TIDMABF
RNS Number : 5804L
Associated British Foods PLC
09 September 2019
9 September 2019
Associated British Foods plc
Pre Close Period Trading Update
Associated British Foods plc issues the following update prior
to entering the close period for its full year results for the 52
weeks to 14 September 2019, which are scheduled to be announced on
5 November 2019.
Trading performance
Our full year outlook for the group is unchanged, with adjusted
earnings per share expected to be in line with last year. Strong
profit performances this year from Primark and Grocery are expected
to be offset by the anticipated decline in AB Sugar.
Interest
Net interest expense will be lower than last year following the
maturity of $310m of private placement senior notes in March and
lower debt in high interest markets. As previously explained, an
increase in other financial income will reflect the increase in the
surplus of our defined benefit pension schemes between the 2017 and
2018 year ends.
Currency
Two thirds of the group's operating profit are earned outside
the UK and the weakening of sterling against our trading
currencies, particularly towards the end of the financial year,
will result in a translation gain this year of some GBP10m.
References to growth in the following commentary are based on
constant currency unless stated otherwise.
Net cash
Free cash flow will be higher than last year with the biggest
factor being lower capital expenditure. Lower expenditure in the
food businesses follows the recent completion of some major capital
projects and the lower Primark spend this year reflects the planned
later phasing of next year's store openings and the consequent
timing of store fit out costs.
Year end net cash is expected to be some GBP900m, compared to
net cash of GBP614m last year.
Grocery
Grocery revenues are expected to be ahead of last year with
adjusted operating profit well ahead. This profit includes a GBP12m
one-time cost for the closure of the Twinings tea factory in China
in the first half and so, on an underlying basis, profit growth was
excellent. Margin improvements were delivered by George Weston
Foods in Australia, ACH in the US, Twinings Ovaltine and
Acetum.
Twinings Ovaltine made good progress this year. Twinings
delivered strong revenue growth following the success of Cold
Infuse teas, while the development of our herbal teas range
included good growth from Superblends in the UK and new launches in
Australia and France. Ovaltine sales growth was supported by the
continuing success of new product launches in Switzerland.
At Allied Bakeries revenues progressed this year following price
increases agreed with a number of customers. As previously advised,
the termination of our largest private label bread manufacturing
contract will lead to a volume loss in our next financial year. We
are taking steps to reduce our capacity and will shortly close our
Cardiff bakery. The costs of closure have been included in our full
year outlook for adjusted operating profit. During the coming year
we will continue to focus on reducing operating losses within the
business.
Jordans, Dorset Cereals and Ryvita delivered an improved
manufacturing capability, with the commissioning of the new Ryvita
bakery in Bardney, Lincolnshire, and transferred muesli production
to a state-of-the-art facility in Poole, Dorset. AB World Foods
enjoyed a successful year with strong growth in the UK and
internationally, particularly in the US.
At Acetum we benefited from a full year of ownership, while
margins improved as grape must prices returned to lower levels than
the exceptionally high level that followed the poor grape harvest
in 2017. Investment was made in the launch of the Mazzetti brand in
the UK, while international sales increased particularly in Canada
and Australia.
ACH performed strongly this year, with excellent margin
improvement driven by lower oil commodity costs, further market
share gains in Mazola corn oil and improved trading in Mexico.
George Weston Foods in Australia delivered excellent margin and
operating profit growth through ongoing cost reduction, procurement
gains and a first year of ownership of Yumi's.
Sugar
AB Sugar revenue and adjusted operating profit will be down on
last year, as previously advised, with lower EU sugar prices having
impacted our UK and Spanish businesses and a poor crop affecting
sales volumes in China. In July we expected the full year profit
decline in Sugar to be reflected in the first half. This has indeed
been the case, with delivery by Illovo of their later phasing of
sales and profit. Our full year outlook is unchanged.
EU stock levels have tightened during 2018/19 as a consequence
of lower sugar production in the last campaign. Indications are
that EU sugar production for 2019/20 will remain at this lower
level following a further reduction in the crop area which will
largely offset improved beet yields. As a consequence, stocks are
forecast to remain low which should underpin the higher spot EU
sugar prices. Our UK and Spanish businesses have continued to
contract sales for next year at improving prices during the
summer.
