TIDMABF
RNS Number : 4770L
Associated British Foods PLC
13 September 2021
13 September 2021
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 53
weeks to 18 September 2021, which are scheduled to be announced on
9 November 2021.
Trading performance
Adjusted operating profit in the fourth quarter for both the
food businesses and Primark is anticipated to exceed our
expectations. Primark's operating profit margin in the period was
strong despite lower than expected sales and Sugar will deliver a
much-improved profit year-on-year, led by a very strong performance
in Illovo.
For the full year, we now expect AB Sugar to deliver an even
greater improvement in adjusted operating profit over last year
than previously expected and Primark's adjusted operating profit,
stated before repayment of job retention scheme monies, to be ahead
of last year. Our outlook for the Group's adjusted operating
profit, stated before repayment of job retention monies, is now
expected to be above last year excluding the benefit of the 53rd
week this year.
The net balance of interest expense, lease interest and other
financial income will be lower than last year. The Group's full
year effective tax rate is still expected to be in the region of
31%. Taking this all into account, including the overall trading
performance, we expect adjusted earnings per share for the full
year to be ahead of previous guidance and marginally ahead of last
year excluding the cost of repayment of job retention scheme
monies.
The strengthening of sterling against most of our trading
currencies will result in a loss on translation this year of some
GBP35m.
References to growth in the following commentary are based on
constant currency unless stated otherwise.
Net cash
Our expectation is that the year end net cash before lease
liabilities will now be some GBP1.9bn, compared to GBP1.6bn at the
end of the last financial year, despite the impact of the pandemic
on Group trading. This outturn reflects the strong cash generating
capability of the Group and good working capital management. The
improvement in net cash since our last trading update is driven by
the Group's higher operating profit and lower than expected Primark
inventory.
Grocery
Grocery revenues are expected to be ahead of last year with
adjusted operating profit lower than in the last financial year
primarily driven by weaker corn oil margins at ACH. Profit also
includes a one-off charge of GBP5m for further restructuring in
Allied Bakeries.
Twinings and Ovaltine continued to make strong progress with
both brands delivering growth. Ovaltine sales growth was primarily
in Thailand, China and Switzerland, and was supported by the
continuing success of new product launches in a number of
countries. Twinings revenue growth was driven by strong new product
launches and good performances in France and North America.
Twinings has become the leading tea brand in France.
AB World Foods, Silver Spoon and Westmill sales were
significantly ahead of pre-COVID levels and maintained the sales
uplifts achieved last year. We increased marketing support to drive
the Mazzetti brand in Acetum, delivering good growth in the US, the
UK, the Netherlands and Germany. At Allied Bakeries, sales reduced
following our decision to exit the supply of bread to the Co-op.
Cost reductions arising from a further consolidation of our
operations mitigated the loss of contribution from these sales.
As expected, adjusted operating profit for ACH will decline
compared to last year, with margins impacted by the later phasing
of price increases following a sharp increase in corn oil cost.
Substantial price increases have been implemented over the year and
a further price increase has been announced. Revenue at George
Weston Foods in Australia is expected to be ahead of last year,
excluding the benefit of the 53rd week this year. Adjusted
operating profit will be lower, mainly driven by a decline in the
Don meat business, where although we have seen some recovery in
foodservice, we are still experiencing volumes lower than last
year. Yumi's delivered strong growth with share gains in its
existing products and successful new product launches.
Sugar
AB Sugar had a strong fourth quarter and revenue for the full
year is expected to be 7% ahead of last year. This growth was
driven by particularly strong domestic and regional volumes for
Illovo as well as by higher prices in Europe and Africa. Adjusted
operating profit will be ahead of expectation and substantially
ahead of last year. All businesses continued to deliver savings
from the ongoing performance improvement programme.
We expect demand in the European market to be in excess of
production again this coming year.
