Final Results

7th Nov 2006 07:00

Associated British Foods PLC07 November 2006 7 November 2006 Associated British Foods plc preliminary results for year ended 16 September 2006 A resilient performance and a year of significant investment. Financial Highlights • Adjusted operating profit up 1% to £561m* • Group revenue up 7% to £6.0bn • Adjusted profit before tax down 4% to £559m ** • Adjusted earnings per share down 3% to 50.9p ** • Dividends per share up 4% to 18.75p • Investment in capital expenditure and acquisitions of £760m • Net debt of £298m • Operating profit down 21% to £413m, profit before tax down 20% to £419m and basic earnings per share down 21% to 38.1p after exceptional charge for reorganisation of British Sugar of £97m. George Weston, Chief Executive of Associated British Foods, said: "This year's performance demonstrates the resilience of the group in the face ofa steep increase in energy costs and the profit impact of EU sugar regimereform. We have taken major steps in the development of our businesses thisyear. In particular, British Sugar and Primark have emerged stronger and betterpositioned." * before amortisation of intangibles, profits less losses on the sale of PP&E and exceptional items. ** before amortisation of intangibles, profits less losses on sale of PP& E, profits less losses on the sale and closure of businesses and exceptional items. All figures stated after amortisation of intangibles, profits less losses on thesale of PP&E and losses on the sale and closure of businesses are shown on theface of the consolidated income statement. For further information please contact: Associated British Foods: Until 1500 only George Weston, Chief Executive Geoff Lancaster, Head of External AffairsJohn Bason, Finance Director Mobile: 07860 562 659Tel: 020 7638 9571 Jonathan Clare/Chris Barrie/Sara Batchelor, Citigate Dewe Rogerson Tel: 020 7638 9571After 1500John Bason, Finance DirectorTel: 020 7399 6500 Notes to Editors 1. Associated British Foods is a diversified international food,ingredients and retail group with sales of £6.0 billion and 75,000 employees in46 countries. Our aim is to achieve strong, sustainable leadership positions in markets thatoffer potential for profitable growth. We look to achieve this through acombination of growth of existing businesses, acquisition of complementary newbusinesses and achievement of high levels of operating efficiency. 2. ABF has strong positions in the markets in which it operates: Sugar ABF is the second largest sugar producer in the world. British Sugar is Europe's most efficient producer and the sole processor of the UK sugar beet crop. It has adapted to the structural changes in world sugar production and has strong positions in Poland and China. Illovo is the largest sugar producer in Africa and one of the world's leading low cost producers.Retail Primark is a major value clothing retail group employing over 18,000 people. It operates 143 stores in the UK, Ireland and Spain.International hot beverages Twinings is the world's leader in speciality teas and infusions. It has manufacturing in Europe and China. Ovaltine is the largest producer of malt-based beverages in Europe and Thailand with manufacturing also in Philippines and China.North America Grocery We have built up a strong portfolio of famous grocery brands in the Americas. Mazola is the leading corn oil in the US and Capullo the leading premium canola oil in Mexico. We have strong positions also in herbs & spices, sauces, corn syrup, starch and yeast.Ingredients AB Mauri has a global presence in bakers' yeast with, with significant market positions in the Americas, Europe and Asia. It is also a technology leader in bakery ingredients. It operates from 42 plants in 25 countries. . ABF Ingredients comprises businesses operating in speciality proteins, enzymes, lipid technologies and polyols. 3. We continue to invest strongly in the future growth of the group. The net expenditure in the year of £760m includes an acquisition spend of £496m, which is mainly the 51% share in Illovo Sugar Limited, £221m on the acquisition and fit out of new stores for Primark and £224m spend in the existing businesses. £181m proceeds were received from the sale of properties and fixed assets. CHAIRMAN'S STATEMENT The past year has seen major long term developments for the group the mostimportant of which have been in our two largest businesses. The sugaroperations are being radically reshaped and the extensive programme of newPrimark 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 bythe £34m impact of sugar regime reform and a £64m increase in energy costs, mostof which could not be recovered in pricing. Developments British Sugar has responded to the fundamental changes in the EU sugar regimewith a number of significant initiatives to reposition the business for growth.Within the EU it has announced a rationalisation of its UK factories and hasrestructured its operations in Poland. Furthermore, it has confirmed itsintention to purchase additional quota with the result that more sugar will beproduced by fewer factories in the future. The acquisition of 51% of thesouthern Africa based company, Illovo Sugar Limited, provides a new platform forgrowth, based on low cost operations in developing markets. From 2008/9 it willbe able to sell into the EU market taking advantage of the Least DevelopedCountries (LDC) status. Finally, a collaboration with BP and DuPont has beenannounced to develop biofuels in the UK. The consequence of this reshaping is that, after the transition to the new EUregime, we will have a sustainable base of production in the EU which, togetherwith LDC sales into the EU, will take our potential scale in Europe to 2 milliontonnes. Our total production capacity will be around 4 million tonnes, onethird in Europe and two thirds in southern Africa and China. Over the 18 months from September 2005 to March 2007 Primark will have taken itsselling space from 2.5 million sq ft to 4.3 million sq ft, an increase of over70%. The major part of this increase comes from the conversion of formerLittlewoods stores to the Primark format. The rollout of the stores which beganin May this year is continuing on schedule. Primark now has a vastly improvedcoverage in its main markets, although opportunities remain for furtherprofitable development. Trading Primark delivered a strong trading performance with a major increase in retailselling space and 3% like-for-like sales growth. This was achieved while copingwith the impact of the fire which destroyed the UK warehouse a year ago andmanaging the significant expansion programme. As expected, results in the yeastand bakery ingredients business, AB Mauri, moved sharply ahead after the initialyear of consolidation following its acquisition. There were also good resultsin many of the grocery businesses in the UK, particularly Twinings Ovaltine, andACH in North America. We are now well into the transition from the old sugar regime to the new andthere was a big impact on prices as producers positioned themselves for the newstructure. The combination of lower prices and higher energy costs resulted insharply reduced European profits. The income statement includes an exceptionalcharge 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 fixedassets last year, the group has invested a further net £760m this year oncapital expenditure in the existing businesses, including the purchase and fitout of new stores for Primark, and on the acquisition of the stake in Illovo aswell as other smaller businesses. We financed this investment from our ownresources 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 levelof gearing at the year end provides the group with the ability to back furtherinvestment in our businesses as appropriate opportunities occur. As a result of the heavy investment of the past two years, the group now has anet interest bill and adjusted profits before tax fell by 4%. Adjusted earningsper share fell by 3% from 52.5p to 50.9p. In the circumstances, I believe thiswas a satisfactory performance. Board changes On 1 November 2006, Michael Jay and Javier Ferran were appointed to the board.Lord Jay's career has been in public service, culminating in his role asPermanent Under Secretary at the Foreign and Commonwealth Office from 2002 to2006 and British Ambassador to France from 1996 to 2001.Mr Ferran is a partner in Lion Capital LLP. He was previously with the BacardiGroup for many years, latterly as President and Chief Executive. Among theirmany other attributes, both Lord Jay and Mr Ferran have extensive internationalexperience. I am confident that both will make valuable contributions to theboard. Employees At the end of the year the group employed 75,000 people in 46 countries. Theyhave faced the demanding trading conditions in the group's markets and reactedwith resourcefulness and determination. I am grateful to them all for theirefforts to maximise the group's results. I would also particularly like towelcome all those in Illovo, who account for 27,000 of the people now working inthe ABF group. Dividends Although adjusted earnings per share are 3% down this year, the directors haveconfidence in the future growth of the business and have proposed an increase of4% in the dividend for the year. A final dividend of 12.5p is proposed to bepaid 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 totalof 18.75p for the year. Outlook Most of our businesses continue to trade well and expect positive developmentsin their results. The profitability of the European sugar businesses will befurther affected by the consequences of the EU sugar regime reform. The phase of exceptionally rapid growth in Primark's floor space will becompleted 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 newstores over a period of time. Looking beyond the current year, the developments referred to earlier in our twomajor businesses give a strong basis for future progress. We will continue toback our other businesses with appropriate levels of investment. The group iswell placed for the longer term. Martin Adamson Chairman OPERATING REVIEW Group revenue increased by 7% to £6.0bn and adjusted operating profit increasedby 1% to £561m. This has been a year of resilient performance and significant investment for thegroup. The reform of the EU sugar regime has been anticipated for many yearsbut there has been uncertainty as to the timing and extent of the impact. Thisyear we estimate the profit impact at £34m with a further £21m for energy costincreases within British Sugar which we were unable to recover through pricingbecause of the trading environment. This substantial impact was more severe andearlier than we had expected. Many businesses delivered excellent growth in the period. Notably theseincluded Primark, from a combination of like-for-like sales growth and anextensive programme of new store openings and extensions, continued organicgrowth in Twinings and Ovaltine