Financial highlights

		Actual	Constant currency
·          Group revenue	£7,422m	+2%	+3%
·          Adjusted operating profit	£648m	-1%	+1%
·          Adjusted profit before tax	£628m	+1%
·          Adjusted earnings per share	61.3p	+3%
·          Dividend per share	11.7p	+3%
·          Gross investment	£672m
·          Net cash	£123m

• Statutory operating profit down 3% to £618m. Last year included the benefit of a profit on the sale of businesses which explains a 30% reduction in statutory profit before tax to £603m this year and a reduction in basic earnings per share of 24% to 60.9 pence.

George Weston, Chief Executive of Associated British Foods, said:

“The group made progress in this period. Good sales and profit growth was achieved by all of our businesses at constant currency, other than Sugar, where the reduction was as expected. Our full year outlook for the group is unchanged with progress expected in both adjusted operating profit and adjusted earnings per share.”

Adjusted operating profit is stated before the amortisation of non-operating intangibles, profits less losses on disposal of non-current assets, transaction costs and acquired inventory fair value adjustments.  These items, together with profits less losses on the sale and closure of businesses, are excluded from adjusted profit before tax and adjusted earnings per share. Constant currency is derived by translating the 2017 results at 2018 average exchange rates.

References to operating profit in the Operating Review are based on the adjusted measure defined above.

INTERIM RESULTS ANNOUNCEMENT

For the 24 weeks ended 3 March 2018

CHAIRMAN’S STATEMENT

This is my first report to shareholders having succeeded Charles Sinclair as Chairman this April, and I am pleased to report on our progress in the period. At actual exchange rates, revenue of £7.4bn in the first half was 2% ahead of last year and adjusted operating profit of £648m was 1% lower. At constant currency, revenue was 3% ahead and adjusted operating profit was 1% ahead of last year. Net financing costs reduced against the same period last year following favourable interest rate movements. The group’s effective tax rate has reduced from 22.7% last year to 21.3% this year on adjusted profit before tax.  This is primarily due to the reduction in the US federal corporate tax rate which will reduce the group’s effective tax rate by 1% in the current financial year.  As a result, adjusted earnings per share were 3% ahead at 61.3 pence.

The statutory operating profit for the period was 3% down at £618m. Last year the statutory profit before tax included a profit of £255m on the sale of both the group’s US herbs and spices business and south China cane sugar operations. As a result, the statutory profit before tax has reduced by 30% to £603m this year and basic earnings per share has reduced by 24% to 60.9 pence.

Cash flow before acquisitions and disposals was lower than the corresponding period last year driven by a return to the usual seasonal cash outflow of AB Sugar and higher Primark inventories with deliveries accelerated ahead of Chinese New Year. Gross capital expenditure of £388m was in line with last year and the purchase consideration, on a debt-free basis, of Acetum in October 2017 amounted to £282m. Together with the payment of the final dividend, these resulted in a net cash balance for the group at the half year of £123m, which compared to net cash of £673m at the beginning of the financial year.

Board

Tim Clarke retired as a director on 30 November 2017 after 13 years on the board. Charles Sinclair has already paid tribute to the immeasurable value of Tim’s contribution and, with his retirement, Javier Ferrán has taken on the responsibilities of Senior Independent Director.

Charles Sinclair retired as Chairman of the Company on 11 April 2018. On becoming Chairman, I succeeded Charles as chairman of the Nomination committee and have stepped down from the Audit committee. Ruth Cairnie succeeded Charles as chair of the Remuneration committee on that date.

Charles has served on the board for almost ten years, of which the last nine years were as Chairman. The development of the Company during his tenure is testament to his wise counsel and steady hand in steering the group through many periods of challenge and considerable change.  Over the last decade the group’s revenue and profit have doubled. All of our businesses have become more efficient and Primark has evolved into a leading international retailer. Charles has always believed that operating ethically is a core value and he has ensured that the governance of the Company has at all times encouraged the management to take a long-term view and to invest in the future. The group’s success in converting profitability into cash has funded the significant investment over this period. We greatly appreciate his tremendous contribution and our very best wishes follow him.

Dividends

The board has declared an interim dividend of 11.7 pence per share, an increase of 3% on last year. The dividend will be paid on 6 July 2018 to shareholders registered at the close of business on 8 June 2018.

Outlook

In the first half, adjusted operating profit was in line with the prior year with growth in Primark, Grocery, Ingredients and Agriculture offset by the expected decline in profit at AB Sugar. In the second half, we expect an acceleration in profit growth at Primark, as a result of margin improvement, and continued profit growth from our other non-Sugar businesses. These should more than offset the decline in profit at AB Sugar in the balance of the year.

