London / UK. (pf) British Premier Foods PLC announced its Half Year results for the 26 weeks ended 30 September 2017. Highlights:
- Half year revenue up +1.5 percent; Q2 revenue up +6.2 percent
- Return to volume driven revenue growth in Q2
- International revenue increased +23 percent in H1
- Over 40 percent of Q2 revenue growth from Nissin and Mondelez International strategic partnerships
- Trading profit of 48.0 million GBP in line with comparative period
- Adjusted profit before tax up +0.5 percent to 26.4 million GBP
- Statutory profit after tax 0.3 million GBP; basic earnings per share 0.0pence
- Net debt 535.3 million GBP; 20.7 million GBP improvement on last year
Chief Executive Officer Gavin Darby: «We are pleased to report a return to revenue growth of +1.5 percent in the first half of the year. A key highlight was our strong performance in the second quarter, with volume driven revenue up +6.2 percent after a challenging first quarter. Our International business continues to go from strength to strength and saw revenue growth of +23 percent in the first half of the year».
«Our Strategic partnerships with Nissin and Mondelez International are working very well, together delivering over 40 percent of our revenue growth in the second quarter. We completed the signing of the new Mondelez International Global Strategic Partnership in the first half of the year and through our partnership with Nissin, Batchelors is now the fastest growing major brand in our portfolio following the launch this year of convenient pot format products such as Super Noodle Pots».
«The cost efficiency programme we launched earlier this year is on track to deliver the expected benefits. We completed the issue of a new 210 million GBP high yield bond in June and our Net debt was 21 million GBP lower than the same point last year; a little ahead of our plans. Overall, we continue to expect the business to make progress in the second half of the year and our expectations for the full year remain unchanged».
Revenue
Group revenue for the 26 weeks ended 30 September 2017 was 353.3 million GBP, an increase of 1.5 percent on the prior period. Branded revenue was in line with last year at 295.4 million GBP while Non-branded revenue increased by 10.1 percent to 57.9 million GBP.
In the second quarter of the year, Group revenue increased by +6.2 percent to 183.2 million GBP compared to the equivalent quarter a year ago. Branded revenue increased by +5.7 percent to 152.3 million GBP and Non-branded revenue grew by +8.9 percent to 30.9 million GBP. Following weaker Q1 trading, the Group’s largest brands recovered in the second quarter to record significantly improved performances in terms of both volume and revenue.
Group revenues have been supported in the first half of the year by a combination of benefits from the Group’s strategic partnerships with Nissin and Mondelez International. In the second quarter, 44 percent of the Group’s revenue growth reflected benefits obtained through these two strategic partnerships, including Batchelors Super Noodle Pots, Soba Noodles and Cadbury growth in International.
The Grocery business unit reported Half year revenue of 255.0 million GBP, up +1.9 percent on the same period a year ago. Branded revenues grew by +0.9 percent to 214.7 million GBP and Non-branded revenue increased by +7.4 percent to 40.3 million GBP. In the second quarter, Grocery revenue grew +9.7 percent, with Branded revenue ahead +10.5 percent and Non-branded revenue increasing +6.1 percent.
As the Group expected, and as previously reported, the first quarter saw weaker trading in its Grocery brands. Although some brands gained market share, revenues declined reflecting lower overall market volumes partly due to a warmer June, lower promotional effectiveness particularly in the Desserts category and a move to more normalised levels of trade investment in non-retail channels.
The second quarter displayed a significantly stronger trajectory with a return to volume and revenue growth in many of the Group’s major brands. One of the major contributors to Grocery branded revenue growth in the half was from Batchelors, which grew +7.8 percent in the period and has also increased its category share by nearly two percentage points over the past year. As commented previously, this was supported significantly by the launch earlier this year of the Batchelors Super Noodles Pot product, a product range closely aligned to the consumer trend of snacking and on the go eating. This product launch was accelerated by leveraging the advanced supply chain capabilities of the Group’s strategic partner, Nissin. The Batchelors brand has also benefitted substantially from the launch of Pasta ‘n’ Sauce pots, another range of convenient quick meals perfectly suited to today’s time conscious consumer.
Bisto, the Group’s second largest brand by revenue, performed consistently well during the half, delivering volume and revenue growth and also delivering share gains. Oxo volumes and revenue were up significantly in the second quarter following lower category sales in the first quarter. Angel Delight, one of the Group’s smaller and historically less heavily invested brands, grew by 30 percent in the period, benefitting from the launch of convenient ready to eat pots.
The Grocery business has been impacted in recent quarters by changing retailer promotional strategies. The Group has largely annualised the effect of these changes and forsome customers have seen the gradual return of multi-buy promotional activities which are generally beneficial to delivering volume growth.
Grocery Non-branded revenue increased by 2.8 million GBP in the period to 40.3 million GBP. New contract wins from both retail and discounter channels, and to a lesser extent, some revenue growth at Knighton Foods contributed to this growth.
