Premier Foods: Preliminary results 2015/2016

London / UK. (pf) British Premier Foods PLC announced its Preliminary results for the 52 weeks ended 02 April 2016. Fourth Quarter and Full Year sales trajectory provides strong platform to accelerate growth, the company reported in its statement.

Full Year Group sales +0.6 percent; Branded sales flat
Q4 Group sales up +1.4 percent; Branded sales up +1.0 percent
Trading profit3 131.0 million GBP, in line with last year
Adjusted profit before tax5 increased +2.9 million GBP to 86.1 million GBP
Adjusted earnings per share5 increased +4.6 percent to 8.3 GBPence
Net debt reduced to 534.2 million GBP from 584.9 million GBP – includes consolidation of Knighton
Improved overall IAS 19 pension schemes position
FY-2016/2017 sales growth guidance raised to 2 to 4 percent

Chief Executive Officer Gavin Darby said: «We are very pleased to report sales growth both in the year and the fourth quarter in what continues to be a deflationary market. Our strategy of investing behind our brands and bringing new innovative products to market continues to deliver very positive results, with six of our major brands growing on average +3.4 percent in the year. The Sweet Treats business reported sales growth in every quarter of the year while the International business also displayed excellent progress during the year with sales up +18 percent».

«Our adjusted earnings per share increased by +4.6 percent in the year, we reduced Net debt by over 50 million GBP and on an accounting basis our pension schemes have an improved financial position».

«We recently set out some additional strategic initiatives which we believe will further accelerate our growth and now expect to deliver sales growth of 2-4 percent in both FY-2016/2017 and the medium term. The potential opportunities presented by our partnership with Nissin are also very exciting. The Board is focused on delivering shareholder value and we see a strong future for Premier Foods with its leading category positions, great brands and strong operational cash flows».

Continuing operations	02 April 2016 (52 weeks)	04 April 2015 (15 months)
Revenue (million GBP)	771.7	964.3
Operating profit/(loss) (million GBP)	54.5	(44.1)
Profit/(loss) after taxation (million GBP)	34.0	(92.7)
Basic earnings/(loss) per share (GBPence)	4.1	(12.7)
Adjusted earnings per share (GBPence)	8.1	9.0

Underlying results (unaudited)	02 April 2016 (52 weeks)	04 April 2015 (52 weeks)	Change
Group sales (million GBP)	771.7	767.4	0.6%
Trading profit (million GBP)	131.0	131.0	0.0%
Adjusted profit before tax (million GBP)	86.1	83.2	3.5%
Adjusted earnings per share (GBPence)	8.3	8.0	4.6%

Operating review

The following commentary unless otherwise stated is prepared for the 52 weeks ended 02 April 2016 with comparative results for the 52 weeks ended 04 April 2015. Results are stated on an «Underlying business» basis which are unaudited and exclude all disposals and joint ventures transactions previously completed. The comparative results are stated on a «Pro forma» basis. Trading results of Knighton Foods Limited which was consolidated on 01 April 2016 are not reflected in the Sales and Trading profit results and associated commentary of the Operating review. All references to the «year», unless otherwise stated, are for the 52 weeks ended 02 April 2016 and the comparative period, 52 weeks ended 04 April 2015. All references to the «quarter», unless otherwise stated, are for the 13 weeks ended 02 April 2016 and the comparative period, 13 weeks ended 04 April 2015.

Introduction

Group sales for the 52 weeks ended 02 April 2016 were 771.7 million GBP, an increase of 0.6 percent on the prior year. In the fourth quarter of the year, total sales grew by 1.4 percent to 185.5 million GBP compared to the equivalent quarter a year ago. While branded sales were flat, six of the Group’s eight largest brands delivered average sales growth of 3.4 percent during the year. These six brands have received more focus on innovation and marketing investment over the last two years and this result clearly demonstrates that the Group’s innovation and brand marketing strategy is working.

