Allied Bakeries, home to Kingsmill, could post another loss in FY17/18, Bason says

Allied Bakeries, home to Kingsmill, could post another loss in FY17/18, Bason says

Associated British Foods' grocery basket had something of a mixed 2016/17 financial year. Dean Best spoke to finance director John Bason about challenges at home, progress overseas, recent M&A and the year ahead.

Announcing Associated British Foods' annual financial results on Tuesday, chief executive George Weston said the UK-based grocery, ingredients and clothing retail business had seen "excellent progress across the group".

The headline numbers for the 52 weeks to 16 September showed ABF saw healthy revenue and adjusted operating profit growth at both actual and constant exchange rates – an important point to make, given the overall tailwind the devaluation in sterling during the year presented for the London-headquartered business.

However, for ABF's grocery division, a business that accounts for around a fifth of the group's overall sales and adjusted operating earnings, the year was something of a mixed bag, with some robust performances overseas but a more varied picture at home.

The annual revenue from the continuing operations within ABF's grocery division - that is excluding the numbers from the US herbs and spices business sold to B&G Foods during the year - jumped 9% to GBP3.38bn (US$4.45bn). The adjusted operating profit from the division rose 3% to GBP303m.

However, at constant exchange rates, the growth on both metrics disappeared, with revenue flat year-on-year and adjusted operating profit down 6%.

ABF pointed to some solid results from units like its Twinings Ovaltine hot beverages business, as well as its grocery operations in North America and Australia, which both grew margins.

UK bread unit falls flat

Nevertheless, ABF's UK grocery businesses, faced with the post-EU referendum fall in the value of sterling, had a more problematic year, not least its domestic bread unit, Allied Bakeries, which ran up a loss.

Speaking to just-food after ABF announced the results, John Bason, the company's finance director, seeks to put the results from the company's grocery business into context and emphasises the underlying attributes of the Allied Bakeries business - but does not shy away from challenges facing the unit.

"Let's put grocery into perspective. Twinings Ovaltine, which is by far the biggest business we've got in grocery, continued to have really a very strong year, growing in its major markets. We had margin and profit improvement from our business in Australia, George Weston Foods, and also in the United States. But I think the business that we had the most difficulty with was Allied Bakeries," Bason says.

Allied Bakeries, home to the Kingsmill, Allinson's and Burgen brands, had been "close to a loss" in the previous 12 months, Bason reveals, but the spike in its wheat bill after the fall in the value of sterling hit the business, which had been unable to recover the rise in commodity costs the form of price increases its retail customers.

"The wheat price here in the UK, sterling price, went from about GBP110 per tonne to GBP145," Bason says.

ABF remains in talks with UK retailers over price. Bason refuses to be drawn on the negotiations but says Allied Bakeries has already worked to lower costs elsewhere in the business and warns the unit could make a loss again in the group's new financial year.

UK bread has moved significantly into loss [and] that loss is not sustainable

"We've got the best-invested bakery assets in the industry. We've done a lot of work to improve our productivity and consistency, we've invested in the brands - not least the relaunch of Kingsmill at the beginning of the year. Given where the losses are, we need some price for that. We've moved significantly into loss [and] that loss is not sustainable," Bason says. "I don't think we will [make a profit this year]. I still think it will be loss-making."

Allied Bakeries is one of the three largest bakery businesses in the UK, alongside family-owned Warburtons and Hovis, which is controlled by US private-equity firm The Gores Group. Hovis got its new investor three years ago when former owner Premier Foods plc sold a majority stake in the struggling business to The Gores Group. The UK bread category has long been one of the most challenging in which to do business in the country and City analysts have asked questions about the future of ABF's UK bread unit for a decade and more

One analyst this week described Allied Bakeries as "a strategic headache" for ABF. Could the company consider a similar move to Premier? Bason does not answer the question directly. "Well, look, I think what we're talking about here is we've invested behind the business, we're saying we've got a great quality product, we are low-cost in terms of our production but we are saying you've got to have some price to be able to recover those input costs. That's the best way forward for us."

ABF does not disclose sales figures for particular brands but elsewhere in the UK - a market Weston told investors earlier in the day had been "a very difficult trading environment for all our businesses as consequence of commodity inflation" - the company saw its ethnic cuisine brands Patak's and Blue Dragon gain market share. The group, meanwhile, is part-way through the construction of a new Ryvita factory in eastern England, a project the company expects to finish in this new financial year and one which demonstrates the confidence it has for the crispbread brand despite the pressure it saw on its domestic market share amid competition from own-label.

Elsewhere among ABF's UK-based assets, the group continued to expand its two breakfast cereal-led businesses, Jordans and Dorset Cereals, internationally, including in Australia, which helped offset some of the pressure on the units' domestic margins. Asked how the brands had performed at home, Bason says: "Fine, absolutely fine."

ABF's recent M&A in grocery

While grocery is not ABF's largest business by sales and the 12 months under review saw the sale of assets in the US, the company did add to the division during the year, snapping up UK sports nutrition firms H5 Ltd and Reflex Nutrition in February.

Alongside the publication of ABF's financial results, the company announced it had decided to close the H5 Ltd site in Leicestershire in central England by the end of 2017 and rationalise production into H5's Brighton facility in the south of the country.

Bason says ABF would look to grow both brands domestically and overseas. "Sports nutrition is growing very fast, not just in the developed markets but around the world," he asserts.

Could ABF look to make more acquisitions in what remains a fledgling and fragmented market? "They would be of interest, yes," is Bason's reply.

Last month - and therefore after the close of the year under review - ABF made another acquisition in the grocery sector, buying Italian balsamic vinegar supplier Acetum.

Acetum, based in Modena in Italy, generated net sales of EUR103m (US$120m) in the year to the end of December 2016. Its brands include Mazzetti, which is sold in markets including Germany and Australia, as well as Acetum and Fini.

"The thing that's important for that business is its PGI status," Bason reflects. "As you look around the world, there's an ever-growing interest not just in very high-quality foods but ones that have a great provenance. Acetum is already in a number of countries around the world. We've got that expertise of selling brands around the world. We think we can bring some of the ABF weight to actually a business that's already quite internationalised. I think they can bring strength to us in Japan, Korea and places like that. There's a bit of synergy going both ways there."

Brexit

The fall in sterling, of course, also provides something of a two-way dynamic. While ABF's UK grocery assets felt the pinch from commodity inflation, the devaluation has provided a boost to the company's exports from the country.

While many UK food companies have expressed concern at the impact Brexit could have on their business and on the industry, ABF's commentary has been relatively more balanced, with the company talking about the prospects for domestic food production to substitute imports and for British businesses to drive their own exports.

"The devaluation of sterling has made the UK a more attractive place to produce food," Bason says. Asked if the decline in the British pound meant ABF stepped up its moves to grow in export markets, he adds: "We have redoubled our efforts because of it, yes."

Future M&A?

In the new year, while ABF thinks Allied Bakeries could book another loss, the company believes its overall grocery business will see "progress". Could the division see more acquisitions? Many of the industry's blue-chip multinationals are turning to M&A to invest in or acquire outright smaller, more agile companies deemed to be meeting evolving consumer trends.

"The world of food in some areas is changing really quite quickly, [with] faster-changing consumer trends and some of it is technology-enabled as well, the ability of new brands to become known and so on. Having been in the food industry for quite some time, I think we're living in a great time for the development of new food brands and new food products and this is something very definitely we have our eye on," Bason says.

He adds: "We always keep our eye on the market but, having said that, we have a financial discipline, which I think is very important here. We're here for building businesses and brands for the long term. We're a good home for brands like these."