AB Foods Regulatory News (ABF)

19 April 2016

Associated British Foods plc announces its

interim results for the 24 weeks ended 27 February 2016

Progress in all our businesses despite currency

Financial highlights

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

"These results demonstrate underlying progress for all of our businesses in the period despite currency. Good buying and selling space expansion continued at Primark, cost reduction and performance improvements contributed to a better result at Sugar, profits were well ahead at Ingredients, and profit margins improved at Grocery and Agriculture."

* before amortisation of non-operating intangibles, profits less losses on disposal of non-current assets and exceptional items.

** before amortisation of non-operating intangibles, profits less losses on disposal of non-current assets, profits less losses on sale and closure of businesses and exceptional items.

All figures stated after amortisation of non-operating intangibles, profits less losses on disposal of non-current assets, profits less losses on sale and closure of businesses, and exceptional items are shown on the face of the condensed consolidated income statement.

References to operating profit in the Operating Review are based on the adjusted measure defined above.

1  Constant currency is derived by translating the 2015 results at 2016 average exchange rates.

ASSOCIATED BRITISH FOODS plc

INTERIM RESULTS ANNOUNCEMENT

FOR THE 24 WEEKS ENDED 27 FEBRUARY 2016

CHAIRMAN'S STATEMENT

These results demonstrate underlying progress for all of our businesses in the period. Primark's selling space expansion continued, profit margins improved in Grocery and Agriculture, profits were well ahead in Ingredients, and Sugar delivered a better result, albeit still at a low level. As expected, the movement in exchange rates held our group profits back, both in the translation of overseas revenues and profits and, significantly, in the transaction effect on the margin at Primark and British Sugar. I am therefore pleased to report interim results for the group of adjusted earnings per share level with last year.

Revenue in the first half increased by 2% at constant currency but was 2% lower than last year at actual exchange rates. Adjusted operating profit increased by 5% at constant currency and by 3% at actual rates. Net financing costs in the period were lower than last year's first half, resulting from a lower average level of net borrowings, and the underlying tax rate was in line with last year. Although adjusted profit before tax was 4% ahead of last year, the results attributable to the minority shareholders in our African and Chinese sugar businesses were greater this year. As a result, adjusted earnings per share in the first half were level with last year. On an unadjusted basis, results were well ahead of last year which included the impact of restructuring in AB Sugar.

After several years of decline, the small improvement in AB Sugar is encouraging. Management has worked hard to embed a culture of performance improvement which is delivering significant cost reduction across all of its businesses. We have established a good track record here and have identified a number of further opportunities. Low world prices and the remaining uncertainty expected from the withdrawal of EU sugar quotas in October 2017 underline the imperative to focus on low-cost production.

I am pleased that after ten successful years of investment in Illovo, we have now reached agreement with its board for the purchase of the minority shareholdings that we do not already own for some £260m. Illovo shareholder approval will be sought at an extraordinary meeting in May. Illovo already benefits from being one of the world's lowest-cost producers and its domestic markets are growing strongly. We believe that full ownership will accelerate Illovo's commercial development and its performance improvement initiatives which are already under way.

Cash flow was much improved this period with a cash inflow from operating activities £174m higher than the same period last year. This improvement was driven mainly by a reduction in EU sugar stocks, but also lower inventory at Primark. Capital expenditure was higher driven by Primark's expansion, and investment in increased capacity and cost reduction in the food businesses. Net debt at the period end was £421m, a reduction of £380m from the position last half year, reflecting strong cash flows both in the second half of last year and the first half of this.

The referendum, on 23 June, on the UK's continued membership of the EU has created uncertainty in the business community and financial markets. ABF is an international business with diverse interests across 48 countries and a business model that, wherever possible, aligns production with the end markets for its products. Primark operates discrete supply chains for its stores in each of the UK, US and eurozone. We undertake relatively little cross-border trading between the UK and the rest of the EU.

