8 September 2008 - Associated British Foods plc issues the following update prior to entering its close period for its full year results to 13 September 2008, which are scheduled to be announced on 4 November 2008.
In our interim management statement issued on 10 July 2008 we reported that trading for the group since the half year had been in line with our expectations. This has continued to be the case. Progress in adjusted earnings per share is expected for the full year. Good growth in adjusted operating profit driven by Primark, Grocery and Agriculture will more than offset the previously highlighted decline in profit from our EU sugar operations and the higher interest charge which is a consequence of higher average net debt for the group.
The income statement will include the following pre-tax exceptional items. The full permanent renunciation of sugar quota for the UK and Poland, agreed with the European Commission as part of the final phase of the EU regime reform, was 206,000 tonnes. Compensation receivable, net of the write-off of the unamortised cost of quota purchased in 2006 and factory closure costs, will be a gain of £23m. The proposed rationalisation of our Australian meat operations was announced in July and will require a charge of some £70m. The tax effect of these items will be treated as exceptional and, following a change of tax law in the UK Finance Act 2008 which will phase out Industrial Buildings Allowances, a further exceptional tax charge, currently estimated at £17m, will be made to reflect the consequential increase in deferred tax.
Expenditure on acquisitions in the year will amount to some £225m primarily comprising the Italian and German yeast businesses of Gilde Bakery Ingredients for AB Mauri, beet sugar factories in north east China and KR Castlemaine in Australia. Proceeds from the disposal of our former German yeast business and the UK emulsifier business amounted to £54m.
Net debt for the group at the year end will be substantially higher than last year. This will reflect the continued significant level of capital investment to develop opportunities in our existing businesses, many of which are of a long-term nature, the acquisition of new businesses and the impact of much higher commodity prices on working capital.
Sugar & Agriculture
As expected Sugar profit will be substantially lower than last year. This is primarily the consequence of reform of the EU sugar regime but also reflects depressed sugar prices in China as a result of a record crop. Illovo has continued to trade well with an expectation of higher volumes and the benefit of higher domestic and world sugar prices.
The European Commission has confirmed that it has virtually achieved its target for reduction in EU sugar production for the marketing year starting October 2008. The final reform changes to sugar reference price, levies, beet prices and access for Least Developed Countries will become effective in October 2009 and have already been announced. The challenge for the industry looking forward is the recovery of high input costs including energy and beet.
Progress is being made in the development of the beet business in north east China and the expansion projects in Illovo.
Agriculture continued the excellent performance delivered in the first half. UK animal feeds performed well and Frontier’s strong position in grain trading and increased demand for farm inputs drove further sales growth.
Grocery
Growth in Grocery revenue and profit was strong in the second half. There was further improvement from Allied Bakeries and some recovery at ACH, our North American vegetable oil and consumer products business. Price increases have recovered commodity cost inflation but substantial increases in energy prices remain a feature of the current trading environment. Revenue growth was driven by these price increases and by higher volumes.
At ACH, margins were impacted in the first half by the delayed recovery of sharp increases in the cost of corn, soy and canola oils. The second half benefited from price increases to recover not only the higher costs in the first half but also the continued inflation experienced since the half year.
The merger of Ryvita and Jordans was completed on 29 August and we have a 62% interest in the combined business. Integration of these businesses is now underway.
In Australia, the acquisition of KR Castlemaine, a leading meat and smallgoods manufacturer, was completed at the end of March. The proposed closure of our existing meat factories in Perth and Melbourne in 2009 and 2010 was announced in July. Production will be transferred into the newly-acquired, low-cost factory at Castlemaine which will be expanded to accommodate the higher volume. The charge for rationalisation is expected to be some £70m, of which £20m is attributable to the write-off of fixed assets, all of which will be treated as exceptional in the income statement this year.
Ingredients
The progress reported in the third quarter management statement is expected to continue with some margin pressure from higher raw material and energy costs. The capacity expansions for yeast, yeast extracts and enzymes are on track. We completed the sale of our small UK-based emulsifier business in August.
Retail
Sales and profit at Primark will again be well ahead of last year. We expect to have opened eight stores in the second half of the year with five in Spain and three in the UK bringing the total to 181 stores. We will be trading from 5.4 million sq ft of selling space which is an increase of 8% over the period. Like-for-like sales growth of 2% is expected in the second half despite the weak trading in April when poor weather this year contrasted with warm weather and the benefit of Easter trading in the comparative period last year. Our Spanish stores have performed well. Operating profit margin is expected to be broadly in line with last year. As a consequence of continuing growth, we will have opened a major new distribution centre at Thrapston, Northamptonshire by the end of the financial year. This will increase our UK capacity by some 50%.