London / UK. (abf) Food, ingredients and retail group Associated British Foods PLC (ABF) announced record annual results for the year ended September 14, 2013. Financial highlights:
- Group revenue up nine percent to 13,3 billion GBP
- Adjusted operating profit up ten percent to 1’185 million GBP before amortisation of non-operating intangibles, profits less losses on disposal of non-current assets and exceptional items
- Adjusted profit before tax up 13 percent to 1’096 million GBP before amortisation of non-operating intangibles, profits less losses on disposal of non-current assets, profits less losses on the sale and closure of businesses and exceptional items
- Adjusted earnings per share up 13 percent to 98,9 GBPence before amortisation of non-operating intangibles, profits less losses on disposal of non-current assets, profits less losses on the sale and closure of businesses and exceptional items
- Dividends per share up twelve percent to 32,0 GBPence
- Net capital investment of 600 million GBP
- Net debt reduced to 804 million GBP
- Operating profit up 25 percent to 1’093 million GBP, profit before tax up 15 percent to 876 million GBP and basic earnings per share up six percent to 74,8 GBPence
George Weston, Chief Executive of Associated British Foods: «I am delighted to report that the group has again delivered a great set of results. Grocery was much improved, Agriculture achieved record profits, Sugar was in line with our expectations and it was a remarkable year for Primark».
Operating Review – Chief Executive´s Statement
I am delighted to report that the group has again delivered a great set of results. The group´s revenue increased by nine percent to 13,3 billion GBP and adjusted operating profit increased by ten percent to 1’185 million GBP. The long-term performance of the group is important to us and this year´s growth is in line with the compound annual revenue and profit growth achieved over the last ten years of ten percent and eleven percent respectively. This success is a direct result of our business model, more description of which is presented in this year´s annual report.
AB Sugar delivered an excellent profit this year which, although lower than last year, was in line with our expectations. The date and extent of EU sugar regime reform have now been clarified and sugar prices for our next financial year are already reflecting a transition. We have invested significantly in our European sugar assets over the years and the AB Sugar management team has plans for further efficiency improvements. As a result, we have established British Sugar as one of the lowest-cost sugar businesses in the world. Maintaining our dialogue with growers and strengthening our relationship with them will be necessary to build a sustainable and competitive sugar industry for the future.
The Primark results this year were remarkable with sales increasing by 22 percent and profit by 44 percent. Both the autumn/winter and spring/summer ranges sold out this year with little discount, which was testament to the success of our buying teams. Our newly opened and refurbished stores have never looked better and the increase in our selling space in continental Europe was significant. Expansion in our more established markets of the UK and Ireland focused on increasing selling space in major cities. In London, we opened our second store on Oxford Street and extended our stores in Manchester, Newcastle and Mary Street, Dublin. In continental Europe, we increased selling space by 25 percent and were very encouraged by trading in all countries. Each new store opening generated excitement which gives us the confidence to believe that Primark is capable of much further growth and I look forward to the opening of our first store in France.
We were shocked and deeply saddened by the events in April 2013 when the Rana Plaza building in Bangladesh collapsed killing more than 1’100 people. A Primark supplier occupied the second floor of this eight storey building which was also the location of a number of other garment manufacturers. Our response focused on meeting the immediate needs of the victims and, in parallel, organising long-term compensation. We donated food to some 1’300 families shortly after the tragedy and have since paid short-term financial support of six months´ salary to more than 3’600 workers in the building, irrespective of their employer. Primark has committed to provide long-term financial compensation to victims who worked for its supplier and their dependants. This was an unprecedented undertaking for us and was only possible with the support and close collaboration of international and local stakeholders including NGOs and trade unions.
The garment industry in Bangladesh has also experienced a number of factory fires in recent years. As a result, we signed the Accord on Fire and Building Safety in Bangladesh, a pioneering agreement between almost 100 apparel brands and retailers, international and local trade unions and NGOs. Primark was the first UK brand to sign this accord which is designed to ensure that sustainable improvements are made to working conditions in the garment industry and reinforces our commitment to health and safety in the workplace.
