Associated British Foods plc has announced in a trading update that the group’s adjusted operating profit for the second half will be in line with expectations. Better than expected sugar profits will help to offset lower than forecast margins at ABF’s discount fashion chain Primark.
Sugar revenues made further progress in the second half driven by strong improvements in both China and Spain more than offsetting the absence of export sales from the UK and lower sales in South Africa. Profit for the full year will be well ahead of last year, and better than expected, with the benefit of these revenue increases and higher prices.
In the EU, the profits of the company’s UK business will reflect the impact of the crop shortfall, as a result of the frost damage sustained during the severe weather last winter, after some recovery through price increases. Production was just below 1.0 million tons of sugar with the shortfall against contracted quantities being made up by a combination of destocking, additional in-house refining in Spain and securing supplementary supplies from third parties at higher cost. In Iberia, Azucarera delivered a much improved performance. Beet campaigns in both the north and south of Spain progressed well and output totaled 410,000 tons of beet sugar against a quota of 378,000 tones. In addition, the Guadalupe refinery substantially increased its output, processing 248,000 tons of cane sugar against 145,000 tons in the previous year.
At Illovo, profit in the second half will be ahead of last year. Local and regional prices have risen in response to world market pressures and export prices to the EU have improved. Production in our financial year is expected to be 1.6 million tons, down from 1.8 million tons last year, driven by the drought affected South African crop. In Zambia, the new season is progressing well with the expanded factory performing at capacity.
Building on last year’s improvement, revenues and profits of the Chinese businesses were substantially ahead reflecting both higher prices and volumes. Beet sugar production doubled to 210,000 tones with the benefit of the ongoing and intensive work with growers to improve mechanization, fertilizer and chemical usage, irrigation and harvesting practices. In the south, sugar production was held back at 415,000 tones by unfavorable weather conditions which reduced the sucrose levels in the cane.
Following delays caused by contractor performance issues, construction activity has recommenced at Vivergo’s bioethanol plant in Hull. The project is expected to complete in spring 2012.
The yeast and bakery ingredients business of AB Mauri maintained the rate of revenue growth achieved in the first half but operating profit in the second half will be sharply lower.
The European yeast market has been extremely competitive and margins have suffered from an inability to recover fully raw material cost increases. Some weakness in the bakery industry in North America led to lower sales of wet yeast and higher-margin technical bakery ingredients, and full recovery of higher input costs was consequently challenging. In China, raw material costs rose as molasses, which were in short supply, were supplemented with higher cost corn syrup.
The company’s Ingredients performance in Latin America was encouraging, benefitting from strong economic growth and continued development across a broadened range of products. Significant raw material cost pressure was successfully offset by price increases. Bakery ingredients had another year of strong revenue growth, particularly in the UK, with an expanded product range. Considerable progress was made in building relationships with key global customers, and technical innovation continued to drive new product development enabling the company to maintain technology leadership in key markets.
At ABF Ingredients, sales of feed, bakery and specialty enzymes made good progress driven by the successful introduction of new products. Commissioning costs of the new yeast extracts factory in Harbin, China were higher than forecast but the factory is now fully operational and plant efficiency is improving. Yeast extract margins continued to be held back by high molasses costs.