Primark demerger planned by end-2027 — the board says separating Primark from the food businesses (with separate boards and shareholders) will improve long-term decision-making and is “not an exercise in financial engineering,” with execution targeted around mid–late 2027.

Group profit fell sharply — H1 adjusted operating profit was down 18% at constant currency (group revenue flat at £9.5bn), adjusted EPS down 15%, while management kept the interim dividend unchanged and continues a £250m buyback programme (£187m completed YTD).

Sugar division surprise weakness — sugar posted an H1 adjusted operating loss (£27m), sales down 9%, and ABF now expects sugar to deliver an adjusted operating loss for the full 2026 year due to European oversupply and aggressive pricing.

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Associated British Foods (LON:ABF) used its latest results presentation to reiterate plans to demerge Primark by the end of 2027 while reporting a weaker first-half performance that management said was broadly in line with expectations, except for sugar.

Chairman Michael McLintock said the board has reviewed “all angles” of a potential Primark separation since November and now has an even stronger conviction that a split “is the right way to go.” He stressed the move is “not an exercise in financial engineering,” arguing that Primark and the food businesses have “very distinct dynamics” and “deserve and need separate oversight from separate dedicated boards” and “separate groups of shareholders.”

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McLintock said ABF is “absolutely focused now on delivering this transaction,” with timing discussed as “the end of 2027.” He added there is “probably a sweet spot between June and October,” and said the company has tried to put a “top estimate” of costs into its release. He also said Wittington is “fully supportive.”

CEO George Weston said the separation is intended to improve long-term decision-making, noting, “If we didn’t think that this change in governance would accelerate long-term growth in Primark, we wouldn’t be doing this.” In the Q&A, Weston said Primark would benefit from bringing “industry expertise… around international, around digital, around marketing” onto a dedicated board, while a standalone food company would face more direct market scrutiny. CFO Joana Edwards added that both businesses are expected to have “very strong balance sheets” as standalone entities, though management did not provide detailed capital structure targets.

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For the 24 weeks ended 28 February, Edwards said group revenue was £9.5 billion, “flat compared to last year at actual rates,” including a £76 million foreign exchange translation benefit. At constant currency, revenue was 2% below last year, reflecting 2% growth in Primark sales and a 3% decline in aggregate food sales.

Group adjusted operating profit was £691 million, down 18% at constant currency, which Edwards said was driven mainly by lower profit in Primark, grocery, and sugar. Weston said adjusted operating profit fell 18% and adjusted EPS was down 15%, adding that the difference reflected the benefit of share buybacks.

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Management kept the interim dividend unchanged year-over-year. Edwards said the interim dividend was £0.207 per share, and Weston said the group completed £187 million of buybacks year-to-date, with the full £250 million program expected to be completed by the end of the financial year.

Edwards reported free cash flow of £71 million compared with £27 million a year earlier, citing reduced working capital outflow due to lower Primark inventory levels since the 2025 year-end. She also said the half-year net debt position including lease liabilities was £3.0 billion, compared with £2.1 billion in the prior-year period, with leverage at 1.2 times. The pension surplus was £1.7 billion, which she described as “a very significant asset.”

Primark sales rose 2% to £4.7 billion, Edwards said, but like-for-like sales declined 2.7% overall. The UK was notably stronger, with sales growth of 3% and like-for-like growth of 1.3%, and Edwards said Primark “gained market share in a difficult U.K. clothing market.” In continental Europe, sales fell 1% and like-for-like sales declined 5.6% amid a weak consumer environment.

Primark’s adjusted operating profit margin was 10.1%, which Edwards said was in line with expectations. She said gross margin was lower due to “the higher level of markdowns as we effectively managed inventory levels,” partially offset by favorable FX and supplier efficiencies. During Q&A, Weston said, “Inevitably, we did buy too much,” and said the higher markdowns reflected that, though he added the company would not expect “the same level of markdowns to repeat themselves.” Edwards also pointed to “very benign” weather and the need to clear winter product.

Primark CEO Eoin Tonge described initiatives to “reenergize” the customer proposition, focused “unapologetically” on the UK and womenswear. He pointed to “Major Finds” drops to reinforce value messaging, category work in denim and performance wear, and new womenswear activity including the “Shock Me Chic” campaign and partnerships such as Coleen Rooney. Tonge also said Primark launched a new youth label, “The Scene,” with an encouraging early response.