Grocery made good progress this year with revenue growth and profit ahead by 24 percent, mainly as a result of margin improvement from both good trading and the non-recurrence of restructuring costs. Twinings Ovaltine is our most profitable grocery business and it achieved excellent results, performing well in all of its major markets. I am pleased with the much improved result from George Weston Foods in Australia following the action taken by the management team which delivered higher volumes and lower conversion costs in the meat business and increased sales and margins in the bread business. The results in UK Grocery showed good progress from Jordans, Ryvita, Westmill and AB World Foods, offset by margin pressure in the bakeries and Silver Spoon.
The management team at AB Agri deserves much credit for its achievements over recent years. These have seen the development of the business into a profitable group that makes a major contribution to agriculture, especially in the UK, focused on providing value-adding animal feed products and services. It is recognised for its innovation and the development of bespoke services to customers and this year delivered a record profit.
Following last year´s appointment of a new chief executive at AB Mauri, our yeast and bakery ingredients business, a number of further management changes have been made during the financial year. Some stabilisation in underlying trading has already been achieved and the new team is engaged in reviewing the cost base and structure of the business.
Although the level of capital expenditure was lower again this year, it still represents a substantial investment in the assets of the group. We completed a number of projects in AB Mauri and AB Sugar and took a major step forward in the programme to equip our UK bakeries with state-of-the-art bread plants. The rate of selling space expansion at Primark is increasing and we expect capital investment in the coming year to rise. We can fund this comfortably from the high level of cash generated from operations.
After last year´s record performance, AB Sugar delivered revenue and underlying adjusted operating profit in 2013 that were in line with management expectations at the beginning of the year which recognised that reduced European production, as a consequence of lower yields and higher beet costs in the UK, would lead to a profit decline. Production volumes in Africa were ahead of last year and profit benefited from good sales demand and stable pricing. Profitability in China was lower than last year as a result of weak sugar prices throughout the year. Our performance improvement programme is now firmly established across all our businesses with the aim of increasing asset utilisation and reducing costs. The programme seeks to embed continuous improvement within all areas of our businesses by identifying and driving major change initiatives, tailoring capital expenditure to underpin our performance improvement and accelerating the implementation of co-product activities across the group.
British Sugar produced 1,15 million tonnes of sugar, lower than last year´s 1,32 million tonnes as a result of poor growing conditions during 2012 which led to lower beet yields and sugar recovery. Sugar prices generally remained strong, consolidating the full year impact of last year´s price increases. Co-product prices remained good with animal feed sales supported by exceptionally high wheat prices. These were offset to some extent by low, combined heat and power plant contributions, which were a feature of low electricity prices but high gas prices. We continued to invest in our production facilities with completion, during the year, of several major schemes focused on reducing energy consumption and increasing plant reliability. Looking forward to 2013/14, crop yields are expected to be slightly below average but we expect sugar production to at least achieve sales quota and to meet our bioethanol requirement. Beet costs for the forthcoming financial year were agreed in June 2012 at levels similar to those incurred in the campaign in this financial year.
In Spain, sugar beet volumes were lower than last year with a reduction in the area planted in the north. Heavy rains in the spring led to a delay in the completion of the campaign until the second week of May. Beet yields in both the north and south were very good and partly compensated for the lower volumes. Total beet sugar production was 405’000 tonnes, down from 468’000 tonnes in the previous year. 242’000 tonnes of imported raw sugar were refined at Guadalete and a further 95’000 tonnes were co-refined at the northern beet plants. Significant energy efficiency improvement work was completed during the year substantially reducing the energy cost per tonne of refined white sugar.
In June 2013, the European Council of Ministers confirmed that existing quota arrangements would continue until 30 September 2017 when sugar quotas for domestic production would end. Tariffs for sugar imports into the EU are not affected. AB Sugar expects this change to encourage growth in EU production by the most efficient producers of both sugar and isoglucose.
