AB Foods Regulatory News (ABF)

For release 21 April 2015

Associated British Foods plc announces its

interim results for the 24 weeks ended 28 February 2015

ABF delivers a sound trading result

Highlights

George Weston, Chief Executive of Associated British Foods, said:

"This is a sound trading result with significant progress made in operating profit by Primark, Agriculture and Ingredients, and further improvement in Grocery's margin. As expected, profitability at AB Sugar was substantially lower as a result of much weaker EU sugar prices. Primark's performance was driven by significant expansion of selling space and superior trading by the stores opened in the last 12 months and plans for its entry into the north-east of the US are well advanced."

ASSOCIATED BRITISH FOODS plc

INTERIM RESULTS ANNOUNCEMENT

FOR THE 24 WEEKS ENDED 28 FEBRUARY 2015

CHAIRMAN'S STATEMENT

I am pleased to report interim results for the group that delivered adjusted earnings per share 1% ahead of last year. This result says much about the strength of the non-sugar businesses given the impact, as expected, of much lower EU sugar prices which led to a substantial decline in Sugar profitability. The expansion of retail selling space and the superior trading by the stores opened in the last 12 months drove strong sales and profit growth for Primark. The recovery at Ingredients continued with a robust increase in profit, Agriculture maintained its profit growth trend, and Grocery achieved further margin improvement in a difficult trading environment.

Revenue in the first half increased by 1%, and by 3% at constant currency. Revenue in our food businesses was lower than last year primarily because of food commodity price deflation, particularly in sugar. Adjusted operating profit fell by 5%, and by 2% at constant currency. Sterling was stronger against most of our major operating currencies in the first half, with the exception of the US dollar.

Net financing costs in the period were £3m lower than last year's first half, resulting from a lower average level of net borrowings compared with the same period last year. The underlying tax rate of 21.3% is below the 23.5% applied to first half profits last year, reflecting the further reduction in the UK corporation tax rate applicable in the current year and a higher proportion of profit earned in territories with lower rates. Adjusted earnings per share were 1% ahead of last year and, at constant currency, would have been 3% ahead.

The cash flow from operating activities in the first half of the year was much lower than last year, largely driven by a higher working capital outflow. This was due to both an unusually low level of working capital at the interim stage last year and a higher stockholding at Primark this half year. Net capital investment of £277m in the first half was lower than last year, primarily due to the phasing of expenditure on new stores for Primark, while expenditure within the food businesses continued at the same level as last year. The redevelopment of a former factory site in Western Australia is progressing well with proceeds of £13m realised in the period. It was also pleasing to see the success of Stratas Foods, our edible oils joint venture with ADM in the US, with the receipt of a £27m dividend in the period following the £9m received in the second half of last year. We completed the acquisition of Dorset Cereals last October at a cash cost of £60m.

Net debt at the period end was £801m, a reduction from the position last half year. Cash generation was very strong in the second half of last year, driven by a bigger reduction in working capital than had been expected, which resulted in a low level of net debt at the year end. As outlined above, cash flow in the first half of this year was weaker than last year with the higher working capital outflow and the acquisition expenditure.

Currency

The group is diverse and multinational with operations and transactions in many currencies. Exchange rates between some of our major trading currencies have changed markedly in recent months. Significantly, the US dollar has appreciated over the last 12 months, the euro has weakened since the start of this calendar year and the US dollar/euro exchange rate has moved by more than 20% over the last year. The impact on adjusted operating profit in the first half from the translation of overseas results into sterling was a loss of £11m and, if current rates persist, the translation impact on full year profits when compared with last year would be in the order of £25m.

However, these movements in exchange rates will potentially have more of an impact on our transactional exposures where we manufacture or purchase in one currency and sell in another. As an example, British Sugar has a sterling cost base but the majority of its sales contracts are denominated in euros. Similarly, Primark buys a substantial proportion of its garments in US dollars and sells in euros and sterling. Primark takes out forward currency contracts to cover its purchase costs when orders are placed and, in the current year, some protection has been afforded by the agreement of contracts at more favourable exchange rates than those available now. The benefits of these contracts will therefore fade as we move into next year, which will have an impact on margins. Our attention remains focused on delivering a compelling product offering whilst maintaining our cost advantage. We will maintain our position of offering the lowest prices and best value on the high street.