and strong trading from AB Mauri which is nowperforming well after its acquisition two years ago. It has been a very disappointing year for Allied Bakeries with revenue declinesin both Kingsmill and own label and profitability has sharply reduced. The newmanagement team has developed detailed plans for the reinvigoration of thebrand. With the need for brand investment, no immediate improvements inprofitability should be expected next year. In Australia the problems in commissioning the new Sydney bakery have beenlargely overcome in the second half of this year. This is a state-of-the-artbakery and we can look forward to having the capacity to supply the New SouthWales market with quality products with much improved customer service. It isalso encouraging to see the improvement in profitability of the meat & dairybusiness in Australia after two difficult years that saw the consolidation ofproduction facilities and challenging trading issues. Further improvements inefficiency are planned for the coming year. The shape of ABF has changed considerably over recent years, and the acquisitionof Illovo in September this year will further transform our sugar operationsfrom a very UK centric business only a few years ago to what is now the secondlargest sugar producer in the world. ABF now operates in 46 countries and hasbuilt critical mass in a number of businesses through acquisition and organicgrowth. We have strengthened our positions in international hot beverages andbranded grocery, taken a leading position in global yeast production and firmlyestablished Primark as a major clothing retailer in the UK and Ireland. It isthis strength in depth, combined with a wider geographic spread, that providesthe group with the ability to absorb economic challenges and still deliver aresilient performance. That said, the structural reform of the EU sugar regime has such a major impacton the profits of European producers that a fundamental change to British Sugaris required if it is to continue to compete effectively. We have announced theclosure of two of our six UK factories at the end of the forthcoming campaignand the intention to purchase additional quota that will become available fromthe regime reform. This will reinforce British Sugar's position as the lowestcost beet sugar producer in the EU. Illovo will benefit from these regimechanges from 2009 when the EU market will be opened to producers in LeastDeveloped Countries. Primark's expansion programme has progressed well with the opening of 27 storesduring the year. This increased our retail selling space by 40% to 3.5 millionsq ft and included the opening of our first store in Spain. It would have beenvery easy for an expansion programme of this scale to have absorbed managementto the detriment of the day-to-day business. It is therefore to the credit ofthe management team that, despite this considerable distraction, goodlike-for-like sales growth was achieved when many competitors on the high streetfound trading difficult. This was all the more impressive given the severedisruption caused by the fire that completely destroyed the main UK warehouseand is testament to the dedication of the Primark workforce. The Chairman has mentioned the contribution our people have made during the yearand I endorse his comments. Our expansion into southern Africa through Illovohas added 27,000 people to the group. In recognition of its interdependencewith the communities in which it operates, Illovo provides and co-ordinates awide range of social programmes focusing on basic needs such as the provision ofwater and sanitation, healthcare, education delivery and involvement incommunity outreach programmes. Illovo also provides considerable training andsupport to farmers in order to promote sustainable agriculture and economicdevelopment activities. PRIMARY FOOD & AGRICULTURE Primary Food 2006 2005Revenue £m 671 700Adjusted operating profit £m 115 166 Agriculture 2006 2005Revenue £m 631 735Adjusted operating profit £m 16 20 In Primary Food, the sharp decline in profit from £166m to £115m is attributableto the EU operations of British Sugar. The imbalances in supply and demandwithin the EU sugar market and changes in producer behaviour in anticipation ofthe new regime resulted in price pressure in the first half of the year. Theimpact in the second half was in line with our expectations. In addition,profit was reduced by a weaker euro and significantly higher energy costs,particularly gas prices in the UK. The impact on the business of the changes tothe EU sugar regime is estimated at £26m, excluding Silver Spoon, with a furtherimpact of £21m for unrecovered energy cost increases. This year's processing campaigns were excellent with sugar production of 1.34million tonnes in the UK and 206,000 tonnes in Poland. A number of productionrecords were set covering productivity, sugar yields and energy usage. OurChinese cane sugar operations performed well in their first campaign followingthe expansion of the Shibie and WuXuan factories. Capacity is now more thanhalf a million tonnes although the factories have produced substantially belowthis level this year because of the much reduced cane crop following severedrought earlier in the year. The profit impact of this was, however, largelymitigated by higher sugar prices. In July the European sugar industry commenced the implementation of the EUCommission's reform of the EU sugar regime. These changes will result in theprogressive withdrawal of institutional price support and marginal producerswill be encouraged to exit the sector, not only to reduce surplus production,but to create a deficit in local production. This deficit is aimed at providingimport opportunities by 2009 for Least Developed Countries (LDCs). During thetransition period, the impact of these changes and continued imbalances insupply and demand can be expected to continue to affect the profit at BritishSugar. In anticipation of a difficult transition, the Commission has imposed a2.5 million tonne transitional quota cut for 2006/7 which equates to 133,000tonnes for British Sugar in the UK and 20,000 tonnes for Poland. This is higherthan the temporary quota cut imposed in 2005/6. The Commission also confirmedthat the restructuring levy, the means by which a fund is established tocompensate processors who exit, of €126 per tonne will be based on the fullpermanent quota. A number of European processors have already taken the optionto withdraw, reducing quota production for sugar and inulin by 1.5 milliontonnes for the 2006/7 campaign. Decisions on renunciation for the 2007/8campaign are expected to be made by other EU processors by Spring 2007. Thereis a possibility that the Commission's target of a further 3 million tonnesreduction will not be met. In these circumstances, the Commission has reservedthe right, in the new regulations, to impose permanent pro rata quota cuts. Next year, sugar supply in the EU will be substantially lower as a consequenceof a likely smaller crop and the temporary quota cut already announced by the EUcommission. The smaller crop in the UK is, however, still expected to meetquota, including additional quota to be purchased. British Sugar has announced a number of developments which reposition thegroup's sugar businesses for the future. The York and Allscott beet sugar factories will close after the end of the 2006/7 campaign and processing will be consolidated at the four remaining factoriesin the UK. British Sugar has confirmed its intention to purchase the 83,000tonnes of additional sugar quota available in the UK as a result of regimereform. As a result, we will produce more sugar from four factories than wecurrently produce from six. These developments follow the consolidation ofBritish Sugar's Polish operations into two factories last year and theapplication to acquire 11,000 tonnes of additional sugar quota available inPoland. Together these will reinforce British Sugar's position as the lowestcost processor in the EU beet sugar industry. An exceptional charge of £97m has been included in the consolidated incomestatement comprising £64m of asset write-down and £33m of estimated cash costsassociated with the reorganisation. This charge has been excluded from thecalculation of adjusted earnings. The investment in additional quota in the UKand Poland is expected to cost £47m dependent on the success in securing thetargeted volumes. This cost will be capitalised and amortised over nine years. On 4 September 2006 we completed the acquisition of a 51% interest in IllovoSugar Limited, the largest sugar producer in Africa and one of the world'sleading low-cost producers, for a cash consideration of £288m. It is theleading producer in South Africa, Malawi, Zambia, Swaziland and Tanzania and hasa strong and growing presence in Mozambique. It produced 1.9 million tonnes ofsugar in 2005/6 and has identified development programmes to expand thiscapacity substantially. ABF will support Illovo's stated plans for capacity expansion and development inits African markets. It is expected that Illovo will benefit from theapplication of British Sugar's proven expertise in improvement in operationalefficiency, co-product development, marketing and product innovation. In turn,British Sugar's Chinese cane sugar operations will benefit from Illovo'sagricultural expertise. The changes to the EU sugar regime will provide free access for exports to theEU from LDCs from 2009. The LDC classification includes Malawi, Zambia,Tanzania and Mozambique. British Sugar will provide an efficient route tomarket for these exports from Illovo. In the first full year after acquisition the operating profit return is expectedto meet ABF's cost of capital, and will be earnings enhancing. As a result ofthis acquisition, two-thirds of the group's sugar production next year isexpected to be outside the EU. The combination of British Sugar and Illovo willcreate a powerful partnership in Africa and Europe. In June, we announced a collaboration with BP and DuPont to produce biofuels inthe UK. Construction has already started on a production facility atWissington, and the 55,000 tonne, 70 million litre, unit is expected to commenceoperations in 2007. Discussions are continuing to develop detailed plans forfurther production facilities. This has been another challenging year for Agriculture. Revenue fell by £104mto £631m reflecting the sale, in April last year, of the grain trading business,Allied Grain, into Frontier, a joint venture with Cargill. Profit at £16m wasbelow last year reflecting the impact of avian influenza and higher energycosts. Good progress was made in the targeted growth sectors of feedmicro-ingredients, speciality feeds and the animal feed business in China. The UK feeds business benefited from a restructuring to provide a betteralignment with customer needs. Frontier traded very well in its first full yearof operation and cost savings have been achieved ahead of the original