On digital, Tonge said website traffic rose 37% in the first half and the CRM database grew by 1 million customers to more than 5 million, including 3.5 million in the UK. He said the Primark app has launched in the UK and is available in Ireland and Italy, with rollout to Spain and Portugal planned in the second half. Management reiterated that home delivery remains uneconomic for the business; Weston said it is still a “return dilemma.”

Primark opened 11 owned stores in the half, including five in the U.S., bringing the U.S. total to 38. Tonge highlighted an upcoming Manhattan flagship opening on May 8 as a key moment to build awareness. He also described Primark’s new franchise model in the Middle East as a “game changer,” saying the first store in Kuwait traded better than expected and early stores in Dubai traded “well above expectations,” with Bahrain and Qatar planned to open later this calendar year.

However, management also flagged a recent slowdown in Primark trading. Weston said the company has seen what it believes is an impact on sales “in just the last couple of weeks… across the whole of Europe,” tied to the Middle East conflict’s effect on consumer sentiment. Tonge described the slowdown as “marked but not dramatic.” Edwards said comparisons are complicated by timing effects such as Easter and other calendar events, and reiterated guidance that assumes negative like-for-like sales in the second half, with full-year Primark adjusted operating margin expected to be “approximately 10%.”

In grocery, Edwards said sales were £2.1 billion, in line with the prior-year half, while adjusted operating profit fell 20% at constant currency, primarily due to weakness in U.S. oils (Mazola and the Stratas joint venture). Weston said Mazola’s core consumers are Hispanic households, where spending has been pressured, leading to reduced entertaining and oil reuse. He said ABF has responded with promotions, smaller pack formats, and maintaining advertising share of voice, calling Mazola the number one brand and saying its share is “about the same as the next two combined.”

Weston said international brands such as Twinings and Ovaltine delivered good volume-led growth, though profit in the half was impacted by higher cocoa costs and startup costs for a new Ovaltine factory in Nigeria. He said cocoa prices peaked in the first half and have since come down, adding that second-half improvement is expected as startup costs do not repeat.

In ingredients, Edwards said AB Mauri sales and profit declined due to weaker U.S. demand for bakery ingredients and subdued demand for specialty yeast used in alcoholic beverages. Weston said ABF Ingredients (ABFI) delivered good growth across most businesses and highlighted an agreement by SPI Pharma to acquire Elementis Pharma to strengthen its position in pharmaceutical actives.

Sugar was the clear negative surprise. Edwards said sugar sales declined 9% and the segment posted an adjusted operating loss of £27 million, driven by prolonged low average selling prices in Europe and, in the UK, lower export sales and an inventory valuation reduction. Spain’s loss improved versus the prior-year half due to restructuring actions. Edwards said ABF does not expect to offset the first-half loss in the second half and now expects sugar to deliver an adjusted operating loss for the full year in 2026.

Weston attributed the European situation to continued oversupply and strong yields despite reduced acreage, saying the surplus is “quite small” but has driven “very aggressive pricing.” He said sowing intentions are “well down across most of Europe,” but added the company has not yet seen pricing respond to a potential deficit. On Africa, he said fundamentals remain strong but noted near-term headwinds including Tanzania startup delays and sugar imports pressuring margins in South Africa and Eswatini.

For the group, Edwards reiterated that adjusted operating profit and adjusted EPS are expected to be below last year, with the phasing “weighted to the second half,” and said segmental guidance is unchanged except for sugar. Weston said the company expects the direct cost impact of the Middle East conflict to be manageable in 2026 due to hedges, while warning that prolonged conflict could further weaken consumer demand.

Associated British Foods is a diversified international food, ingredients and retail group with sales of £13.9bn, 128,000 employees and operations in 53 countries across Europe, Africa, the Americas, Asia and Australia. Our purpose is to provide safe, nutritious, affordable food, and clothing that is great value for money. With the breadth of our business, our brands and global reach, ABF aims to consistently deliver value to its stakeholders. Our business is split into five segments: Grocery; Sugar; Agriculture; Ingredients; and Retail.

The article "Associated British Foods H1 Earnings Call Highlights" was originally published by MarketBeat.