ABF blames sugar for predicted reduced earnings

By Anthony Fletcher

- Last updated on GMT

Related tags Associated british foods Eu

Associated British Foods (ABF) said that it expects a reduction in
earnings after tax in the second half of the financial year.

In a pre close period trading update published today, the UK ingredients firm blamed the impact of price pressure on its EU sugar businesses in the first half, adverse trading conditions in its bakery operations and higher energy costs.

"The reduction in earnings will be in line with our expectations,"​ said chairman Martin Adamson.

In British Sugar, the imbalances in supply and demand within the EU sugar market and changes in producer behaviour in anticipation of the new regime in the first half resulted in price pressure.

However, the firm said that the impact of these factors in the second half has been in line with expectations.

Next year, sugar supply in the EU will be substantially lower as a consequence of a likely smaller crop and the temporary quota cut already announced by the EU commission. The smaller crop in the UK is, however, still expected to meet quota, including the additional quota purchased.

"Our estimate of the reduction in operating profit in the next financial year as a result of the introduction of the restructuring levy, net of the benefit of the reduction in beet price, and the smaller crop remains unchanged,"​ said Adamson.

ABF has announced a number of initiatives within this sector that represent a significant investment in the future of sugar operations. The acquisition of a 51 per cent interest in Illovo Sugar, the largest sugar producer in Africa and one of the worlds leading low cost producers, was completed on 4 September 2006 for a cash consideration of £286m (R3.8bn).

"A full years trading will be consolidated into next years income for the group,"​ said Adamson. "Well over half of our sugar production next year will be outside the EU."

In July, the group also announced its intention to purchase additional quota in the UK and Poland and the closure of factories in York and Allscott at the end of the 2006/7 campaign. An exceptional charge to cover the costs of the factory closures will be made in this financial years income statement and will be excluded from the calculation of adjusted earnings.

Within the grocery division, Twinings, Ovaltine, Ryvita, Capullo in Mexico and Westmill all achieved strong profit growth. ACH performed well although Mazola volumes continued to be down in a declining oils category.

"Profit at Silver Spoon was affected by pricing pressure on granulated sugar,"​said Adamson. "In Australia, there are encouraging improvements in the operation of the new Sydney bakery.

"However, trading has been particularly difficult at Allied Bakeries with lower volumes of both Kingsmill and own label significantly reducing profitability."

As expected, interest payable, net of investment income, will be considerably higher than last year. However, the recent weakening of the US dollar, which has reduced the operating profit of US dollar earnings on translation, has benefited the interest payable on the group's US dollar borrowings.

Spending on acquisitions in the year will be some £400m, a figure that mainly involves Illovo.

Finally, in the group's retail sector, Primark has delivered strong sales and profit growth in the second half, while the programme for the refit and opening of the former Littlewoods stores is on schedule with the expectation of 18 stores trading at the financial year end.

The group's full year results to 16 September 2006 will be announced on 7 November 2006.

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