businessplan for the joint venture. In China, the opening of the new feed mill in South Henan in April brought thenumber of mills to six. China is the world's biggest pig producer and Henan isthe country's second largest pig producing province. We have had a strongpresence in North Henan since 2002 and the new mill will enable furtherexpansion. A new mill is being constructed in the North East of China andshould begin production by the New Year. Avian influenza had a major, directimpact on our China business, where delayed restocking on poultry farms reducedthe demand for animal feeds. RETAIL 2006 2005PrimarkRevenue £m 1,168 989Adjusted operating profit £m 166 141 LittlewoodsRevenue £m 141 17Adjusted operating profit £m 19 (1) Primark again delivered very strong revenue and profit growth, both increasingby 18% to £1,168m and £166m respectively. The revenue increase resulted from 3% growth in like-for-like sales and asubstantial increase in retail selling space. Like-for-like growth was 6% inthe first half of the year. However, it was flat in the second half after theexceptionally strong 12% increase in the same period last year. Retail selling space increased by 40% over the year from 2.5 million sq ft to3.5 million sq ft. Much of this space was added towards the end of thefinancial year and the increase in the weighted average floor space for thisyear over last was 17%. In total 27 stores were opened during the year and,following the closure of six smaller stores, Primark was trading from 143 storesat the year end. The first store in Spain, at Plenilunio outside Madrid, was opened in May andthis has been followed by a store in Murcia after the year end. Both stores aretrading satisfactorily. New store openings:Ayr Glasgow (Argyle Street) NottinghamBradford Harlow OxfordBromley Hull PortsmouthCardiff Lakeside Thurrock PrestonCroydon Leeds SouthendDarlington Leicester SouthportDundalk Luton SuttonExeter Maidstone SwanseaGateshead (Metro) Mansfield Plenilunio (Madrid) Stores closed:Bristol (compulsory purchase) Cardiff (resite) Southend (resite)Bromley (resite) Darlington (resite) Swansea (resite) The major programme for the refit and opening of the former Littlewoods storesis on schedule and 18 of the 41 stores were open at the financial year end. Ofthe 79 stores not required, 69 have either been sold or are under offer andproceeds of £144m have been received. Negotiations for the sale of theremainder are continuing. The Primark trading performance is remarkable given the disruption caused by thefire which destroyed the main UK warehouse last November. Swift action by themanagement team mitigated the potentially disastrous effect on the supply ofstock to the stores. Deliveries to stores were restocked after 48 hours and atemporary warehouse was quickly replenished with specially arranged deliveriesfrom suppliers. The stock loss, additional costs of working and businessinterruption were insured and most of the cash for the stock loss and additionalcosts of working has been received. However, an element of the claim wasself-insured and the profit for the year includes a charge for this. Thewarehouse operation is being transferred to the rebuilt warehouse. Primark was accepted as a member of the Ethical Trading Initiative (ETI) in May.The ETI is an alliance of companies, trade unions and non-profit organisationsthat aims to promote respect for the rights of people in factories and farmsworldwide. As a member of the ETI, Primark has committed to monitoring andprogressively improving working conditions in the factories that supplyPrimark's products. The Littlewoods retail business, acquired in July 2005, was very successfullytraded out and finally closed in January. The profit from this trade out was£19m and was well ahead of our expectation at the time of the acquisition. The principal driver of sales and profit growth in 2007 will be the additionalfloor space although the higher depreciation charge associated with theinvestment in the new stores will have a detrimental effect on operating profitmargins. The like-for-like sales growth measure will become of limited use as aguide to the performance of Primark over the next year or so as this rapidexpansion of selling space takes place. This measure excludes new and extendedstores for their first year of trading and will only therefore cover trading inless than half of the selling space at the next half year. Furthermore, wewould expect that the opening of so much space will inevitably affect sales insome of our existing stores. Many of these existing stores currently have veryhigh sales densities and this development is seen as positive. At the half yearwe will show the existing like-for-like measure and one adjusted to excludestores affected by new openings. For the coming year, it is expected that all the remaining former Littlewoodsstores will be opened with a further 18 trading by Christmas and the remainingfive in 2007. A 70,000 sq ft store is planned to open in Oxford Street, Londonin Spring 2007. We anticipate a year-on-year increase in the weighted averagefloor space of some 45% and, with a year end total of 4.5 million sq ft ofselling space, Primark's position as a major fashion retailer in the highstreets of the UK and Ireland will be firmly established. GROCERY 2006 2005Revenue £m 2,656 2,590Adjusted operating profit £m 185 185 Revenue increased by 3% to £2,656m and profit was level at £185m. Strongprogress was made by Ryvita, International Hot Beverages, ACH and our ethnicfoods business, Westmill. However, profitability was held back by particularlydifficult trading at Allied Bakeries, with lower volumes, and lower sugarpricing in Silver Spoon. At ACH, the Mexican sales, marketing and distribution infrastructure is now wellestablished. Capullo, the premium canola oil brand, has grown strongly and,supported by a new advertising campaign, increased its market share. Thebusiness has successfully integrated the Karo syrup brand in Mexico and,building on our expertise in the US, the brand is performing well. In the USthe consumer brands in spices and yeast traded in line with expectation. Goodprogress was made with the development of the premium spice brand, SpiceIslands. The consumer oil category suffered a decline during the year followingpublicity around health concerns over the use of trans fatty acids. Althoughnot containing trans fatty acids, Mazola volumes suffered as a consequence ofthe general category decline. Despite lower oil volumes and the impact ofhigher energy costs and increased vegetable oil costs, profitability wasimproved over last year through efficiencies. The UK core crispbread market demonstrated value growth during the year andRyvita outperformed the market, strengthening its position as the leading brand.The premium range of wholeseed crispbreads had a particularly successful year.Ryvita Minis, launched last year in the growing healthy bagged-snack market,continued to perform well supported by launches of sweet flavours and a furthersavoury variety. Ryvita further enhanced its position as a healthy eating snackbrand with the launch of better-for-you cereal bars branded 'Ryvita Goodness'.For some years now Ryvita has delivered consistent sales and profit growthdriven by increased marketing support and new product introductions. Our international hot beverage brands, Twinings and Ovaltine, continued to growwell with investment in new products and marketing. Twinings showed stronggrowth in the UK where premium Everyday tea is now well established and GreenTea sales were well ahead of last year. The television advertising, featuringStephen Fry, was extended both to Green Teas and infusions promoting theirhealth benefits. In the US, the Twinings range has been relaunched with anupdated packaging design and market share has increased. Good progress has alsobeen made in a number of overseas markets. The tea packing supply chainrationalisation was completed successfully with the closure of plants in Franceand the US and the new facility in Shanghai is operating well. Ovaltinecontinued to show good growth particularly in Thailand and China with thesuccessful launch of new products. In Australia, the commissioning of the new bakery in Sydney has been difficult.This facility replaces the Fairfield bakery destroyed by fire in 2002, theChatswood bakery and the Chipping Norton distribution centre. Severeoperational difficulties were experienced in the first half of the year whichled to significantly increased costs and unacceptable levels of customerservice. Good progress has been made in the second half bringing with it majorimprovements in production efficiency, logistics and customer service. OutsideNew South Wales the baking business achieved good sales growth. The launch ofAustralia's first low GI (Glycaemic Index) white bread in January 2006 isproving to be very successful. The results of the meat & dairy businessimproved following a sharper commercial drive and a reduction in factory costs. Performance at Allied Bakeries has been unsatisfactory during the year withvolume declines in both Kingsmill and own label. A new management team is nowin place and is taking steps to stabilise the business. Two new Kingsmillproducts have been launched, the promotional strategy has been revised and fullrecovery plans have been developed. The combination of reduced volumes,increased promotional spend and higher energy costs resulted in a much reducedlevel of profitability. The recent substantial increase in wheat costs will notbe recovered immediately by bread price increases and, with the investmentnecessary to support the recovery plans, we do not anticipate a majorimprovement in profitability next year. In Silver Spoon, as a further consequence of EU sugar regime change, granulatedsugar came under retail pricing pressure and sustained some volume reductionimpacting profit by £8m. However, Billington's unrefined cane sugars and ourlower calorie 'Light' sugar both grew strongly. Westmill again delivered good profit growth. Its established position as aleading supplier to the UK ethnic food sector was strengthened with theacquisition, in March, of the Rajah, Green Dragon and Lotus brands from Heinztogether with distribution rights to the Amoy brand into the ethnic foodchannel. These additions enable Westmill to sell a complete range of ethnicfoodstuffs into the wholesale and food service sectors including spices, sauces,rice, edible oils, flour and noodles. Its brands inspire strong consumerloyalty among the 5 million people in Britain who make up its target ethniccommunities. INGREDIENTS 2006 2005Revenue £m 729 583Adjusted operating profit £m 82 65 AB Mauri, our international yeast and bakery ingredients business, contributedstrongly to the 25% increase in revenue to £729m and 26% increase in profit to£82m. This reflected a full year's contribution following its acquisition inNovember 2004, the benefits of price and volume increases in yeast, and growthin