TIDMABF
RNS Number : 8113D
Associated British Foods PLC
24 February 2020
24 February 2020
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 interim results for the 24
weeks to 29 February 2020, which are scheduled to be announced on
21 April 2020.
IFRS 16 Leases
We have adopted IFRS 16 from this financial year and the
forthcoming interim results will be our first to be reported under
this new accounting standard. Under our chosen transition option,
the results for the prior period will not be restated. Primark is
our only business where this change will result in a material
effect on operating profit and so, to understand its underlying
business performance, the commentary for Primark is on a
lease-adjusted basis. Commentary for the group is on both a
reported and a lease-adjusted basis.
Currency
The average exchange rate for sterling against our major trading
currencies, other than the US dollar, was stronger in the first
half than in the comparable period last financial year and,
consequently, there will be a loss on translation in the first half
of some GBP6m. In the second half, with a higher contribution of
overseas profits, there will be a more significant loss on
translation if current exchange rates are unchanged.
Trading outlook
For the half year, we expect sales growth for the group and
expect adjusted operating profit to be ahead of last year on both a
lease-adjusted and reported basis. On a lease-adjusted basis we
expect adjusted earnings per share to be ahead of last year, with
lower net financial expenses offsetting an increase in the
effective tax rate. On a reported basis, the dilutive effect of the
adoption of IFRS 16 on earnings will result in a small reduction in
adjusted earnings per share in the first half.
We expect strong growth in adjusted operating profit in the
second half, driven by profit growth for Primark and a second half
weighting of the AB Sugar profit recovery. As a result, our outlook
for the full year for the group is unchanged with progress
expected, on both a reported and a lease-adjusted basis, in
adjusted earnings per share.
Cashflow and funding
Cash outflow and capital expenditure in the first half will be
in line with the corresponding period last year. Net cash before
IFRS 16 lease liabilities is expected to be some GBP800m at the
half year, compared to GBP386m at the first half last year.
Including IFRS 16 lease liabilities of GBP3.6bn, net debt will be
some GBP2.8bn.
COVID-19
Following the outbreak of COVID-19 in China, our main priority
is the health and safety of our colleagues and we are taking all
possible actions to support them. At the same time, each of our
businesses are closely monitoring the current and potential effects
on their operations of the outbreak. The effect on supply chains
for businesses dependent on Chinese sourcing continues to
evolve.
A number of our food businesses have operations in China. The
Chinese sugar campaign was completed in January before the outbreak
developed significantly. Our AB Mauri, AB Agri and Ovaltine
factories are operating, but at reduced capacity due to labour and
logistics constraints.
Primark sources a broad assortment of its product from China. We
typically build inventories in advance of Chinese New Year and, as
a consequence, are well stocked with cover for several months and
do not expect any short-term impact. We are working closely with
our suppliers in China to assess the impact on their factories and
supply chains and their ability to fulfil our current orders. If
delays to factory production are prolonged, the risk of supply
shortages on some lines later this financial year increases. We are
assessing mitigating strategies, including a step up in production
from existing suppliers in other regions.
Grocery
Revenue in the first half is expected to be in line with last
year at constant currency, with higher sales at George Weston Foods
in Australia and the first contribution from Anthony's Goods in the
US offset by lower sales at Allied Bakeries. Margin and operating
profit will be ahead, benefiting from a higher margin in ACH and
reduced operating losses at Allied Bakeries. Furthermore, last year
included a GBP12m one-time cost for the closure of the Twinings tea
factory in China.
Twinings revenues were ahead of last year, driven by growth in
black teas and excellent sales of herbal teas. Ovaltine revenues
were held back by a slow start in Thailand, partially offset by
sales growth in China, Brazil and Switzerland driven by new
products and expanded distribution. Margin at Twinings Ovaltine
improved, benefiting from the tea supply chain improvements
delivered last year.
AB World Foods achieved good sales growth in the period, driven
by strong sales at Blue Dragon in the UK and increased Patak's
sales in Europe and North America. As expected, Allied Bakeries
revenues declined but the operating loss was reduced with our
ongoing programme of cost reductions more than offsetting the loss
of contribution from lower sales.
At the start of February there was a fire at our Wakefield
Speedibake factory, resulting in significant damage. The site was
safely evacuated, and we have comprehensive insurance for property
damage and business interruption.
At ACH in the US sales of Mazola corn oil increased, delivering
further market share gains, and margins improved. At George Weston
Foods in Australia both Tip Top and the Don meat business achieved
sales growth and Yumi's continued to grow strongly.
Sugar
AB Sugar revenue is expected to be ahead of last year in the
first half due to higher EU sugar prices and increased export sales
at Illovo. These higher EU prices, combined with reductions in the
costs of sugar production, will deliver an increase in operating
profit for the first half. Most of the improvement in sugar profit
this year will be delivered in the second half as a result of
phasing of Illovo profit and a further realisation of the increase
in sugar prices in our EU businesses. Operating profit for the full
year remains in line with our expectations.
Our UK and Spanish businesses have now largely completed
contracting sales for this financial year. EU prices have remained
at levels significantly higher than last year and the recent
increase in the world market sugar price should provide further
support to EU prices in the medium term.
UK sugar production is expected to be 1.18 million tonnes this
year, up on last year, with a recovery in sugar yield more than
offsetting the reduction in crop area. The campaign is entering its
final stages and is progressing well.
