Premier Foods: Half Year 2015/2016 Interim Results

London / UK. (pf) British Premier Foods PLC announced its Interim results for the 26 weeks ended 03 October 2015 and an exciting partnership with Paul Hollywood. Half year summary:

Branded sales in H1 increased plus 0.1 percent and Q2 up plus 1.6 percent; first quarterly increase for two years
Trading profit2 increased plus 8.4 percent
Adjusted profit before tax up plus 21.6 percent and adjusted earnings per share increased plus 21.9 percent
Operating profit 23.3 million GBP, up 36.1 million GBP on FY15 H1
Profit after tax 21.7 million GBP, compared to prior period loss after tax (49.1m)
Net debt of 585.3 million GBP in line with expectations; will reduce significantly in H2
Combined pension deficit reduced to 32.8 million GBP from 211.8 million GBP
Announces introduction of new brand; Paul Hollywood premium baking mixes

Gavin Darby, CEO: «We are pleased to see Group branded sales growth in both the first half and second quarter of this financial year, as well as Trading profit progression. This reflects the clear benefits from our continued commitment to brand investment and innovation. It is also encouraging to see strong sales growth in our International business following the investment we have made in additional resources».

«In the third quarter of the year, we expect to deliver positive Group branded sales growth, with Sweet Treats performing more strongly than Grocery. The industry backdrop remains a challenging one, but with strategies which are delivering tangible results and significantly higher marketing spend planned for the second half, our profit expectations for the year remain unchanged».

«In our Sweet Treats business, we are on track to deliver double digit margins in FY15/16 a year earlier than previously expected. Looking further forward, we remain committed to investing for sales and profit growth, and expect to deliver branded sales growth for the Group of one to two percent in FY16/17 and the medium term».

Continuing operations	FY16 H1	FY15 H1
Revenue (million GBP)	341.2	343.9
Operating profit / (loss) (million GBP)	23.3	(12.8)
Profit / (loss) after taxation (million GBP)	21.7	(49.1)

Underlying results	FY16 H1	FY15 H1	Change
Branded sales (million GBP)	306.6	306.4	0.1 percent
Trading profit (million GBP)	50.6	46.7	8.4 percent
Adjusted profit before tax (million GBP)	28.1	23.1	21.6 percent
Adjusted earnings per share (GBPence)	2.7	2.2	21.9 percent

Statutory and Underlying results

The Company’s results for the 26 weeks ended 3 October 2015 are presented on an «Underlying» basis, unless otherwise stated. The «Underlying» results exclude the results of previously completed business disposals and associate investments. «Continuing operations» includes the respective periods that the Company previously maintained controlling ownership of associate investments.

million GBP	Continuing operations	Less: Disposals	Less: Associates	Underlying business
FY16 H1
Sales	341.2	–	–	341.2
Trading profit	50.3	0.2	0.1	50.6
Ebitda	58.0	0.2	0.1	58.3

FY15 H1
Sales	343.9	(0.3)	(3.9)	339.7
Trading profit	45.6	0.5	0.6	46.7
Ebitda	52.3	0.5	0.6	53.4

Operating review

The following commentary unless otherwise stated is on an «Underlying» basis, which excludes all previously completed disposals and associate investments and references the 26 weeks ended 3 October 2015 (FY15/16 H1) and the comparative period, 26 weeks ended 4 October 2014 (FY14/15 H1). All references to the «quarter», unless otherwise stated, are for the 13 weeks ended 3 October 2015 and the comparative period, 13 weeks ended 4 October 2014.

million GBP	FY16 H1 (26 weeks)	FY15 H1 (26 weeks)	Change ( percent)

Sales
Branded	306.6	306.4	0.1
Non-branded	34.6	33.3	3.7
Total sales	341.2	339.7	0.4

Divisional contribution	68.2	64.9	5.1
Group and corporate costs	(17.6)	(18.2)	3.3
Trading profit	50.6	46.7	8.4

Ebitda	58.3	53.4	9.2

Quarter 2 sales results

million GBP	FY 16 Q2 (13 weeks)	FY15 Q2 (13 weeks)	Change ( percent)

Sales
Branded	156.5	154.1	1.6
Non-branded	18.5	16.6	10.6
Total sales	175.0	170.7	2.4

Introduction

Total sales for the 26 weeks ended 3 October 2015 were 341.2 million GBP compared to 339.7 million GBP in the prior year, an increase of 0.4 percent. In the second quarter, total sales increased by 2.4 percent, with the Company’s branded sales growing by 1.6 percent and non-branded sales up 10.6 percent. This represents the first quarterly branded sales growth for two years.

