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

Associated British FoodsAnnouncement

27/02/2023 07:00

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RNS Number : 0510R  Associated British Foods PLC  27 February 2023

27 FEBRUARY 2023

Pre-Close Period Trading Update

 

Trading summary for the half year

For the half year, we expect total sales for the Group to be more than 20%
ahead of last year at actual exchange rates and more than 16% ahead at
constant currency. Adjusted operating profit at the half year is expected to
be broadly in line with the same period last year.

As outlined in our trading statement of 24 January, we continued to encounter
significant cost pressures. Consumer spending has proven to be more resilient
in this trading period than anticipated at the start of the financial year.

Our Food businesses continue to seek to recover inflation through cost
mitigation and price increases. For the half year, we expect both aggregate
sales and aggregate adjusted operating profit to be well ahead of the same
period last year, albeit at a lower margin. Due to better trading, we now
expect adjusted operating profit at Ingredients to be significantly ahead of
the same period last year. Adjusted operating profit at Grocery is expected to
be slightly lower than last year with inflation in input costs continuing to
run ahead of pricing and cost mitigation activity.

Primark traded very well for the half year, total sales are expected to be
£4.2bn, 19% ahead of the same period last year at actual exchange rates and
16% ahead at constant currency. Adjusted operating profit margin for the half
year is now expected to be above 8%.

 

Full year outlook

For the full year, our expectation for the Group result has improved. Adjusted
operating profit and adjusted earnings per share are now expected to be
broadly in line with the previous financial year.

In the second half the recovery of significant inflation in our input costs
remains a management priority but inflation has become less volatile and
recently some commodity costs have declined. Macro-economic headwinds for the
consumer remain and may weigh on spending in the months ahead. At Primark, we
remain cautious about the resilience of consumer discretionary spending in the
face of continuing inflation in the cost of living and higher interest rates.

For the full year adjusted operating profit in our Food businesses is expected
to be modestly ahead of last year. After the very strong performance in the
first half, we now expect Ingredients profit for the full year to be well
ahead of last year. As expected, increased costs as a consequence of the much
lower UK beet crop will reduce second half profit and bring adjusted operating
profit for the full year at AB Sugar broadly in line with the prior year. We
now expect the Grocery adjusted operating profit to be broadly in line with
the prior year as the benefit of our pricing actions become more apparent.

At Primark, we now expect an improvement to our previous expectations of
adjusted operating profit in the second half as a result of higher sales and
some lower operating costs. For the full year we now expect adjusted operating
profit margin to be above 8%.

We continue to expect finance income net of finance expense to increase
substantially reflecting higher interest rates on our net cash balances. Other
financial income will increase significantly as a result of the further
substantial increase in the surplus in the Group's defined benefit pension
schemes. We expect an increase in the effective tax rate to around 25%, driven
by the mix of tax jurisdictions and higher UK corporation tax rates.

 

Cash flow and funding

The cash outflow for the Group in the first half is expected to be some
£900m. The period saw the payment of the final dividend of £235m for our
2022 financial year and the initiation of the £500m share buyback programme
with some £140m repurchased to date. Working capital increased by some £300m
in our Sugar businesses driven by two factors: the expected seasonal inventory
build from the beet processing campaigns in our northern hemisphere
businesses, and the higher valuation as a result of higher input costs.
Primark working capital increased with the earlier handover of spring/summer
inventory from our suppliers, higher levels of inventory needed to supply our
growing store estate, and again higher valuation as a result of higher input
costs.

Net cash before lease liabilities is expected to be some £0.6bn at the half
year, compared to £1.5bn at the half year last year. This reduction has been
mainly driven by an increase in working capital as a result of the rebuilding
of inventories at Primark, which were at unusually low levels a year ago
following a period of supply chain disruption, and higher valuation of
inventories across all businesses. Investment in capital expenditure has
increased and represents the higher run-rate which we expect over the medium
term.

At the half year end, net debt is expected to be some £2.6bn, including lease
liabilities of £3.2bn, giving a financial leverage ratio of 1.1 times. Total
liquidity is expected to be £2.5bn.

 

References to changes in revenue in the following segmental commentary are
based on constant currency.

 

Grocery

Revenue in the first half is expected to be some 10% higher than the same
period last year as price increases continued to build throughout the period
to recover cost inflation. Further pricing is under way but we continue to
expect some erosion of adjusted operating profit margin at both the half year
and the full year. For the half year, adjusted operating profit will be
somewhat lower than the same period last year. For the full year, we now
expect adjusted operating profit to be broadly in line with the previous year
driven in part by the contribution from good trading at ACH.

Half year sales at Twinings Ovaltine are expected to be broadly in line with
the same period last year. Twinings revenues are expected to be ahead driven
by good performances in the US and Australia and continued growth of our
Wellness teas. Ovaltine revenues were held back by disruption to imports into
Myanmar and lower foodservice sales in China which were affected by the
pandemic-related disruption. We are increasing marketing investment to
continue to build the Twinings brands. Earlier phasing of the marketing
investment in this financial year will result in a profit reduction in the
first half but we expect an improvement in the second half.