UK sugar production of 0.9 million tonnes this year 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. Looking ahead, as we start the sugar
campaign this September, our production forecast for next year is
over 1.0 million tonnes with a reversion to normal yields more than
offsetting a reduced planting area. Our sales in the UK this
financial year have been strong. Work to restart the Vivergo
bioethanol plant early next year is on track. The recent transition
to E10 in blended petrol underpins the strong demand for bioethanol
from fuel blenders.
In Spain we have seen an increase in revenues reflecting strong
demand and higher prices, although operating profit margin was
impacted by lower volumes from the northern beet crop. As a result
of our current view of the prospects for yield and sugar content
from beet sugar and our expectation of higher volumes but lower
margins in our raw refining operation, we will make a one-time
non-cash exceptional charge of some EUR100m to write down the net
asset value of this business.
Illovo revenues are expected to be ahead of last year driven by
strong domestic and regional sales particularly in Zambia. Sugar
production was ahead of last year and although the disruption to
production in Tanzania and Mozambique last year was not repeated,
there was some disruption this quarter to the operations in South
Africa and Eswatini as a result of civil unrest. Higher sales and a
much-improved sales mix, combined with efficiency gains from the
performance improvement programme, will deliver a higher than
expected operating profit. Following the profit decline last year,
the recovery this year is very strong and operating profit will
exceed the profit delivered two years ago. In May we announced the
expansion of our operations in Tanzania which will more than double
our sugar production when commissioned. 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.
Ingredients
Ingredients revenues will be up on last year and adjusted
operating profit is now expected to be ahead driven by strong
trading in AB Mauri.
In AB Mauri demand for yeast and bakery ingredients remained
strong in South America with price increases offsetting the
significant cost inflation in that region. The growth of non-dairy
creamer product sales in Brazil continued and the expansion of our
Brazilian yeast plant is well underway. In North America, demand
for retail yeast reduced but sales still remained well ahead of
pre-pandemic levels. In Europe sales to the foodservice and craft
channels have increased following the easing of many of the
COVID-19 restrictions.
In ABF Ingredients, all businesses experienced an acceleration
of market demand recovery in the last quarter. Enzyme sales to the
bakery, food and textile markets continued to grow and achieved an
all-time high, driven by growth in markets outside Europe and new
product launches. Animal feed enzymes saw some competitive pricing
pressure. Ohly, our yeast extracts and seasoning powders business,
continued to make good progress in the food and health markets.
Abitec sales grew in the pharmaceutical and nutritional lipid
markets.
Agriculture
AB Agri sales were well ahead of last year. Revenues in our UK
compound feed business and in China were well ahead with the
successful recovery of higher commodity and energy costs through
feed prices. Competitive pricing pressure increased in animal feed
enzymes and impacted margin at AB Vista. Taken together, adjusted
operating profit is now expected to be ahead of last year.
Retail
Sales in the second half of this financial year are expected to
be some GBP3.4bn and include trading for the 53rd week. Primark's
operating profit margin in the second half, stated before the
charge for repayment of job retention scheme monies, benefited from
a significant reduction in store labour costs and lower store
operating costs and is expected to be over 10%. Our forecast for
the full year adjusted operating profit, stated before repayment of
job retention scheme monies, is now ahead of the profit delivered
last year.
Like-for-like sales in the third quarter were 3% ahead of the
comparable period two years ago reflecting the very strong trading
in the UK and those European regions where stores had reopened.
Customers came back to our stores with enthusiasm and sales
reflected some pent-up demand with very high basket sizes. Our
sales in the fourth quarter were affected by the impact on footfall
as a result of the changes in public health measures in our major
markets to control the spread of COVID-19 and its Delta variant in
particular. Trading in the fourth quarter varied considerably
across the estate with a big impact in our major markets of the UK
and Spain. However, we have seen a significant improvement in
trading as the period progressed, from a weekly decline in
like-for-like sales of 24% at the start of the period to a decline
of 10% in recent weeks. For the fourth quarter as a whole,
like-for-like sales are expected to be 17% lower than the same
period two years ago.