Trading profit3 for the 52 weeks ended 02 April 2016 was 131.0 million GBP; in line with both the prior year and the Company’s expectations. Within this, the group has invested approximately 3 million GBP more consumer marketing compared to the prior year, while depreciation was 2.2 million GBP higher following recent increased levels of capital investment in the Group’s cake bakeries.

Market overview

During the past year, the UK grocery market has continued to display volume growth alongside a consistently deflationary environment. The rate of UK food deflation has remained broadly constant at 1.5 percent-2.0 percent over the last twelve months and as previously commented, reflects a combination of benign input costs and price competition across the wider grocery market.

The significant growth channels of discounters and online have continued their respective progress over the last year with the Group displaying growth broadly in line with both these growth sectors of the market. This reflects commitments to deliver growth in the discounters channel, principally but not exclusively through our non-branded offering, while dedicated resource has been recruited to realise the opportunities in online through a more focused and tailored approach.

During the year the Group continued to expand its offering of products with a nutritional benefit in response to a growing consumer demand for healthy choices. This included the launch of the ‘Exceedingly Good’ range of Mr Kipling Snack Pack slices containing wholesome ingredients such as oats, cranberry and coconut, the launch of Bisto Best Reduced Salt which has been a strong seller since its introduction in 2015 and increased vegetable content of its Loyd Grossman, Sharwood’s and Homepride cooking sauces so that around 70 percent contain ‘one of your five a day’. Building on existing achievements, the Group has recently refreshed its nutrition strategy for the next three years including plans to reduce calories and levels of added sugar in a number of product categories through reformulation initiatives, the introduction of calorie caps for individual cakes and the expansion of single portion packs of cake as a percentage of the portfolio. The Company also plans further salt reductions throughout its portfolio and will expand the number of new products launched into market with added nutritional benefits or calorie reductions.

Brand investment and innovation

The Group increased its investment in consumer marketing in the year to approximately 36 million GBP, an increase of nearly 10 percent on the prior year. The Group is committed to progressively increasing its consumer marketing investment over the medium term. In FY-2016/2017 the Group plans to spend 42 to 44 million GBP on consumer marketing, increasing its expenditure on media advertising and preparing the foundations for the launch of certain Grocery brands in the chilled arena. Consequently, nine of the Group’s brands are planned to benefit from TV advertising in FY-2016/2017.

Where the Group has invested in marketing its brands and introducing new products to market, it has demonstrated positive results. During the past year, six of the Group’s largest eight brands; Bisto, Oxo, Loyd Grossman, Sharwood’s, Mr Kipling and Cadbury cake all grew sales and on average, by +3.4 percent. Ambrosia and Batchelors, the other two major brands, saw sales decline by (2.9 percent) in the year. In aggregate, the former six benefitted from both higher level levels of marketing investment as a proportion of sales and more product launches. In FY-2016/2017, the Ambrosia and Batchelors brands will receive higher levels of marketing investment and are also expected to benefit from new products which align to current consumer trends such as Ambrosia Deluxe custard, Ambrosia Frozen Custard ice cream and Batchelors High Protein and High Veg pots.

Customer relationships

The Group counts all of the major food retailers in the UK as key customers of its products. In the ordinary course of business, it is customary for the food retailers to regularly review their product categories to ensure they offer their customers the best value and choice in their stores through category range reviews. Some of the Group’s major customers have undertaken category range reviews over the past year and in overall terms, the outcome of these reviews is that they have concluded in line with the Company’s expectations. While the Company has lost some slower selling product codes in some areas, it has also gained increased availability of some higher selling product codes in other areas; both changes were as expected. With its category based strategy, the Company continues to enjoy good relationships across its customer portfolio.

Grocery

Grocery sales were 548.6 million GBP in the year, slightly behind the prior year as growth in non-branded sales was offset by a small decline in branded sales to 504.9 million GBP. Sales in the fourth quarter increased by 0.5 percent, with both branded and non-branded delivering growth compared to the prior year. These results are set against the backdrop of deflation in the wider UK Grocery market. Divisional contribution was 3.1 million GBP lower at 142.1 million GBP due to increased consumer marketing investment in the year.

