REG - Assoc.British Foods - Trading update

Associated British FoodsAnnouncement

01/07/2021 07:00

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RNS Number : 7462D  Associated British Foods PLC  01 July 2021

1 July 2021

 

Associated British Foods plc

Trading update

 

 

Associated British Foods plc today issues a trading update for the 40 weeks to
19 June 2021 which summarises the significant trading developments since the
last market update.

 

Trading performance

 

The following table sets out revenues by business segment for the third
quarter of our financial year and for the cumulative 40 weeks to 19 June 2021
and changes at constant currency(2) to comparable periods in the prior year.
The third quarter is the 16-week period from 28 February to 19 June 2021.

 

         Third quarter £m                               constant fx  Year to date £m                                   constant fx
 Grocery                           871                  -3%          2,705                                             +2%
 Sugar                             406                  +21%         1,169                                             +7%
 Agriculture                       391                  +10%         1,137                                             +8%
 Ingredients                       376                  +3%                                1,111                       +2%
 Retail                            1,605                +207%                              3,837                       -11%
 Total                         3,649                    +47%                            9,959                          -2%

 

 

As expected Grocery revenues in the third quarter were lower than last year,
with a decline of 3%. Third quarter sales last year were very strongly ahead
of the prior year, with an increase of 9%, with much higher retail channel
volumes as a consequence of the first lockdowns across our major markets.
Sales in this quarter were 6% higher than sales in the same pre-pandemic
period two years ago.

 

Sugar revenues in the quarter were significantly ahead, driven by strong
volumes in Illovo and China and higher prices in Europe and Africa.

 

Primark revenues reached £1.6bn in the third quarter with the reopening of
all stores and the opening of seven new stores. These revenues were well ahead
of last year's third quarter sales of £0.6bn, when the first lockdowns
resulted in the closure of all our stores for an average period of 12 weeks.
This quarter, sales in the reopened stores were ahead of expectation in all
markets, a number of new sales records were set and the like-for-like(1)
performance was much improved on earlier periods during this pandemic
reflecting an increase in both confidence and willingness to spend by our
customers. Primark's like-for-like(1) sales were 3% up on a two-year basis in
the quarter, but volatility remains high and performance varied by region
depending on the degree of restrictions related to COVID-19. Data for the
total UK clothing market, which includes online sales, for the seven-week
period after reopening shows both volume and value share gains for Primark on
a two-year basis.

 

Group cash generation in the quarter was both ahead of expectation and much
stronger than in prior years. Net cash before lease liabilities(3) for the
group increased from £705m at the beginning of the quarter to over £1.45bn
at the end of the quarter. This improvement was mostly delivered by recovery
in Primark sales along with a reduction in the inventories which had built up
during lockdown. Assuming that no Primark stores are closed in the remainder
of this financial year, we expect the excess inventory at the end of lockdown
to have returned to more normal levels by the financial year end. Net cash
before lease liabilities(3) for the group is expected to be above £1.7bn at
the financial year end.

 

For the full year, we now expect that the improved performance at Illovo will
result in a higher adjusted operating profit at AB Sugar. Adjusted operating
profit at Grocery is expected to be lower than last financial year primarily
driven by lower margins at ACH. Following the encouraging sales performance by
Primark since stores reopened this quarter, we now have higher expectations
for final quarter sales. Our forecast for full year sales at Primark has
increased accordingly and adjusted operating profit, stated before repayment
of job retention scheme monies, is now expected to be broadly in line with
last year. Our outlook for the adjusted operating profit for the group, stated
before repayment of job retention monies is now in line with last year.

 

The group's adjusted effective tax rate for the full year is now expected to
be some 31%, down from 34.9% forecast at the half year, as a consequence of
the increase in profits at Primark. Since the half year the Government has
enacted its proposal to increase the UK corporation tax rate to 25% from April
2023. Our guidance for the group's tax rate includes the deferred tax impact
of this measure in this financial year.