Negotiations with our EU customers regarding prices for the 2013/2014 marketing year have been challenging. There has been a higher availability of sugar in the EU as a consequence of the conversion of non-quota sugar to quota, additional tariff rate quotas for imported sugars and low world sugar prices. In addition, competition has increased as other European producers look for new market opportunities ahead of regime change. Both of these factors have created a downward pressure on EU prices. The market is rapidly adjusting ahead of the regime reform in 2017. As a well-invested business and one of the world´s lowest-cost producers, we believe that we are well placed to succeed in this market with higher sugar volumes, albeit at lower prices.
Construction of Vivergo´s bioethanol plant in Hull was completed last year and continues to make progress, albeit behind plan. Monthly production volumes are increasing and full production is expected in the new calendar year. The plant uses feed wheat and has the capacity to produce 420 million litres of bioethanol and 500’000 tonnes of high-protein, high-fibre animal feed.
Illovo´s sugar production of 1,87 million tonnes for the financial year compared to 1,77 million tonnes last year, reflecting further recovery in the South African crop and good performances from the recently expanded facilities in Swaziland and Zambia. Prices throughout the year were generally stable although increased levels of imports into Tanzania and South Africa have brought some price pressure in these two countries. In Malawi, the currency has stabilised and domestic prices were increased in line with inflation. Pressure on prices across the region is expected to increase in the coming year.
The recently completed new custom-designed warehouse and distribution facility in Pietermaritzburg is fully operational and will provide improved storage and logistics benefits to the South African business. Construction of the new potable alcohol distillery in Tanzania was successfully completed within budget. This plant is now in the final stages of commissioning with the first sales made in October. The three downstream facilities in South Africa all operated well.
In China, sugar production in the south was higher than last year at 500’000 tonnes, principally due to an increase in the planted area and in the north was in line with last year at 277’000 tonnes. An increase in sugar supply, from high levels of imports and improved domestic production, led to lower sugar prices. With exceptionally high government intervention stockholdings, the price outlook for the new financial year remains challenging. The business sustained a significant loss in the year and embarked upon a major cost reduction and factory efficiency programme. This included, in the first half, the decision to mothball our Baolongshan and Wangkui factories at the end of the campaign, with a non-cash charge of 22 million GBP included within adjusted operating profit. In early September we completed the sale of our beet factory at Chifeng where the regional government had announced its intention to redevelop the area. A charge of 15 million GBP has been taken as a loss on sale of businesses in the income statement.
Agriculture had a record year with revenues and profit well ahead of last year driven by a strong performance across the UK businesses and international growth for AB Vista.
The UK livestock sector experienced a mixed year. Dairy farmers saw milk price increases being largely offset by higher costs and poor quality and quantity of forage. Consolidation in the poultry market depressed farm margins and the pig market continued its slow recovery from several years of low margins and high raw material costs. The continuing trend among UK consumers and retailers to prefer locally produced meat has provided a welcome stimulus to the UK industry and there are some signs of raw material costs beginning to fall.
Our UK feed business, AB Connect, saw strong demand for ruminant feeds and poultry feed volumes grew in line with increased demand from UK consumers. Our international feed enzyme and micro-ingredients business, AB Vista, continued to grow faster than the market, particularly in North America with the success of our Quantum Blue phytase enzyme, sales of which were up more than 30 percent on last year. The business also became the second largest global supplier of betaine, a functional micro-ingredient extracted from sugar beet molasses.
Premier Nutrition traded well, particularly in UK poultry and maintained its market-leading position in UK starter feeds. Further progress was achieved in its developing markets in Asia and Central and Eastern Europe. AB Sustain´s beef and dairy farm carbon footprint models have been improved further and were recertified by The Carbon Trust. In addition, its new biodiversity valuation programme «Think.Nature» secured an endorsement from Natural England.
China continued to be a challenging market, particularly in pigs and poultry. Progress in poultry was hampered by an avian flu outbreak during the year but growth was achieved in our co-products business. Good raw material procurement and cost management underpinned profit delivery.