Allied Bakeries has secured significant pricing, and volumes have been
resilient, but inflationary pressures remain. Sales at Acetum, our leading
Balsamic vinegar producer, grew in the first half and we continued to invest
in capacity for aged and organic product. Pricing at AB World Foods and
Westmill is also expected to drive sales higher.

Revenue growth will be strong at ACH, our edible oils and bakery ingredients
business in the US, reflecting a good trading performance and pricing actions
to cover inflationary costs. Both Mazola and Fleischmann's improved their
strong market share positions. Stratas, our joint venture in the US that
supplies oils to the foodservice, ingredients and retail markets, continued to
trade strongly. George Weston Foods in Australia is expected to deliver strong
sales growth led by pricing. Our Tip Top baking business traded well but faced
a number of inflationary pressures, specifically very high bread wheat prices
due to a wet Australian harvest. Don KRC, our meat business, will deliver good
sales growth with improved production volumes as labour availability improved.

 

Sugar

AB Sugar traded strongly in the first half with revenues expected to be some
26% higher than the same period last year due to higher sugar prices in Africa
and Europe and an increase in bioethanol sales following the recommissioning
of Vivergo. The adjusted operating profit margin at AB Sugar is expected to
reduce as the contribution from higher sugar and coproduct prices was more
than offset by the impact of higher energy costs and, for Vivergo, also higher
wheat costs which led to a loss in the half year. Adjusted operating profit
for AB Sugar is expected to be well ahead of the same period last year.

 

European sugar prices continued to improve over last year as a result of lower
European sugar production. Estimates for EU sugar production in the 2022/23
campaign are now some 10% lower than last year due to lower yields caused by
adverse weather and a smaller growing area. Both European and world sugar
prices remain high. Our UK and Spanish businesses have largely contracted
sales for the year at these improved prices.

 

UK sugar production for the 2022/23 campaign is still expected to be 0.74
million tonnes, down from 1.03 million tonnes from the last campaign. This
fall in production reflects lower beet sugar yields following unusually
adverse weather conditions. British Sugar has moved swiftly to secure
alternative sources of supply and is working with customers to ensure
continuity of supply. Energy cost inflation has been significant even though
mitigated by government support. The shortfall in UK sugar beet production
will result in much lower profitability at British Sugar in the second half.
Since recommissioning, Vivergo, our bioethanol plant in Hull, has been
operating to specification but will record a loss at the half year due to
higher energy and wheat costs combined with lower bioethanol prices.

 

Sugar production at Azucarera will be lower than last year. The benefit of
higher sugar prices was more than offset by higher energy costs in this first
half.

 

We expect significantly higher profitability at Illovo with higher prices,
increased sugar production in Malawi and Zambia, and an improved performance
in Eswatini and Mozambique after the impact last year of strike action and
flood damage respectively. The construction of the new production and
packaging plant at Kilombero, Tanzania, is on track.

AB Sugar China trading performance was below the same period last year mainly
as a result of lower sugar prices which resulted from a reduction in demand
due to the temporary closure of hospitality venues caused by pandemic-related
restrictions.

 

Agriculture

Revenue in the first half is expected to be ahead of the same period last year
reflecting pricing taken to recover higher input costs. Market conditions
continue to remain challenging with high commodity and energy costs. Lower UK
feed volumes were the result of avian influenza and a reduction in the UK pig
herd. China compound feed volumes were also lower as a result of low livestock
prices. Margin and adjusted operating profit are expected to be slightly lower
in this half year.

 

Ingredients

Our Ingredients businesses performed very strongly in the period with
significant growth in sales expected at the half year. Compared to the same
periods last year, we expect margin and adjusted operating profit to be ahead
at both the half and full year.

AB Mauri exceeded expectation with both pricing to recover input cost
inflation and good volume growth and is expected to deliver stronger revenue
growth. ABF Ingredients, our specialty ingredients business, continued to
trade strongly.

 

Retail

Trading at Primark has been good in all its markets, well ahead of
expectations, and represents a material improvement in both the UK and Europe
on the second half of our last financial year. We believe our proposition of
great quality at affordable prices and attractive store experience is proving
increasingly appealing to both existing and new customers. Early reaction to
our spring and summer ranges has been very positive.

 

We expect Primark total sales to be 16% ahead of the same period last year
driven by like-for-like sales 10% ahead as a result of higher unit volumes and
higher average selling prices. Footfall increased strongly in both the UK and
in Europe. Last year sales were disrupted by the consumer reaction to Omicron
from December, which resulted in a reduction in footfall, and store closures
for a period in the Netherlands and Austria. COVID-related public health
measures remained in place in a number of European countries into the spring.

 

The increase in weighted average retail selling space was more meaningful in
the period, at 3%, and follows the acceleration of our store opening
programme. All the new stores opened in the period are performing well and
have high sales densities. We expect retail selling space to be 17.8 million
sq ft at the half year which compares to 17.0 million sq ft a year ago.