The Company is particularly pleased by the return to branded sales growth demonstrated both in the half and the second quarter of the year. This provides further evidence that the Company’s strategy of investing behind its brands, bringing exciting new products to market and working in even closer partnership with its customers, is delivering tangible results. Additionally, this shows a progressively improving sales trend over the last three quarters as the positive benefits of the strategy flow through. With an increased focus on international, sales in the international business unit grew by 22 percent at constant currency in H1 and by 38 percent on the same basis in the second quarter.

Trading profit for the 26 weeks ended 3 October 2015 was 50.6 million GBP, 8.4 percent higher than the prior year. Total Divisional contribution was 3.3 million GBP higher than the prior year at 68.2 million GBP, partly reflecting 2.4 million GBP lower consumer marketing as the Company rephases this activity towards its key trading period of the third quarter. Consumer marketing for the year is forecast at 36-38 million GBP (2014/15: 33 million GBP). Gross margins held up well during the first half of the year supported by improved asset utilisation in the Sweet Treats business and a period of benign input cost inflation. Ebitda grew by 4.9 million GBP in the first half, broadly following the trend of Trading profit.

Market overview

The backdrop to the UK grocery market is a well documented one. The growth channels of discounters, convenience stores and online have continued to gain market share, albeit the rate of growth in some of these channels has started to slow. Food deflation, reflecting a combination of benign input costs and a more competitive market has been prevalent for approximately twelve months, while grocery volumes have displayed a consistent return to growth of 1.5-2.0 percent through 2015.

In overall terms, the Company has grown share in its categories over the last 52 weeks and in particular, continued to gain share and drive category growth in the Cake and Flavourings and Seasonings categories. In these two categories, where the Group has focused its investment over the last twelve months, the Group has seen volume, value and share gains in each of the main brands; Bisto; Oxo; Mr. Kipling and Cadbury cake. Household penetration5 rates have also increased for each of these four brands, reflecting both this brand investment and their relevance to the UK consumer.

Brand investment and innovation

Over the last twelve months, the Company has significantly increased its consumer marketing investment and launched a number of new products to market. Highlights have included the relaunch of Mr. Kipling with major TV advertising campaigns, the Bisto Together project with Simply Casserole and Rich Gravy Pastes, Oxo Herbs and More, Cadbury dessert pots, Homepride advertising featuring «Fred» and Sharwood’s Stir Fry Melts. In the most recent quarter’s trading, branded sales increased 1.6 percent; a year ago branded sales recorded a decline of 4.3 percent. This turnaround demonstrates that the Company’s strategy of investing behind its brands is delivering results and reinforces the plans for further product innovation and marketing. In the first half of the year, 15.2 percent of the Company’s sales were delivered from products launched in the last two years; this compares to 11.3 percent for the 52 weeks ended 4 April 2015 and 6.9 percent two years ago.

The Company invested 13 million GBP in consumer marketing in the first half of the year, a slight decline on the prior period, although it expects to spend 36 million GBP to 38 million GBP in the full year. A large proportion of this investment will be focused on its key trading period of the third quarter, when the Company expects to deliver attractive returns on investment given the seasonal nature of its branded portfolio. This uplift in spend represents a 10-15 percent increase over the prior year and the Company expects to increase this further in FY17; a clear demonstration of the importance it places on brand investment as a driver of Group performance.

Additionally, the Company has been successful in delivering improved media buying efficiency through a lower cost per television rating. While the emergence of social and digital media has increased relevance, television advertising remains the most effective medium for the Company to communicate its brands to consumers.

Customer relationships

The Company employs a category based strategy, the overall premise of which is designed to deliver category growth for the mutual benefit of the Company, its customers and consumers. Over recent times, it has rationalised the range of product codes it sells, focusing on the bigger selling lines and worked in closer partnership with its customers, helping the Company achieve category captaincy and advisor statuses. The Company also works in close partnership to agree business plans and propose listings of new products with many of its customers.

A major customer has recently completed a review of the Company’s Grocery categories, which has concluded in line with the Company’s expectations. While the Company has lost some slower selling product codes as a result of this review, it has also gained increased availability of some higher selling product codes; both changes were as expected. With promotional activity always a feature of the commercial landscape, it remains too early to definitively gauge the overall impact of these ranging decisions, but the company continues to enjoy good relationships across its customer portfolio.