In the UK, sugar production of 1.15 million tonnes was
significantly lower than last year when beet yields achieved record
levels. Next year's production is expected to be higher than this
year, with an improvement in beet yield more than offsetting the
reduction in crop area.
In Spain, we concluded the contracting of beet volumes with
growers for the 2019/20 campaign at reduced prices from last year.
This led to our contracted crop area reducing by one third and beet
sugar production is expected to be around 205,000 tonnes. This
lower beet sugar production will be compensated by increased raw
sugar refining. We expect an improved operating result for Spain
next year arising from higher sugar prices and these lower beet
costs.
Sugar production at Illovo is expected to increase slightly to
1.72 million tonnes this year, driven by further improvements in
cane yields. Profitability will be in line with expectations, with
particularly strong performances in Tanzania, Zambia and Eswatini
offsetting weaker results in Malawi and South Africa.
In China, sugar production of 149,000 tonnes was well down on
last year as very poor quality beet hampered factory production and
sugar extraction which, combined with low domestic sugar prices,
will produce a loss in this financial year as previously advised.
The new crop is well established and some recovery in beet quality
is expected.
Agriculture
AB Agri revenues will be well ahead of last year, driven by
higher feed volumes and higher feed prices reflecting an increase
in raw material costs. Adjusted operating profit has, however,
reduced following the loss of high margin co-products from the
Vivergo bioethanol plant, following its closure last autumn, and
lower sales of sugar beet feed.
Speciality Nutrition, our premix and starter feed business,
successfully commissioned a new factory at Fradley Park,
Staffordshire. Profits were lower than last year which benefited
from unusually high vitamin prices. Frontier improved its result
from grain trading following high wheat prices in the first half
and increased market volatility.
Sales and profit at AB Vista declined reflecting an increasingly
competitive phytase enzyme market but we are encouraged by the
launch of Signis, our innovative animal digestion aid. Profit fell
in our Chinese feed business with lower sales to the dairy and pig
sectors.
Ingredients
Ingredients revenues will be ahead of last year, while adjusted
operating profit is expected to be in line.
In AB Mauri, sales in North America increased supported by
product innovation in bakery ingredients and higher yeast prices to
recover increased input costs. Although our businesses in South
America generally performed robustly, sales and profits in
Argentina were impacted by the challenging economic environment,
increased competition and the application of hyperinflationary
accounting. On 31 May we completed the acquisition of Italmill, a
supplier of specialist bakery ingredients from a well-invested
facility in the north of Italy.
We recently announced our intention to form a yeast and bakery
ingredients joint venture in China with Wilmar International. This
will combine our existing activities in China and technical
expertise with their extensive sales and distribution capability.
Completion is subject to the receipt of regulatory approvals. The
joint venture will build a major yeast plant to be co-located with
Wilmar's facilities in north east China.
Sales and profit at ABF Ingredients were modestly impacted by a
lower contribution from animal feed enzymes. AB Enzymes continued
to grow in the bakery and other food markets and increased its
international sales. Ohly, our yeast extracts and seasoning powders
business, made good progress in the food and health markets. PGPI,
our US protein extrusion business, delivered strong sales growth of
plant protein crisps.
Retail
Sales at Primark for the full year are expected to be 4% ahead
of last year at constant currency and actual exchange rates, driven
by increased selling space partially offset by a 2% decline in
like-for-like sales. Sales growth in the fourth quarter increased,
driven by an improvement in like-for-like performance. Early
trading of the new autumn/winter range has been encouraging.
Primark has performed well in the UK where sales in the total
clothing, footwear and accessories market have been weak. We
continued to deliver a significant gain in market share, with sales
growth of 3% and a like-for-like sales decline of 1%. Sales growth
was driven by a strong contribution from new selling space. We have
been encouraged by our customers' reaction to our new store in
Birmingham High Street which showcases our full product range and
new food and beverage and beauty services.
