Weak sugar sales to hit annual profits at Associated British Foods

A delivery of sugar beet arriving at the British Sugar factory in Bury St Edmunds.

A delivery of sugar beet arriving at the British Sugar factory in Bury St Edmunds. - Credit: Su Anderson

Strong trading at retailer Primark failed to boost Associated British Foods today as the Silver Spoon-to-Ovaltine conglomerate warned that annual earnings will fall due to the strong pound and weak sugar sales.

The FTSE 100-listed firm, which employs 118,000 people in 47 countries and whose UK businesses include beet processor British Sugar, said operating profit at Primark jumped 8% to £322 million in the 24 weeks to February 28, driven by an 11% increase in retail space.

The discount fashion retailer, which runs 287 stores in the UK and continental Europe, opened 10 stores in the period in countries including the Netherlands and Germany as well as relocating its Northampton store to larger premises.

But overall Associated British Foods said its adjusted operating fell 4% to £450 million due to the strong pound and weak European Union sugar prices causing a loss at its sugar unit.

It added that the strength of the pound, particularly against the euro, and its weak sugar business would lead to “a modest decline” in annual earnings per share at the group. Shares fell 3%.

At Primark, the group said its like-for-like sales were held back by unseasonably warm weather in the autumn across northern Europe.

It added that Christmas trading was strong, and that stripping out the distortions of new store openings in the Netherlands and Germany like-for-like sales in the period would have been similar to last year at 3%.

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ABF also runs operations in agriculture, grocery and ingredients. Its brands include Ryvita, Ovaltine, Silver Spoon, Kingsmill and Patak’s.

EU sugar prices have fallen by around 40% per tonne over the last two years, which led the sugar unit to swing to a £3m operating loss, compared to a £64m operating profit in the same period a year ago.

It added that its ingredients unit made a robust increase in profit, its agriculture unit maintained its profit growth trend, and its grocery business achieved further margin improvement in a difficult trading environment.

Chief executive George Weston said: “This is a sound trading result.”

The group said that its outlook for the full-year was unchanged, with Primark on track to open eight stores in the US later in 2015. It expects its grocery, ingredients and agriculture units will make further progress in operating profit, but forecasts its sugar business will post a large annual reduction in profit compared with last year.

The group’s sugar business, which includes operations in Spain, China and Africa as well as the UK, saw revenues fall by 10% from £1.027billion in last year’s first half to £928million, representing a 6% decline on a constant currency basis.

ABF said the impact on profitability of lower EU sugar prices and a higher beet price in the UK had been partly offset by a focus on performance improvement across the business, with the division expected to achieve a small profit for the full year.

“The campaigns in the UK and Spain were excellent with record factory performances,” said ABF. “We benefited from a large UK crop with good extraction rates, and UK sugar production is estimated to be 1.45m tonnes compared with last year’s 1.32 million tonnes.

“The campaign was completed at all sites within the first two weeks of March. Further capital investment was made in cost reduction and efficiency improvements including a major project to improve energy efficiency at the Cantley plant.”

Quota stock levels in the EU were “returning to historical norms” and euro sugar prices now appeared to have stabilised, ABF said.

World sugar prices remained low but the division’s results for the second half would benefit from further performance improvement initiatives and the non-recurrence of last year’s cost of restructuring the EU sugar businesses.

“Margins will be reduced on British Sugar’s euro-denominated sales contracts with the euro at current levels. However, there has been some stabilisation in EU sugar prices in recent weeks, albeit at very low levels,” it added.