Interim Management Statement July 2014
Associated British Foods plc today issues its third quarter management statement, in accordance with the requirements of the UK Listing Authority’s Disclosure and Transparency rules. The figures stated below relate to the 40 weeks ended 21 June 2014.
Headlines
- Primark third quarter sales 22% ahead at constant currency
- Continued profit progress at Ingredients
- EU sugar prices have continued to fall
- Full year adjusted earnings per share now expected to be ahead of last year
Revenue summary
Group revenue from continuing operations for the 40 weeks to 21 June 2014 was 2% below the same period last year but 2% ahead at constant currency.
Year-on-year change in revenues:
| 16 weeks to 21 June 2014 | 40 weeks to 21 June 2014 | |||
| Actual rates | Constant rates | Actual rates | Constant rates | |
| Sugar | -26% | -20% | -23% | -19% |
| Agriculture | -11% | -10% | -6% | -5% |
| Grocery | -12% | -5% | -7% | level |
| Ingredients | -5% | +9% | -4% | +6% |
| Retail | +19% | +22% | +16% | +17% |
| Total group | -3% | +3% | -2% | +2% |
Exchange rates
Sterling was stronger than most of our major currencies in the first half of this financial year but the strengthening was markedly towards the end of that period. That strength has continued throughout the third quarter with the euro also now weaker than last year. This has had a negative impact on the translation of sales and profits from overseas businesses, particularly in Grocery and Ingredients. In determining the adjusted earnings per share outlook for the full year, the likely negative impact arising from currency translation, if current exchange rates prevail, will be some £50m compared with last year’s result.
Sugar
Sugar revenues in the last 16 weeks were 20% lower than last year at constant currency, driven by substantially lower sugar prices, weaker EU sales volumes and lower sugar production in North China. Year-to-date sugar revenues at constant exchange rates are 19% behind last year.
The UK campaign in 2013/14 produced 1.32 million tonnes of sugar compared with 1.15 million tonnes in the previous year, with beet yield per hectare 12% ahead. Record operating performances were achieved at all plants, with an increase in capital expenditure to enable further improvements in cost efficiency and sustainability.
The new crop for the 2014/15 season has made very good progress. The beet price payable to growers for this crop was agreed in summer 2013, at a substantial increase over the price for this year, and at a cost of some £30m. Discussions are under way with the National Farmers Union to agree future beet prices beyond the 2014/15 season that will ensure a sustainable UK beet sugar industry reflective of the new commercial environment for EU sugar. A reduction in sugar production in Spain was driven by a substantially lower volume in the north, which is expected to be partially mitigated by a stronger performance in the south.
In response to the substantial profit decline in our sugar businesses, and in addition to the continuous improvement programme that is delivering cost reductions across the AB Sugar group, we are planning to undertake a further overhead reduction exercise. The details will become clearer during the fourth quarter, but we expect to take a one-time charge of some £20m in this year’s adjusted operating profit to provide for the associated costs.
Illovo’s 2014/15 season is now under way with a generally good start for all countries. Continued low world sugar prices have impacted revenues both in Tanzania, which is a deficit market, and South Africa where low-priced imports have entered the market in competition with locally produced sugar. EU export proceeds were lower than anticipated as a consequence of the deterioration of EU prices although it is hoped that new tariff arrangements in South Africa and import controls in Tanzania will alleviate the situation in the near term.
In China, final production volumes in the south were 560,000 tonnes, 60,000 tonnes ahead of the prior year as a consequence of an increase in cane yields and a higher sucrose content. Production in the north was 116,000 tonnes, a reduction from the 277,000 tonnes produced last year as a result of severe flooding in Heilongjiang and fewer factories in operation following last year’s rationalisation. An overhead reduction exercise has more than offset the reduced profitability arising from lower sugar prices.
EU sales prices have continued to fall as a consequence of the exceptional measures taken by the European Commission to increase the availability of quota sugar in the EU, and heightened competitor activity as the industry looks ahead to the reform of the sugar regime at the end of September 2017. Early customer negotiations have commenced for the 2014/15 UK contract round and whilst prices remain weak, early indications are that they are now stabilising, albeit at lower prices than we previously expected.
Agriculture
Agriculture revenues were 10% behind last year in the quarter at constant currency with lower commodity prices reducing sales values at AB Connect but with continued strong growth for AB Vista driven by the success of its Quantum phytase feed enzyme. Feed volumes were resilient supported by strong demand from dairy farmers for sugar beet feed. The impact on profit from the revenue decline was mitigated by the maintenance of cash margins in AB Connect and the growth achieved by higher margin businesses such as AB Vista.
Grocery
Grocery revenues were 5% lower than last year at constant exchange rates, with the majority of the decline arising at Silver Spoon as a result of lost contracts and considerably lower UK sugar pricing. Allied Bakeries achieved market share growth for Kingsmill although trading conditions continued to be challenging. The profit and sales momentum at Twinings Ovaltine continued in the period. Revenues at George Weston Foods made further progress as meat volumes continued to improve, and trading at ACH remains encouraging with a particularly good performance in the quarter from Capullo, our premium oil brand in Mexico.
Ingredients
With most of its businesses located overseas, the Ingredients segment was particularly affected by the strength of sterling in the last quarter with reported revenues 5% lower than last year but 9% ahead at constant currency. The profit progress made in the first half has continued, with all regions showing improvement, particularly the Americas.
Retail
Primark’s revenue growth in the quarter accelerated to 22% at constant exchange rates bringing the year-to-date sales increase to 17%. This was driven by like-for-like growth, a further increase in retail selling space and superior sales densities in our new stores. In the third quarter, the strong like-for-like sales growth benefited from the warm weather, especially compared to the very cold months of March and April last year, and built further on strong trading in May and June last year. Year-on-year selling space has increased by 1.0 million square feet from 9.0 million square feet last year. Operating margin remained in line with the first half, continuing to benefit from warehouse and distribution efficiencies and lower freight rates.
At 21 June 2014 we were operating from 275 stores and total retail selling space has now reached 10 million square feet. Since the half year a further nine stores have been opened including relocations in Cardiff and Plenilunio, in Spain. We now have five stores in France with three very successful openings during the quarter in the suburbs of Paris, adding to Marseilles and Dijon which were opened in the first half. We also opened in Cologne in Germany, Nijmegen in The Netherlands, Logrono in Spain and Canterbury in the UK. A small store in Dundalk in the Republic of Ireland was closed in the period. Plans for the first store openings in the north east of the USA towards the end of 2015 remain on track.
We have a very strong pipeline of new stores in Europe extending over a number of years. With our current phasing of store openings, we now expect a net increase in retail selling space in this financial year of 1.2 million square feet, which is actually 1.4 million square feet of additions less 0.2 million square feet of closures arising where old stores are too small or have been relocated. We then expect the increase in selling space in the next financial year to be a little less than 1.0 million square feet, to be followed in the autumn of 2015 by a strong programme of openings.
Financial position
The cash flow continued to benefit from much improved working capital. Capital expenditure year-to-date is £70m higher than last year with a higher proportion spent on new stores for Primark. Net debt at 21 June 2014 was £287m lower than the half year at £540m, and a further reduction is expected by the year end.
Trading outlook
Full year adjusted earnings per share are now expected to be ahead of last year, with better profit progress in Retail, Grocery and Ingredients offsetting the adverse effects of lower sugar prices and the strengthening of sterling.
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, Eleni Menikou
Tel: 020 7638 9571
Jonathan Clare
Tel: 07770 321881