Chairman's statement
The developments... in our two major businesses give a strong basis for future progress. The group is well placed for the longer term.
The past year has seen major long-term developments for the group, the most important of which have been in our two largest businesses. The sugar operations are being radically reshaped and the extensive programme of new Primark store openings is now approaching completion.
Overall adjusted group operating profits were marginally ahead of last year. There were very satisfactory advances in several businesses which were offset by the £34m impact of sugar regime reform and a £64m increase in energy costs, most of which could not be recovered in pricing.
Developments
British Sugar has responded to the fundamental changes in the EU sugar regime with a number of significant initiatives to reposition the business for growth. Within the EU it has announced a rationalisation of its UK factories and has restructured its operations in Poland. Furthermore, it has confirmed its intention to purchase additional quota with the result that more sugar will be produced by fewer factories in the future. The acquisition of 51% of the southern Africa based company, Illovo Sugar Limited, provides a new platform for growth, based on low cost operations in developing markets. From 2008/9 it will be able to sell into the EU market taking advantage of its Least Developed Countries (‘LDC’) status. Finally, a collaboration with BP and DuPont has been announced to develop biofuels in the UK.
The consequence of this reshaping is that, after the transition to the new EU regime, we will have a sustainable base of production in the EU which, together with LDC sales into the EU, will take our potential scale in Europe to 2 million tonnes. Our total production capacity will be around 4 million tonnes, one third in Europe and two thirds in southern Africa and China.
Over the 18 months from September 2005 to March 2007 Primark will have taken its selling space from 2.5 million sq ft to 4.3 million sq ft, an increase of over 70%. The major part of this increase comes from the conversion of former Littlewoods stores to the Primark format. The rollout of the stores, which began in May this year, is continuing on schedule. Primark now has a vastly improved coverage in its main markets, although opportunities remain for further profitable development.
Trading
Primark delivered a strong trading performance with a major increase in retail selling space and 3% like-for-like sales growth. This was achieved while coping with the impact of the fire which destroyed the UK warehouse a year ago and managing the significant expansion programme. As expected, results in the yeast and bakery ingredients business, AB Mauri, moved sharply ahead after the initial year of consolidation following its acquisition. There were also good results in many of the grocery businesses in the UK, particularly Twinings Ovaltine, and ACH in North America.
We are now well into the transition from the old sugar regime to the new and there was a big impact on prices as producers positioned themselves for the new structure. The combination of lower prices and higher energy costs resulted in sharply reduced European profits. The income statement includes an exceptional charge of £97m for the cost of restructuring British Sugar’s UK production. Trading at Allied Bakeries continued to be unsatisfactory with lower volumes, and profit fell as a result.
Building on the substantial investment of £1.5bn in acquisitions and fixed assets last year, the group has invested a further net £760m this year on capital expenditure in the existing businesses, including the purchase and fit-out of new stores for Primark, and on the acquisition of the stake in Illovo as well as other smaller businesses. We financed this investment from our own resources and at the end of the financial year the group had net debt of £298m. The combination of the group’s ability to generate cash and the very low level of gearing at the year end provides the group with the ability to back further investment in our businesses as appropriate opportunities occur.
As a result of the heavy investment of the past two years, the group now has a net interest bill and adjusted profits before tax fell by 4%. Adjusted earnings per share fell by 3% from 52.5p to 50.9p. In the circumstances, I believe this was a satisfactory performance.
Board changes
On 1 November 2006, Michael Jay and Javier Ferrán were appointed to the Board. Lord Jay’s career has been in public service, culminating in his role as Permanent Under Secretary at the Foreign & Commonwealth Office from 2002 to 2006 and British Ambassador to France from 1996 to 2001. Mr Ferrán is a partner at Lion Capital LLP. He was previously with the Bacardi Group for many years, latterly as President and Chief Executive. Among their many other attributes, both Lord Jay and Mr Ferrán have extensive international experience. I am confident that both will make valuable contributions to the board.
Employees
At the end of the year the group employed 75,000 people in 46 countries. They have faced the demanding trading conditions in the group’s markets and reacted with resourcefulness and determination. I am grateful to them all for their efforts to maximise the group’s results. I would also particularly like to welcome all those in Illovo, who account for 27,000 of the people now working in the ABF group.
Dividends
Although adjusted earnings per share are 3% down this year, the directors have confidence in the future growth of the business and have proposed an increase of 4% in the dividend for the year. A final dividend of 12.5p is proposed to be paid on 12 January 2007 to shareholders on the register on 1 December 2006. Together with the interim dividend of 6.25p already paid, this will make a total of 18.75p for the year.
Outlook
Most of our businesses continue to trade well and expect positive developments in their results. The profitability of the European sugar businesses will be further affected by the consequences of the EU sugar regime reform.
The phase of exceptionally rapid growth in Primark’s floor space will be completed early in 2007. The extra space will fuel sales and profit growth. This will occur not just in the current year but as trading develops at the new stores over a period of time.
Looking beyond the current year, the developments referred to earlier in our two major businesses give a strong basis for future progress. We will continue to back our other businesses with appropriate levels of investment. The group is well placed for the longer term.
Martin Adamson
Chairman