 

We expect these improvements in our outlook to result in adjusted earnings per
share for the group reaching a level below last year, only reflecting the
charge for repayment of the job retention scheme monies and the higher
year-on-year adjusted effective tax rate.

 

References to changes in revenue in the following segmental commentary are
based on constant currency(2).

 

 

ESG

 

In March 2021, the group held the first in a series of investor events
designed to set out our approach to this important topic. This first
presentation is available on our website www.abf.co.uk. We will be holding our
second event on 17 September with a focus on Primark and its sustainability
strategy, reducing its impact on the environment and improving the lives of
the people in its supply chain.

 

 

Grocery

 

Grocery revenues in the first half were 8% ahead of the first half last year
which was before March 2020 when the major economic consequences of COVID-19
started. However, sales in the third quarter this year were 3% lower than the
third quarter last year. Although retail channel sales remained at elevated
levels in many of our markets this quarter, this has to be compared to the
exceptionally high retail channel volumes experienced during the first
lockdowns. Sales in the third quarter last year were 9% up on the prior year
and so sales this quarter were 6% ahead of the pre-pandemic levels of two
years ago.

 

In the third quarter Twinings Ovaltine sales were well ahead, with the segment
decline driven by ACH, George Weston Foods and UK Grocery. Corn oil costs in
the US have increased substantially this year. These higher costs
significantly impacted the profit margin this quarter ahead of further price
increases planned by Mazola for the end of this financial year. For the full
year, we expect Grocery revenues to be ahead of last year but for operating
profit to decline by a mid-single digit percentage compared to last year as a
result of the ACH margin reduction.

 

Ovaltine sales were well ahead of last year driven by growth in China,
Switzerland, and in particular Thailand. Twinings revenues were marginally
lower in the quarter compared to last year's exceptionally strong performance
in the grocery channel following widespread lockdowns in a number of our key
markets. Twinings in France continued to perform well, becoming the number one
selling tea brand in the quarter.

 

Although sales in this quarter were behind at AB World Foods, Jordans and
Dorset Cereals, Ryvita, Silver Spoon and Acetum, all brands have grown sales
compared to pre-COVID. Westmill and Sports Nutrition showed significant growth
in the quarter, driven by some recovery in their out-of-home business. At
Allied Bakeries, expected volume reductions followed the exit from the supply
of bread to the Co-op in April. Cost reductions have been delivered to
mitigate the loss in contribution.

 

Revenues in ACH North America were lower, which compared to last year's peak
in demand for baking products, corn oil and particularly consumer yeast.
Revenue at George Weston Foods in Australia was lower, with a marginal decline
in Tip Top volumes and a more substantial decline in the Don meat business.
Yumi's strong growth continued.

 

 

 

Sugar

 

AB Sugar had a strong third quarter with revenues 21% up on last year bringing
the cumulative increase in this financial year to 7%. This was driven by
particularly strong volumes in Illovo and China, as well as by higher prices
in Europe and Africa. The profit margin in Illovo was much improved on last
year and more than offset lower European sugar margins, which were affected by
higher production costs as a consequence of the reduction in the beet crop.
All businesses continued to deliver savings from the on-going performance
improvement programme.

 

The world sugar price has risen in recent months. In the European market, we
expect demand to be in excess of production again this coming year, which
should give further pricing opportunities if stronger global pricing is
sustained.

 

UK sugar production of 0.9 million tonnes was well down on the 1.19 million
tonnes produced last year, due to adverse weather conditions at the time of
planting and the severe impact of virus yellows on sugar beet. Our production
forecast for next year is just over 1.0 million tonnes with a reversion to
normal yields more than offsetting a reduced planting area. The work to reopen
the Vivergo bioethanol facility in Hull is on target and supply to UK fuel
blenders is expected to commence in early 2022. Earlier this year the UK
Department for Transport announced an increase in the mandated inclusion
levels of renewable ethanol in petrol from E5 to E10 to be effective from
September.

