ABF feels tough trading environment

By Anita Awbi

- Last updated on GMT

Related tags Associated british foods

Associated British Foods has become the latest manufacturer to show
concern over rising energy prices and the competitive retail
environment - but insists half-year profits will be in line with
expectations, boosted by its clothing division.

In advance of April's trading results, the maker of Ovaltine and Allinsons bread said these pressures would make for slightly weak performances in the sugar, ingredients and processed foods divisions.

But the company's star performer, the Primark clothing chain, was on hand to lift overall margins. The division was recently set back by a fire at the main London warehouse, but is now forecast to report like-for-like sales growth of 6 per cent, providing a much-needed boost.

Meanwhile ABF grocery has been affected by lower than expected sales volumes at Britain's Allied Bakeries, and the commissioning costs of a new bakery in Sydney, Australia.

But key brands Twinings, Ryvita and Ovaltine all achieved strong sales growth, working to bolster the division.

ABF finance director John Bason told AFX News that although Primark had a good first half, and sugar is in line with forecasts, the grocery sector fared "a little bit worse"​ than expected.

This follows a series of disappointing returns in the food industry generally, as key manufacturers such as Nestle and Kraft report slow European sales due to private label threat, and profit dents from expensive fuel and logistics costs.

ABF's British Sugar division is expected to report a lower operating profit than last year, due to a change in market legislation. This follows an announcement that it will close two of its four Polish sugar-processing factories.

"Trading in the current year for British Sugar in the UK and Poland has been difficult with price pressure on contracts for this calendar year and sharply higher energy costs,"​ ABF said.

But this was expected. Last year ABF warned that the new EU sugar reform, fully implemented this month, could slice £10m from operating profit in 2006-7, and some £40m per year thereafter.

While the reform will mean cheaper sugar sources for European confectioners, a handful of leading ingredients suppliers, including ABF and Danisco, will feel the pinch on the bottom line.

Through the reform the guaranteed price for white sugar will be cut by 36 percent over 4 years. Farmers will be compensated for 64.2 percent of the price cut through a decoupled payment.

The EU believes that reform will enhance the competitiveness and market-orientation of the EU sugar sector, guarantee it a viable long-term future and strengthen the EU's negotiating position in the current round of world trade talks.

It will bring a system, which has remained largely unchanged for almost 40 years, into line with the rest of the reformed Common Agricultural Policy (CAP).

Overall ABF, currently the fourth-largest food producer in Britain, is expected to deliver profit before tax and goodwill amortisation of around £613m in the current fiscal year to the end of September 2006, up from £590m last year.

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