As a result, our full year outlook for the group is unchanged with progress expected in both adjusted operating profit and adjusted earnings per share.

OPERATING REVIEW

At constant currency, group revenue of £7.4bn was 3% ahead and adjusted operating profit of £648m was 1% ahead of last year. The group made progress in this period. Good sales and profit growth was achieved by all of our businesses at constant currency, other than Sugar, where the reduction was as expected.

With some two thirds of the group’s operating profit generated outside the UK, the weakness of sterling had a very favourable effect on the translation of our overseas results last year. This half year sterling has slightly strengthened against our major trading currencies, other than the euro, leading to a loss on translation in these results of some £11m.

Illovo, the largest sugar producer in Africa, contributes some half of the sales and volumes of AB Sugar. Our expectation is that the contribution this year from this profitable business will be in line with that delivered last year. The reduction in profit reported by AB Sugar this period was the result of significantly lower EU prices which adversely affected our UK and Spanish businesses. These lower prices were the result of the end of the EU sugar regime, the consequent removal of domestic sales quotas and an increase in sugar supply. AB Sugar has spent a number of years preparing for this, primarily in the reduction of its cost base and importantly we believe that British Sugar, at current exchange rates, is the lowest cost producer of sugar in the EU. Although we can now expect more volatility in the EU sugar price to affect the profitability of the European operations of AB Sugar, we have been working to deliver a satisfactory shareholder return over the medium term.

Primark performed well with profit growth of 4% achieved against a backdrop of unseasonable weather in Europe and a margin decline following the adverse effect of currency on purchases. Our UK performance was remarkable in the circumstances and delivered a strong increase in our share of the total clothing market. Looking ahead we expect this profit growth to accelerate with the continuation of our retail selling space expansion and an improvement in margin following the recent strengthening of sterling against the US dollar.

The strong profit growth of our other businesses this period should be recognised, particularly supported by further margin improvement in Grocery and Ingredients. Development of new products and expansion into new markets underpin much of this result and should lead to continued progress in the second half.

Sales and profit growth commentary in this Operating Review are based on results stated at constant currency.

Grocery

Continuing businesses	2018	2017	Actual fx	Constant fx
Revenue £m	1,672	1,658	+1%	+4%
Adjusted operating profit £m	159	151	+5%	+9%

Revenue in the first half was ahead of last year and adjusted operating profit was well ahead, driven by growth in Twinings Ovaltine, further margin improvement at George Weston Foods and a contribution from Acetum. As a consequence, Grocery margin increased to 9.5%.

Revenues at Twinings Ovaltine increased with especially strong growth in the Ovaltine brand. This was led by its major markets of Thailand and Switzerland, where there were new product launches and intensive marketing investment.  In addition, good sales growth was achieved in important future markets, including China, Brazil, Nigeria and Vietnam. There was good progress by Twinings in the US and Italy, and green teas and infusions performed well in Australia and France.

In the UK there was an increase in the market share of private label bread.  The Christmas trading period was good with Kingsmill being the best performer. We continued to invest in our brands with the launch of Kingsmill Super Seeds and craft loaves from Allinsons, and national television advertising celebrated the role that Kingsmill plays in family life. Continued progress has been made in reducing the operating loss at Allied Bakeries in this financial year. The operating result at Silver Spoon was better than the same period last year with some price improvement. Billington’s, our premium unrefined baking sugar brand, had a successful marketing campaign which included a partnership with the Great British Bake Off and innovative recipe advertorials in The Times.

Jordans achieved good overseas growth, especially in Australia and Canada and, with the benefit of recent launches, in New Zealand and Brazil. In the UK, Ryvita Thins has shown continued growth although sales of crispbread have suffered from strong competition, particularly in the retail discounters. Good progress has been made with the construction of the new Ryvita bakery at Bardney in Lincolnshire which is expected to be commissioned in September.

At AB World Foods, Patak’s delivered further share growth following the successful launch of paste pots which had strong endorsement by Jamie Oliver. Westmill had another period of consistent growth in noodles, and our investment in a substantial increase in production capacity is well under way. Our premium market-leading atta flour, Elephant, was successfully relaunched with full marketing support.

Acetum, the Modena-based balsamic vinegar business, was acquired in October and its integration is progressing well. The prospects for this business are good although, following a poor European grape harvest, unusually high raw material costs are likely to impact margins in the second half of this financial year.

At ACH in the US, our successful Mazola advertising campaign promoted its favourable health benefits and drove further volume growth and increased market share. The increased profit contribution from this was partially offset by higher freight costs, which have affected all of our US businesses. Profit in Mexico benefited from much stronger volumes of Capullo and a more favourable exchange rate with the US dollar.