In Spain, operating profit has benefited significantly from the
lower beet prices contracted with growers last year, coupled with
higher sugar prices. Beet sugar production will be lower than last
year at 210,000 tonnes due to the reduction in contracted crop area
in the north, which will however be compensated for by an increase
in raws refining.
The campaign in China has now completed. A much better-quality
crop and the linking of some grower payments to the sugar content
of their beet has resulted in a significantly reduced operating
loss for the period. Sales are in line with last year, with lower
production at 125,000 tonnes being offset by higher domestic sugar
prices.
At Illovo, revenues were ahead of last year, however this was
driven mainly by export sales which had a much lower margin. Our
higher-margin domestic sales in South Africa fell in the first
quarter due to increased imports and a decline in consumption in
that developed market. Sugar production in the first half was
limited by heavy rains in a number of countries, but for the full
year is expected to be broadly in line with last year at some 1.7
million tonnes.
Agriculture
Revenue at AB Agri will be ahead of last year in the first half,
while we expect operating profit to be broadly in line with last
year. Our UK feed business experienced higher supply chain costs,
lower prices for sugar beet feed and reduced exports to mainland
Europe. This was partially offset by strong feed enzymes sales at
AB Vista, particularly in the Americas.
Ingredients
Revenue in the first half is expected to be ahead of last year,
however adjusted operating profit will decline with a lower margin
at ABF Ingredients.
AB Mauri will deliver sales and operating profit growth. The US
business performed well, with strong sales growth in yeast and
profit also benefiting from operational efficiencies. Italmill, the
specialist bakery ingredients business acquired in May last year,
was successfully integrated. Sales of our high-quality bakery
toppings from our new facility in Brazil were ahead of
expectation.
At ABF Ingredients, Abitec and SPI Pharma experienced lower
sales volumes as a result of increased competition, which was only
partially offset by the continuing sales growth by the enzymes
business to the feed, food and technical markets.
Retail
Sales at Primark are expected to be 4.2% ahead of last year in
the first half at constant currency and 2.5% ahead at actual
exchange rates, driven by increased retail selling space and level
like-for-like sales. With the expected decline in margin, operating
profit is expected to be marginally down on last year at constant
currency and on a lease-adjusted basis. On a reported basis
operating profit will be ahead of last year.
In the UK we delivered a further increase in our share of the
total clothing, footwear and accessories market. Sales are expected
to be 3.0% ahead of last year, driven by a strong contribution from
new selling space partially offset by a 1.3% decline in
like-for-like sales. Trading was particularly good over November
and December but weakened in January and February against very
strong comparatives in the prior year.
Sales in the Eurozone are expected to be 5.3% ahead of last year
at constant currency with particularly strong sales growth in
France, Belgium and Italy. Our new store in Milan traded ahead of
expectation and our store in Ljubljana, Slovenia continued to trade
strongly. Like-for-like sales for the Eurozone were 0.5% ahead,
continuing the much-improved performance reported in the January
trading statement. This was driven by excellent like-for-like sales
in France and Italy and, at this early stage, a notable improvement
in Germany which was delivered through a series of operational
changes made by the new management team.
Our business in the US continued to perform strongly, delivering
like-for-like sales growth, with particularly strong trading at the
store in Brooklyn. Together with the contribution from the planned
store openings at American Dream, New Jersey and Sawgrass Mills,
Florida, we expect a much-improved operating result for the
year.
As expected, margin was lower in the first half than in the same
period last year. Purchases this year were contracted at a much
stronger US dollar exchange rate than for purchases last year, but
the effect was substantially mitigated by both reduced markdowns
and reductions in the costs of goods, primarily lower materials
prices.
Foreign exchange contracts are in place for most of the second
half purchases, at an exchange rate in line with those for the
second half last year. As a result, we expect second half margin to
be in line with the same period last year, and so still expect
margin for the full year to be only a small reduction on that
achieved last year.
Retail selling space increased by 0.2 million sq ft since the
financial year end and, at 29 February 2020, 375 stores will be
trading from 15.8 million sq ft compared to 15.1 million sq ft a
year ago. Three new stores were opened in the period: Seville Lagoh
in Spain; Kiel in Germany; and Milan Fiordaliso in Italy. In
addition, we relocated to larger premises in the Norte shopping
centre in Porto, Portugal and the Norwich store in the UK was
extended. Selling space was reduced in two stores in Germany and a
small store in Rathfarnham, Ireland was closed.
We expect to open 0.9 million sq ft of new selling space in this
financial year. A strong opening programme is planned for the next
quarter, with a net 0.5 million sq ft of additional selling space.
New stores will open in: Trafford Centre, Manchester in the UK;
American Dream in New Jersey, US; Lens, Strasbourg, Paris Plaisir
and Paris Belle Epine in France; Maximo in Rome, Italy; Mons in
Belgium; Barcelona Plaza de Cataluña in Spain; Gropius Passagen in
Berlin, Germany; and Warsaw, Poland.
In Eastern Europe, following our forthcoming opening in Warsaw,
we have signed leases for further openings: Poznan, Poland;
Bratislava, Slovakia; and Prague and Brno, Czech Republic.
For further enquiries please contact:
Associated British Foods
John Bason, Finance Director Tel: 020 7399 6500
Catherine Hicks, Corporate Affairs
Director
Citigate Dewe Rogerson
Chris Barrie, Jos Bieneman Tel: 020 7638 9571
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END
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