headroom between the group´s borrowing facilities and projected levels of net debt is more than sufficient to meet the needs of the business for the foreseeable future.

Dividends: As previously indicated, the profit improvement in this financial year is expected to be weighted towards the first half. Accordingly the board has decided to declare an interim dividend of 9,35 GBPence, an increase of ten percent on last year. The dividend will be paid on 05 July 2013 to shareholders registered at the close of business on 07 June 2013.

Outlook: Low growth looks set to remain a feature of the developed economies in which we operate. With this in mind we remain focused on delivering operating efficiencies and maximising the return on investments made by the group over recent years. We continue to pursue growth opportunities in developing markets. For the full year we expect strong profit growth from Primark, although not at the same level of the first half which had the remaining benefit of lower cotton prices and we also expect an improvement in Grocery. These will more than offset a reduction in profit from Sugar as a result of lower EU production and lower prices in China. Given this strong first half performance and some modest earnings growth in the second half, we expect to make good progress for the financial year.

Operating Review (Chief Executive´s Statement)

Group revenues increased by ten percent to 6’333 million GBP and adjusted operating profit was 20 percent ahead of last year at 496 million GBP. Average exchange rates were similar to last year in all major currencies resulting in no material translation effects in these results. The first half was notable for the exceptional trading from Primark achieved during a difficult time for many retailers on European high streets. This was a testament to the strong management team at Primark and a very successful seasonal range. I am also pleased with the on-target performance by George Weston Foods in Australia, following a protracted period of operational and commercial difficulties and with the early progress made by the new team at AB Mauri.

The operating profit achieved by AB Sugar in the last financial year was a consequence of careful investment together with higher production volumes and prices in the regions where we operate. However, we have already seen much lower prices in China this year and expect pressure in the EU and some countries in Africa. Our focus is on improving efficiency, reducing cost and selectively increasing capacity and downstream capability to mitigate the effects on operating profit of margin reduction from lower prices.

Primark´s expansion in continental Europe is proving to be very successful and the prospects for further growth are exciting. We are actively searching for appropriate locations in all the countries where we operate and in the next financial year we will open our first stores in France. Primark´s margin in the first half benefited from an ideal combination of lower cotton prices, better exchange rates and lower markdowns. With a strengthening US Dollar we expect to see some pressure on margins in the next financial year.

The consumer food industry in developed countries faces the continuing challenge of consumers seeking more value as their disposable incomes are squeezed. Our Grocery businesses have performed well in this environment and look set for further growth. Allied Bakeries continued its capital investment to reduce its cost base. The management team at George Weston Foods has made considerable progress with improvements in profitability in both Tip Top bread and the Don KRC meat business. Both businesses benefited from the restructuring undertaken last year.

We have focused on achieving good returns from the investments we have made over recent years and have paid close attention to the management of working capital. The benefits of this are evident in the stronger cash flow, the year-on-year reduction in net debt and a higher return on capital employed.

Sugar

Sugar revenues increased by ten percent in the first half benefiting from comparison with weaker volumes at the beginning of the prior period in the UK and south China. Operating profit was lower than last year with an improvement at Illovo more than offset by a deterioration in China trading together with a non-cash charge for the mothballing of our two smallest beet sugar factories in north China.

UK revenues were ahead of last year, driven by higher volumes at the beginning of the financial year than the abnormally low level achieved last year. Poor growing conditions during 2012 resulted in a lower beet yield and sugar recovery. As a consequence, this year´s UK campaign started later and factory throughput was lower to allow for a slower filtration process. Sugar production for the current year is now estimated to be 1,15 million tonnes compared with last year´s 1,32 million tonnes. The Vivergo bioethanol plant in Hull is now operational, with full production expected during the summer.

In Spain, delayed planting in the south is expected to reduce the size of the southern crop and heavy rains extended the campaign in the north into April, consequently delaying planting for the new season. We expect to produce 393’000 tonnes of beet sugar, compared with 468’000 tonnes last year, the Guadalete refinery is expected to produce 222’000 tonnes of refined cane sugar and a further 94’000 tonnes of co-refined cane sugar will be produced at the northern beet plants. Sales revenues in the first half were lower than last year.

Our EU sugar profits for the full year are expected to be lower than last year as a consequence of lower production volumes in the UK and Spain and higher beet costs.

The Chairman refers to the political discussions surrounding proposals for further reform of the EU sugar regime. In the meantime recent tenders have seen some reduction in import duties payable.

Revenue and profit at Illovo benefited from higher production volumes with increased cane yields and sugar content, particularly in South Africa. Campaigns were extended in Zambia and Swaziland where the recently expanded plants operated well. Sugar production for the season ended March 2013 was 1,75 million tonnes, compared with 1,53 million tonnes last year. With South Africa and Zambia both carrying cane over into the new season, Illovo intends to commence the new campaign as soon as practicable in order to maximise factory throughput. Work on the new sugar warehouse in South Africa has finished and it is now operational. The new potable alcohol distillery at Kilombero in Tanzania is expected to be commissioned this summer.