If the current euro weakness against sterling and the US dollar persists, this will have an impact on the group's operating profit for the remainder of this financial year and a greater impact next year.

The board

In January we welcomed Wolfhart Hauser to the board as a non-executive director. Dr Hauser is currently chief executive officer of Intertek Group plc. He has established and led a broad range of successful international service industry businesses. He is currently a non-executive director of RELX Group plc, formerly Reed Elsevier, and chairman designate of FirstGroup PLC. We look forward to Wolfhart's active participation at the board.

Dividends

The board has declared an interim dividend of 10.0 pence per share, an increase of 3% on last year. The dividend will be paid on 3 July 2015 to shareholders registered at the close of business on 5 June 2015.

Outlook

Our trading outlook for this financial year is unchanged. Primark's European expansion and sales growth continues and plans for its entry into the north-east of the US are well advanced. For the full year, Grocery, Ingredients and Agriculture will make further progress in operating profit and, as previously stated, low EU sugar prices and continued weakness in the world sugar price will result in a large reduction in profit from AB Sugar compared with last year. We also expect a much lower underlying tax rate for the full year compared with last year's rate.

With sterling's continuing strength against most of our major trading currencies, and the transactional impact of euro weakness on the results of Primark and British Sugar, we now expect a modest decline in adjusted earnings per share for the group for the full year.

Charles Sinclair

Chairman

21 April 2015

OPERATING REVIEW

Adjusted operating profit in the first half of £474m was 5% lower than last year on group revenues that were 1% higher at £6,248m. At constant currency, first half profits were 2% lower and revenues were 3% ahead. With the notable exception of the US dollar, sterling strengthened against most of our major trading currencies which had a negative effect on operating profit of £11m on the translation of overseas results. This is a sound trading result with significant progress made in operating profit by Primark, Agriculture and Ingredients, and further improvement in Grocery's margin. As expected, profitability at AB Sugar was substantially lower as a result of much weaker euro-denominated EU sugar prices. Primark's performance was driven by significant expansion of selling space and superior trading by the stores opened in the last 12 months. Plans for its entry into the north-east of the US are well advanced.

SUGAR

Revenue in the first half was 6% lower than last year at constant currency driven, as previously indicated, by substantially lower EU sugar prices. The impact on profitability, combined with a higher UK beet price, was partly mitigated by the focus on the performance improvement programme which has been embraced by all of the sugar businesses and which delivered good results. A small operating loss was sustained but a small profit for the full year is expected.

The campaigns in the UK and Spain were excellent with record factory performances. We benefited from a large UK crop with good extraction rates, and UK sugar production is estimated to be 1.45 million tonnes compared with last year's 1.32 million tonnes. The campaign was completed at all sites within the first two weeks of March. Further capital investment was made in cost reduction and efficiency improvements including a major project to improve energy efficiency at the Cantley plant. In Spain, all factories performed well and a concerted effort to manage beet supplies more effectively resulted in the avoidance of disruption caused in recent years by poor weather. Total production this year is estimated to be 708,000 tonnes, an increase from last year's 597,000 tonnes. 414,000 tonnes is expected to be produced from beet; 250,000 tonnes refined from imported raw sugars at Guadalete; and 44,000 tonnes co-refined at the northern beet plants.

Quota stock levels in the EU are returning to historical norms and euro sugar prices now appear to have stabilised. However, world sugar prices remain at a low level.

Illovo's production season was almost complete at the half year with only Kilombero in Tanzania still operating. Total production volume for the season which ended in March 2015 was 1.76 million tonnes, slightly lower than last year's 1.84 million tonnes, with the impact of drought in South Africa being largely offset by higher volumes elsewhere. Zambia achieved record sugar production and further development at the factory is now planned which will increase sugar refining capacity and create new sugar conditioning and storage facilities to enable the supply of higher quality sugars to the regional market. Tanzania saw some recovery from last year's challenges, with consistent operation supporting the strong output of potable alcohol at the new Kilombero distillery. The economic conditions in Malawi are very challenging and the appreciation of the kwacha and high interest rates made pricing difficult and held back domestic sales volumes. It is anticipated that the difficulties in Malawi, little recovery in South African volumes and lower EU export proceeds will result in a further decline in Illovo's earnings in the coming year.