bakery ingredients. Good progress was made in recovering higher raw material costs, particularlymolasses and energy, through price increases and cost savings in a number of keymarkets including North America, China, India, Turkey, Australia and WesternEurope. Strong demand in Asia has resulted in substantial further investment inproduction capacity in the region. The factory in Xinjiang, Western China,which opened last year is operating well and is already running close tocapacity. The existing Harbin and Hebei plants in China were expanded as wereplants in Vietnam and at Chiplun in India. The Chiplun investment enabled theclosure of a smaller plant in Kolkata. A new plant was commissioned in NewZealand and construction has commenced on further expansion of capacity atHarbin and Xinjiang. In bakery ingredients, much effort has gone into transferring our technologyacross the group. Sales and technical support teams are now working withcustomers in most markets with further opportunities to be developedparticularly in China and South America. Since this business was created in2005 it has grown strongly, especially in its key emerging markets of China,South America and South & West Asia. Agreement has been reached to sell a smallbakery mix and icings business based in Denver, Colorado. The operation was notwell located and was loss-making. A loss of £4m arising on the sale of thisbusiness has been included in the income statement. ABF Ingredients comprises businesses operating in speciality proteins, enzymes,lipid technologies and polyols. In speciality proteins, the yeast extractsbusinesses have seen strong growth and have benefited from improvement inmanufacturing efficiency and yield. Plans are proceeding to expand productioncapacity, increase the product range and broaden our customer base. Protient, aproducer of dairy protein concentrates and isolates, was acquired during theyear and complements our yeast based proteins business. The enzymes business continued to focus on the introduction of new products,particularly in the textile and bakery sectors. Despite higher energy costs our polyols business traded in line with last year,with food polyols benefiting from improved manufacturing efficiencies andantacids maintaining the improvement in manufacturing performance seen lastyear. In speciality lipids, the sterols business has had some success indeveloping new technology in the manufacture of sterols from wood-based rawmaterials as well as our traditional soy-based products. George WestonChief Executive FINANCIAL REVIEW GROUP PERFORMANCE Group sales increased by 7% to £5,996m and operating profit, adjusted to excludeexceptional items, the amortisation of intangibles and profits on the sale ofproperty, plant & equipment, increased by 1% to £561m. The small improvement in adjusted operating profit before exceptional items wasdelivered despite much higher energy costs and the significant reduction fromBritish Sugar arising from sugar regime reform. This was offset by anotherstrong performance from Primark and good progress in many of our food andingredients businesses. The disposal of properties, plant and equipment resulted in a profit of £10mcompared with £20m last year. Additional costs of £8m have been charged inrespect of the closure of the former Littlewoods business following the decisionto cease trading earlier than previously envisaged, resulting in higher voidcosts prior to disposal of the stores not required by Primark. These additionalcosts were more than compensated by the higher than anticipated trading profitgenerated through the closure process which are reflected in operating profit.A loss of £4m was incurred on the disposal during the year of three smallbusinesses in the US and China. Financial income and financial expenses in the income statement include thegross amounts in respect of the group's defined benefit pension schemes. Thenet charge of £2m compares with net income last year of £25m. This year on yearchange of £27m results primarily from the heavy investment, through acquisitionand refurbishment, in new stores for Primark. Profit before tax fell from £527m to £419m reflecting an exceptional charge of£97m for the costs of closing two British Sugar factories and a £16m increase inthe intangible amortisation charge arising on recent acquisitions together withthe small net loss on the sale of fixed assets and businesses. Adjusted toexclude these items, profit before tax fell 4% from £580m to £559m. TAXATION The tax charge of £111m included an underlying charge of £150m, at an effectivetax rate of 26.8% on the adjusted profit before tax described above. Theeffective tax rate has reduced from 27.4% as a result of an increase in theprofits subject to lower tax rates. The overall tax charge for the yearbenefited from a £13m (2005 - £7m) credit for tax relief on the amortisation ofintangible assets and goodwill arising from recent asset acquisitions. Thiscredit, together with the tax effect of the other exceptional items, has beenexcluded from the calculation of adjusted earnings per share. EARNINGS AND DIVIDENDS Earnings attributable to equity shareholders reduced by £78m to £301m and theweighted average number of shares in issue was 790 million. Earnings perordinary share therefore fell by 21% from 48.0p to 38.1p. A more consistentmeasure of performance is provided by the adjusted earnings per share whichexcludes the provision for the British Sugar factory closures, profits on thesale and closure of businesses and fixed assets and the amortisation ofintangibles net of any tax benefit. Adjusted earnings per share fell by 3% from52.5p to 50.9p. The interim dividend was increased by 4% to 6.25p and a final dividend has beenproposed at 12.5p which represents an overall increase of 4% for the year. Inaccordance with IFRS, no accrual has been made in these accounts for theproposed dividend which is expected to cost £99m and will be charged next year.The dividend is covered, on an adjusted basis, 2.7 times. BALANCE SHEET Non-current assets increased by £761m to £4,392m due to the acquisitions in theyear, principally Illovo, and a level of capital expenditure significantlyhigher than depreciation with continued investment in Primark. The use of current asset investments to finance the acquisition of Illovo hasresulted in net borrowings of £298m at the year end compared with net cash fundsof £212m last year. Working capital, including tax accruals and provisionsincreased by £204m of which £131m is accounted for by the inclusion of Illovo. The net surplus in the group's defined benefit pension schemes, employee benefitassets less liabilities, increased from £76m last year to £127m this year. The group's net assets increased by £305m to £4,182m. A currency loss of £74m arose on the translation into sterling of the group'snon-sterling net assets. This resulted from a strengthening of sterling againstmost overseas currencies year on year. The high level of investment made this year in acquisitions and capitalexpenditure has resulted in a decline in return on capital employed for thegroup from 23.6% to 18.9%. Return on capital employed is defined as operatingprofit before exceptional items and the amortisation of intangibles expressed asa percentage of average capital employed for the year. CASH FLOW Net cash flow from operating activities was £419m compared to £515m last year.This reduction is primarily the result of an adverse working capital movementyear on year of £75m and the use of the provision established last year for theclosure of the former Littlewoods stores. The group invested a net £760m in capital expenditure and acquisitions duringthe year. Capital expenditure amounted to £432m of which £221m was spent on theacquisition of new stores and the refitting of existing Primark stores. Thebalance was used principally to upgrade, modernise and expand existingmanufacturing facilities. £382m was spent on the Illovo acquisition, includingdebt assumed, and a further £114m was spent on the acquisitions of smallerbusinesses to complement our grocery, animal feed and ingredients operations.£181m was realised from the disposal of property, plant & equipment, principallythe surplus former Littlewoods stores. TREASURY POLICY AND CONTROLS The group's cash and current asset investments totalled £402m at the year endincluding £75m placed with professional investment managers who have fulldiscretion to act within closely monitored and agreed guidelines. The investment objective is to preserve the underlying assets, whilst achievinga satisfactory return. The investment guidelines are kept under constant reviewwith the objective of monitoring and controlling risk levels. The guidelinesrequire that investments must carry a minimum credit rating of AA-/A1 for longand short-term paper respectively, and also set down conditions relating tosovereign risk, length of maturity, exchange rate exposure and type ofinvestment instrument. Aggregate limits for each category of investment andrisk exposure are set for each manager. The group's UK cash balances are managed by a central treasury departmentoperating under strictly controlled guidelines, which also arranges term bankfinance for acquisitions and to meet short-term working capital requirementsparticularly for the sugar beet harvest. Since the year end the company hasrefinanced its external borrowings and has negotiated a multicurrency $1.2bnsyndicated loan facility with a term of five years with two one-year extensionoptions. It will be used for general corporate purposes. The new facility hasbeen provided by our existing bank group. A number of the group's businesses are exposed to changes in exchange rates onsales and purchases made in foreign currencies and to changes in commodityprices. British Sugar is exposed to movements in the euro exchange rate on theprice of sugar in the UK and Poland, Primark sources garments from overseasprimarily in US dollars and many businesses purchase raw materials in foreigncurrencies largely US dollar denominated. Significant cross-border transactions are covered by forward purchases and salesof foreign currency, or foreign currency options as appropriate. The majorityof the group's commodity exposures are managed through forward purchase orfutures contracts with only very limited use being made of options. Allderivative transactions are tightly controlled within set limits and speculativetrading is not undertaken. The group does not hedge the translation effect of exchange rate movements onthe income statement. FINANCIAL REPORTING STANDARDS AND ACCOUNTING POLICIES The financial statements for the year ended 16 September 2006 have been preparedin accordance with International Financial Reporting Standards (IFRS) asendorsed and adopted for use in the EU. The results for the comparative yearended 17 September 2005 are also presented in accordance with IFRS. Accountingpolicies applicable under IFRS are set out below. The provisions of IAS 32 andIAS 39 have been adopted with effect from 18 September 2005. John Bason Finance Director The annual report and accounts will be available on 9 November 2006 and theannual general meeting will be held at Congress Centre, 28 Great Russell Street,London WC1B 3LS at 11am on Friday, 8 December 2006. CONSOLIDATED INCOME STATEMENT for the year ended 16 September 2006 Before Exceptional Exceptional Items Items1 Total 2006 2006 2006 2005 £m £m £m £mContinuing operations NoteRevenue 1 5,996 - 5,996 5,622Operating costs before exceptional items (5,486) (5,486) (5,099)Impairment of property, plant & equipment - (64) (64) - Restructuring costs - (33) (33) - 510 (97) 413 523 Share of profit after tax from joint ventures 10 - 10 7and associatesProfits less losses on sale of property, plant & 10 - 10 20equipmentOperating profit 530 (97) 433 550 Adjusted operating profit 1 561 - 561 555Profits less losses on sale of property, plant & 10 - 10 20equipmentAmortisation of intangibles (41) - (41) (25)Exceptional items - (97) (97) - Profits less losses on sale of businesses (4) - (4) (1)Provision for loss on termination of an (8) - (8) (47)operationProfit before interest 518 (97) 421 502 Financial income 149 - 149 162Financial expenses (151) - (151) (137) Profit before taxation 516 (97) 419 527 Adjusted profit before taxation 559 - 559 580Profits less losses on sale of property, plant & 10 - 10 20equipmentAmortisation of intangibles (41) - (41) (25)Exceptional items - (97) (97) -Profits less losses on sale of businesses (4) - (4) (1)Provision for loss on termination of an (8) - (8) (47)operationTaxation - UK (89) 29 (60) (82) - Overseas (51) - (51) (59) 2 (140) 29 (111) (141) Profit for the period 376 (68) 308 386 Attributable to: Equity shareholders 369 (68) 301 379Minority interests 7 - 7 7 Profit for the period 376 (68) 308 386 Basic and diluted earnings per ordinary share 4 38.1p 48.0p 1 Refer to accounting policy note below. CONSOLIDATED BALANCE SHEET at 16 September 2006 2006 2005 £m £mNon-current assetsIntangible assets 1,542 1,152Property, plant & equipment 2,479 2,255Biological assets 46 -Investments in joint ventures 54 36Investments in associates 15 15Employee benefits assets 169 95Deferred tax assets 82 78Other receivables 5 -Total non-current assets 4,392 3,631 Current assetsAssets classified as held for sale 53 9Inventories 681 556Biological assets 51 -Trade and other receivables 913 678Other investments 53 269Cash and cash equivalents 349 929Total current assets 2,100 2,441TOTAL ASSETS 6,492 6,072 Current liabilitiesLiabilities classified as held for sale (11) -Interest bearing loans and overdrafts (531) (447)Trade and other payables (997) (750)Income tax (85) (113)Provisions (49) (61)Total current liabilities (1,673) (1,371) Non-current liabilitiesInterest bearing loans (176) (539)Income tax - (4)Provisions (21) (29)Deferred tax liabilities (398) (233)Employee benefits liabilities (42) (19)Total non-current liabilities (637) (824)TOTAL LIABILITIES (2,310) (2,195)NET ASSETS 4,182 3,877 EquityIssued capital 47 47Other reserves 173 173Translation reserve (29) 44Hedging reserve (6) -Retained earnings 3,773 3,584 3,958 3,848 Minority interests 224 29TOTAL EQUITY 4,182 3,877 CONSOLIDATED CASH FLOW STATEMENTfor the year ended 16 September 2006 2006 2005 £m £mCash flow from operating activitiesProfit before taxation 419 527 Add back non-operating itemsProfits less losses on sale of property, plant & (10) (20)equipmentProfits less losses on sale of businesses 4 1Provision for loss on termination of an operation 8 47Exceptional items 97 -Financial income (149) (162)Financial expenses 151 137 Adjustments forShare of profit from joint ventures and associates (10) (7)Amortisation 41 25Depreciation 177 161Pension costs less contributions (1) (8) Increase in inventories (29) (25) Increase in receivables (178) (20)Increase/(decrease) in payables 78 (9)(Decrease)/increase in provisions (62) -Cash generated from operations 536 647Income taxes paid (117) (132)Net cash from operating activities 419 515 Cash flows from investing activitiesDividends received from joint ventures 1 2Dividends received from associates 3 2Purchase of property, plant & equipment (432) (403)Purchase of intangibles (13) -Sale of property, plant & equipment 181 39Purchase of subsidiary undertakings (496) (1,130)Sale of subsidiary undertakings - 8Purchase of joint ventures and associates - (18)Interest received 36 54Loan repayment from joint venture - 51Net cash from investing activities (720) (1,395) Cash flows from financing activitiesDividends paid to minorities (6) (4)Dividends paid to shareholders (144) (135)Interest paid (47) (29)Decrease in other current asset investments 216 273Financing:(Decrease)/increase in short term loans (46) 364(Decrease)/increase in long term loans (365) 170Inflow from reductions in own shares held 1 7Net cash from financing activities (391) 646 Net decrease in cash and cash equivalents (692) (234)Cash and cash equivalents at the beginning of the 894 1,120periodEffect of movements in foreign exchange (4) 8Cash and cash equivalents at the end of the period 198 894 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEfor the year ended 16 September 2006 2006 2005 £m £mActuarial gains/(losses) on defined benefit schemes 43 (7)Deferred tax associated with defined benefit schemes (12) -Effects of movements in foreign exchange (88) 44Tax on effects of movements in foreign exchange - (1)Net gain on hedge of net investment in foreign subsidiaries 14 2Movement of cash flow hedging position (13) -Net (loss)/gain recognised directly in equity (56) 38Profit for the period 308 386Total recognised income and expense for the period 252 424Adjustments relating to adoption of IAS 32 and IAS 39 on 18 September 2005 (Equity 7 -shareholders) 259 424Attributable to:Equity shareholders 246 416Minority interests 6 8 252 424 NOTES TO THE PRELIMINARY ANNOUNCEMENT for the year ended 16 September 2006 1. Segmental analysis Segment reporting is presented in respect of the group's business andgeographical segments. The primary format, business segments, is based on thegroup's management and internal reporting structure and combines businesses withcommon characteristics. Inter-segment pricing is determined on an arm's lengthbasis. Segment results, assets and liabilities include items directlyattributable to a segment as well as those that can be allocated on a reasonablebasis. Unallocated items comprise mainly corporate assets and expenses, cash,borrowings, employee benefit balances and current and deferred tax balances.Segment capital expenditure is the total cost incurred during the period toacquire segment assets that are expected to be used for more than one year. Business segments The group is comprised of the following business segments: - Grocery The manufacture of grocery products, including hot beverages, sugar & sweeteners, vegetable oils, bread & baked goods, ethnic foods, herbs & spices and meat & dairy products which are sold to retail, wholesale and foodservice businesses. - Primary Food The processing of sugar beet and sugar cane for sale to industrial users and to Silver Spoon, which is included in the grocery segment. - Agriculture The manufacture of animal feeds and the provision of other products for the agriculture sector. - Ingredients The manufacture of bakers' yeast, bakery ingredients, speciality proteins, enzymes, lipid technologies and polyols. - Retail Buying and merchandising value clothing and accessories through the Primark and Penneys retail chains. Geographical segments The secondary format presents the revenues, profits and assets for the followinggeographical segments: - United Kingdom- Europe, Middle East & Africa- The Americas- Asia Pacific Geographically segmented revenues are shown by reference to the geographicallocation of customers. Segment assets are based on the geographical location ofthe assets. Revenue Adjusted operating profit 2006 2005 2006 2005 £m £m £m £mGrocery 2,656 2,590 185 185Primary Food 671 700 115 166Agriculture 631 735 16 20Ingredients 729 583 82 65Retail 1,309 1,006 185 140Central - - (22) (21) 5,996 5,614 561 555Businesses disposed:Agriculture - 8 - - 5,996 5,622 561 555 Geographical segments United Kingdom 3,003 2,816 281 314Europe, Middle East & Africa 746 720 73 72The Americas 1,210 1,102 124 10 102Asia Pacific 1,037 976 83 67 5,996 5,614 561 555 Businesses disposed:United Kingdom - 8 - - 5,996 5,622 561 555 1. Segmental analysis - for the year ended 16 September 2006 Business segments Primary Grocery Food Agriculture Ingredients Retail Central Eliminations Total £m £m £m £m £m £m £m £mRevenue from continuing operations 2,675 766 631 775 1,309 - (160) 5,996Internal revenue (19) (95) - (46) - - 160 -Revenue from external customers 2,656 671 631 729 1,309 - - 5,996Adjusted operating profit 185 115 16 82 185 (22) - 561Exceptional items - (97) - - - - - (97)Amortisation of intangibles (12) - - (29) - - - (41)Profits less losses on sale of 4 4 (1) - 2 1 - 10property, plant & equipmentProfits less losses on sale of 3 (2) - (6) - 1 - (4)businessesProvision for loss on termination of - - - - (8) - - (8)an operationProfit before financial income, 180 20 15 47 179 (20) - 421financial expenses and taxationFinancial income 149 - 149Financial expenses (151) - (151)Taxation (111) - (111)Profit for the period 180 20 15 47 179 (133) - 308 Segment assets (excluding 1,782 1,497 158 1,010 1,302 14 - 5,763investments in associates and jointventures)Investment in associates & joint 7 6 27 29 - - - 69venturesSegment assets 1,789 1,503 185 1,039 1,302 14 - 5,832Cash and cash equivalents 356 - 356Employee benefits assets 169 - 169Deferred tax assets 82 - 82Other investments 53 - 53Segment liabilities (303) (338) (48) (113) (214) (60) - (1,076)Interest-bearing loans and (707) - (707)overdraftsIncome tax (86) - (86)Deferred tax liabilities (398) - (398)Employee benefits liabilities (43) - (43)Net assets 1,486 1,165 137 926 1,088 (620) - 4,182 Capital expenditure 84 55 6 48 303 - - 496Depreciation 71 36 7 30 33 - - 177Amortisation 12 - - 29 - - - 41Impairment - 64 - - - - - 64Other significant non-cash expenses - 30 - - 10 - - 40 Geographical segments United Europe The Asia Kingdom Middle East Americas Pacific Eliminations Total &Africa £m £m £m £m £m £mRevenue from external customers 3,003 746 1,210 1,037 - 5,996Segment assets 2,519 1,533 1,023 757 - 5,832Capital expenditure 357 52 30 57 - 496Depreciation 101 18 26 32 - 177Amortisation 4 7 18 12 - 41Impairment 64 - - - - 64Other significant non-cash expenses 40 - - - - 40 Other significant non-cash expenses include a provision of £30m for costsassociated with the closure of two UK sugar factories, announced on 4 July 2006,and a provision of £10m for costs associated with the termination ofLittlewoods. 1. Segmental analysis - for the year ended 17 September 2005 Business segments Primary Elimina- Grocery Food Agriculture Ingredients Retail Central tions Total £m £m £m £m £m £m £m £m Revenue from continuing operations 2,604 802 747 620 1,006 - (165) 5,614Businesses disposed - - 11 - - - (3) 8Internal revenue (14) (102) (15) (37) - - 168 -Revenue from external customers 2,590 700 743 583 1,006 - - 5,622 Adjusted operating profit 185 166 20 65 140 (21) - 555Amortisation of intangibles (5) - - (20) - - - (25)Profits less losses on sale of (1) 24 (3) - - - - 20property, plant & equipmentProfits less losses on sale of 1 - 3 - - (5) - (1)businessesProvision for loss on termination of - - - - - (47) - (47)an operationProfit before financial income, 180 190 20 45 140 (73) - 502financial expenses and taxationFinancial income 162 - 162Financial expenses (137) - (137)Taxation (141) - (141)Profit for the period 180 190 20 45 140 (189) - 386 Segment assets (excluding investments 1,756 663 160 923 872 276 - 4,650in associates and joint ventures)Investments in associates and joint 5 5 25 16 - - - 51venturesSegment assets 1,761 668 185 939 872 276 - 4,701Cash and cash equivalents 929 - 929Employee benefits assets 95 - 95Deferred tax assets 78 - 78Other investments 269 - 269Segment liabilities (348) (96) (55) (99) (230) (12) - (840)Interest bearing loans and overdrafts (986) - (986)Income tax (117) - (117)Deferred tax liabilities (233) - (233)Employee benefits liabilities (19) - (19)Net assets 1,413 572 130 840 642 280 - 3,877 Capital expenditure 109 38 7 25 228 - - 407Depreciation 68 35 6 24 28 - - 161Amortisation 5 - - 20 - - - 25Other significant non-cash expenses 14 - - 5 - 47 - 66 Geographical segments Europe United Middle East The Asia Elimina- Kingdom & Africa Americas Pacific tions Total £m £m £m £m £m £mRevenue from external customers 2,824 720 1,102 976 - 5,622Segment assets 2,319 717 954 711 - 4,701Capital expenditure 263 54 21 69 - 407Depreciation 94 15 24 28 - 161Amortisation 2 10 10 3 - 25Other significant non-cash expenses 51 5 8 2 - 66 . Other significant non-cash expenses include a provision of £47m for costsassociated with the termination of Littlewoods 2. Income tax expense 2006 2005 £m £m Current tax expense UK - corporation tax at 30% (2005: 30%) 37 84 Overseas - corporation tax 46 49 Over-provided in prior years - (1) 83 132 Deferred tax expense UK deferred tax 21 (2) Overseas deferred tax 8 12 Over-provided in prior years (1) (1) Total income tax expense in income statement 111 141 Reconciliation of effective tax rate Profit before taxation 419 527 Less share of profit from joint ventures (10) (7) and associates Profit before taxation excluding share of profit from joint ventures 409 520 and associates Nominal tax charge at UK corporation tax rate of 30% (2005: 30%) 123 156 Lower tax rates on overseas earnings (23) (25) Expenses not deductible for tax purposes 12 9 Utilisation of losses - (1) Deferred tax not recognised - 3 Adjustments in respect of prior periods (1) (1) 111 141 3. Dividends 2006 2005 pence pence Per share 2004 final - 11.15 2005 interim - 6.00 2005 final 12.00 - 2006 interim 6.25 - 18.25 17.15 £m £m Total 2004 final - 88 2005 interim - 47 2005 final 95 - 2006 interim 49 - 144 135 The 2006 interim dividend was declared on 19 April 2006 and paid on 3 July 2006.The 2006 final dividend of 12.5p, total value of £99m, will be paid on 12January 2007 to shareholders on the register on 1 December 2006. 4. Earnings per share The calculation of basic earnings per share at 16 September 2006 was based onthe net profit attributable to equity shareholders of £301m (2005: £379m), and aweighted average number of shares outstanding during the year of 790 million(2005: 789 million). The calculation of the weighted average number of sharesexcludes the shares held by the Employee Share Option Scheme on which thedividends are being waived. Adjusted earnings per ordinary share, which exclude the impact of profits lesslosses on the sale property, plant & equipment and businesses, provision forloss on termination of an operation, intangible amortisation, exceptional itemsand the associated tax credits, is shown to provide clarity on the underlyingperformance of the group. The diluted earnings per share calculation takes into account the dilutiveeffect of share options. The diluted, weighted average number of shares is 790million (2005: 789 million). There is no difference between basic and dilutedearnings. 2006 2005 £m £m Adjusted profit for the period 402 414 Profits less losses on sale of property, 10 20 plant & equipment Profits less losses on sale of businesses (4) (1) Provision for loss on termination of an (8) (47) operation Exceptional items (97) - Tax effect on above 26 11 Amortisation of intangibles (41) (25) Tax credit on intangible amortisation 13 7 Profit for the period attributable to equity 301 379 shareholders 2006 2005 pence pence Adjusted earnings per share 50.9 52.5 Earnings per share on: Sale of property, plant & equipment 1.3 2.5 Sale of businesses (0.5) (0.1) Provision for loss on termination of (1.0) (6.0) operation Exceptional items (12.3) - Tax effect on above 3.3 1.4 Amortisation of intangibles (5.2) (3.2) Tax credit on intangible amortisation 1.6 0.9 Earnings per ordinary share 38.1 48.0 5. Analysis of net funds/(debt) At At 18 16 September Cash Acquisitions/ Exchange September 2005 flow disposals adjustments 2006 £m £m £m £m £m Cash at bank and in hand, cash 894 (692) - (4) 198 equivalents and overdrafts(1) Short-term borrowings(1) (412) 46 (6) (1) (373) Investments 269 (216) - - 53 Loans over one year (539) 365 (14) 12 (176) 212 (497) (20) 7 (298) (1) Cash and cash equivalents comprise cash balances, call deposits andinvestments with original maturities of three months or less. Bank overdraftsthat are repayable on demand and form an integral part of the group's cashmanagement are included as a component of cash and cash equivalents for thepurpose of the cash flow statement. Assets classified as held for sale include£7m of cash balances. 6. Other information The financial information set out above does not constitute the group'sstatutory financial statements for the years ended 16 September 2006 and 17September 2005 but it is derived from them. The 2005 financial statements havebeen filed with Registrar of Companies whereas those for 2006 will be deliveredfollowing the company's annual general meeting. The auditors' opinions on thesefinancial statements were unqualified and did not include a statement underSection 237 (2) or (3) of the Companies Act 1985. SIGNIFICANT ACCOUNTING POLICIES for the year ended 16 September 2006 Associated British Foods plc (the "Company") is a company domiciled in theUnited Kingdom. The consolidated financial statements of the Company for theyear ended 16 September 2006 comprise those of the Company and its subsidiaries(together referred to as the "group") and the group's interest in associates andjointly-controlled entities. The financial statements were authorised for issue by the directors on 7November 2006. Statement of compliance The consolidated financial statements have been prepared and approved by thedirectors in accordance with International Financial Reporting Standards asadopted by the EU (Adopted IFRS). These are the group's first consolidatedfinancial statements prepared under IFRS and IFRS 1 has been applied. Basis of preparation The financial statements are presented in sterling, rounded to the nearestmillion. They are prepared on the historical cost basis except that derivativefinancial instruments, biological assets and other current investments arestated at their fair value. Non-current assets held for sale are stated at thelower of carrying amount and fair value less costs to sell. The preparation of financial statements under IFRS requires management to makejudgements, estimates and assumptions about the reported amounts of assets andliabilities, income and expenses. The estimates and associated assumptions arebased on historical experience. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the period in which theestimates are revised. The financial statements of the Company and its subsidiary undertakings areprepared for the 52 weeks ended 16 September 2006, except that, to avoid delayin the preparation of the consolidated financial statements, those of Australia,New Zealand, China, Poland and the North and South American subsidiaryundertakings are made up to 31 August 2006. Adjustments are made forsignificant transactions or events occurring between 31 August and 16 September. The accounting policies set out below have been applied to all periods presentedexcept where the policy relates to the implementation of the following AdoptedIFRS as permitted by IFRS 1: Business combinations - the provisions of IFRS 3 have been applied from 3September 2004. The net carrying value of goodwill at 18 September 2004, afteradjustment to include the acquisition of the US Herbs & Spices business on 3September 2004 under IFRS, has been deemed to be the cost at 19 September 2004; Financial instruments - the provisions of IAS 32 and IAS 39 have been adoptedfrom 18 September 2005. Comparatives have not been restated; Cumulative translation differences arising on consolidation of subsidiaries -IAS 21 requires such differences to be held in a separate reserve rather thanincluded in the profit and loss reserve under UK GAAP. The translation reservehas been deemed to be nil on 19 September 2004; Share-based payments - the measurement provisions of IFRS 2 have not beenapplied to share options granted prior to 7 November 2002 nor to any optionsthat vested prior to 19 September 2004; Employee benefits - pursuant to IAS 19, all cumulative actuarial gains andlosses in relation to employee benefit schemes are recognised as at the date oftransition of 19 September 2004; and Non-current assets held for sale and discontinued operations - IFRS 5 has beenearly adopted from 19 September 2004. Basis of consolidation The consolidated financial statements include the results of the Company and allof its subsidiary undertakings from the date that control commences to the datethat control ceases. The consolidated financial statements also include thegroup's share of the results of its joint ventures and associates on anequity-accounted basis from the point at which joint control or significantinfluence respectively commences, to the date that it ceases. Subsidiary undertakings are entities controlled by the Company. Control existswhen the Company has the power, directly or indirectly, to govern the financialand operating policies of an entity so as to obtain benefits from itsactivities. Joint ventures are those entities over whose activities the group has jointcontrol, established by contractual agreement. Associates are those entities in which the group has significant influence, butnot control, over the financial and operating policies. Business combinations On the acquisition of a business or an interest in a joint venture or associate,fair values are attributed to the identifiable assets, liabilities andcontingent liabilities acquired, reflecting conditions at the date ofacquisition. Adjustments to fair values include those made to bring accountingpolicies into line with those of the group. Revenue Revenue represents the net invoiced value of goods delivered to customers,excluding sales taxes. Revenue is recognised when the risks and rewards of theunderlying products have been substantially transferred to the customer.Revenue is stated net of price discounts, certain promotional activities andsimilar items. Borrowing costs Borrowing costs are accounted for on an accruals basis in the income statementusing the effective interest method. Exceptional items Exceptional items are defined as items of income and expenditure which arematerial and unusual in nature and which are considered to be of suchsignificance that they require separate disclosure on the face of the incomestatement in accordance with paragraphs 86 and 87 of IAS 1, Presentation ofFinancial Statements. Foreign currencies In individual companies, transactions in foreign currencies are recorded at therate of exchange at the date of the transaction. Monetary assets andliabilities in foreign currencies are translated at the rate prevailing at thebalance sheet date. Any resulting differences are taken to the incomestatement. On consolidation, assets and liabilities of foreign operations that aredenominated in foreign currencies are translated into sterling at the rate ofexchange at the balance sheet date. Income and expense items are translatedinto sterling at weighted average rates of exchange other than substantialtransactions which are translated at the rate of exchange on the date of thetransaction. Differences arising from the retranslation of opening net assets of groupcompanies, together with differences arising from the restatement of the netresults of group companies from average or actual rates, to rates at the balancesheet date, are taken to the translation reserve. Pensions and other post-employment benefits The group's principal pension funds are defined benefit plans. In addition thegroup has defined contribution plans and other unfunded post-employmentliabilities. For defined benefit plans, the amount charged in the incomestatement is the cost of vested benefits accruing to employees over the year,plus any benefit improvements granted to members by the group during the year.It also includes a credit equivalent to the group's expected return on pensionplan assets over the year, offset by a charge equal to the expected interest onplan liabilities over the year. The difference between the market value of planassets and the present value of plan liabilities is disclosed as an asset orliability on the consolidated balance sheet. Any related deferred tax (to theextent it is recoverable) is disclosed separately on the consolidated balancesheet. Any actuarial gains or losses are recognised immediately in thestatement of recognised income and expense. Contributions payable by the group in respect of defined contribution plans arecharged to operating profit as incurred. Share based payments: employee benefits The Executive Share Incentive Plan allows executives to receive an allocation ofshares to be received at the end of 2005/6 subject to attainment of certainfinancial performance criteria. The fair value of the shares to be awarded isrecognised as an employee expense with a corresponding increase in equity. Thefair value is measured at grant date and spread over the period during which theexecutives become unconditionally entitled to the shares. The fair value of theshares allocated is measured taking into account the terms and conditions uponwhich the shares were allocated. The amount recognised as an expense isadjusted to reflect the actual number of shares that vest. The Share Option Scheme (1994) and Executive Share Option Scheme (2000) allowexecutives to acquire shares of the Company. The fair value of options grantedis recognised as an employee expense with a corresponding increase in equity.The fair value is measured at grant date and spread over the period during whichthe executives become unconditionally entitled to the options. The fair valueof the options granted is measured using a binomial lattice model, taking intoaccount the terms and conditions upon which the options were granted. Theamount recognised as an expense is adjusted to reflect the actual number ofshare options that vest except where forfeiture is only due to share prices notachieving the threshold for vesting. Income tax Income tax on the profit or loss for the period comprises current and deferredtax. Income tax is recognised in the income statement except to the extent thatit relates to items taken directly to reserves. Current tax is the tax expected to be payable on the taxable income for theyear, using tax rates enacted or substantially enacted at the balance sheetdate, together with any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing fortemporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for taxation purposes. Thefollowing temporary differences are not provided for: the initial recognition ofgoodwill, the initial recognition of assets or liabilities that affect neitheraccounting nor taxable profit other than those acquired in a businesscombination, and differences relating to investments in subsidiaries to theextent that they will probably not reverse in the foreseeable future. The amountof deferred tax provided is based on the expected manner of realisation orsettlement of the carrying amount of assets and liabilities, using tax ratesenacted or substantially enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is no longerprobable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends arerecognised at the same time as the liability to pay the related dividend. Financial instruments The group has adopted the exemption granted by IFRS 1 that IAS 32 and IAS 39need not be applied to the comparative period. Consequently the 2005 disclosureprovided for financial instruments is in accordance with UK GAAP. Under UKGAAP, forward foreign exchange contracts hedging transactional exposures wererevalued at year end exchange rates with net unrealised gains and losses beingdeferred to match the maturity of the underlying exposures. The accountingpolicies described below for financial instruments are applicable from 18September 2005 and are in accordance with IFRS. The effect of adopting thesestandards was to recognise a net derivative asset of £7m in the opening balancesheet. Derivative financial instruments The group uses derivative financial instruments to hedge its exposure tofluctuations in foreign exchange and interest rates and also to changes in theprice of certain commodities used in the manufacture of its products. Derivative financial instruments are recognised in the balance sheet at theirfair value calculated using either discounted cash flows or option pricingmodels consistently applied for similar types of instrument. Both techniquestake into consideration assumptions based on market data. Changes in the fairvalue of derivatives that do not qualify for hedge accounting are charged orcredited to the income statement. The purpose of hedge accounting is to mitigate the impact on the group ofchanges in exchange or interest rates and commodity prices, by matching theimpact of the hedged item and the hedging instrument in the income statement.To qualify for hedge accounting the hedging relationship must meet severalconditions with respect to documentation, probability of occurrence, hedgeeffectiveness and reliability of measurement. At inception of the transactionthe group documents the relationship between hedging instruments and hedgeditems, as well as its risk management objective and strategy for undertakingvarious hedge transactions. This process includes linking all derivativesdesignated as hedges to specific assets and liabilities or to specific firmcommitments or forecast transactions. The group also documents its assessment,both at the hedge inception and on a quarterly basis, as to whether thederivatives that are used in hedging transactions have been, and are likely tocontinue to be, highly effective. The group designates derivatives that qualify as hedges for accounting purposesas either: (a) a hedge of the fair value of a recognised asset or liability(fair value hedge), (b) a hedge of a forecast transaction or firm commitment(cash flow hedge), or (c) a hedge of a net investment in a foreign entity. Themethod of recognising the resulting gains or losses from movements in fairvalues is dependent on whether the derivative contract is designated to hedge aspecific risk and qualifies for hedge accounting. Where a derivative financial instrument is designated as a hedge of thevariability in cash flows of a highly probable forecast transaction, theeffective part of any gain or loss on the derivative financial instrument isrecognised directly in the hedging reserve. The ineffective part of any gain orloss is recognised in the income statement immediately. When the forecast transaction subsequently results in the recognition of anasset or liability, the associated cumulative gain or loss is removed fromreserves and is included in the initial measurement of the non financial assetor liability. Otherwise the cumulative gain or loss is removed from reserves andis recognised in the income statement at the same time as the hedgedtransaction. To the extent that any part of the hedge is ineffective, the gainor loss on that part is recognised in the income statement. Net investment hedges take the form of either foreign currency borrowings orderivatives. All foreign exchange gains or losses arising on translation of netinvestments are recorded in equity and included in the translation reserve.Monetary liabilities used as a net investment hedge are revalued at closingexchange rates with resulting gains or losses taken to equity. Foreign exchangecontracts hedging net investments in overseas businesses are revalued at fairvalue. Fair value movements on effective hedges are taken to equity with anyineffectiveness recognised in the income statement. Derivatives embedded in other financial instruments or other non-financial hostcontracts are treated as separate derivatives when their risk andcharacteristics are not closely related to those of the host contract. In thesecircumstances the host contract is not carried at fair value and unrealisedgains or losses on the derivative are reported in the income statement for theperiod. Non-derivative financial instruments Financial assets and financial liabilities are measured initially at fair value,plus directly attributable transaction costs, and thereafter at amortised cost,except for other current investments. The group has designated some currentinvestments as "financial assets at fair value through profit and loss" becausethese instruments are managed, and their performance is evaluated, on a fairvalue basis in accordance with the group's risk management and investmentstrategy. Investments other than those designated as "at fair value throughprofit and loss" are classified as investments available for sale, where gainsand losses arising from changes in fair value are recognised directly in equity,until the security is disposed of or is determined to be impaired at which timethe cumulative gain or loss previously recognised in equity is included in theincome statement for the period. Financial assets are derecognised when the contractual rights to the cash flowsexpire or the contractual rights to receive the cash flows are transferred. Thecontractual rights to receive cash flows are transferred when substantially allthe risk and rewards of ownership of the financial asset are transferred.Financial liabilities are derecognised when the obligation specified in thecontract is discharged, cancelled or expires. Comparative accounting policy for 2005 The following accounting policy has been applied to the key financialinstruments used by the group for the year ending 17 September 2005, inaccordance with UK GAAP. Forward foreign exchange contracts and currency options are used to hedgeforecast transactional cash flows and accordingly, any gains or losses on thesecontracts are recognised in the profit and loss account when the underlyingtransaction is settled. Derivative commodity contracts are used to hedgecommitted purchases or sales of commodities and accordingly, any gains or losseson these contracts are recognised in the profit and loss account in the sameaccounting period as the underlying purchase or sale. Gains or losses onhedging instruments that are cancelled due to the termination of the underlyingexposure are taken to the profit and loss account immediately. Property, plant & equipment Items of property, plant & equipment are stated at cost less accumulateddepreciation and impairment charges. Depreciation is charged to the income statement on a straight-line basis overthe estimated useful lives of items of property, plant & equipment sufficient toreduce them to their estimated residual value. Land is not depreciated. Theestimated useful lives are as follows: - freehold buildings 66 years- plant and equipment, fixtures and fittings: - sugar factories 20 years - other operations 12 years- vehicles 8 years Biological assets Cane roots and growing cane are valued at fair value determined on the followingbases: - Cane roots - the escalated average cost, using appropriate inflation related indices, of each year of planting adjusted for the remaining expected life. - Growing cane - the estimated sucrose content valued at the estimated sucrose price for the following season, less the estimated costs for harvesting and transport. Leases Where the group has substantially all the risks and rewards of ownership of anasset that is subject to a lease, the lease is treated as a finance lease.Other leases are treated as operating leases. Finance leases are stated at thelower of fair value and present value of minimum lease payments less accumulateddepreciation and impairment. Payments made under operating leases arerecognised in the income statement on a straight-line basis over the term of thelease. The benefit of lease incentives received is recognised in the incomestatement over the life of the lease. Intangible assets other than goodwill Intangible assets that are acquired by the group and have a finite life arestated at cost less accumulated amortisation and impairment charges. Amortisation is charged to the income statement on a straight-line basis overthe estimated useful lives of intangible assets from the date they are availablefor use. The estimated useful lives are as follows: - customer relationships - up to 5 years- grower contracts - up to 10 years- technology and brands - up to 15 years Goodwill All business combinations are accounted for by applying the purchase method.Goodwill represents amounts arising on acquisition of subsidiary undertakings,associates and joint ventures. In respect of business acquisitions that haveoccurred since 3 September 2004, goodwill represents the excess of the purchaseconsideration over the fair value of the net identifiable assets acquired,including separately identified intangible assets. In respect of acquisitions prior to this date, goodwill is included on the basisof its deemed cost, represented by the net book value recorded under previousGAAP. The classification and accounting treatment of business combinations thatoccurred prior to 3 September 2004 has not been reconsidered in preparing thegroup's opening IFRS balance sheet at 18 September 2004. Goodwill is not amortised but is tested for impairment at each balance sheetdate. Research and development Expenditure on research activities, undertaken with the prospect of gaining newscientific or technical knowledge and understanding, is recognised in the incomestatement as an expense as incurred. Expenditure on development activities, whereby research findings are applied toa plan or design for the production of new or substantially improved productsand processes, is capitalised if the product or process is technically andcommercially feasible and the group has sufficient resources to completedevelopment. The expenditure capitalised includes the cost of materials, directlabour and an appropriate proportion of overheads. Other developmentexpenditure is recognised in the income statement as incurred. Capitaliseddevelopment expenditure is stated at cost less accumulated amortisation andimpairment charges. Impairment The carrying amounts of the group's assets, other than inventories and deferredtax assets, are reviewed at each balance sheet date to determine whether thereis any indication of impairment. If any such indication exists, the asset'srecoverable amount is estimated. For goodwill the recoverable amount is estimated at each balance sheet date. An impairment charge is recognised whenever the carrying amount of an asset orits cash-generating unit exceeds its recoverable amount. Impairment charges arerecognised in the income statement within operating costs. Impairment charges recognised in respect of cash-generating units are allocatedfirst to reduce the carrying amount of any goodwill allocated to acash-generating unit (or group of units) and then to reduce the carrying amountof the other assets in the unit (or group of units) on a pro-rata basis. Goodwill was tested for impairment at 18 September 2004, the date of transitionto IFRS, even though no indication of impairment existed. Calculation of recoverable amount The recoverable amount of assets is the greater of their net selling price andvalue in use. In assessing value in use, the estimated future cash flows arediscounted to their present value using a pre-tax discount rate that reflectscurrent market assessments of the time value of money and the risks specific tothe asset. For an asset that does not generate largely independent cashinflows, the recoverable amount is determined for the cash-generating unit towhich the asset belongs. Reversals of impairment An impairment charge in respect of goodwill is not subsequently reversed. In respect of other assets, an impairment charge is reversed if there has been achange in the estimates used to determine recoverable amount. An impairment charge is reversed only to the extent that the asset's carryingamount does not exceed the carrying amount that would have been determined, netof depreciation or amortisation, if no impairment charge had been recognised. Inventories Inventories are stated at the lower of cost and net realisable value. Costincludes raw materials, direct labour and expenses, an appropriate proportion ofproduction and other overheads, but not borrowing costs. Cost is calculated ona first-in first-out basis. Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits and investmentswith original maturities of three months or less. Bank overdrafts that arerepayable on demand and form an integral part of the group's cash management areincluded as a component of cash and cash equivalents for the purpose of the cashflow statement. New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are notyet effective for the year ended 16 September 2006 and have not been applied inpreparing these consolidated financial statements: IFRS 7 Financial Instruments: Disclosures and the Amendments to IAS 1Presentation of Financial Statements: Capital Disclosures require extensivedisclosures about the significance of financial instruments for an entity'sfinancial position and performance, and qualitative and quantitative disclosureson the nature and extent of risks. IFRS 7 and amended IAS 1, which will beadopted for the group's 2007 financial statements, will require additionaldisclosures with respect to the group's financial instruments and share capital. IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting inHyperinflationary Economies addresses the application of IAS 29 when an economyfirst becomes hyperinflationary and in particular the accounting for deferredtax. IFRIC 7, which becomes mandatory for the group's 2008 financialstatements, is not expected to have any significant impact on the consolidatedfinancial statements. IFRIC 8 Scope of IFRS 2 Share-based Payments addresses the accounting forshare-based payment transactions in which some or all of goods or servicesreceived cannot be specifically identified. IFRIC 8 will become mandatory forthe group's 2007 financial statements, with retrospective application required.The group has not yet determined the potential effect of the interpretation. IFRIC 9 Reassessment of Embedded Derivatives requires that a reassessment ofwhether embedded derivatives should be separated from the underlying hostcontract should be made only when there are changes to the contract. IFRIC 9,which becomes mandatory for the group's 2007 financial statements, is notexpected to have any significant impact on the consolidated financialstatements. IFRIC 10 Interim Financial Reporting and Impairment prohibits the reversal of animpairment loss recognised in a previous interim period in respect of goodwill,an investment in an equity instrument or a financial asset carried at cost.IFRIC 10 will become mandatory for the group's 2008 financial statements, andwill apply to goodwill, investments in equity instruments, and financial assetscarried at cost prospectively from the date that the group first applied themeasurement criteria of IAS 36 and IAS 39 respectively (i.e. 18 September 2005). IFRIC 10 is not expected to have any significant impact on the consolidatedfinancial statements. The group does not consider that any other standards or interpretations issuedby the IASB, but not yet applicable, will have a significant impact on theconsolidated financial statements. This information is provided by RNS The company news service from the London Stock Exchange

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