Margins increased at George Weston Foods in Australia and New Zealand as a result of better trading and a reduction in overhead and operating costs. Profit at the Don KRC meat business was ahead, mostly driven by improved factory performance. Tip Top bread volumes improved, benefiting from the launch of a new, softer loaf and Thins, launched last year, performed well.

Sugar

Continuing businesses	2018	2017	Actual fx	Constant fx
Revenue £m	938	1,081	-13%	-12%
Adjusted operating profit £m	90	123	-27%	-24%

AB Sugar’s revenue and adjusted operating profit were well down on last year which, as expected, was primarily as a result of significantly lower EU prices which adversely affected our UK and Spanish businesses. This was partially mitigated by a much larger UK crop and the ongoing benefits from performance improvement projects across the group.

Sugar production at Illovo this year is estimated to improve again, to over 1.7 million tonnes, with generally favourable weather conditions and improved management of irrigation and crops, although poor sugar content in the cane in Zambia led to some shortfall in sugar production there. We expect full year operating profit to be in line with that achieved last year. Good progress was made in the development of Illovo’s regional sugar markets and sales of co-products, including potable alcohol in Tanzania, were strong. We continue to roll out advanced drip irrigation systems with major capital investments in Swaziland and Malawi.

Our sugar business in China performed well and processed 1.25 million tonnes of beet. The quality of beet processed was dramatically better following improvements made in beet handling and storage, and factory operations were excellent. With good domestic prices, we expect an improvement in profit for the full year.

The EU sugar regime ended on 30 September 2017 resulting in the end of sales quotas and the removal of constraints on exports. Sugar production in the EU during the 2017/18 campaign was substantially higher than last year as a result of exceptionally high beet yields and increased crop area. As a consequence, the EU has become a net exporter of sugar. Domestic prices have fallen and are now more closely related to world market prices. The global supply of sugar has moved back into surplus, with large crops in a number of major producing countries, and as a consequence, the sugar price on the world market has fallen. EU ethanol production from sugar has also increased leading to lower ethanol prices.

In the UK, a record beet yield and larger crop area led to an increase in sugar production from 0.9 million tonnes last year to around 1.37 million tonnes this year. Our sales for this financial year are largely contracted but, with sugar available from a number of EU countries and strong competition, prices have fallen significantly. Looking ahead, there has been a good take-up by growers of sugar beet contracts for 2018/19,  the area contracted is in line with 2017/18 but delays experienced in drilling the new crop may affect yields this year. Following an extended maintenance shutdown, during which significant plant improvement work was completed, Vivergo has now restarted operations.

In Spain, sugar production from beet is expected to be around 0.4 million tonnes, ahead of last year. Sowing of the 2017/18 southern crop has been completed with an area in line with last year. As a result of higher sugar production from beet, the cane refinery at Guadalete will process lower volumes this year. Importantly for the 2018/19 campaign in the north, reserves of irrigation water, which had become depleted this year, have been replenished following snowfalls over the winter.

New product development supported the growth of sales and profit at Germains, our seed treatment and enhancement business. Growth has been particularly strong in the US horticulture market, and future growth will be supported by expansion of our facility at Gilroy, California.

Performance improvement projects in AB Sugar, supported by capital investment where appropriate, made material contributions to the profit from each part of the business.

Agriculture

	2018	2017	Actual fx	Constant fx
Revenue £m	615	552	+11%	+13%
Adjusted operating profit £m	24	23	+4%	+9%

Revenue growth in the first half was driven by higher feed volumes, the impact of increased raw material costs in the UK on feed prices and sales growth in our new business ventures. Sales increased by 13% and adjusted operating profit by 9%.

In the UK, compound feed sales have benefited from increased consumption of poultry and better profitability in the pork market. A larger sugar beet crop compared to last year increased the sales and contribution of co-products. The new anaerobic digestion plant in Yorkshire has been fully commissioned and is now running at near full capacity. Profit at Frontier has been held back by low volatility and weakening grain prices which have limited both merchanting and trading opportunities. Speciality Nutrition, our premix and starter feed business, performed strongly with increased sales volumes and new customers.

Volumes at AB Vista were driven by higher sales in Europe and North America, and profitability in our China feed business was much improved. Good sales progress was made across our new business ventures, in particular in Agrokorn our Danish speciality protein business.

Ingredients

	2018	2017	Actual fx	Constant fx
Revenue £m	720	730	-1%	+5%
Adjusted operating profit £m	63	61	+3%	+11%

Revenue in the first half was 5% ahead of last year and operating profit growth was strong at 11% with a further improvement in margin.  Progress was made in both AB Mauri and ABF Ingredients.