In China, total production fell from 676,000 tonnes to 529,000 tonnes primarily as a result of a reduced growing area in the south. However, the southern factories performed well achieving good extraction rates following success in reducing the time between cane being cut and its delivery to the factories. In the north, operations at the Qianqi and Zhangbei factories were excellent but volumes at our northernmost factories did not recover from last year's flood-affected volumes.

Achieving beet yields sufficient to provide our factories at Yi'an and BoCheng in Heilongjiang with an adequate supply of raw material, at a competitive cost, has been particularly challenging for a number of years, even with the benefit of significant advances made both in agricultural and factory operations in this region. In January we concluded that these factories were likely to remain uneconomic for the foreseeable future and announced our intention to cease sugar operations in Heilongjiang. We also announced action to be taken to reduce associated overheads. At that time we expected a loss of some £128m, reflecting the write-down of assets and one-off cash costs of £18m to close the sites. Since then we have disposed of the Yi'an factory and provision has been made for our revised estimate of the loss on disposal or closure of businesses in these results of £116m, all of which has been excluded from adjusted operating profit. Discussions for the disposal of BoCheng are continuing and, if successful, we expect a further marginal reduction in the provision and virtually no cash costs. Following this action, we expect our remaining sugar factories in China to be cash generative.

At the beginning of February we announced that our interim results would include a non-cash exceptional charge of £98m to impair the group's shareholder loans to the Vivergo Fuels joint venture. Although the Vivergo bioethanol plant has achieved rated output and is now focused on maintaining efficient production, the continuing fall in crude oil and bioethanol prices, and the further weakening of the euro against sterling, led to the partial impairment of these loans.

AB Sugar's results for the second half of this year will benefit from further performance improvement initiatives and the non-recurrence of last year's cost of restructuring the EU sugar businesses. Margins will be reduced on British Sugar's euro-denominated sales contracts with the euro at current levels. However, there has been some stabilisation in EU sugar prices in recent weeks, albeit at very low levels.

The business remains focused on the management of its cost base. The performance improvement programme is expected to deliver further benefits across all Sugar businesses next year, overhead reduction initiatives are in process and agreement has been reached with UK and Spanish growers for a lower beet cost next year, all of which will go some way to offsetting the effects of low sugar prices and the structural change in the euro/sterling exchange rate.

AGRICULTURE

At AB Agri, excellent trading by AB Vista and strong commercial and operational performances across the businesses drove first half adjusted operating profit 21% ahead of last year on revenues that were 8% lower, driven by a fall in commodity feed prices.

An abundant availability of forage crops and a fall in commodity prices resulted in lower revenues from our UK feed business which accounts for two-thirds of the turnover of the AB Agri division. A good operational performance saw UK feed profit only marginally lower than last year. AB Vista, our feed ingredients business, continued to deliver strong growth in both sales and profit. Recent investment has enabled expansion of the feed enzymes business with a significant increase in sales of our phytase feed enzyme, Quantum Blue, a large proportion of which has come from new markets in Eastern Europe, the Middle East, Asia and South America. This sales growth has led to an increase in throughput at the new granulation facility in Evansville, Indiana with the higher volume further improving factory profitability. In Speciality Nutrition, the recent expansion and modernisation of the UK pre-mix and starter feed plant at Rugeley enabled the business to meet higher UK demand. These higher revenues offset the impact of lower export volumes to the EU where falling pig prices dampened demand.

In China, despite weak market conditions, our compound feed business performed well with good procurement and success for its strategy of targeting feed sales to large farms. As the industry in China moves from traditional backyard farms to larger, more professionally managed farms, our business is well placed to deliver the higher quality service, differentiated products and food safety credentials demanded by these businesses.