Sales in the Eurozone are expected to be 5% ahead of last year
at constant currency, with particularly strong sales growth in
Spain, France, Italy and Belgium. The contribution from our new
stores in Bordeaux, Seville Torre and Ljubljana exceeded our
expectations. Like-for-like sales fell by 3%, driven mainly by a
weak performance in Germany where we have strengthened management
and initiated focused marketing.
Our US business continued to deliver strong sales growth, driven
by excellent trading at the Brooklyn store, which opened last
summer, and like-for-like growth. This, coupled with the lower
operating costs arising from the selling space reduction in three
stores, will result in a significantly reduced US operating loss.
Our tenth US store at American Dream, New Jersey will open this
autumn to be followed by Sawgrass Mills, Florida later in 2020 and
we have exchanged contracts on a store in State Street,
Chicago.
The first half operating margin of 11.7% was well ahead of the
same period last year of 9.8%. This was driven by a weaker US
dollar on contracted purchases, better buying and tight stock
management. As expected, margin in the second half will be lower
reflecting the effect of a stronger US dollar on purchases. Stock
has continued to be managed tightly and markdowns in the second
half are now expected to be in line with the good performance last
year. Our full year outlook for operating profit is unchanged, with
margin ahead year-on-year.
The strengthening of the US dollar during this year and the
recent weakening of sterling will increase the cost of goods for
next year. We anticipate achieving some mitigation from reduced
materials prices, the favourable effect of exchange rates in
sourcing countries and better buying. Combined with a more typical
level of markdown, we expect a reduced margin next year.
Retail selling space increased by a gross 0.95 million sq ft
this year, with 14 new store openings. Four stores were added in
the UK; three in Germany; two in Spain; two in France and one each
in Belgium, the Netherlands and our first store in Slovenia. We
relocated to new premises in Birmingham High Street which, at
160,000 sq ft, became our largest store. The smaller of our two
stores in Oviedo, Spain, was closed and the size of our store in
the King of Prussia mall in Pennsylvania was reduced. This brings
the total estate to 373 stores trading from 15.6 million sq ft
compared to 14.8 million sq ft a year ago.
In the next financial year, we are planning to add a net 1
million sq ft of additional selling space, weighted to the second
half. France and Spain will see the most space added and we expect
to open 19 new stores together with a number of relocations and
extensions. The major new stores will include Paris Plaisir, Lens
and Calais Cité Europe in France, Milan Fiordaliso in Italy, Bilbao
Gran Via, Barcelona Plaza de Cataluña and Seville Lagoh in Spain,
Rotterdam Forum in the Netherlands and Trafford Centre in the UK.
Our first store in Poland will open in 2020 in Warsaw, taking
Primark to its thirteenth country.
Brexit
Our businesses have completed all practical preparations should
the UK no longer be a member of the EU and contingency plans are in
place should some of our businesses experience disruption at the
time of exit.
Adoption of IFRS 16 Leases
The group will adopt IFRS 16 in the 2020 financial year and the
2020 interim results will be our first financial report prepared
under this new accounting standard. We will transition using the
modified retrospective approach, under which the comparative period
is not restated. While this is a significant change in financial
reporting, our business model remains unchanged and our balance
sheet remains robust.
The effects of adopting IFRS 16 will be calculated based on our
transition date of 15 September 2019 and on bond yields as at that
date. We expect to recognise lease liabilities at transition of
some GBP3.5bn, the vast majority of which relate to Primark's
leasehold store estate. For Primark, IFRS 16 will result in an
increase in operating profit margin and a reduction in its return
on capital employed percentage to the mid-teens due to right-of-use
assets being recognised on the balance sheet. The results of our
Food businesses are not significantly affected. Our current
projection is that the adoption of IFRS 16, if applied to this
financial year on a pro forma basis, would result in a reduction in
the group's adjusted earnings per share of no more than 2%.
We will report under existing accounting standards in our 2019
annual report in November. Our annual results presentation will
outline the pro forma impact of IFRS 16 on the 2019 financial
statements and metrics.
For further enquiries, please contact:
Associated British Foods Tel: 020 7399 6500
John Bason, Finance Director
Catherine Hicks, Corporate Affairs
Director
Citigate Dewe Rogerson Tel: 020 7638 9571
Chris Barrie, Jos Bieneman
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END
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