REG - Assoc.British Foods - Pre Close Period Trading update

Associated British FoodsAnnouncement

08/09/2022 07:00

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RNS Number : 6866Y  Associated British Foods PLC  08 September 2022

8 September 2022

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 17 September 2022,
which are scheduled to be announced on 8 November 2022.

 

Headlines
 ●    Group outlook for this financial year unchanged: significant increase in
      adjusted operating profit and adjusted earnings per share
 ●    Food
      o                                         Sales growth over last year increased in fourth quarter demonstrating price
                                                actions
      o                                         Adjusted operating profit outlook for Grocery, Sugar and Agriculture in line
                                                with expectations
      o                                         Improved trading at ABF Ingredients now expected to deliver higher operating
                                                profit
 ●    Primark
      o                                         Total sales expected to be some £7.7bn, 40% ahead of reported sales last year
                                                at constant currency
      o                                         UK like-for-like1 sales improved in the fourth quarter to achieve close to
                                                pre-COVID levels
      o                                         Continental Europe like-for-like1 sales weaker than expected in the fourth
                                                quarter
      o                                         Expected full year operating profit margin of 9.6% with second half operating
                                                profit margin of 8.0%
      o                                         Click and Collect trial on track for UK regional launch in run-up to Christmas
 ●    Net cash before lease liabilities expected to be £1.5bn and net debt
      including lease liabilities of £1.7bn
 ●    Board will consider in November whether the Group has surplus cash and capital
      available for return to shareholders

 

Outlook for next financial year
 ●    Food
      o     Profit expected to be ahead of this year with further significant input cost
            inflation and pricing action
      o     Additional investment in growth initiatives and higher marketing spend
      o     Sugar operating profit well ahead; Grocery operating profit broadly in line
 ●    Primark
      o     Sales growth driven by pricing and acceleration of selling space expansion
      o     Significant market volatility affecting costs: strengthening of the US dollar
            at the end of this quarter and much higher energy costs
      o     Declining disposable income for consumers as a consequence of inflation
      o     Significant action to mitigate input cost inflation
      o     Commercial decision to limit further pricing actions in the next financial
            year
      o     For next financial year, operating profit margin now expected to be lower than
            second half of this financial year
 ●    Group
      o     Significant growth in sales expected
      o     Now expect adjusted operating profit and adjusted earnings per share to be
            lower than this financial year

 

An analyst call will be held at 09.00 BST today, Thursday 8 September 2022.

 

Trading this financial year

Group revenue(2) for the year will be well ahead of last year. In our food
businesses, higher revenues reflect price actions and some volume increases,
especially in Ingredients. In Primark, the much higher revenues reflect the
ending of COVID-related restrictions and the resumption of more normal
customer behaviour.

Adjusted operating profit for the Group will be significantly ahead of last
financial year, in line with our expectations.

This year will benefit from lower interest and lease interest expense compared
to last year and other financial income will be higher driven by a further
increase in the surplus in the Group's UK defined benefit pension scheme.  As
expected, the Group's full year effective tax rate will decline from 28.1%
last financial year to below 23% this year.

Our outlook for significant progress in adjusted earnings per share this
financial year for the Group remains unchanged.

References to growth in the following commentary are based on constant
currency unless stated otherwise.

 

Net cash

Unusually, there was a cash outflow for the Group this year due to some £160m
spent on acquisitions and an increase in working capital of some £750m. The
increase in working capital reflects inflation and the timing of receipt of
Primark autumn/winter inventory around the year end dates which contributed
some £440m of the increase: the late arrival of inventory at the end of last
year as a result of supply chain difficulties contributed some £200m of the
increase, and the planned earlier than usual arrival of inventory this
financial year end contributed a further £240m. Our expectation is that net
cash before lease liabilities will be some £1.5bn at the year end, and would
have been £1.7bn had we not chosen to advance the Primark inventory purchase
this year end.  This compares to £1.9bn at the end of the last financial
year.

The Group's committed Revolving Credit Facility, due to expire in 2023, was
renewed in June. The new Facility is for £1.5bn, up from £1.1bn previously,
is now free of performance covenants and runs for five years with two 1-year
extension options. The successful launch on 10 February of our inaugural
public bond of £400m, 2.5 per cent due 2034, diversified the Group's sources
of funding and extended the duration of our borrowings. During the year the
majority of the remaining Private Placement Notes, £221m, were repaid leaving
only some £85m to be repaid in March 2024.