Frontier Agriculture, our joint venture arable operation, traded at similar levels to last year and, after a slow start, sales volumes of crop inputs are now improving as UK farmers commit to purchases of fertiliser and crop protection products. Currency changes and geographical influences added complexity to grain trading operations, and lower than normal protein levels in domestic wheat have increased the demand for quality wheat imports, all of which plays well to Frontier's grain trading capability.

GROCERY

A noteworthy achievement in the first half was the delivery of an adjusted operating profit 4% ahead of last year despite a revenue decline of 4% largely due to commodity price deflation.

Twinings Ovaltine made excellent profit progress in the period. Tea sales grew in the UK and Australia, where record market shares were achieved, and very strong growth was realised in its developing markets of China and India. The UK relaunch of black tea in new packaging formats was rolled out at the end of the period and will be supported by a major new television advertising campaign in the second half. Profit growth was driven not only by higher sales but also by lower manufacturing conversion costs and further operating efficiencies in the integrated tea supply chain. Ovaltine continued to perform well in its developing markets with strong growth particularly in south-east Asia.

The UK bakery market remained intensely competitive and the profitability of Allied Bakeries reduced as a result. This was driven by a combination of over-capacity in the industry, reducing manufacturers' margins, and retailers seeking to prove their value credentials in essential shopping items such as bread. The investment programme to modernise our bakeries is largely complete, our marginal cost of production has improved and we are now winning new volume in the market. Although we lost the contract to supply Tesco with Kingsmill bread after the half year, the lost volume has been replaced elsewhere.

Since its acquisition last October, Dorset Cereals has traded well and its integration with Jordans Ryvita is on track and performing ahead of our business plan. Jordans increased sales, particularly internationally with its launch in Australia where it is trading ahead of expectations. Performance in the UK was strong in the granola segment where new product launches drove increased volume. Ryvita sales came under pressure from increased competition in crispbread although successful television advertising helped Ryvita Thins achieve double-digit growth.

At ACH in North America, Mazola achieved strong volume growth following increased investment in advertising and marketing highlighting the cholesterol-lowering benefits of corn oil. Volume and market share growth was achieved by Capullo in Mexico where margin benefited from lower oil costs.

This was a disappointing period for George Weston Foods in Australia. Bread margins have been reduced by a combination of competitive price pressure and retailers featuring bread in their drive for lower prices with heavy price promotion activity. Operationally, the business has implemented a cost reduction programme across all bakery sites and is focused on delivering productivity improvements. Marketing and advertising support behind The One and Abbotts' Village Bakery drove an increase in market share for these brands. Revenue at the Don KRC meat business increased with improved volumes at the two major retailers. However, higher-cost and variable-quality raw materials reduced margins in the first half, but we expect to benefit from supply improvements in the second half of the year.

INGREDIENTS

Revenue in the first half was 3% ahead of last year at constant currency. Building on last year's improvement, operating profit for the half year was substantially ahead, with further recovery in yeast and bakery ingredients and a very strong performance from ABF Ingredients.

Revenue and profit improvement at AB Mauri was achieved in most regions and is a reflection of the strong brand and product capability the business has to offer in many markets globally. Growth was also achieved in both the yeast and bakery ingredients product groups. Benefits from the continuous improvement programmes were delivered, particularly in the optimisation of the supply chain, with a notable improvement at the new facility in Mexico. Trading conditions in South America proved to be challenging due to high inflation in both Argentina and Venezuela and an economic slowdown in Brazil. In Venezuela, continued currency devaluation had a negative impact on our business in the region which depends on imports denominated in US dollars. In January we opened a new technology centre in St Louis, Missouri to enhance customer support and product application development across a range of yeast and bakery ingredient solutions in North America. The integration of the bakery ingredients business in western Europe, which was acquired last year, is progressing to plan with the region overall showing growth over the prior year.

ABF Ingredients delivered excellent growth in sales and profits in the first half driven primarily by the enzymes business. Feed enzymes again performed well, building on the strong collaboration with AB Vista, and making good progress in the focus areas of supplying detergents and pulp and paper manufacturers.