The UK Chancellor's 2016 budget included proposals for the introduction of a soft drinks levy in the UK aimed at addressing rising levels of obesity. There is uncertainty as to how these proposals may be implemented. Obesity has been, and continues to be, a complex issue driven by many different factors. We remain committed to informing and educating consumers about the role that sugar can play in the diet and lifestyle.

The board

On 13 April 2016 Peter Smith retired after nine years' service as chairman of the Audit committee and as a valued member of the board. I would like to thank Peter for his steadfast commitment and the enthusiasm with which he has steered the Audit committee through a period of substantial change in corporate governance and financial reporting.

We welcome Richard Reid to the board. Richard was appointed as a director on 14 April 2016 and succeeds Peter as chairman of the Audit committee. Richard was a partner in KPMG LLP having joined the firm in 1980 and was latterly, until his retirement last year, chairman of the London office. He brings to the board a wealth of experience across a range of consumer products and retail businesses.

Dividend

The board has declared an interim dividend of 10.3 pence per share, an increase of 3% on last year. The dividend will be paid on 1 July 2016 to shareholders registered at the close of business on 3 June 2016.

Outlook

The underlying trading outlook for the group for the full year is unchanged.

Sterling has weakened recently against our major trading currencies. If current rates were to prevail, this would give rise to a currency translation benefit in the second half and we would no longer expect currency translation to have a material impact on our results for the full year. With the exchange rates applicable to most of Primark's purchase orders for the second half already having been fixed, we would expect any further impact on Primark's margin for the balance of the financial year to be limited. British Sugar margins are, however, expected to benefit from sterling weakness on its euro-denominated sales.

We now expect only a marginal decline in adjusted earnings per share for the group for the full year.

Charles Sinclair

Chairman

19 April 2016

OPERATING REVIEW

Adjusted operating profit in the first half of £486m was 5% higher than last year on group revenues that were 2% ahead at £6,117m, at constant currency. As explained in the Chairman's statement, the currency effects of both translation and transaction have held back the financial performance in the first half. Underlying progress was made by all of our businesses this year.

The clothing retail market over the half year has been challenging, especially in the UK. The rate of Primark's selling space additions will increase and the pipeline of new store openings is strong, both for the second half of this year and next year. We are encouraged by the early trading in the US and are excited by the prospect of Primark's recent entry into Italy. These achievements are noteworthy as is the work undertaken to mitigate the transactional currency impact on margin.

Both AB Mauri and the speciality ingredients businesses have continued the recovery of the last two years with a further substantial improvement in profits. This recovery is broadly based, driven by a combination of performance improvement, cost reduction and commercial development.

GROCERY

Adjusted operating profit in the first half was 2% ahead of last year on revenues that were 1% lower at constant currency and 4% lower at actual exchange rates. Margin improved from 8.1% to 8.6% continuing the progress of recent years.

Twinings Ovaltine achieved market share gains for tea in the UK, Italy, the US and Australia where a combination of television, digital and print advertising campaigns have been used to good effect. Sales of Ovaltine were better in Thailand where margin also improved and, in its developing markets, good progress was made in Vietnam. Difficult economic conditions led to disappointing sales in Nigeria.

The UK bakery market remains intensely competitive with retailers choosing bread as a means of highlighting their value for money to shoppers. Although average prices have been stable for the last six months, they remain at their lowest level for eight years. Kingsmill's market share grew, with a substantial increase in sales volumes and strong consumer demand for alternative bakery products, especially Sandwich Thins. Bakery margins as a whole remain under pressure. Capital investment in the period included the moving and upgrading of the bun plant from Orpington to Cardiff which, together with the Stoke bakery, supplied 50 million hot cross buns this season. A new warehouse management system has been installed at Stockport, West Bromwich and Glasgow which has significantly increased picking speeds and ensured that we maintain our leading customer service levels. Roll-out of this new system to all remaining bakeries will take place over the next 12 months.

