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April 24, 2012

On the money: ABF eyes improved grocery returns

Associated British Foods has insisted it expects the performance of its grocery division to improve in the medium term as investments made to reduce its cost base begin to feed through to the bottom line.

Associated British Foods has insisted it expects the performance of its grocery division to improve in the medium term as investments made to reduce its cost base begin to feed through to the bottom line.

The company today (24 April) booked a 5.6% increase in first-half EBITA to GBP412m on the back of an 11% sales gain. However, the group’s grocery businesses, which account for 31% of sales and 21% of profits, saw profits fall in the period despite a 4% increase in sales. 

Grocery EBITA fell by 31% to GBP75m. The unit’s margin dropped by 210bps as continued issues at the group’s Australian grocery business, George Weston Foods, and one-off restructuring charges in the UK hit profitability. 

Speaking during a conference call with analysts this morning, chief executive George Weston said the results of the Australian business were “frankly disappointing”. According to Weston, to improve its performance in Australia the company must reduce its overheads, see an improvement in bread pricing and complete the commissioning of its new Castlemain meat facility. 

“Bead pricing in last two months has been moving up… and the mix between branded and non-branded has improved,” Weston commented. 

In addition, ABF has been investing in improving productivity in the market and, finance director John Bason revealed, the group spent GBP15m over the past six months across its bakery and meat businesses in the country to restructure operations. 

“We expect a significant turnaround in George Weston’s profitability next year, although the competitive environment in Australia remains difficult,” Weston insisted.

In UK grocery, ABF invested GBP10m to improve the productivity of its Allied Bakeries unit, including the closure of two “small” bakeries, as part of an ongoing programme to boost efficiency. 

The group also stepped-up the advertising level behind its flagship Kingsmill brand. 

“Our UK brands have performed well,” Weston insisted. “Kingsmill is performing well within the grocery portfolio: its sales are still growing.”

The company added that the Silver Spoon and Twinings-Ovaltine businesses both booked growth in the half and suggested that it expects to see a sales lift in the second-half resulting from promotional activity around the Queen’s diamond jubilee. 

While management insisted that improvements in grocery – particularly efficiency improvements – would result in improved profits at the unit, Panmure analyst Graham Jones lowered his second-half forecast for the business. 

“We believe trading conditions will remain difficult for the rest of the year, and as such are cutting our full-year EBITA forecast from GBP220m to GBP205m,” he wrote in a note following the interim results release. 

In contrast, Bernstein analyst Andrew Wood suggested that an easing of commodity costs would result in improved grocery profitability in the next six months. 

“We do expect an improving performance in H2, particularly on margins, as commodities ease,” he suggested.  

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