Concern over the outlook for Associated British Foods‘ sugar business has weighed on the company’s share price in spite of a jump in full-year earnings. While the outlook for sugar remains challenging, ABF expects an upswing at its grocery and Primark businesses to continue to propel profits in the coming year, FD John Bason tells just-food.
Associated British Foods booked a 25% increase in full-year profits yesterday (5 November), boosted by a 24% jump in grocery operating profit and a stellar performance from discount clothing chain Primark, where profits grew 44%.
However, the firm saw its share price dip, closing down 2.5% yesterday, as investors reacted cautiously to a 15% decline in sugar profitability – and concerns the demise of sugar will continue into next year and beyond.
Speaking to just-food in the wake of the results, ABF finance director John Bason says the company was “pleased” with its performance in sugar.
“The profits in the EU were certainly held up with quite strong sugar prices during the year. It was really around the sugar production in the UK and Spain that resulted in lower European sugar profits… The part of the world that really pulled us back was China. The Chinese authorities allowed quite large amounts of sugar imports into the country so the sugar price was really quite low and as a result we made quite a big loss in our Chinese sugar operations. Illovo, by contrast, produced more sugar and had a much higher profit as a result.”
Looking to the coming year, ABF expects to see an increase in pricing pressure in Europe, which will put further pressure on the bottom line.
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“There is more sugar available in the EU. The date of the end of internal quotas has been confirmed as September 2017. So we are seeing more competition, more sugar around, and prices will be lower in 2013/14. That has been well flagged with the city,” Bason says.
However, he remains upbeat on ABF’s ability to adapt to the new EU system of sugar quotas. “We know internal quotas are going to come to an end in 2017. That gives us two years more than we thought… the industry [has more time] to prepare itself for a more competitive market. What we are really saying is that the prices moving the way that they are in 2014, if anything we are making a faster transition for that post-2017 world than we previously thought.”
Currently, sugar generates a hefty 35% of group profits. However, ABF will now have to “absorb that reduction in profit and move forward”. Bason is upbeat on the group’s ability to do so.
“Next year, 2014, will see a shift to other businesses. Sugar will be less. But what you find is grocery will be more. I think we will start to get a recovery in our ingredients businesses and we have the growth of Primark,” he predicts.
In grocery, ABF is looking to accelerate its profit growth, Bason says.
“There are a couple of things behind that. The first one is recovery in Australia, George Weston Foods, where we have taken a lot of costs out… There is a very real momentum in the Australian business. I think people were pleased to see evidence of that in 2013 and we expect more of it in 2014.
“Elsewhere, Twinings Ovaltine, fantastic worldwide business. Growth is in the high single digits in terms of both sales and profits. That business continues to go well.
“We had a good year in our UK businesses – Jordan’s, Rivita, Blue Dragon and Patak’s… we were able to move Allied Bakeries on in two senses: we got good volume growth this year, so Kingsmill is now the number two in the market, and we also showed the market the big improvements we’ve made – so a lower cost base and great quality bread coming out of it.”
As the company looks to speed profit growth in Allied Bakeries, ABF will focus on improved efficiencies. The company does hope to drive volume at its bakery unit but in “the right way: not by discounting but by marketing new bread”, Bason says.
According to Bason’s assessment, the greatest growth potential in grocery lies in ABF’s Twinings and Ovaline brands. “Twinings and Ovaltine is already a big business with sales heading towards GBP1bn. They have an international appeal, so tea particularly in the developed markets and Ovaline in the developing markets. That is a business of real scale and we continue to see great proof in that. It has grown massively over the last ten years. The profitability has been transformed. It is a much bigger business, a much more profitable business, than it was then.”
However, he adds that he “likes” ABF’s smaller “niche” businesses – Jordans, Ryvita, Patak’s, Blue Dragon. “They continue to do well, both in the UK and selected markets overseas. And I think in time we will make more progress.”
For these brands, ABF is targeting international expansion, Bason reveals. The company views expansion into markets like Canada as being of particular interest for Ryvita, Patack’s and Blue Dragon, he adds.
“For Ryvita, for example, a number of markets overseas – like Canada for example – [are appealing]. In terms of Patack’s and Blue Dragon we have always done well in northern Europe – Scandinavia, Germany and so forth. We again see Canada as a big growth market for that, as well as selected markets in Asia. By ABF standards they are not big, but we see very nice growth in those.”
With a near 50% jump in full-year profits, the star performer for ABF over the past year has undoubtedly been Primark. “Primark has really reinvented value clothing,” Bason claims.
“Primark has never looked as good as it has over the last year in a number of ways. The buyers did a great job in that autumn-winter, spring-summer ranges really sold through with very, very little markdown. The buyers got it right. They were right on the bubble in terms of fashion and what people wanted to buy. Primark has stuck by its low price, best value on the high street credos, even when cotton prices increased. I think that’s really paid dividends for us. And the stores are looking great. The new stores that have opened are large, modern and bright. And from the shop windows, the fashionability of the offering brings all things together.”
With plans to step-up European expansion, Bason is confident that Primark will continue to serve as a growth-engine for ABF for the foreseeable future.