 

As a result of this strong trading, we now expect adjusted operating profit
margin to be above 8%. This compares to last year's first half margin of
11.7%. The margin reduction is the result of the increase in the cost of
bought-in goods, driven by the significant strengthening of the US dollar
against sterling and the euro, higher freight rates, and inflation in labour
and energy costs.

 

Trading in the UK was particularly strong and we expect sales for the half
year to grow by 15% driven by an increase in like-for-like sales of 14%.
Primark's share of the total UK clothing, footwear and accessories market by
value, including online sales, was higher as a consequence, as evidenced by
the latest 12 week data to 8 January 2023, which shows Primark's market share
continued to outperform, increasing from 6.3% last year to 6.8% this year.
Footfall remains strong in major city centres as well as on high streets and
retail parks.

 

Total sales in Europe, excluding the UK, are expected to increase by 18%
driven by higher footfall with growth in all our markets. Like-for-like sales
are expected to be 8% higher. We have had a very extensive store opening
programme in this region, giving a 6% year-on-year increase in weighted
average retail selling space. Of note, our new stores in Bucharest, Romania,
and in Bari and Caserta, both in southern Italy, opened strongly and have
continued to trade particularly well.

 

Sales growth of some 12% is expected in the US. Prior year comparatives were
particularly strong with consumer spending supported by COVID-related
government stimulus. Three new stores opened in the period and we remain on
track to nearly double the number of US stores in this financial year.

 

Looking ahead to the second half, we remain cautious about the resilience of
consumer discretionary spending in the face of continuing inflation in the
cost of living and higher interest rates. Our expectation is that
like-for-like sales growth in the second half will be lower than that achieved
in the first half but, based on our experience to date, will be better than
our previous expectation. As a consequence, sales densities will improve
compared to the same period in the prior year. Sea freight costs have returned
to more normal levels and energy costs are much reduced recently. However, the
cost of bought-in goods will be higher due to the strength of the US dollar
against sterling and the euro and higher wage costs are expected. Taking these
factors into account, we now expect full year margin for Primark to be above
8%.

The rollout of Primark's improved website continues. Already operational in
the UK and the Republic of Ireland, the website is on track to be available to
customers in Germany, Spain, France and the US soon with the remaining markets
expected by the middle of the calendar year. Our Click and Collect trial of
children's products in 25 stores in the UK was launched in late November and
continues.

Retail selling space has increased by 0.5 million sq ft since the financial
year end and at 4 March 2023 we will be trading from 419 stores and 17.8
million sq ft of retail space, compared to 17.0 million sq ft a year ago.
Thirteen new stores will have been opened in the period: our first store in
Romania, Primark's 15th market, three in the US, three in Italy, three in
France, two in Poland, and one in Northern Ireland. We fully reopened our Bank
Buildings store in the heart of Belfast, which was damaged by fire in 2018,
and closed our temporary store in Donegal Place. We extended our stores at
Sawgrass Mills, Florida, and Galway Eyre Square, Republic of Ireland, and
closed as planned our store in Weiterstadt, Germany.

 

An investor and analyst call will be held at 09.00 GMT today, Monday 27
February 2023.

All participants must pre-register to join this conference using the
Participant Registration link below. Once registered, an email will be sent
with your unique Registrant ID. Participant registration page:
https://register.vevent.com/register/BI28a854a4c3414333bc9485db4db6f3b4
(https://eur02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fregister.vevent.com%2Fregister%2FBI28a854a4c3414333bc9485db4db6f3b4&data=05%7C01%7CLeeann.O%27Sullivan%40abfoods.com%7Cdf16597070564c9fc80b08db1670d616%7C39c5be5d25104eee9ca0197a6e89e482%7C1%7C0%7C638128446105327157%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=vNNYUm79TPwEuUcjHmwecfgGDECv84cJbtY4fcpCmys%3D&reserved=0)

 

Notes:

 -  Definitions of the alternative performance measures referred to in this
    announcement can be found in note 30 of our Annual Report and Accounts 2022.
 -  The like-for-like Retail metric reflects the measurement of the performance of
    our retail stores on a comparable year-on-year basis. This measure represents
    the change in sales at constant currency excluding new stores, closures and
    relocations. It is measured against comparable trading days in each year.
 -  Financial leverage is defined as net debt including lease liabilities:
    adjusted EBITDA for the year to 4 March 2023.
 -  Total liquidity comprises net cash/debt before lease liabilities plus
    qualifying debts and credit facilities. Qualifying debt and credit facilities
    are those which are medium-to-long term, are committed and either contain no
    performance covenants, or where they do, they are assessed as highly unlikely
    to be breached in even a severe downside scenario.
 -  We expect the number of shares at the end of the first half to be 780m, with a
    weighted average number of shares for this half year of 786m.

 

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
 Holly Gillis  Tel: 07940 797560
 Ellen Wilton  Tel: 07921 352851

 

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