Dorset Cereals continued to perform very well and the brand has now been launched in Australia with good distribution in the two major national retailers. Jordans and Ryvita both made further progress internationally, growing particularly well in Australia, Canada and France.

At AB World Foods, Patak's and Blue Dragon maintained their positions as the leading Indian and Oriental ambient brands in the UK with support for both on television, radio and in-store. Significant cost inflation on spices and dhal flour, the principal ingredient in pappadums, has put pressure on margins. Westmill Foods' core ethnic catering business traded well, with Lucky Boat noodles volumes well ahead. In the ethnic consumer market, Elephant Atta volumes recovered strongly after a weaker performance last year, and Green Dragon Thai rice achieved strong growth.

Operating profit in North America was maintained, despite a very competitive market for vegetable oils, with further advertising behind the Mazola brand promoting the health benefits of plant sterols. In the US, ACH's foodservice volumes showed good growth reflecting strong partnerships with key distributors and the impact of lower Mazola retail volumes was offset by a reduction in overheads. In Mexico, oil volumes were lower and margins came under pressure from the devaluation of the peso. Stratas Foods achieved strong volume growth in both foodservice and retail oils.

Trading at George Weston Foods in Australia was much improved. Revenues were ahead of last year across all businesses with particularly strong progress made by the Don KRC meat business. Here further factory improvements and lower procurement costs drove the improved result. Tip Top continued to drive a more efficient cost base and the brand has undergone a complete redesign with new packaging across the bakery range.

SUGAR

Revenue for AB Sugar in the first half was 3% higher than last year at constant currency and the operating result improved. A tightening of EU and Chinese stock levels resulted in a strengthening of domestic prices in those markets, but world prices remain low. With most of British Sugar's contracts for the current year already agreed, there will be no material impact on its profit from the improvement in pricing until next year.

After last year's record UK sugar production of 1.45 million tonnes, a smaller area was contracted for cultivation this year. This reduction, combined with beet yields returning to more typical levels, resulted in production just short of 1.0 million tonnes. Operating performance remained very strong at all sites with a successful campaign completed in February. However, the benefit of the reduction in beet costs for this campaign was more than offset by a higher overhead cost in stock, as a result of the lower volumes, and weakness of the euro in the period. This reduced the half year operating result and we also expect the result for the full year to be lower than last year.

A state-of the-art anaerobic digestion plant for the production of biogas is being built at Bury St Edmunds and will be commissioned later this year. This facility will have the capacity to use 100,000 tonnes of pressed sugar beet pulp as a feedstock and will generate five megawatts of electricity for export to the grid. Importantly, this will reduce the energy consumed on site, by eliminating both the need to dry pulp and the transportation cost of removing it, and will be a major contributor to further cost reduction.

The Vivergo bioethanol plant has operated well which, combined with better bioethanol prices, led to some improvement in its result in the first half. At current wheat prices and with increasing production rates, this progress is expected to continue in the second half.

In Spain the operating result improved significantly with the benefit of lower beet costs, better pricing and higher production. In the north, the campaigns at Miranda and Toro were completed by mid January and at La Bañeza, where the start of the campaign was deferred to allow further maturity of the beet, it was completed in early April. Total beet sugar production is estimated to be 440,000 tonnes compared with last year's 414,000 tonnes. Additionally, 25,000 tonnes will be produced from the refining of imported raw cane sugars at the northern beet factories.

Illovo's production is expected to be 10% below last year at 1.47 million tonnes as a result of the widespread effects of drought on growing conditions and power supply. Investment in a new refinery at Nakambala in Zambia is progressing well and will come on stream later this year. This will enable us to meet the growing demand for more refined sugars in the African market and will strengthen our leadership in the region.