Net debt is expected to be some £1.7bn, including lease liabilities of
£3.2bn.  The Group's financial leverage, defined as net debt including lease
liabilities: EBITDA, at the year end, is expected to be some 0.8 times. The
board will consider in November whether the Group has surplus cash and capital
available for return to shareholders.

 

Grocery

Grocery revenue is expected to be ahead of last year and is benefiting from a
build of price increases taken during the year with the year-on-year increase
particularly evident in the last quarter. Further pricing action is underway.
As expected, adjusted operating profit is below last financial year driven
mostly by the lag between input cost inflation and revenues resulting from
subsequent price actions.

Twinings sales reflected a return to more normal levels of demand after the
COVID lockdowns of last year and were supported by further new product
launches in the wellness category.  Ovaltine sales were ahead with continued
strong performance in Switzerland, Thailand and Nigeria and a return to
stronger out-of-home consumption. Twinings Ovaltine profit will include some
£14m of ERP development costs in line with the application of the IFRIC 38
clarification of accounting for cloud computing software arrangements.

Allied Bakeries sales were ahead of last year but losses increased with
significantly higher costs for wheat, energy and distribution. Although
pricing action at AB World Foods and Jordans Dorset Ryvita led sales to be
ahead, margins declined. Westmill benefited from the continued improvement in
restaurant and take-away trade sales.

Revenue growth at ACH was stronger with the benefit of price actions taken
over the last year which more than offset a decline in the US retail yeast
volumes from COVID-elevated levels. The profit of our joint venture in the US,
Stratas, was strongly ahead driven by strong procurement. George Weston Foods
in Australia delivered good sales growth and an increase in adjusted operating
profit compared to last year despite COVID-related labour shortages in our Tip
Top bread and Don KRC meat businesses.

 

Sugar

AB Sugar revenue is expected to be substantially ahead of last year driven by
higher sugar and co-product prices. The contribution from higher market prices
and the continued focus on cost savings broadly offset the effects of
significant input cost inflation, particularly energy, and some operational
difficulties in Southern Africa. Recommissioning costs and start-up losses at
our Vivergo bioethanol plant were some £30m. We are expecting operating
profit to be ahead of last year.

European sugar prices moved much higher this year. Looking ahead we expect
European sugar demand to remain in excess of production in our next financial
year. These stronger prices have been supported by higher world market sugar
prices.

UK sugar production was 1.03 million tonnes, compared to 0.9 million tonnes in
the last campaign, with much improved sugar yields as a result of good growing
conditions. The factories performed well. Forward cover of gas costs mitigated
much of the impact of very high energy prices in the year. We have benefitted
from improved margins for electricity produced for export to the grid and from
bioethanol derived from sugar beet. Recommissioning at Vivergo has progressed
well.

The performance in Spain improved with higher prices, production and sales
volumes. Very high temperatures in the south of Spain have reduced beet crop
yields and increased imports of cane raws for refining have mitigated the
shortfall.

Illovo continued to deliver strong domestic and regional sales volumes and
benefited from higher market prices. The season saw disruption to production
in Malawi, Eswatini and Mozambique following cyclones Ana and Eloise and high
rainfall in South Africa. As a consequence Illovo's sugar production for the
full year is expected to be 1.45 million tonnes compared to 1.58 million
tonnes last year. We expect adjusted operating profit to be in line with the
much improved result last year.

 

Agriculture

AB Agri sales are expected to be well ahead of last year with higher selling
prices, as a result of high commodity costs, partially offset by some volume
reduction. Frontier traded strongly with good grain trading volumes and a high
demand for crop protection products. Revenues at AB Vista were broadly in line
with last year but margins were reduced. Adjusted operating profit for AB Agri
is expected to be ahead of last year.

In the quarter we acquired Greencoat Limited, an animal supplement and care
business. Greencoat's products are well known in the UK and EU equine
supplement markets with its NAF Five Star brand.

 

Ingredients

Revenue is expected to be strongly ahead of last year driven by both AB Mauri
and ABF Ingredients following price increases in both businesses and, in ABF
Ingredients, some volume increases. Adjusted operating profit is expected to
be ahead of last year and ahead of expectations.

Revenue growth for AB Mauri is expected to be strong, particularly in North
America. In Europe sales to the foodservice and craft channels have increased
following the easing of many of the COVID restrictions. Margin continued to be
impacted by the timing of customer price actions.