Frontier performed well in a year in which the supply of UK grain was poor and of variable quality. A higher volume of wheat imports increased the complexity and cost of the UK cereal supply chain which, together with global price volatility throughout the year, resulted in strong earnings from grain trading. A wet autumn in 2012 lowered wheat plantings thereby reducing demand for fertiliser and crop protection products. However, the cool spring and warm summer of 2013 provided good growing conditions for autumn planted crops and spring cereals creating a better harvest potential than was previously expected.
Primark´s revenue was 22 percent ahead of last year at actual exchange rates, which benefited from the recent strengthening of the Euro and was 21 percent ahead at constant currency. This excellent result was driven by an increase in retail selling space, like-for-like sales growth of five percent for the full year and superior sales densities in the larger new stores. Like-for-like growth during the year was affected by two periods of unseasonable weather; it was flattered at the start of this financial year with the benefit of seasonal autumnal weather compared with an unseasonably warm autumn in 2011 and was subdued during the very cold months of March and April 2013. Trading at other times of the year was strong, building upon the success of the comparable periods in the prior year. Trading in our stores in northern continental Europe was strong throughout the year and like-for-like growth in Spain, which was initially held back by the large number of new store openings, improved later in the year. Sales of the autumn/winter range in the new financial year are encouraging.
Operating profit margin in the first half was higher than last year reflecting the benefit of lower cotton prices and lower markdowns. The strong trading over the summer also resulted in lower markdowns in the second half and the margin for the full year exceeded our expectations at 12,0 percent. A feature of this year was the achievement of satisfactory operating profit margins, more quickly than expected, in northern continental Europe. This was delivered by superior sales densities and a focus on operating costs. Adjusted operating profit was 44 percent higher than last year at 514 million GBP reflecting the strong revenue growth. Movements in exchange rates had no material effect on profit.
Primark is an international brand with a global supply chain sourcing products from a number of countries in Europe and Asia. We have a responsibility to act and trade ethically and we have a duty of care to workers throughout the supply chain. We are signatories to the United Nations´ Guiding Principles on Business and Human Rights. These were launched in 2012 and outline the responsibility of business and government to protect human rights by preventing and remedying the impact of abuse. This year we further strengthened our in-country teams of ethical trading specialists who are critical in supporting sustainable improvements within supplier factories and providing greater visibility across the supply chain. We conducted 1’825 audits in the last calendar year and ethical trade training continues to be provided to every new Primark employee. We are also developing ways to support workers´ livelihoods and well-being through longer-term initiatives such as the HERproject, focused on education regarding health and nutrition and our Sustainable Cotton programme.
This was another very active year for Primark´s property team and saw the group extend its operations into Austria for the first time with stores in Innsbruck and Vienna. We opened 16 new stores in total during the financial year, including our second store on London´s Oxford Street which has 82’000 square feet of selling space. We extended and refurbished the stores in Manchester, Newcastle, Chester and Mary Street, Dublin and closed the smaller of our two stores in Lincoln. This added 0,8 million square feet of selling space and brought the total to 257 stores and 9,0 million square feet at the financial year end.
Our new store design provides an exciting, fashionable and fun shopping experience. Strategically placed mannequins help to inspire customers to choose outfits that are readily available on adjacent fixtures and prominent signage and wider aisles enable easy navigation through the store. We are also enhancing customer service by providing a higher ratio of fitting rooms and cash registers to ensure a smoother experience when trying on outfits and paying for them.
The new financial year will see another busy schedule of store openings. We expect to add more than a million square feet of selling space during the year, with an extensive programme of 13 openings in time for Christmas 2013 including five in Spain and our first store in France, which will open in Marseille. We also have plans to open a further four stores in France during the financial year. Although our focus is to develop the business through expansion in our existing countries of operation, we continue to explore territories beyond this geographic footprint in the medium term.