In the UK our sales were affected by the rapid and significant
increase in late June and early July in the number of people
required to self-isolate following contact tracing alerts - the
"pingdemic". Data shows that high street footfall was impacted by
the caution displayed by many consumers at that time. The
self-isolation rules were then eased in early August.
Correspondingly, like-for-like sales showed a consistent
improvement through the period from a decline of 24% in the first
four weeks of the quarter to a decline of 8% in the last four
weeks. Data for the UK clothing, footwear and accessories markets,
which includes all channel and online sales, for the 12 weeks from
31 May to 22 August showed that Primark had the same value share of
the total market compared to the same period two years ago.
In Continental Europe, the like-for-like sales were impacted by
the performance of our stores in Spain and Portugal where the
decline of foreign tourism caused by restrictions in international
travel reduced our footfall. In addition, tight restrictions on
store customer numbers were in place in Portugal for most of the
period. Like-for-like sales for both these markets showed a decline
of over 30% for the quarter compared to two years ago. In France,
the requirement for the "pass sanitaire", evidencing a personal
immunity to COVID-19, was introduced in early August and led to
footfall declines.
US like-for-like sales in the quarter, excluding the Boston
Downtown Crossing store which has now been downsized, were 3% ahead
of the same period two years ago. In contrast to Europe, the US has
had minimal public health restrictions.
The quarter saw a continuation of the trend for 'comfort living'
with strong sales of leisurewear such as leggings and cycle shorts,
and continued demand for seam-free matching separates for women. We
also saw a good response to the launch of new licensed product with
the womenswear Disney paisley range proving particularly popular.
Sales of our autumn/winter ranges have started well and, as
families look ahead to autumn, our back-to-school ranges started
strongly with demand for our great value essentials such as
children's t-shirts and socks.
Inventory at Primark during the last lockdown increased by some
GBP400m above our normal levels. Following the reopening of all our
stores, inventory levels have returned to normal and all
spring/summer inventory brought forward from last year has been
sold and the autumn/winter inventory held over from last season
will be sold in the coming months. We are experiencing some delays
to the handover of some autumn/winter inventory caused by port and
container freight disruptions. These delays are expected to reduce
the inventory at the year end by some GBP200m compared to
expectation with a corresponding increase in cash on hand.
Margin in the second half benefited from a significant reduction
in store labour costs, driven by lower store headcount and improved
labour scheduling, and lower store operating costs. The lower store
headcount has been achieved through natural attrition. The
repayment of monies received from the job retention schemes in the
UK, Republic of Ireland, Portugal, Czechia and Slovenia this year
has been charged in the second half at GBP96m.
Looking ahead to our next financial year, operating profit
margin will continue to benefit from lower store labour and
operating costs. Our forecast is for the effect on margin of supply
chain and raw material inflation to be broadly mitigated by the
transaction currency gain arising from the weaker US dollar.
We expect to open a new store in the Fashion District of
Philadelphia in the US on 16 September and so by the year end we
expect to be trading from 398 stores and 16.9 million sq ft of
retail selling space, an increase of 0.7 million sq ft over the
year. Fifteen stores were added this year: four stores in the US;
four in Spain; two in Italy, and one each in France, the UK, the
Netherlands and Poland, as well as our first store in Czechia. We
relocated to new premises in Southend, UK. One of our first stores
to open in the Netherlands, a small store in Alkmaar, was closed
during the period. Downsizing of the Downtown Crossing store in
Boston was successfully completed in September. The three German
stores which were downsized last year have shown sales results in
line with pre-downsizing levels.
COVID-19 restrictions have held back our progress in developing
the pipeline of new stores. We are experiencing some difficulty in
accessing and evaluating potential sites and in negotiating with
potential landlords. In the next financial year, we are planning to
add a net 0.5 million sq ft of additional selling space. We will
add four new stores in Italy, the largest being Milan Via Torino,
four new stores in Spain and one store in each of the US, Czechia
and Ireland. We expect to see an acceleration in new store openings
in future years.