On 8 April we announced that we had reached an agreement with the board of Illovo to acquire the 48.65% interest in the company that we do not already own for a price of 25 rand per share, representing a total consideration of 5.6bn rand (£262m) in cash. Illovo is listed on the Johannesburg stock exchange and completion of the transaction is subject to Illovo shareholder approval which will be sought at an extraordinary shareholder meeting in May. Illovo directors intend to vote in favour of the proposed transaction in respect of their own shares. This transaction is expected to be immediately earnings accretive for ABF.

China also saw an improvement following the closure last year of the two uneconomic factories in Heilongjiang and an increase in prices. Operational performance at the two remaining beet sugar factories at Zhangbei and Qianqi was strong with a record beet supply to both plants, and the highly successful campaign finished in December with 159,000 tonnes of sugar produced. In the south, production was 31% lower than last year at 287,000 tonnes, due to a combination of a smaller area assigned to the cane crop, excessive rain affecting cane maturity and, as a consequence, poor sugar content.

All of our sugar businesses remain focused on the delivery of substantial cost reduction through a combination of continuous improvement, business transformation, capital expenditure and procurement activities. There are many instances of best practice transfer across the group. For example, Illovo undertook a comprehensive study of crop harvesting and inbound logistics in Africa involving the use of GPS technology to map vehicle movements. This is now being adopted by British Sugar and Azucarera to reduce waste both for growers and ourselves. Investment at AB Sugar has not only delivered substantial cost reduction but has also delivered co-product extensions and improvements in product quality and format.

Agriculture

Revenue in the first half was 15% lower than last year, driven by soft commodity prices and lower volumes in our UK feed business, AB Connect. However, excellent trading at AB Vista drove further margin improvement for AB Agri as a whole.

Lower revenues for AB Connect were largely the result of lower demand for ruminant feed during the mild winter. Speciality feed volumes were ahead of last year as the business increased its share of the domestic market, more than offsetting lower export volumes to the EU. We are developing our anaerobic digestion products and services business with the aim of improving the efficiency of this industry. We are also developing an anaerobic digestion plant in Yorkshire which uses low-grade food waste, sustainably, as a feedstock.

AB Vista continued to build on its success in feed enzymes with good progress made in Asia, Europe and the Middle East. As well as continued growth of its phytase enzyme, Quantum Blue, there was also increased demand for Econase XT in the Americas and in south east Asia. North America continued to be very competitive but sales from new markets in eastern Europe were strong.

In China, market conditions remain weak but the impact has been mitigated by improved purchasing and pricing. Furthermore, the industry in China is moving from traditional backyard farms to larger, more professionally managed enterprises that demand higher-quality service, differentiated products and food safety credentials. We have targeted these larger businesses and have had success in winning a number of new feed supply contracts. A new premix plant, which is currently under construction and due to complete at the end of this calendar year, will broaden our product range.

In Frontier Agriculture, good grain trading income was partly offset by lower demand for fertiliser and crop protection products, as a result of excellent sowing conditions in the autumn and a mild winter which allowed crops to establish well.

INGREDIENTS

Revenue in the first half was 4% ahead of last year at constant currency. Building on the improvement of the last two years, operating profit for the half year was substantially ahead, with further recovery in yeast and bakery ingredients and another strong performance from ABF Ingredients.

At AB Mauri, the businesses in the Americas performed well. We lead the North American industry in the application of ingredient technology in industrial bread production and we launched USDA 'certified organic' bread improvers in the period. Despite a difficult economic environment in Hispano America and Brazil, our continued focus on craft bakeries enabled further progress.

Globally we continue to develop our baking technology to enable our customers to meet growing consumer demand for healthier diets, while at the same time improving their productivity. In particular, this has enabled them to reduce sugar and salt in, and remove additives from, their recipes.

Growth was more limited in western Europe. The continued integration of the bakery ingredients business acquired in 2014 saw the rationalisation of warehousing and distribution in Iberia. A new technical centre was opened in the UK to enable the development of new bakery ingredient solutions and the provision of technical support and training to customers.

