Sugar woes drive fall in profit at Associated British Foods

The British Sugar factory in Bury St Edmunds.

The British Sugar factory in Bury St Edmunds. - Credit: Su Anderson

Associated British Foods today reported a 6% fall in full-year pre-tax profits as a third consecutive decline in annual earnings within its sugar business offset improvements elsewhere, including another strong performance from its Primark budget high street fashion chain.

Group revenue for the 52 weeks to September 12 fell by 1% compared with the previous year to £12.8billion, although the figure represented a 2% increase stripping out the effect of adverse currency movements.

Operating profit fell by 6% (or by 4% on a constant currency basis) to £1.092bn and pre-tax profit excluding exceptional items was also 6% lower, at £1.034bn. On a statutory reporting basis, bottom line pre-tax profit was 30% lower at £717million.

Revenue within the group’s sugar business fell by 13% to £1.818bn, with adjusted operating profit 77% lower at £43m.

ABF said the decline in both figures was driven mainly by a further fall in EU sugar prices although these had stabilised towards the year-end, with quota stock levels expected to ease back towards historic norms in 2015-16.

UK sugar production had benefited from very high beet yields and an “excellent” performance by the group’s factories (which include one in Bury St Edmunds) and the crop for the 2015-16 season had made good progress.

With a 25%-plus reduction in the contracted area under cultivation, combined with more typical beet yields, sugar production was expected to be just short of 1m tonnes, against 1.45m last year, which would lead to “a welcome fall” in stock levels, ABF said.

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The group added that its sugar factories in Spain had also performed well, with production ahead of the previous year. Production was marginally down at its African business, Illovo, while in China a mixed performance in terms of production was accompanied by some recovery in market prices, leading to improved profitability.

The group’s grocery business, which includes Silver Spoon sugar and other brands such as Twinings tea and Kingsmill bread, saw revenues fall by 5% to £3.177bn but operating profit improved by 6% to £285m, helped by cost reduction initiatives and improved operation efficiency.

Ingredients revenues dipped by 1% to £1.247bn but operating profit jumped by 85% to £76m, reflecting reduced overheads and a strong improvement in margin. There was a similar picture in the agriculture division, with revenue falling by 8% to £1.211bn but operating profit improving by 20% to £60m.

However, the group’s star performer in terms of sales was again Primark, with total revenues 8% up on the previous year at £5.347bn, helped by the opening of 20 new stores in countries including Germany, Belgium, the Netherlands and its first in the United States.

Like-for-like sales were 1% up for the year as a whole, despite the negative impact of warm autumn and cool spring weather. Operating profit was 2% higher at £673m, despite a squeeze on margins.

ABF chief executive George Weston said: “We delivered a strong operational performance despite the challenges of food commodity deflation and big movements in exchange rates. The group continues to generate strong cash flows and to reduce net debt.”

However, chairman Charles Sinclair cautioned that currency changes were again likely to act as a drag on the group’s earnings over the current financial year, with Primark and British Sugar likely to be worst hit.

“The substantial moves in exchange rates last year, notably the weakening of the euro and emerging market currencies, will have a significant influence on the results for the coming year,” he said. “At this early stage we expect the currency pressures to lead to a modest decline in adjusted operating profit and adjusted earnings for the group for the coming year.”