In the Flavourings + Seasonings category, Bisto and Oxo recorded strong performances, growing both sales and volumes during the year. For Bisto, the Group’s second largest brand, new products launched into market contributed to over half the sales growth, with the new reduced salt Bisto Best product proving particularly popular among consumers. Oxo sales benefitted from the launch of Stock Pots using gel pot technology, aligned to key consumer trends and which accounted for approximately half the brand’s sales growth in the year. This category has received a significant level of investment and focus over the last two years and clearly demonstrates that the Group’s category led strategy is delivering results.

In the Cooking Sauces and Accompaniments category, sales of Loyd Grossman and Sharwood’s continued their positive trajectory from the first half of the year, with both delivering full year sales growth. Loyd Grossman sales benefitted from the rollout of its «Gastro» and «Classic» pouches range and the gel pot Pan Melts product, while Sharwood’s Stir fry Melts were supported by a major TV advertising campaign.

Sales of Ambrosia were down slightly in the year, however they returned to healthy growth in the fourth quarter, assisted by two new product ranges. These comprised a range of premium Deluxe custard including clotted cream, toffee and contemporary salted caramel flavours and a significant extension of the brand into the ice cream market with a range of frozen custard ice cream. Elsewhere in the Desserts category, Mr. Kipling and Cadbury sponge puddings and Cadbury desserts pots have all performed strongly in the year.

As previously highlighted, while sales and volumes of Batchelors have experienced significant declines in the past, this declining trend has materially reduced. New premium cup-a-soup products were launched in the first half of the year, with flavours including Thai Inspired Chicken + Sweet Potato and Southern Style Pulled Pork. Additional new products to be launched in FY-2016/2017 include High Protein pots, High Veg pots and Soup Dippers.

In the fourth quarter, the Group entered into a partnership with renowned baker, Paul Hollywood and launched a unique range of premium artisanal home-baking products which are now available in a number of the Group’s major retail customers.

Sweet Treats

Sweet Treats total sales increased by 3.4 percent in the full year and by 3.8 percent in the fourth quarter. This marks a consistently strong trajectory for the business unit which has delivered sales growth in all four quarters of the year. Both branded and non-branded sales grew in the year; up 1.9 percent and 10.0 percent respectively, with similar trends recorded for the fourth quarter. Volumes, measured in cases and packets of products, also displayed healthy increases in the year. As expected, the business unit achieved its target of delivering double-digit Divisional contribution margins in the year, increasing from 8.3 percent in the prior year to 11.2 percent for FY-2015/2016.

Cadbury cake enjoyed an excellent year, with sales and volumes growing in double-digit percentage terms in both the year and the fourth quarter. While new products such as Amaze Bites and Hot Cakes have provided nearly half of the brand’s growth in the year, the core range has also performed very well. Cadbury cake benefitted from its first television advertising for eight years during the year and this will be repeated in FY-2016/2017.

Mr Kipling launched a number of new products in the year including Deluxe Viennese Whirls, Fabulous Fancy, Victoria Sponge and Coffee cakes, Exceedingly Good slices and premium cup cakes. Mr Kipling grew sales in the year and up to the third quarter this year, had delivered six quarters of consistent growth. Sales were lower in the fourth quarter due to an exceptionally strong comparative quarter in FY-2014/2015. Both Mr Kipling and Cadbury have been instrumental in driving category growth during the year with a number of the new product launches supporting the Group’s premiumisation strategy.

Over half of the business unit’s non-branded sales are generated in the third quarter of the year, and the strong performance in this area reflected mince pie contract gains across both multiple retail and discounter channels. In 2015, the Company sold 185 million mince pies, an 8 percent increase on the prior year. Other non-branded contract wins in the year which contributed to this sales and volume growth included fruit pies.

The strong Divisional contribution margin delivery in the year reflects improved asset utilisation through increased branded and non-branded volumes, improving the product profitability mix and efficiency benefits from capital projects.

International

Sales in the International business increased by approximately 15 percent in the year, and excluding the impact of adverse foreign currency movements, were ahead approximately 18 percent.