We have invested further to improve the efficiency and increase the capacity, of our logistics network. A purpose-built depot in Mönchengladbach, in the west of Germany, came into operation in August 2012 with 425’000 square feet of warehouse space. This increased our total warehouse capability to 2,7 million square feet, adding to the footprint of our existing depots in Ireland, the UK and Spain and enabled a more flexible response to the needs of our customers in northern Europe.
We also undertook a substantial upgrade of our garment-on-hangers system in Magna Park in the UK and extensions to the Spanish and German sites are planned for the new financial year to facilitate our growth across continental Europe.
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Grocery revenue increased by three percent but adjusted operating profit increased by 24 percent, a substantial improvement over last year with the benefit of the non-recurrence of restructuring costs, a strong performance from Twinings Ovaltine and underlying growth in George Weston Foods in Australia in the second half.
Twinings Ovaltine again achieved excellent profit growth driven by higher sales volumes, improved pricing and an increase in total marketing investment with a focus on developing markets. Twinings achieved significant full year sales growth in all of its major markets and particularly in the US where it was again the fastest growing tea brand. Despite more difficult trading in Thailand, Ovaltine made further progress in its developing markets of Asia and South America. Further investment was made during the year in cost reduction and efficiency projects across the business, notably at the tea factory in Poland and from the bringing in-house of liquid malt extract production in Thailand.
Allied Bakeries made significant progress this year in driving volume growth and reducing its cost base. A combination of organic volume growth and the new Co-op supply contract, which commenced in April this year, drove an increase in market share and established Kingsmill as the number two bread brand in the UK. Allinson bread benefited from advertising investment which saw the brand back on television for the first time in ten years and Allinson Wholemeal regained its position as the number one brand in the Premium Wholemeal segment. We continued our capital investment programme to upgrade and modernise the bakeries. The new bread line at our Stockport bakery came on stream in September 2012 and in April this year we opened a new bread line at Walthamstow creating one of the most advanced bakeries in the UK. At West Bromwich another new bread line is on schedule to start commissioning during the autumn of 2013. This is the final stage of a five-year investment journey at West Bromwich, which will leave the site as one of the biggest and most modern in the world. However, the UK bakery market remained intensely competitive and there was some pressure on margins.
Silver Spoon´s revenue and operating profit were below last year reflecting an especially competitive year within the UK packed sugar market. The long, warm summer resulted in less home baking although Billington´s maintained its leading position in brown sugar as a result of increased press advertising and point of sale promotions. In the growing stevia sector, Truvia has become market leader with two product launches including a baking blend. Allinson flour continued to grow strongly, where it is market leader in the bread flour sector, following a brand relaunch and increased distribution.
Jordans and Ryvita both had an excellent year with strong UK sales growth driven by the launch of new pack formats. Jordans achieved its highest market share since its acquisition five years ago. The relaunch of Ryvita crispbread in new foil-fresh packaging drove increased sales and new varieties of Crackerbread and Thins have recently been introduced. Internationally, both brands achieved good sales growth, particularly in Canada and in France the introduction of a small in-country marketing team strengthened our presence and drove an increase in market share. For the second year running the business won the «Waitrose Way» Championing British award for branded products; this year for its pioneering work with British farmers from whom it purchases 80 percent of its raw materials.
AB World Foods made good progress achieving revenue growth in the UK for Patak´s and Blue Dragon. Internationally, a number of new products were launched under these brands with recipes specifically formulated to meet national tastes. Those launched in Canada, Australia and Mexico performed particularly well. Westmill achieved revenue growth in its core brands: Elephant Atta, Lucky Boat noodles, Tolly Boy basmati rice and Patak´s, despite continued weakness in the UK ethnic restaurant and take away trade. The Elephant Atta brand, which was acquired in September 2012, traded well and production, warehousing and distribution were all successfully integrated during the year.
At ACH in the US, baking volumes recovered after a warm 2012 winter and prices were increased to recover higher commodity costs. Flavours secured increased volumes with key customers and Foodservice made progress as restaurant trade showed some improvement. Investment in new product development continued, supported by a higher level of marketing and advertising expenditure, particularly for the new Weber flavouring products which achieved good distribution. In Mexico, there has been an improvement in the overall economic environment and Capullo volumes increased following its successful relaunch in 2012.