ABF Ingredients revenue and profit are expected to be well ahead of last year.
Revenues increased in all the businesses driven by underlying growth,
sustained COVID volume recoveries, new business wins and strong price
execution to offset inflation.

The integration of Fytexia Group, a life science company which develops
scientifically supported active nutrients for human health, is progressing
well.

 

Retail

Total sales(2) for the financial year are expected to be some £7.7bn, which
at constant currency is 40% ahead of the reported sales last year and 44%
ahead of last year adjusted to a comparable 52-week basis.  The much higher
revenues reflect the end of COVID-related restrictions and the resumption of
more normal customer behaviour.

Like-for-like(1) sales in the fourth quarter were in line with those in the
third quarter. Continued improvement in our performance in the UK market was
offset by a weaker than expected performance in Continental Europe. Total
sales in the fourth quarter are expected to be 7% higher than last year,
adjusted to a comparable 52 week basis driven by increased selling space and
one year like-for-like growth of 6%. Like-for-like(1) sales for the quarter
are expected to be 9% below the comparable pre-COVID period.

The loss of contribution from the expected improvement in Continental European
sales is now likely to result in a full year adjusted operating profit margin
for Primark of 9.6% and a second half adjusted operating profit margin of
8.0%.

In this final quarter trading in the UK was strong with sales densities much
improved on the third quarter driven by like-for-like sales 13% ahead of last
year and just below pre-COVID levels three years ago. This improvement was
driven by higher customer footfall across the estate and, in particular, by
customers returning to high streets and city centres. Primark's share of the
total UK clothing, footwear and accessories market by value, which includes
online sales, for the 12 weeks ending 24 July was broadly in line with
pre-COVID levels three years ago. Performance in the Republic of Ireland
continued to be strong with like-for-like sales consistently close to
pre-COVID levels.

In the final quarter total sales in Continental Europe are expected to be 5%
ahead of the same period last year, adjusted to a comparable 52 week basis,
driven by selling space expansion of 4% and like-for-like sales 1% ahead of
last year. Compared to pre-COVID levels three years ago, like-for-like sales
were behind by 18%.  Across these markets footfall failed to improve in the
fourth quarter. This was driven by different factors in each market but
recently we have seen some signs of customer caution relating to their spend
in all markets.

In Iberia, sales densities this quarter were much improved on last year when
COVID restrictions constrained domestic demand and resulted in low levels of
tourism. The improvement this year was held back by extreme temperatures
during the summer months which kept many customers at home. Market data
earlier this year indicated that the total market for apparel was still well
below pre-COVID levels. In France, the total retail clothing sector has
continued to trade behind pre-COVID levels without the expected step-up in
customer footfall, particularly in the Paris outskirts where we have a
concentration of stores and where we believe sales have lagged the rest of the
country. In Italy, total sales in the quarter increased 20% year-on-year with
enthusiastic customer reaction to the four new stores opened during the year.
In Germany, sales densities have not returned to pre-COVID levels and so in
coming months we will review options for further action to reposition our
business for success in this important market.

Total sales in the US in the quarter are expected to be some 27% ahead of
pre-COVID levels driven by new store openings, with like-for-like(1) sales
close to pre-COVID levels.

To date, retail selling space in the financial year increased by a net 0.4
million sq ft. Since the last trading update, we have opened two stores in
Italy: Chieti and Bologna. We will open a further three stores before the
financial year end: Brno in Czechia; Tallaght in the Republic of Ireland; and
San Sebastián in Spain. As a result, we will be trading from 17.3 million sq
ft of retail selling space at the end of the financial year, a net increase of
0.5 million sq ft compared to a year ago. The opening of our new store in
Queens, New York, is now planned for the early part of the next financial
year.

We have made very good progress in developing a strong pipeline of new stores
in line with our ambition to grow the store estate to some 530 stores by the
end of our 2026 financial year. We expect to add a net one million sq ft of
retail selling space in the next financial year with the vast majority of new
stores in our growth markets of the US, France, Italy and Spain.

The new UK website has been live since April and our initial judgement has
been confirmed that customers have welcomed its new features. The key metrics,
such as traffic and engagement, have steadily built from a strong start. The
new stock-checker facility is being enthusiastically adopted. We remain on
track to launch the UK trial of a Click & Collect service in the run-up to
Christmas this year, focused on 25 stores in the north of England and Wales.
We have chosen a much-expanded range of children's products for this trial,
which we believe has the potential to satisfy unfulfilled demand, driving
footfall from both existing and new customers to deliver incremental sales in
store.