The Australian business performed very well, up 47 percent during the year as a result of new listings of both Sharwood’s and Mr Kipling and Cadbury cakes in certain retailers. Market share of Indian cooking sauces increased by +4.6 percentage points reflecting improved distribution levels.

Sales in the USA grew by 23 percent, with the fourth quarter particularly strong, reflecting a very good Sharwood’s performance with market share in Indian cooking sauces up +2.2 percentage points in the year. The Company also undertook a new trial of Mr. Kipling Apple, Fruit and Mississippi Mud Pies across 250 stores of a major US retailer in the third quarter of the year which delivered some encouraging results. Ireland sales grew in constant currency, supported by Bisto and Oxo TV advertising in the second half of the year.

The International business unit has significantly increased the size of the team during the year to reflect the growth aspirations of the Group. The business unit now employs 28 people, an increase from just 9 a year ago, across a range of key functions to support the Group’s growth plans.

Efficiency and cost control

Over the coming financial year, the Group will be looking more closely at improving the quality and product consistency across certain lines within its Grocery business. Expertise will be used to review current manufacturing processes to identify areas for improvement which are expected to deliver increased line efficiencies. Additionally, and following a review of its Grocery plant line management operations, teams will become more streamlined, delivering greater flexibility within manufacturing sites and resulting in overhead cost reductions.

In logistics, the Group is reviewing options in both its transport and warehousing operations which may lead to changes in the configuration of its network. While these reviews are ongoing, the majority of these changes are likely to take place late in the year and into FY17/18.

The Group maintains a continual focus on improving the returns on investment from promotional activity in which it participates with major customers. In the third quarter of the year, the Group’s key trading period of the year, the Grocery business delivered improved returns on investment on promotional activity and also executed 27 percent more off shelf instore shipper displays compared to the prior year.

HM Government has recently implemented a National Living Wage (NLW) for all employees above the age of 25 which was effective from April 2016. The Company expects there will be a relatively small increase in labour costs in FY-2016/2017 as a result of this legislation. 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. Additionally, HM Government have also proposed to implement an Apprenticeship Levy, effective from April 2017. The Group will look to offset the impact of this levy through its continued investment in training and apprenticeships and create a more flexible workforce.

Net regular interest

Net regular interest for FY-2015/2016 was 44.9 million GBP, in line with the Group’s expectations and 2.9 million GBP lower than the prior year. The Group’s sources of financing were largely unchanged in the year, except for the previously announced closure of its 80 million GBP debtors securitisation programme. As a result of the low utilisation and subsequent closure of this securitisation programme, interest charges attributable to it more than halved to 1.2 million GBP in the year. As expected, the largest component of financing was interest due to holders of the senior secured notes and was 30.8 million GBP in the year. Bank debt interest was 1.7 million GBP lower in the year due to approximately one month’s term loan debt from the previous financing structure included in the comparative period.

The Company expects net regular interest for the 2016/2017 financial year to be marginally lower than FY-2015/2016.

Associate investments

As at 04 April 2015, the Company held a 49 percent interest in both Hovis Limited and Knighton. On 1 April 2016, the Company gained control of Knighton for reporting purposes under IFRS 10 and consequently this business is consolidated in the financial statements for the year from that date.

For the financial period ended 02 April 2016, the Company recognised a share of loss from associates of (22.6 million GBP), of which (14.1 million GBP) is due to the share of loss from its investment in Hovis. This loss reflects the highly competitive UK Bread market. The share of loss from the Company’s investment in Knighton was (8.5 million GBP) during the period due to challenging market conditions, an unsatisfactory systems implementation and following a review of the carrying value of certain assets.

Additionally, the Group wrote off its remaining investment in Hovis which is reflected in the impairment charge of 9.3 million GBP. The remaining 4.3 million GBP investment in Knighton was written off reflecting the challenging market conditions faced by the business. Consequently, associate investments had a nil value as at 02 April 2016.