Grocery

In the first half of the year, sales in the Grocery business grew by 0.3 percent, with branded sales ahead 0.6 percent, while Divisional contribution increased by 1.2 percent to 60.8 million GBP. In the second quarter, total sales increased by 3.3 percent, of which branded sales contributed 3.1 percent.

The business unit’s biggest brand, Bisto, again recorded a strong performance, delivering both volume and sales growth in H1 and the second quarter. Sales benefitted from the launch of Bisto Simply Casserole pastes, launched approximately twelve months ago, which align strongly to key consumer trends such as convenience and «foodieness». This product, which has re-vitalised the category was recently renamed «Made Simple» and now has additional, new flavour variants recently launched to market. Additionally, Oxo grew sales and volumes in the half, supported by the launch of Oxo Stock Pots, again aligned to key consumer trends.

While sales of Ambrosia were marginally down in the half and flat in the quarter, it held share and remains the clear market leader in the ambient desserts category. As part of its standard brand planning cycle, the business unit has undertaken some key usage and attitude consumer research and identified opportunities for the Ambrosia brand to premiumise its offering and stretch into adjacent categories. Consequently, Ambrosia is planning to launch new «Deluxe» premium custard products to market in early 2016 in a variety of packaging formats. This exciting new product range is expected to be supported by new television advertising and plays to the premiumisation trend which has been followed with success by other brands in the portfolio.

In cooking sauces, Sharwood’s and Loyd Grossman both enjoyed very healthy sales growth in H1 and in the second quarter. Sharwood’s benefited from the launch of Stir Fry Melts, a product based on gel pot technology used in other parts of the portfolio and aligned to consumer trends of convenience and «foodieness», while Loyd Grossman also saw the launch of Pan Melts and continued momentum from its «Gastro» and «Classics» pouch range.

The Batchelors brand continues to experience falling sales, although this declining trend has to some extent reduced. New more premium cup-a-soup products were launched in the second quarter, with flavours including Thai Inspired Chicken and Sweet Potato and Southern Style Pulled Pork while further more contemporary Batchelors products are planned for introduction in 2016.

The Company’s home-baking brands, including McDougalls, Be-Ro and Atora, have historically received less focus than its core categories. Given the increasing popularity of home-baking over recent years, this category is now worth 387 million GBP with additional opportunities for growth in the premium segment of the market through new innovation. To capture these opportunities and help revitalise the category, the Company has entered into a partnership with renowned baker, Paul Hollywood, to launch a unique range of premium, artisanal home-baking products under the Paul Hollywood name.

These exciting new products will be created in conjunction with Paul according to his exacting standards and recipes and reflecting his vision to make artisanal baking products more accessible to a wider audience. The products will be produced at the Company’s existing facilities and Paul will be instrumental in the marketing of the new range. The initial range of products includes 12 different bread, savoury and sweet mixes which are expected to be available in-store early in 2016. The Company’s marketing investment plans for its existing branded portfolio remain unaffected by the new partnership.

Sweet Treats

Sweet Treats delivered a strong first half performance with sales up 0.8 percent and Divisional contribution ahead 54.2 percent at 7.4 million GBP, the latter reflecting an increase in Divisional contribution margin from 5.2 percent to 7.9 percent. In the second quarter, total sales increased 0.2 percent, with lower branded sales offset by higher non-branded sales of over 18 percent. The lower branded sales were due to cycling the major Mr. Kipling brand relaunch in the prior year and phasing of promotional activity which is expected to reverse in the third quarter. In terms of market share, Mr. Kipling was successful in growing both volume and value share in the first half of the year.

The ambient cake category continues to grow and Mr. Kipling has maintained its momentum, delivering volume and sales increases in both the first half of the year and the second quarter. Sales in H1 were supported by the launch of milkshake flavour snack pack slices, while new products including Deluxe Viennese Whirls, Fabulous Fancy and Victoria sponge and Coffee cakes were also launched towards the end of the half. In the second half, the business unit expects to launch an exciting new range of wholesome oat, fruit and nut based snack pack slices which align closely to relevant consumer trends. All the new products the Sweet Treats business unit is introducing are based on pertinent consumer trends and insights such as «togetherness»; «reward»; «snacking» and «nutrition» to ensure maximum consumer and customer interest.

Cadbury cake benefited from its first television advertising in eight years in the period, while new product development included «Amaze Bites» and Hot Cakes. Both products have been very well received by retail customers and initial results are encouraging.