Capital investment in our Montreal and Memphis yeast plants has facilitated significant improvement in the consistency of product quality and plant efficiency. This included new equipment to improve raw materials handling and deliver automated sanitation systems. We are also investing in a new bakery ingredients plant in Argentina, which is due to commence operations early next year.

ABF Ingredients achieved good revenue growth in the first half and all businesses made further profit progress. Strong factory performances and effective cost control resulted in increased margins, particularly at AB Enzymes which made further advances in the baking and detergent sectors. In the US, functional excipients achieved significant growth and speciality cereals advanced with a good performance from protein extrusions. Key capacity expansion projects, to enable further growth in enzymes and speciality lipids, are on track.

RETAIL

Primark's sales in the first half were 7% ahead of last year at constant currency, driven by increased retail selling space, and 5% ahead at actual exchange rates.

Following a strong performance at the start of the financial year, trading was weaker in the weeks leading up to and over Christmas, as a result of unseasonably warm weather across northern Europe, resulting in like-for-like sales for the first half that were less than 1% below last year. Our stores in France delivered a strong like-for-like performance despite the very high sales densities achieved in their first year of trading last year. As expected, the impact of new store openings on the like-for-like sales in existing stores in Germany and the Netherlands has eased. Early trading at our two stores in the US has been encouraging, with very positive customer feedback. Primark has been well received, particularly its exceptional value for money and the breadth of its product range. Footfall and sales density have increased steadily as awareness of the Primark brand, which started at a low level, continues to grow.

Adjusted operating profit was 1% lower than last year at constant currency and 3% lower at actual exchange rates. As previously explained, Primark buys a substantial proportion of its garments in US dollars, and sells them in euros and sterling, giving rise to transactional currency exposures. Forward currency contracts are taken out to cover these exposures when orders are placed. Last year's results were therefore protected from the effect of the devaluation, in early calendar 2015, of the euro against the US dollar. The impact of this devaluation was felt in the first half of this year when the operating profit margin of 11.7% was 0.9 percentage points lower than last year. This margin decline was smaller than had been expected, as much of the impact of the stronger dollar was mitigated by a good buying performance and a lower level of mark-downs arising from a well-managed stock position. This margin decline also included the net cost, in the US, of the head office and warehouse which only supported two stores in the first half.

Retail selling space has increased by 0.3 million sq ft since the last financial year end and by 0.8 million sq ft since the 2015 half year. At 27 February 2016, 299 stores were trading from 11.5 million sq ft of retail selling space. We opened a net six new stores in the period including a flagship, 133,000 sq ft store on Gran Via in central Madrid in October, and our second store in the US, at the King of Prussia mall in Pennsylvania, at the end of November.

The number of openings will be greater in the second half, with a further 0.3 million sq ft in seven new stores already opened since the half year including Cagnes-sur-Mer, near Nice, and Toulon in France. The remaining openings will be weighted towards the end of the second half and, for the full year, we expect to have opened a total of 1.4 million sq ft of new selling space.

Our store opening plans for our two most recent markets are well advanced. In the US, six stores are scheduled to open later this calendar year and we expect to open a 70,000 sq ft store in the American Dream shopping mall in New Jersey in calendar 2017. This will bring the total number of stores in the US to nine. We have also announced the locations of our first three stores in Italy. On 14 April we had an enthusiastic response to the opening of our 57,000 sq ft store in Arese, a city 12 kilometres north west of Milan. This will be followed by Brescia in the early autumn and Florence later in 2017.

We are making a significant investment in our warehouse infrastructure. Last year, capacity was added in Spain and Germany and we opened a new warehouse in Bor, on the western border of the Czech Republic. This summer we will migrate our Magna Park distribution centre in the UK to a larger, purpose-built warehouse at Islip, Northamptonshire, and open a new facility in Roosendaal in the Netherlands. By the end of this year we will have doubled our capacity since 2013.

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