ABF: bakery business improves profitability in Q3/2010

London / UK. (abf) Food, ingredients and retail group Associated British Foods PLC (ABF) issues its third quarter management statement, in accordance with the requirements of the UK Listing Authority´s Disclosure and Transparency rules, for the 40 weeks ended 19 June 2010. Highlights:
Group revenue from continuing operations year to date up 14 percent
Revenue momentum in first half continued in third quarter
Strong performance from Primark, sales year to date ahead 17 percent
Strong group cash flow sustained
Group trading outlook remains in line with expectations
Trading performance

Group revenue from continuing operations for the 40 weeks to 19 June 2010 was 14 percent ahead of the same period last year and in line with the growth reported at the half year. The weakness of sterling continued to benefit the translation of group revenues from continuing businesses which were nine percent ahead at constant currency, again in line with the half year.

Trading performance

Group revenue from continuing operations for the 40 weeks to 19 June 2010 was 14 percent ahead of the same period last year and in line with the growth reported at the half year. The weakness of sterling continued to benefit the translation of group revenues from continuing businesses which were nine percent ahead at constant currency, again in line with the half year. Year-on-year increase in revenues:

	16 weeks to 20100619	40 weeks to 20100619
Sugar	44 percent	44 percent
Agriculture	06 percent	04 percent
Grocery	05 percent	04 percent
Ingredients	08 percent	07 percent
Retail	15 percent	17 percent
Total group (continuing operations)	13 percent	14 percent

Sugar

Sugar revenues in the last 16 weeks were 44 percent ahead of last year benefiting from the inclusion of the sales of Azucarera which was acquired in April 2009. Excluding these sales, sugar revenues were 16 percent ahead in the last 16 weeks and twelve percent ahead year-to-date.

The UK business had an excellent campaign producing 1,3 million tonnes of sugar. Market supply has been tight during the period and prices have held up well. Profit benefited from these higher prices and volumes, together with better factory efficiencies, lower energy costs and a strong euro. In Spain, the first campaign for the Guadalete refinery was successfully completed with operational performance in line with expectations. Rainfall has been unseasonably high across the country, resulting in a reduced beet crop in the south and a lengthened campaign in the north. Both of these factors will have an adverse impact on the full year performance.

At Illovo, a long rainy season in most countries has impacted the new season start-up, but all operations are now running well and Zambia is operating close to its expanded capacity levels. Profit has been affected by the impact of a weakening of the currencies outside South Africa on the translation of results; the impact of lower world prices and the Rand´s strength on South African exports; and the effect of a weakening euro on exports to the European market. The Swaziland expansion and co-generation project is progressing well and is on target to be operational in the first half of 2011.

Local currency sugar prices in China have remained strong, despite the sharp fall in world market prices, as a result of strong local demand and a drought-affected crop. Sugar production is expected to be significantly lower than last year following the effect of drought on cane yields in the south and a smaller beet crop in the north, but a marked improvement in operating results is expected year-on-year.

Agriculture

In Agriculture, total revenue was ahead six percent in the 16 week period and four percent year-to-date. UK feed revenues were ahead in all sectors except sugar beet feed, which was affected by lower prices, but revenue for the full year is expected to be in line with last year. Growth in speciality feeds and nutrition continues to exceed expectations. At Frontier, trading revenues returned to more normal levels following two years of exceptional market volatility.

Grocery

Grocery revenues in the quarter increased by five percent over last year and were four percent ahead year to date. In the US, Mazola volumes cumulatively remain ahead of last year with gross profit significantly ahead benefiting from the absence of losses on vegetable oil futures incurred last year. In Australia, a fall in commodity costs in the first half led to lower prices both in the bakery and meat businesses as the benefit was passed on to customers. This trend continued in the third quarter with lower sales revenues than last year as a result. Manufacturing efficiency improvements and new products launched in the first half resulted in improvement in profitability in the bakery business, but the competitive market conditions experienced by the meat business have continued with a consequent adverse impact on margins.

In the UK, Allied Bakeries traded strongly with the Kingsmill brand continuing to perform well. The retail environment remains hugely competitive and the level of promotional activity has been high. As a consequence, sales of branded products increased at the expense of own label brands.

Twinings Ovaltine has achieved good growth this year seeing a rebound from the weak consumer demand experienced last year. Twinings has continued to perform very well with higher volumes and strong pricing across a number of markets notably the UK and the US. Ovaltine also achieved good volume growth, particularly in its important Thailand market despite significant disruption there in recent months. Developing markets also continue to perform well. The restructuring of our global tea supply chain is on schedule and construction is now underway in both Poland and China.

Silver Spoon benefited from the full realisation of savings from last year´s investment in packing rationalisation. Strong revenue growth was achieved by AB World Foods with the relaunch of the Patak´s brand and through export sales. Jordans and Ryvita volumes improved during the quarter helped by well-timed promotional activities. Market conditions continue to be difficult for Westmill Foods with further declines in the Indian and Chinese restaurant sectors. However, by focusing on its brands and value propositions, profit remained ahead of last year.

Ingredients

Ingredients´ revenues were eight percent ahead in the quarter and seven percent ahead in the year-to-date. This segment continues to benefit from the weakness of sterling, particularly against the Australian Dollar, and at constant currencies revenue was ahead year-to-date by four percent. The yeast and bakery ingredients business continued to trade well with a strong sales performance in Latin America and from its bakery ingredients products generally. Commissioning of the new yeast and yeast extracts plant in Harbin, China is underway. At ABF Ingredients, the yeast extracts and enzymes businesses continued to trade well with a good performance in the US yeast market and sustained growth in the feed enzyme sector.

Retail

Primark is having an excellent year with particularly strong trading in Spain and very encouraging progress made in its other continental European stores. Revenue year-to-date has increased by 17 percent driven by an increase in retail selling space and further like-for-like sales growth. Sales since the half year were 15 percent ahead, with a weakening of the euro in the quarter having an adverse effect on non-UK revenues when translated into sterling. Operating margins for the second half of the year have been strong and the margin for the full year is now expected to be ahead of that achieved last year with the benefit from increased volumes more than offsetting higher freight charges and the effect of adverse currency movements on supply costs. At 19 June 2010 ABF was trading from 198 stores with 6,2 million square feet of selling space. Since the half year we have opened new stores in Chester in the UK and Barcelona in Spain and completed the extension of our store in East Ham in London. Another five stores are now planned to open before the year end, two in Spain in Castellon and Elche, two in the UK in Bury and Blackburn and one in Killarney in Ireland.

Financial position

The significant improvement in cash flow achieved in the first half has been sustained with further progress made in working capital. As expected capital expenditure remains substantially ahead of last year but this increase is more than covered by the higher level of cash flow from operations. As a result, the cash flow before acquisitions and disposals is much stronger than last year and net debt has fallen from the half year position of 1’090 million GBP to somewhat below one billion GBP at 19 June 2010.

Trading outlook

Trading for the group since the half year remains on track to deliver very good progress in earnings for the full year – Associated British Foods PLC (ABF) said in its latest interim management statement.