At George Weston Foods in Australia, trading met expectations with recovery and improved profitability in the second half. The bread business achieved margin improvement through a combination of an improved product mix and price increases, despite a challenging trading environment where the major retailers are continuing to promote in-store bakery products. Good progress was made with cost reduction programmes to offset inflationary pressures. There was also a continued focus on brand building and innovation with Burgen, The One and Abbott´s all being relaunched during the year resulting in an increase in market share. The meat business performed in line with expectations, showing a significant improvement over last year with higher volumes and factory productivity gains resulting in improved margins and better customer service. Further efficiencies were achieved in sales distribution and warehousing and administrative costs were reduced, all of which contributed to improved profitability.
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Revenue for the full year was two percent ahead of last year and underlying operating profit was in line. Adjusted operating profit includes a rationalisation charge of 21 million GBP for the cost of closing dry yeast production in Italy following the start-up of the new low-cost dry yeast plant in Mexico earlier in the year and five million GBP of accelerated depreciation in China.
Following the difficulties experienced by the yeast business last year, the performance by AB Mauri this year was steady although markets remain very competitive and raw material costs high. The new management team is undertaking a review of margin improvement opportunities and particularly a number of cost reduction and restructuring initiatives. There were solid performances from HispanoAmerica, Australia, New Zealand and the UK and particularly in the US where the impact of the failure of a major customer was mitigated by business development activities. Trading in China improved and bakery ingredients products made a good contribution.
Commissioning of the new yeast factory in Mexico, which was built to enhance our reach and competitiveness in the global dry yeast market, saw the start of a new phase of business development in Central America and the Caribbean. The performance of the new yeast factory at Yantai, China met expectations. The recently opened bakery ingredients facility in Cordoba, Spain was designed to develop the growing bakery ingredients market in Iberia and complements our existing yeast manufacturing and marketing business there.
At ABF Ingredients, increased demand in the US for extruded ingredients has resulted in our existing production facility reaching full capacity. A new cereal extrusions factory has been built at Evansville, Indiana which is now being commissioned. Further growth was achieved in bakery, feed and speciality enzymes, with a particularly good response to new products launched last year. The growth achieved by Enzymes since the factory in Finland was expanded in 2009 has resulted in this factory also reaching full capacity and further expansion is now being planned. The yeast extracts business in China was affected by the reduced availability and high price of sugar beet molasses with limited opportunity to improve profitability through price increases. Production of yeast extracts in China in the current market and with high input costs is uneconomical and we have taken a charge of 72 million GBP within the loss on sale and closure of businesses in the income statement, to write down the carrying value of the associated assets and to provide for restructuring costs. We have also written down the value of our yeast assets in India due to increasingly strict regulatory requirements for waste discharge.
In August we completed the disposal of our small US whey protein operation. Although profitable, we have not been able to develop sufficiently differentiated products and the consolidation of the dairy protein industry presented an opportunity to exit this market. A charge of 26 million GBP has been taken as a loss on disposal of the business reflecting a profit on the disposal of the tangible assets net of a write-off of the associated goodwill.
Since the financial year end we have entered into an agreement to acquire, subject to approval by the relevant competition authority, a bakery ingredients business with sales of 50 million GBP and operations in western Europe. This business will strengthen AB Mauri´s operations in the region by broadening its product range in key craft markets beyond a yeast-only offering.
Looking ahead to the next few years we see excellent prospects for Primark and further margin recovery in Grocery. However, this year we have seen an earlier than anticipated weakening of EU sugar prices, ahead of the now confirmed reform of the European sugar regime in 2017, and, as we stated in our September statement, this is expected to reduce AB Sugar´s profits further. With the strength of the group´s balance sheet and strong cash generation, we have every reason to be confident in the continuing development of the group.