AB Foods Regulatory News (ABF)

16 January 2014

Associated British Foods plc

Interim management statement

Associated British Foods plc today issues an interim management statement for the 16 weeks to 4 January 2014, in accordance with the requirements of the UK Listing Authority's Disclosure and Transparency rules.

Headlines

· Excellent Christmas trading at Primark

· Encouraging performance from Grocery and Ingredients

· Sugar performance weaker than expected

· Adverse translation impact of recent sterling strength

· No change in full year earnings' expectations

Trading performance

Group revenue for the first 16 weeks was in line with last year. Revenue growth by business segment was:

Compared with the first quarter last year, sterling weakened against the euro but has strengthened against most other major currencies, particularly in recent weeks. As a result, group revenue for the quarter would have been 1% higher at constant currency. If sterling remains at current rates the impact for the rest of the year will be more significant.

Sugar

Revenues in the period were 27% below last year at constant currency, and 28% lower at actual rates as the strength of the euro was broadly offset by the weakness of the South African rand. EU sugar prices, as previously indicated, were lower in the period which will lead to lower revenues and margins for both the UK and Spain in the full year. The further recent fall in world sugar prices may put further pressure on revenues and margins, particularly in China. Sales volumes for Illovo and China were lower than last year and reduced sugar production in Spain led to the elimination of non-quota exports this year.

The UK campaign is progressing to plan. Beet quality and sugar content are encouraging and all factories are operating well. Sugar production for the current year is now estimated to be 1.28 million tonnes compared with last year's 1.15 million tonnes. Production consistency has improved at the Vivergo bioethanol plant in Hull and volumes have increased. In Spain, the northern campaign was delayed to maximise beet development from the reduced area under cultivation in the 2013 crop year and has achieved an improved start-up performance compared with last year.

Illovo's revenues were weaker with lower domestic volumes and regional prices. The Malawian kwacha has continued to decline against both the rand and sterling since last financial year end.

All five factories in south China made a good start to their campaign with sugar content and extraction both ahead of last year. Production volumes in the north were held back by flooding in Heilongjiang and fewer factories in operation following the rationalisation last year. With the benefit of recent cost reduction measures and improved factory performance in the north, we expect the China sugar business to deliver a substantial improvement in profitability this year.

Agriculture

Revenue was level with last year at both constant currency and actual rates. Lower UK feed volumes were offset by growth in China, and a strong performance at AB Vista where Quantum Blue in South America and Econase in Asia were the main contributors. Frontier traded at similar levels to last year with good sales of crop inputs and fertilisers.

Grocery

Revenue at constant currency was 2% ahead of last year but at actual rates was 1% below, largely as a result of a weaker Australian dollar. Twinings Ovaltine again performed well with strong growth for tea in the US and the UK. Sales by the UK grocery businesses were in line with last year. Volumes and margins at Allied Bakeries were ahead of last year but continued to face strong competition. Sales at Silver Spoon declined as a result of lost contracts and reduced UK sugar pricing but the profit impact has been partially mitigated by overhead cost reduction.  Sales increased in local currency at George Weston Foods in Australia, profitability has improved and further progress was made in the Don KRC meat business with increased volumes and improved cost control. Revenue at ACH was ahead of last year with higher corn oil volumes.

Ingredients

Revenue at constant currency was 3% ahead of last year at constant currency but 2% lower at actual rates. In yeast and bakery ingredients, cost inflation in South America was successfully recovered with improvement in volumes and margins in Brazil. Revenues in North America were ahead driven by increased volumes. Profit in AB Mauri is improving. At ABF Ingredients, the new extrusions factory at Evansville in the US has been successfully commissioned, products have been approved by key customers and the factory is fully operational.

Retail

Sales at Primark were 12% ahead at constant currency and, with the benefit of a stronger euro, were 14% ahead of the same period last year at actual rates. This was driven by an 8% increase in selling space, strong like-for-like growth and higher sales densities from new stores. Trading in the year to date has built upon the exceptional like-for-like growth delivered in the same period last year. Although like-for-like sales in the first eight weeks were held back by the unseasonably warm weather and the strong comparatives in the previous year, the second half of the period was characterised by excellent Christmas trading with very strong like-for-like growth.

Operating profit margin was higher than in the same period last year, reflecting the Christmas trading, and was better than expected.

Retail selling space increased by 0.6 million sq ft since the financial year end. At 4 January 2014, 268 stores were trading from 9.6 million sq ft of selling space. We opened 14 new stores in the period including our first in France which began trading on 16 December from 63,000 sq ft in Marseille. Early signs suggest that Primark has captured the imagination of French consumers, with one of our best store openings to date. In Spain we opened five new stores and closed the smaller of our two stores in La Coruña, bringing the total there to 39. Three further stores were added in the UK, including Crawley where we relocated to a larger site, and we also closed our small store in Leytonstone. Two new stores were added in the Netherlands and one each in Germany, Austria and Portugal, all of which have begun trading exceptionally well.

We expect to add a further 0.5 million sq ft of selling space in this financial year, bringing the net additions for the year to 1.1 million sq ft which is substantially more than that achieved in 2013. The additional stores will include a further four in France, three located in shopping centres in the suburbs of Paris and one in Dijon; two additional German stores, our second in Berlin and one in Cologne; three new UK stores including a relocation in Cardiff; and we will also relocate our Plenilunio store, our first in Spain, to a location twice its size. This additional space will be opened more evenly through this financial year and the 8% increase in selling space achieved in the first quarter will increase as the year progresses. Capital expenditure for the full year is planned to be ahead of last year.

Financial position

Operating cash flow in the period was better than last year driven by a strong working capital inflow, particularly at Primark, compared with last year's outflow. Capital expenditure continued at a level similar to last year with lower expenditure in the food businesses offset by a higher investment at Primark. Net debt at 4 January 2014 was £392m lower than last year end at £412m.

Trading outlook

Lower sugar prices, as the market rapidly adjusts ahead of EU regime reform in 2017, will result, as previously indicated, in a substantial reduction in profit from our sugar businesses this year. With the further recent fall in world sugar prices this reduction will now be greater than previously expected. Building upon the like-for-like growth already achieved, and with the further store expansion planned for the remainder of the year, Primark's profit will be well ahead of last year with a higher margin than expected. Given the current strength of sterling, when these factors are combined with revenue growth and margin improvement in Grocery, and a lower interest charge, we continue to expect adjusted earnings per share for the current financial year to be similar to 2013.