The increase in non-branded sales in the first half of the year reflects a number of new business wins across a variety of customers. One key area of focus is mince pies, of which the Company sold approximately 150 million in FY14/15. The business continues to evaluate all such business opportunities and while it is very focused on driving branded sales growth, recognises that certain non-branded business can nevertheless be attractive. One of the benefits of such an approach is in supporting manufacturing site utilisation which is already reflected in the increased divisional contribution margin seen in the first half of the year. With the delivery of this increased divisional contribution margin already evident, the Company now expects to deliver a double-digit Divisional contribution margin in the Sweet Treats business in the current financial year; a year earlier than previously indicated.

During the period, the Sweet Treats business completed the implementation of its new Mr. Kipling snack pack slices line at its factory in Barnsley, South Yorkshire. This new line provides additional capacity and flexibility, so presenting opportunities to enter the convenience channel with twin-pack format sizes where sales and margin per slice are typically higher than the core range.

A significant proportion of the Group’s capital expenditure allocation this year is being spent at its Stoke cake bakery, where a number of automation projects are already delivering savings which have supported the Divisional contribution progress in the period.

International

In September 2014, the Company announced a new strategic business unit structure. Since the creation of this structure, the colleagues working in the International business unit have increased from nine to 27, with many of these joining the Company from other leading consumer sector companies in the last six months.

With this increased focus on international, sales of the business unit grew by 22 percent at constant currency in H1 and by 38 percent on the same basis in the second quarter. Strong performances were particularly noted in Australasia and Ireland. In Australasia, sales in the second quarter increased by 74 percent as a result of new listings of Sharwood’s, gaining significant market share and moving up to second largest brand in the Indian food market. Ireland sales increased by 7.5 percent at constant currency in the quarter, growing share in a flat market. In the third quarter, the Irish business will benefit from Bisto and Oxo television advertising, for the first time in over two years.

In the USA, sales of Sharwood’s are performing strongly; delivering double-digit sales growth and market share gains. Additionally, the Company has an exciting new trial of Mr. Kipling Apple, Fruit and Mississippi Mud Pies taking place across 250 stores of a major US retailer during November.

Group and corporate costs, efficiency and organisation structure

The Company is planning to invest approximately 25 million GBP in FY16 on capital projects across its manufacturing facilities. In particular, a number of projects have now been completed at our Stoke cake bakery to increase automation on packing lines, reducing a number of manual tasks and so delivering efficiency benefits. Additionally, the Company has embarked on a process optimisation programme at certain manufacturing facilities which involves working with a specialist partner to identify opportunities for sharper process control to deliver improvements in both product cost and quality. The payback on these cost reduction projects is expected to be just one year.

Group and corporate costs were slightly lower in the first half of the year compared to the prior period at 17.6 million GBP. Following the announcement by HM Government of the intention to implement a National Living Wage (NLW) for all employees above the age of 25 from April 2016, the Company has undertaken an initial analysis to assess the potential impact on its cost structure. While there is no impact in the current financial year, the Company expects there will be a relatively small increase in labour costs in the following year, FY16/17. The impact is expected to be greater at some of the Group’s manufacturing sites than others. While the NLW is expected to rise to at least 9.00 GBP an hour by 2020, this level represents the bottom of current government forecasts and the Company is currently undertaking a more detailed assessment of the potential cost implications by 2020.

The organisational structure of Grocery, Sweet Treats and International is now firmly in place and working well. An integral part of this structure has involved ensuring the right senior teams are in place across each business unit. Consequently, the Group has recruited some key talent from leading consumer sector companies each with a strong track record to support in delivery of the respective business unit objectives.

Outlook

The Company is particularly pleased to report Group branded sales growth in both the first half and second quarter of the year, as well as Trading profit2 and adjusted earnings progression. This reflects clear benefits of the Company’s continued commitment to its brand investment and innovation programmes.

In the third quarter of the year, the Group expects to deliver positive branded sales growth, with Sweet Treats anticipated to perform more strongly than Grocery. The industry backdrop remains a challenging one, but with strategies which are delivering tangible results, and significantly higher marketing spend planned for the second half, the Group’s profit expectations for the year remain unchanged.

In the Sweet Treats business, the Company is on track to deliver double digit divisional contribution margins in FY15/16; a year earlier than previously indicated. Looking further forward, the Company remains committed to investing for sales and profit growth and expects to deliver branded sales growth of 1-2 percent in FY16/17 and the medium term.