Looking ahead to the next financial year, we expect sales growth to be driven
by the increase in retail selling space and like-for-like growth resulting
from both the price increases implemented for autumn/winter this year and
those planned for spring/summer next year. Primark has already been managing
the challenges of supply chain disruption, inflation in raw material and
energy costs and in labour rates, alongside the higher purchasing costs which
have resulted from the strengthening of the US dollar over this financial year
against sterling and the euro.  To mitigate these pressures, in addition to
the price increases mentioned above, there are also plans to improve store
labour efficiency and deliver lower operating costs. In recent weeks the US
dollar has strengthened significantly against sterling and the euro, and
energy costs remain volatile and higher. Against this current volatile
backdrop and a context of likely much reduced disposable consumer income, we
have decided not to implement further price increases next year beyond those
already actioned and planned. We believe this decision is in the best
interests of Primark and supports our core proposition of everyday
affordability and price leadership.

As a result of the timing of the recent movements in currency and energy
prices, and the commercial decision to limit further price increases next
year, we now expect Primark's profit margin for next year to be lower than the
operating profit margin of 8.0% expected for the second half of this financial
year.

Looking further ahead, we remain focused on returning the business to an
operating profit margin of some 10% as commodity prices moderate and consumer
confidence improves.

 

ESG

We hosted an ESG Investor Briefing on 18 May, the third such briefing for
investors on key factors for the Group. This latest briefing focused on the
environmental factors that are most material. We demonstrated in the
presentation, which can be found in our website, that many of these
environmental factors present opportunities for our businesses.  We have
evaluated where climate change is likely to have the most material impact on
the Group and we will set out the relevant scenario analyses in our full year
reporting in accordance with the requirements of TCFD.

 

We will shortly post a letter to certain shareholders regarding their
electronic and hard copy communication preferences. A copy will be submitted
to the National Storage Mechanism at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)  and will be
viewable on our website at https://www.abf.co.uk/investors
(https://eur02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.abf.co.uk%2Finvestors&data=05%7C01%7Cray.cahill%40abfoods.com%7Ca84274d5378f49736c3808da8fe9ea5f%7C39c5be5d25104eee9ca0197a6e89e482%7C1%7C0%7C637980532093261015%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=%2BbdTjSR%2FzmbMKRy6aqBBHAbJBlL91uZEGD5BFdAQOqw%3D&reserved=0)

 

Notes:

(1) Like-for-like sales metric expressed represents like-for-like sales over
three years and enables measurement of the performance of our retail stores
compared to our experience in 2019, the last full financial year before any of
the economic effects of COVID. This measure represents the change in sales at
constant currency in our retail stores adjusted for new stores, closures and
relocations. Refits, extensions and downsizes are also adjusted for if a
store's retail square footage changes by 10% or more. For each change
described above, a store's sales are excluded from like-for-like sales for one
year. No adjustments are made for disruption during refits, extensions or
downsizes if a store's retail square footage changes by less than 10%, for
cannibalisation by new stores, or for the timing of national or bank holidays.
It is measured against comparable trading days in each period.

(2)  53rd week impacted both our Primark and Grocery business/GWF last year
and represented sales of around £160m.

Definitions of the alternative performance measures referred to in this
announcement can be found in note 30 of our Annual Report and Accounts 2021 as
well as note 13 of the Interim Results Announcement released on the 26 April
2022.

This announcement contains inside information. The person responsible for
arranging the release of the announcement is Paul Lister, Director of Legal
Services and Company Secretary.

This pre close trading update contains forward-looking statements. These have
been made by the directors in good faith based on the information available to
them up to the time of their approval of this report. The directors can give
no assurance that these expectations will prove to have been correct. Due to
the inherent uncertainties, including both economic and business risk factors
underlying such forward-looking information, actual results may differ
materially from those expressed or implied by these forward-looking
statements. The directors undertake no obligation to update any
forward-looking statements whether as a result of new information, future
events or otherwise.

 

 

For further information please contact:

 

 Associated British Foods:
 Tel: 020 7399 6545
 John Bason, Finance Director
 Chris Barrie, Corporate Affairs Director

 Citigate Dewe Rogerson:
 Tel: 020 7638 9571
 Jos Bieneman Tel: 07834 336650
 Holly Gillis Tel: 07940 797560

 

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