Sales volumes in China were unusually low in the prior period and as a result, revenues in this first half were ahead despite much lower prices. A larger cane crop is expected to increase southern sugar production volumes for the full year to 484’000 tonnes compared with last year´s 405’000 tonnes. Sugar production in the north is expected to be marginally behind last year´s 287’000 tonnes at 277’000 tonnes and the new Zhangbei factory was fully commissioned in time for the new season. As a result of much lower sugar prices our operations in China will be loss-making this year. It is anticipated that sugar prices will continue at this level for some time and we have sought to reduce our cost base. At the end of this campaign the small beet factories at Wangkui and Baolongshan have been mothballed and a non-cash charge of 22 million GBP has been taken in the period to write down the value of the associated assets.

Agriculture

Revenue in the first half was seven percent ahead of last year, driven mainly by the increased cost of commodities. Some improvement in operating costs led to firmer margins and another good performance from Frontier advanced operating profit by 25 percent.

With limited alternatives available to farmers, demand for sugar beet feed in the UK was high in the period but sales for the rest of the year will be constrained by the smaller UK beet crop. Premier Nutrition traded well in the UK and, with continuing investment in Asia and Central and Eastern Europe, also achieved good sales growth in this region. A number of manufacturing efficiency projects are nearing completion and our highly automated production facility at Rugeley, designed to provide increased assurance over feed safety, is now operational. AB Vista´s feed enzyme business continued to make good progress, particularly in North America, supported by the success of the recently launched Quantum Blue phytase.

Frontier traded at similar levels to last year. The supply of grain in the UK has been poor and of variable quality, leading to a higher volume of wheat imports which increased the complexity and cost of the UK cereal supply chain. Wet autumn conditions lowered wheat plantings to 70 percent of normal levels, reducing the demand for fertiliser and crop protection products, although volumes are expected to pick up as spring planting resumes.

China revenues fell short of last year with lower demand for pig and poultry feed. However, good growth was achieved in co-products driven by strong sugar beet feed volumes and the development of new products for the feed ingredients market. Good raw material procurement underpinned profit delivery.

Grocery

Grocery revenue increased by one percent to 1’832 million GBP and profit improved substantially to 97 million GBP benefiting from the non-recurrence of restructuring costs in George Weston Foods in Australia and Allied Bakeries.

Twinings Ovaltine again performed well with some good market share gains. Twinings sales in the UK were well ahead of last year with continued success for the «gets you back to you» television advertising campaign and the launch of new tea infusions. Tea sales were strong in the US where growth was driven by the K-cup dispenser format and redesigned packaging which gave greater prominence to the brand on shelf. Production efficiencies at the new tea factory in Poland and cost reduction initiatives in the Ovaltine plant in Switzerland drove further improvement in operating profit.

The UK bread market remains highly competitive. The worst UK harvest of recent years resulted in low volumes of wheat which was also of inferior quality but Allied Bakeries continued to produce high-quality bread and recovered the higher cost. Further expansion of the Kingsmill brand was achieved with the launch of 50/50 Bagels and a 50/50 Little Big Loaf. Kingsmill also launched a Fruit + Fibre breakfast range of bread, muffins and bagels in the period and new products were introduced under the Allinson and Burgen ranges. The new bread plant at Stockport has been operational since September and this summer will see the commissioning of Allied Bakeries´ largest plant, with a capacity of 10’000 loaves an hour, at Walthamstow. Work has also commenced at West Bromwich to replace two smaller production lines with a new bread plant which is expected to be operational by the end of the calendar year.

Silver Spoon remains the leading retail sugar brand although the intensely competitive marketplace adversely affected volumes and margins. We continued to invest in Billington´s, now the leading brand of unrefined baking sugars and Truvia, the stevia-based, zero calorie sweetener which is the clear market leader in this new category. A stevia/sugar blend for baking and a new tablet format were launched in the period supported by television advertising. The Allinson range of culinary flours continued to grow strongly but the increase in wheat costs had an adverse impact on margins. Ryvita performed well in the UK with particularly strong growth for Thins, benefiting from the addition of a new flavour variant and the wider distribution of Rustic Bakes which were launched last year. Jordans also had a good first half with growth in Country Crisp and Granola, both of which benefited from new product launches.

Westmill grew volumes in the period with share gains for its two key catering brands, Lucky Boat noodles and Patak´s. In September 2012 the acquisition of Elephant chapatti flour and associated ethnic flour brands received competition clearance and commercial and logistics activities were successfully transferred by the end of November. AB World Foods achieved good growth in Blue Dragon, the UK´s largest oriental ambient brand following last year´s relaunch and Patak´s both in the UK, where it was supported by a high level of promotion and internationally.

