Yeast leavens ABF’s ingredient business despite tough competition

By Ben Bouckley

- Last updated on GMT

Related tags: Fructose, Associated british foods

Associated British Foods (ABF) saw ingredient revenues rise by 6% in the first quarter, despite strong competition in European and US yeast markets and soaring commodity prices.

Overall group revenue up 10% in the 16 weeks to January 8 2011 was in line with expectations,​ said ABF in its first quarter management status, adding that the comparative weakness of sterling compared with the same period last year against the South African rand and Australian dollar had a positive impact on results.

Commodity costs increased significantly during the period, which benefited sugar profitability, said ABF, while it also plans to implement​price rises to recover high wheat costs.

Ingredient revenues up

Total ingredient revenues were 6% up on last year, driven by the yeast division’s good progress in China with​higher domestic volumes sold, while bakery ingredients also performed well in South America.

The firm said this offset EU and US competition in yeast, as did strong sales of feed enzymes and yeast extracts, but the company warned that higher Chinese molasses prices had reduced operating margins; commissioning costs at its new yeast extracts factory in Harbin is also set to adversely affect profits in the first half of 2011.

Andrew Wood, senior research analyst, Sanford C. Bernstein, hailed ABF's ingredient growth, but noted that a decline against 2010’s overall 8% sector revenue increase: Despite some commodity pressures, we expect another good performance in the first half of 2011,”​ he said.

Weather strikes sugar

ABF said sugar revenues were 7% ahead on Q1 2010, due to higher prices in all regions, but recent UK temperature rises and pre-Christmas cold weather meant an adverse affect on the quality of remaining UK sugar beet still due for processing,​ about 25% of the crop.

Despite a Spanish sugar campaign that is progressing well, ABF said a shortage of imported cane reduced refined volumes from its Guadelete site, but it expected Azucarera profits to be higher than last year due to better prices.

African producer Illovo’s operating profits fell despite yearly volumes to March 2011 expected to match last year, with South African droughts offset by increases in Zambian production.

In Northern China increased acreage and improved yields​meant a larger crop, although Southern yields were hit by a summer drought.

Managing commodity costs

Graham Jones, analyst, Panmure Gordon, said of ABF's overall sugar division performance: “Our initial estimate is the hit to profit from the lower crop and sugar content, plus higher processing costs could be £20m.” ​As such Panmure lowered their EBITA (earnings before interest, tax and amortisation) forecast for the division from £270m to £250m for 2011, versus £240m last year.

ABF said it needed to manage rising commodity costs over the coming months, and although it expects further 2011 growth, “this will be moderated by the eventual impact of the adverse weather conditions on UK sugar production”.

Said Jones:“After ABF’s stunning 26% PBT growth in 2010, we now forecast 5% growth this year, although we expect growth to accelerate again in 2012.”

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