As we look ahead, digital has a critical role to play as part of
Primark's marketing mix. We are progressing the initial design and
development for the new digital platform and recruitment of new
talent to create a new digital capability within the business is
underway. A new and improved customer-facing website will be
launched in the next calendar year. Improved functionality will
allow us to showcase a much larger proportion of the Primark range
and to provide customers with range availability by store. We are
also strengthening our digital marketing capability to enable us to
deliver more personalised content to customers.
ESG
We held our first ESG briefing in March, which covered the
Group's strategy and governance in relation to ESG factors,
provided an in-depth review of Primark's processes to provide
assurance of its supplier practices, as well as an overview of the
key factors for the Group. This presentation is available on our
website. Our next briefing is on 17 September and will focus on
Primark's sustainability strategy, designed to reduce Primark's
impact on the environment and to improve the lives of people in its
supply chain. A new customer campaign will highlight Primark's
commitment to make more sustainable fashion affordable for all. A
further briefing is due to be held in early 2022 and will focus on
the environmental factors that are most material for the Group.
Financial leverage policy
The Board's treasury policies are in place to maintain a strong
capital base and manage the Group's balance sheet to ensure
long-term financial stability. They are the basis for investor,
creditor and market confidence and enable the successful
development of the business.
The Board has approved a financial leverage policy for the
Group. In the ordinary course of business, the Board prefers to see
the Group's ratio of Net Debt: EBITDA (on an IFRS16 basis and
before exceptional items) to be well under 1.5 times at each half
year and year end reporting date. In exceptional circumstances, the
Board will be prepared to see leverage above that level for a short
period of time.
The Group holds substantial net cash balances, which reduce its
net debt, which in turn include lease liabilities, and most
importantly ensure that it has sufficient liquidity to meet
unforeseen requirements.
Notes:
1. Two year like-for like sales
This measure enables measurement of the performance of our
retail stores compared to our experience in 2019, which was before
any of the economic effects of COVID-19. 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
two years. No adjustments are made for disruption during refits,
extensions or downsizes, for cannibalisation by new stores, or for
the timing of national or bank holidays. It is measured against
comparable trading days in each year.
2. Exceptional items
Exceptional items are items of income and expenditure which are
material and unusual in nature and are considered of such
significance that they require separate disclosure on the face of
the income statement.
3. Adjusted profit and earnings measures
Adjusted operating profit is stated before amortisation of
non-operating intangibles, transaction costs, amortisation of fair
value adjustments made to acquired inventory, profits less losses
on disposal of non-current assets and exceptional items. Adjusted
profit before tax is stated before amortisation of non-operating
intangibles, transaction costs, amortisation of fair value
adjustments made to acquired inventory, profits less losses on
disposal of non-current assets, exceptional items and profits less
losses on sale and closure of businesses. Adjusted earnings and
adjusted earnings per share are stated before amortisation of
non-operating intangibles, transaction costs, amortisation of fair
value adjustments made to acquired inventory, profits less losses
on disposal of non-current assets, exceptional items and profits
less losses on sale and closure of businesses together with the
related tax effect. Items as defined above which arise in the
Group's joint ventures and associates are also treated as adjusting
items for the purposes of adjusted operating profit, adjusted
profit before tax, adjusted earnings and adjusted earnings per
share.
4. Constant currency
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.
5. Net cash before lease liabilities
This measure comprises cash, cash equivalents and overdrafts,
current asset investments and loans.
6. Task Force on Climate-Related Financial Disclosures
In response to amendments to the FCA's listing rules, published
in December 2020, relating to the Task Force on Climate-Related
Financial Disclosures, a separate section of the annual report for
this financial year will include disclosures around climate-related
matters. We will focus on governance as it relates to climate
change and will incorporate information currently disclosed in
other published reports such as the CDP report. Work is underway to
ensure compliance with the rules in the annual report for the 2022
financial year.
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 33665
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