Trading at George Weston Foods in Australia met expectations in the first half. Total revenue in the period was in line with last year and profitability was significantly improved with the non-recurrence of last year´s restructuring costs. Price increases were secured for Tip Top bread but the market continued to be difficult with a high level of in-store bakery promotions. The bakery business continued to make good progress with cost reduction programmes continuing to offset inflationary pressure. Progress was also made in the Don KRC meat business where production and sales volumes were higher and cost control and customer service were both improved.

Revenue and operating profit at ACH were ahead of last year. Some recovery in the US baking sector and improvements in operational efficiency more than offset commodity cost increases to drive an improved performance for baking. Investment in new products and marketing expenditure in the first half was higher than last year which contributed to sales growth, particularly in Canada. In Mexico, Capullo, our premium oil brand was relaunched last year and, with increased marketing support, was better positioned to meet the challenges of a competitive market.

Ingredients

Revenue and underlying operating profit in the first half were in line with last year. Following the successful start-up of the new Mexican yeast plant, a provision of 15 million GBP has been made to cover the expected cost of restructuring our European dry yeast capacity.

Following the difficulties experienced by the yeast business last year, the performance this period has seen some stabilisation although markets remain very competitive. A solid performance in Hispano-America drove revenue growth across all product categories and a focus on operational efficiencies throughout the region mitigated the effect of high inflation in Argentina and Venezuela. In Brazil, raw material price instability and competitor activity made trading conditions difficult and severely impacted margins. However, recent increases in selling prices are expected to lead to a better second half result, particularly in bakery ingredients.

In the US, the difficulties faced by the country´s third largest plant bakery business will continue to have an impact on our business in the short term. Commissioning of the new yeast plant in Veracruz, Mexico progressed according to plan and domestic fresh yeast sales began in March. Dry yeast commissioning will be under way shortly with commercial production expected during the summer. Expansion of the business across the Middle East and Africa saw the opening of a new regional office in Dubai in March and bakery ingredients production at the new factory in Cordoba, Spain commenced in October. Supply of yeast to the Vivergo bioethanol plant has now commenced and volumes will increase as production builds.

Yeast quality and productivity in China improved and there was some reduction in molasses costs. Domestic volumes were level with last year and there was strong demand for dry yeast exports. Commissioning of the new fresh yeast plant in Yantai and the recently expanded dry yeast capacity at Xinjiang were both completed in the period.

At ABF Ingredients, further growth was achieved in bakery, feed and speciality enzymes, driven by new products launched last year. The growth achieved by enzymes since the factory in Finland was expanded in 2009 has resulted in this factory reaching full capacity and further expansion is now being planned. In the US, strong dairy markets contributed to good results in whey proteins and lactose and sales of extruded grain products were well ahead of last year. Responding to increased demand for extruded ingredients and specialty animal feeds, a new cereal extrusions factory is under construction at Evansville, Indiana in the US which is on track to be operational at the end of the summer. Operations at the new yeast extracts plant in China continued to make good progress.

Retail

The performance from Primark in the first half was exceptionally strong. Sales were 24 percent ahead of the same period last year including seven percent like-for-like growth, a substantial expansion of retail selling space and superior sales densities in the larger new stores. The like-for-like growth benefited particularly from comparison with weak sales during the unseasonably warm autumn of 2011. Trading over the Christmas period was good but has been weaker during the prolonged period of cold weather since the New Year. Trading in our stores in northern continental Europe: Germany, the Netherlands, Belgium and Austria, was particularly strong during the period. Like-for-like growth in Spain was held back in the short term by the large number of recent store openings there.

Operating profit margin was much higher than in the same period last year, reflecting the benefit of lower cotton prices, a weaker US Dollar and lower markdowns as a result of better trading. No further margin improvement from lower cotton prices is expected in the second half. Although Dollar-denominated garment purchases for the balance of this financial year are already committed and the related currency exposure is covered, the recent strengthening of the US Dollar against both Pound Sterling and the Euro can be expected to put pressure on margins for the forthcoming autumn and winter ranges.

This was an extremely active period for new store openings. Retail selling space increased by 0,7 million square feet since the last financial year end and by 1,0 million square feet or 13 percent, since the 2012 half year. At 02 March 2013, we were trading from 257 stores and 8,9 million square feet of selling space. We opened 15 new stores in the period including six in Spain and four in the UK including our second store on London´s Oxford Street, with 82’000 square feet of selling space. Two new stores were opened in Germany including one in Frankfurt´s Zeil, one of the country´s premier shopping locations. We opened our first two stores in Austria and a further store in the Netherlands. We also relocated our store in Sunderland to a larger site and completed the refurbishment and extension of our flagship store on Mary Street in Dublin. Capital expenditure of 136 million GBP in the first half was in line with last year.

This pace of store openings will not continue for the remainder of this financial year. We expect to add a further 100’000 square feet of space this year mainly comprising the completion of extensions to our Newcastle and Manchester stores. Expenditure on new stores and refits for the full year is expected to be at a similar level to last year. New store openings will accelerate early next year including our first steps into France.

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