 

Illovo revenues in the quarter were driven by strong domestic sales. Sugar
production is marginally ahead of last year after a good start to the season
in all countries except South Africa. Higher sales and an improved sales mix,
combined with cost benefits from the performance improvement programme,
delivered a higher than expected improvement in profitability. In May we
announced the expansion of our operations in Tanzania which will more than
double our sugar production when commissioned in 2023. The additional volumes
will be sold domestically and this project will be a major contributor to the
Tanzanian government's objective of moving towards sugar self-sufficiency.

 

The favourable phasing of sales volumes this quarter will likely lead to a
smaller increase in revenues in the fourth quarter. Following the stronger
than expected performance by Illovo, we expect full year operating profit for
AB Sugar to also be ahead of previous expectations.

 

 

Ingredients

 

Revenue in the third quarter was 3% ahead of last year, driven by both AB
Mauri and ABF Ingredients.

 

AB Mauri experienced better demand compared to the third quarter of last year
which saw peak COVID-19 restrictions. Sales to foodservice and craft channels
in Europe were ahead with less severe restrictions. In South America demand
for yeast and bakery ingredients remained strong and significant cost
inflation has been mitigated through price.

 

We saw year-on-year sales growth at ABF Ingredients in this quarter.

 

 

Agriculture

 

AB Agri sales in the third quarter were 10% ahead of last year. Revenues in
our UK compound feed business and in China were well ahead driven by higher
wheat, soya and cereal prices. Nevertheless, we saw lower revenues at AB Vista
and AB Neo compared to last year, when a number of our customers were building
safety stocks in the light of the first COVID-19 global lockdowns and
subsequent supply uncertainty.

 

 

Retail

 

This quarter has been characterised by the extensive reopening of stores and
all stores were trading at the period end. During the quarter, restrictions on
the movement of people and trading were widespread and impacted our sales.
Although restrictions eased during the quarter, many remain in place with
limitations on tourist travel and trading hour restrictions having the most
impact. Primark revenues of £1.6bn in this quarter reflected the build in
sales as stores reopened. Third quarter sales of £0.6bn last year followed
the loss of sales in that period with all stores closed for an average of 12
weeks.

 

The phasing of store reopenings this quarter is summarised in this table.

 

 Date                                  Store              Selling space     % selling

                                       number             m sqft            space open
 Open at 28 February                           77               3.5              22%

 England, Wales
 Open at 12 April                            227                 9.5             57%

 Scotland, NI, Netherlands, Portugal
 Open at 30 April                            301              12.6               75%

 ROI, France, Germany
 Open at 19 June                             396              16.8             100%

 

 

 

We were trading from 22% of our retail selling space at the beginning of the
quarter. The reopening of stores in England and Wales on 12 April, which
represent some 40% of retail selling space, was a key milestone. All remaining
stores reopened over the subsequent two months.

 

Like-for-like(1) sales for the quarter were 3% ahead of the comparable period
two years ago when sales were at pre-COVID levels. Our stores in the UK,
Republic of Ireland, France and Italy delivered very strong increases, the US
was marginally ahead and like-for-like(1) sales elsewhere in continental
Europe were lower reflecting trading restrictions. For the reopened stores
like-for-like(1) performances are based on trading for a small number of weeks
and reflect pent-up demand in the early weeks after reopening. However, they
are significantly better than the performances after reopenings earlier in the
pandemic driven by higher customer footfall than on those occasions, an
increase in basket sizes and a lower level of markdown. Where we have been
able to see evolution of trading over a number of weeks, footfall and basket
sizes have declined from the peaks at reopening, although in our strongest
markets, higher than pre-COVID basket sizes have continued and offset the
lower footfall.

 

Data for the UK clothing, footwear and accessories markets, which includes all
channel and online sales, for the seven weeks after the reopening of stores,
shows both value and volume share gains for Primark compared to the same
period two years ago. Both Primark and online gained share over this period.

 

The relevance and appeal of our value-for-money offering has been evidenced by
the number of customers that have returned to shop in person in our stores,
across every one of our markets, each time we have reopened post-lockdown.
This reopening has also seen a resurgence in demand for fashion across
womenswear and menswear, as customers start to step out of lockdown
leisurewear. There has been a strong response to our two hero womenswear
ranges for spring/summer, Joyful Gelato and Garden Party, with the pink
gingham and purple blazers selling out within weeks supported by digital
marketing. Licence product performed very well with strong sales in our
NBA-branded and children's gaming ranges, particularly in the US. Our new baby
collection made a strong start.

 

Inventory at Primark during the last lockdown increased to some £400m above
our normal levels. Inventory has been falling during the quarter and, assuming
that all stores continue to trade for the remainder of the financial year, we
expect to return to a more normal inventory at the financial year end.

 

Repayment of monies due from the job retention schemes will be made before the
financial year end and now covers the UK, Republic of Ireland, Portugal,
Czechia and Slovenia, for a total of £96m. This compares to the estimate of
£121m made at the time of the interim results announcement for all job
retention scheme funds received by Primark from European governments and
reflects those markets where there is an established process for repayment.

 

Retail selling space has increased by a net 0.6 million sq ft since the
beginning of the financial year. We are now trading from 396 stores, 16.8
million sq ft of retail selling space, which compares to 16.0 million sq ft a
year ago. We successfully added seven new stores in the third quarter:
Chicago, our 12th store in the US, Poznan in Poland, Tamworth in the UK,
Bilbao Gran Via in Spain, Rome Est in Italy, Prague Wenceslas Square in
Czechia, and a flagship 80,000 sq ft store in Rotterdam Forum in the
Netherlands. One of our first stores to open in the Netherlands, a small store
in Alkmaar, was closed during the period. Our Prague store is located on the
iconic Wenceslas Square in the heart of the city and is our first store in
what has become our 14(th) market. We expect to open two further stores in
this financial year, Marbella in Spain and, around the year end, a store in
the Fashion District of Philadelphia in the US. This will take our total
number of stores to 398, trading from 16.9 million sq ft of retail selling
space.

 

Our new stores have had a positive reception from customers with queues on
opening day and very good sales. We have a healthy pipeline of new stores and
are looking forward to the opening of our 400(th) store this autumn.  We will
build on our entry this year into eastern Europe with more stores in Poland
and Czechia, and our first store in Slovakia. We will also continue to expand
in France, Spain, Portugal and Italy. In the US, our stores continue to trade
strongly. We had a strong response to our opening in Chicago and we plan to
accelerate our growth in the US.

 

We have grown our following across Primark's social media channels to 24.5
million from 22 million at the end of the last financial year. Digital has a
critical role to play as part of Primark's marketing mix and we are now
investing in a market-leading digital platform, a key component of which will
be the launch of a new customer-facing Primark website early in the next
calendar year. The improved functionality of the website will allow us to
showcase a much larger proportion of the Primark range and provide to
customers range availability by store. We are also strengthening our digital
marketing capability to enable us to deliver more personalised content to
customers.

 

With all Primark stores trading again, and in the light of the additional
sales generated since stores reopening and the encouraging like-for-like(1)
performance, we now expect Primark profit for the full year, stated before
repayment of job retention scheme monies, to be broadly in line with that
achieved last year.

 

Notes:

1.     Two year Like-for-like sales have been calculated on a
store-by-store basis, for those stores open in the period, and are measured
against the comparable trading days in 2019, which was before any of the
economic effects of COVID-19.

 

2.     Constant currency measures are derived by translating the relevant
prior year figure at current year average exchange rates, except for countries
where CPI has escalated to extreme levels, in which case actual exchange rates
are used. There are currently two countries where the group has operations in
this position - Argentina and Venezuela.

 

3.     Net cash before lease liabilities comprises cash, cash equivalents
and overdrafts, current asset investments and loans.

 

 For further enquiries please contact:
 Associated British Foods
 Tel: 020 7399 6545

 John Bason, Finance Director
 Catherine Hicks, Group Corporate Affairs Director

 

 

 

 Citigate Dewe Rogerson
 Tel: 020 7638 9571

 Chris Barrie            Tel: 07968 727289
 Jos Bieneman            Tel: 07834 336650

 

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