The integration of AB Mauri's yeast and bakery ingredients business in Australia and New Zealand with the flour milling business of George Weston Foods in Australia has begun to deliver benefits through its more efficient structure, better procurement and an improved customer offering. As the results of the milling business were previously included within the Grocery segment, the 2014 comparative results have been restated to transfer £114m of revenue and £2m of operating profit from Grocery to Ingredients.

RETAIL

Primark's sales in the first half were 15% ahead of last year at constant currency driven by an 11% increase in retail selling space and very high sales densities in stores opened during the last 12 months. As a result of the weakening of the euro against sterling, total sales were 12% ahead of the same period last year at actual exchange rates.

The very strong trading in the stores opened over the last 12 months is excluded from the like-for-like measure. Several of these stores now regularly feature in Primark's top 20 stores by annualised sales including Berlin-Alexanderplatz, the new store in Cardiff, Stuttgart, Cologne and, following our entry into France, Marseille and all three stores in Paris.

Like-for-like sales for the group were level with last year and were held back by unseasonably warm weather across northern Europe last autumn and the impact that opening new stores in the Netherlands and Germany had on existing stores in this region. Like-for-like sales over the important Christmas trading period were strong. The UK delivered a positive like-for-like performance and Spain, Portugal and Ireland all performed very strongly. As new stores opened in the Netherlands and Germany, sales in existing stores declined as customers chose to shop more locally rather than travelling the long distances that we saw in the early days of trading in these countries. This is consistent with the normal trading pattern that we have seen in the early days of Primark's expansion in new countries. If the Netherlands and Germany are excluded from the comparison, like-for-like growth for the group would have been 3% in the first half.

Adjusted operating profit was 11% ahead at constant currency and 8% ahead at actual exchange rates. Operating profit margin of 12.6% was 0.5 percentage points lower than last year with a higher level of mark-down. A proportion of our product is sourced in US dollars and its strengthening, particularly against the euro, has an impact on our sourcing costs which our buying teams are working to mitigate. The impact of sustained US dollar strength will increase our costs for the autumn/winter season and will be seen in the fourth quarter of this financial year and into the following financial year. We will not allow currency changes to impact our model of providing up-to-the-minute fashion at the best value to our customers in each of our markets.

Retail selling space increased by 0.5 million sq ft since the last financial year end and by 1.1 million sq ft since the 2014 half year. At 28 February 2015, we were trading from 287 stores and 10.7 million sq ft of retail selling space. We opened ten new stores in the period including the relocation of the Northampton store to much larger premises. We opened four stores in the Netherlands, increasing space by some 60% and bringing our total there to 12, and three stores in Germany including 80,000 sq ft in Dresden. Further store openings or extensions to existing stores will take place in Germany, Belgium and the UK in the second half. Total new selling space to be opened in the financial year will be less than one million sq ft. We have an extensive pipeline of new stores to be opened over the next few years with a strong programme of some 1.5 million sq ft scheduled for the next financial year.

Significant investment was made in the first half to expand warehouse capacity in Europe and further expenditure is planned for later in the year. At the beginning of this year the capacity at Torija in northern Spain was doubled and the extension of our Mönchengladbach warehouse in Germany, which increased capacity by 60%, is now fully operational. We plan to open a new warehouse in the autumn, located in Bor on the western border of the Czech Republic, which will service stores in Austria and Germany.

Good progress was made in building the management team in the US in anticipation of our launch in late 2015. We have signed eight store leases in the north-east of the country, including seven from Sears. Six store locations have been announced including Downtown Crossing in Boston and five in the following shopping malls: King of Prussia and Willow Grove Park, PA; Staten Island, NY; Danbury Fair, CT; and Freehold Raceway, NJ. A lease has also been signed for warehouse space located in the Lehigh Valley area of Pennsylvania.

George Weston

Chief Executive

CONDENSED CONSOLIDATED INCOME STATEMENT

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONDENSED CONSOLIDATED BALANCE SHEET

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS