UPDATE: AB Foods 1Q Sales Strong, Outlook Remains In Line

Associated British Foods PLC (ABF.LN) Thursday reported strong first-quarter sales with sugar and grocery revenues boosted by sterling's weakness and a stellar performance from low-cost retail chain Primark over the key Christmas period.

The U.K. food producer and retail group said sales for the 16 weeks to 3 Jan. were up 21% from a year earlier. It expects full-year net earnings to be in line with expectations.

"The weakness of sterling, particularly against the euro and US dollar, has been a major feature of the period - with the main beneficiaries of currency translation being Grocery and Ingredients," the company said in a statement.

Even stripping out the currency benefits, the company's sales were still up 15%, partly reflecting the price increases it has made in the last year.

While the sales performance was strong, there was no positive news on margins or earnings, disappointing some.

"Strong sales growth bodes well for prospects, but weak margin development should lead to weak earnings growth," commented Andrew Wood at Sanford Bernstein.

AB Foods - which is 55% owned by the founding Weston family - operates Primark and produces food brands such as Twinings tea and Kingsmill bread. It also produces sugar in Europe through its British Sugar unit and has sugar operations in China and in Africa through its Illovo venture.

Sales and profit at Primark were up 18% on the year "reflecting the increase in retail selling space and very good like-for-like sales growth," it said.

Finance Director John Bason in an interview declined to give Primark's same-store sales numbers but confirmed that that they were sector-leading figures.

Bason said that while the weak pound was benefitting the company in terms of translating its profit, it also would result in higher purchasing costs for Primark in 2009.

"We haven't seen any impact yet but the weakness of sterling will hit Primark's purchasing in late spring or early summer," said Bason. "There is a chance of prices going up across the high street," he said.

Grocery revenue was 21% ahead, helped by higher product prices and the acquisition of the Jordans business.

Bason said there had been evidence of consumers trading down to cheaper grocery goods, with consumers of branded Australian bread in particular downtrading to retailer-branded products. Twinings has also experienced a slow down in its growth rate, he said.

The company's ingredients businesses, almost entirely located outside the U.K., benefited significantly from the weakness of sterling against the U.S. dollar and the euro.

One disappointment was the Chinese sugar operations. Bason said that new capacity in the Chinese sugar market had resulted in supply outstripping demand in the country forcing prices down. He said the situation would likely correct itself and supply and demand would return to balance in 6-12 months.

By 0940 GMT, the company's shares were up 2 pence, or 0.2%, at 676 pence in lower London market. The stock has fallen 13% over the past 12 months.

Company Web site: www.abf.co.uk

-By Michael Carolan, Dow Jones Newswires; 44-20-7842-9278; [e-mail]

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