AB Mauri in the half year delivered a further improvement in the operating performance of its plants and continued to invest in technology and manufacturing capability. Profit in North America was well ahead following the successful integration of Specialty Blending, the bakery ingredients business acquired last year, sales growth from bakery ingredients and improved yeast plant performance. Our business in South America performed well given the challenging economic conditions in the major economies of Argentina and Brazil, and the new bakery ingredients manufacturing facility in Buenos Aires is now fully operational.

Trading performance in Europe was ahead of last year and the recently opened UK Technical Centre delivered a number of differentiated products to our customers. A milestone in the building of our research and development capabilities was marked with the opening of the Global Bakery Centre in Made, Netherlands in September. Elsewhere our investment included the start of construction of a bakery ingredients plant in Panyu, China.

In ABF Ingredients, our enzyme business successfully completed the major capacity increase at its production site in Finland. Sales growth was particularly strong in enzymes for the bakery, detergent and other technical markets. Abitec in the US delivered further growth in its lipid products for pharmaceutical and nutrition applications and additional capability at Janesville, Wisconsin is being commissioned. PGPI, our US protein extrusion business performed very well with growth in cereal crisps benefiting from the consumer trend in the US for healthy snacking.

Retail

	2018	2017	Actual fx	Constant fx
Revenue £m	3,477	3,222	+8%	+7%
Adjusted operating profit £m	341	323	+6%	+4%

Sales at Primark were 7% ahead of last year at constant currency, driven by increased retail selling space, and 8% ahead at actual exchange rates.

Like-for-like sales for the group declined 1.5% for the 24 weeks. Sales were held back by unseasonably warm weather in October with a significant decline in the like-for-like measure in that month. The last week of the period was also challenging with freezing temperatures across northern Europe. Encouragingly, like-for-likes sales for the 15 weeks to 24 February 2018 delivered growth of 1% and record sales were achieved in the week before Christmas. Early customer reaction to the spring/summer range has been encouraging. Primark’s following on digital and social media grew strongly again. Our website and these social channels are increasingly relevant to our customers, building awareness of our brand and product, and are drawing them into our stores.

Primark performed very well in the UK with sales 8% ahead of last year and a strong increase in our share of the total clothing market. This was driven by a 3% growth in like-for-like sales, an increase in selling space and the breadth of our consumer offering. Sales in Continental Europe were 6% ahead of last year mainly driven by increased retail selling space, partially offset by like-for-like decline in northern Europe.

Our business in the US made progress in the period. We continue to refine the operating model of our stores in the North East. We expect to reach an agreement soon to open a store in Sawgrass Mills, Florida in late 2019 which will provide the opportunity to trade in another type of retail environment, in both mall format and geographic location, to our existing stores. The store will be supplied from our existing US warehouse.

Operating margin in the first half was 9.8% and compared to 10% in the same period last year with better buying virtually offsetting the adverse effect of the US dollar exchange rate on purchases. Stock was tightly managed in the period and markdowns were in line with those of the first half last year.

We expect an acceleration in Primark profit growth in the second half as a result of an improvement in margin over the same period last year. This will be driven by better buying and some benefit of the recent weakness of the US dollar which will more than offset an expected return to a more normal level of markdowns, compared to the very low level achieved last year.

Retail selling space increased by 0.4 million sq ft since the financial year end and, at 3 March 2018, 352 stores were trading from 14.3 million sq ft which compared to 13.1 million sq ft a year ago. Seven new stores were opened in the period: Bielefeld, Münster and our second store in Stuttgart in Germany, Charlton and Staines in the UK, Loulé in the Algarve, Portugal and Le Havre in France. In addition, there were three relocations in the UK: a return to the redeveloped Westgate shopping centre in Oxford and a move to larger stores in Rotherham and Grimsby.

We still expect a total of 1.2 million sq ft of new selling space to be added in this financial year, and a strong programme is planned for the second half. We have already opened a new store in Metz, France, a large extension to our existing store in Meadowhall, UK and we have returned to much larger premises in Kingston, UK. The new stores planned for the remainder of this financial year are: Toulouse in France, Munich and Ingolstadt in Germany, Antwerp in Belgium, Valencia in Spain, Brooklyn, our ninth store in the US, Tilburg in the Netherlands, Burnley in the UK and in the Westfield London shopping centre at White City.

New store openings to date:

UK	Germany	France	Portugal
Charlton	Bielefeld	Le Havre	Loulé
Staines	Münster	Metz
	Stuttgart Königstrasse
Relocations:
Oxford, Rotherham, Grimsby and Kingston

New stores planned for the second half:

UK	Germany	France	Belgium
Westfield London	Munich	Toulouse	Antwerp
Burnley	Ingolstadt
Spain	US	Netherlands
Valencia