Cash flow

Total cash inflows in the year were 55.7 million GBP. Trading profit was 131.0 million GBP, while depreciation of 16.1 million GBP was in line with the Company’s expectations, although this is expected to be slightly higher in FY-2016/2017 at 17-18 million GBP. Interest paid was 41.7 million GBP and capital expenditure was 25.4 million GBP. Pension contributions of 12.9 million GBP were broadly in line with the previously agreed schedule of pension deficit contributions and costs associated with administering the pension schemes. Other non-cash items principally relate to the add-back of share based payments. Cash restructuring costs relating to a major re-organisation of the Group’s IT function is one of the main elements of the 7.5 million GBP outflow in the year.

Net debt

Net debt at 02 April 2016 was 534.2 million GBP. This represents a 50.7 million GBP reduction in Net debt compared to the prior year and also includes the impact of consolidating Knighton.

The Company’s Net debt / Ebitda ratio reduced to 3.6x at the year end, down from 4.0x as at the end of 2014/2015 and reflects the Group’s focus on debt reduction. The Group expects deleveraging will progress at a slower rate from FY-2016/2017 due to the increase in the previously agreed annual deficit cash contributions to the pension schemes.

Accelerating growth strategy

On 23 March 2016, the Group announced a number of strategic initiatives to help accelerate growth across its three business units of Grocery, Sweet Treats and International. Together with the Group’s existing plans, these new initiatives are expected to support the Group to deliver its medium term sales growth guidance of 2-4 percent. The new initiatives will leverage the Company’s existing platforms, infrastructure and brand presence to expand further into new formats, channels and markets:

In Sweet Treats, we plan to build on the successful trial of our Cake-On-The-Go range of Mr Kipling twin pack slices and Cadbury mini roll twin pack by accelerating growth of our brands in broader convenience channels through capitalising on our manufacturing investments, innovation expertise and dedicated new team.
In Grocery, we intend to extend our strong brands into premium areas within the chilled grocery sector in both the sweet and savoury segments, to meet consumers’ growing health-consciousness.
In International, we plan to leverage the investment we have already made in hiring an experienced team to step-change the size of our International business. Our focus will be on accelerating the expansion of our cake brands in the US and other geographies using our differentiated offering, unique formats and packaging. Initial store trials have demonstrated the potential for future growth in these markets.

The Group also announced on 23 March 2016 that it had entered into a co-operation agreement with Nissin Foods Holdings Company Limited and subsequently a Relationship agreement was entered into.
Over recent years, the Group has discussed a number of potential strategic opportunities with Nissin. This new strategic partnership has the potential to create significant long-term value for both organisations through strategic co-operation in the following areas:

Providing Premier with access to Nissin’s innovative products and formats to distribute in the UK market under either Nissin’s or Premier’s brands, such as Batchelors.
Enabling Premier to benefit from Nissin’s international scale to accelerate the distribution of Premier’s products in key overseas markets.
Sharing of Nissin’s significant intellectual property, innovation and technical know-how to develop new products.
Creating opportunities for both companies to leverage their joint manufacturing capabilities and infrastructure.
Facilitating sharing of expertise and best practice through appropriate secondments of personnel.

Further to the Relationship agreement dated 22 April 2016, the Group is today announcing that Mr. Kijima, Managing Director of Nissin, is appointed a non-executive director of the Board of Premier Foods with effect from 21 July 2016.

Outlook

The Group’s strategy of investing behind its brands and bringing new innovative products to market delivered positive results in FY-2015/2016. In FY-2016/2017 consumer marketing investment is expected to increase again, to 42 to 44 million GBP, with nine brands planned to benefit from television advertising. Building on this trajectory, the Group now expects to deliver sales growth of 2-4 percent in both FY-2016/2017 and the medium term, and together with its supply chain efficiency programme, anticipates good progress to be delivered in FY-2016/2017.

Future prospects for the Group are reinforced by the recently announced initiatives to accelerate growth in each of its business units in addition to the potential opportunities presented by the partnership with Nissin. The Board are focused on delivering shareholder value and see a strong future for Premier Foods with its leading category positions, great brands and strong operational cash flows.

Operating review end. The complete news release is available on the company’s web server.