Sweet Treats delivered revenue growth of 0.7 percent in the first half of the year to 98.3 million GBP. Branded sales were 1.9 million GBP lower at 80.7 million GBP while Non-branded revenue continued its strong trajectory, growing by 17.0 percent to 17.6 million GBP.
Cadbury cake revenue in the Sweet Treats business unit was marginally ahead of the prior year and reached its highest ever value UK market share of 8.4 percent in the period, according to IRI. Total Mr Kipling revenue was slightly lower than the prior year, although momentum is building in its margin-enhancing cake on the go range with growth of +55 percent in the period.
The growth in Non-branded Sweet Treats revenues continued the same pattern as seen in the prior year, with new contract wins across a broad range of retail customers in various cake sub-categories. Additionally, the business is benefitting from the growth of the hard discounter channel with the continuation of new retail space.
The International business unit continues to perform very strongly and in line with the Group’s medium term expectations. In the first half of the year, revenues grew +23 percent on a constant currency basis and were up +30 percent in the second quarter. Over the last two years, International revenues have progressed at a compound annual growth rate of 18 percent, and have posted twelve successive quarters of year on year growth in the last three years.
A key part of the business unit’s success to date is due to the growth of Mr Kipling and Cadbury cake in Australia. Building on this, the Group has recently entered the New Zealand market for the first time with a range of Mr Kipling and Cadbury cakes. Additionally, Sharwood’s, the Group’s third largest brand in international markets, is expected to benefit from further expansion in the USA over the medium term through increased distribution in a major USA retailer.
An important element of the International business’s strategy is the transition from a predominantly sales and distribution model to one of building brands in some of its key international markets. In FY16/17 the Sharwood’s brand benefitted from a targeted social media marketing campaign in Australia and this is being followed up in the current year by similar marketing activity for Mr Kipling, also in Australia. These are the first such marketing campaigns the Group has undertaken in its international markets and are central to support its growth ambitions.
Trading profit
business and 11.5 million GBP from Sweet Treats. Group + corporate costs were broadly in line with the prior period at 14.9 million GBP.
Grocery Divisional contribution benefitted from increased volumes in the first half of the year from the Bisto, Batchelors, Loyd Grossman and Sharwood’s brands, although this was offset by mix effects with higher sales of lower margin products such as Non-branded flour. As previously commented, the Group has experienced material input cost inflation in the past year from both commodity cost increases and the devaluation of Sterling. The Group takes a blended approach to managing these cost increases, managing its own efficiencies, adjusting promotional mechanics and formats where appropriate and finally looking at limited price increases where these cannot be avoided.
The Group undertakes a collaborative approach when working with its customers, and accordingly this process took longer than expected. As a result, while Grocery Divisional contribution was lower in the first quarter of the year, the second quarter saw a return to more normal percent margin levels following the conclusion of this process. Input cost inflation is forecast to continue into the second half of the year, albeit at a lower rate. As a result the Group will continue to keep its cost recovery plans under close review.
Grocery also saw reduced overhead recoveries in some manufacturing sites in the period. In particular, the transition to higher promotional price points for the core Ambrosia range resulted in short-term reductions in volumes which in turn impacted manufacturing overhead recoveries at the Group’s Lifton site. Entering the second half, promotional volumes in Ambrosia are recovering and manufacturing recoveries have returned to normal levels. A decline in volumes and lower efficiencies during the first half of the year at Knighton Foods materially impacted Divisional contribution.
During the year, the Group has embarked on a major transformation of its warehousing and distribution operations. This programme is planned to consolidate all the Group’s logistics operations at one single location in Tamworth, central England. While the first phase of the transition has experienced some initial implementation challenges, these are now substantially resolved and the plan to deliver the programme benefits remains on track.
In Sweet Treats, Divisional contribution was +4.9 million GBP higher than the comparative period at 11.5 million GBP. This was due to phasing of consumer marketing investment and savings from new and ongoing lower levels of SG+A costs. These SG+A savings in Sweet Treats are expected to continue into the second half of the year.
As previously stated, the Group expects to invest the majority of its consumer marketing spend in the second half of the financial year. Activity will be particularly focused on the third quarter – the Group’s key trading period, and hence the time of year when we are able to deliver the best return on investment.
Operating profit
Adjusted EBITDA in the first half of the year was 56.1 million GBP and depreciation was 8.1 million GBP, both of which were in line with the comparative period.
Operating profit increased by 0.5 million GBP to 22.5 million GBP in the period, and while restructuring costs and amortisation of intangible assets were lower in the period, these were partly offset by an impairment of goodwill related to Knighton Foods. Restructuring costs in the Half year of 3.1 million GBP related to charges associated with the Group’s logistics restructuring programme. The comparative period included restructuring costs of 7.1 million GBP, a large proportion of which were charges related to corporate activity. An impairment charge of 4.3 million GBP in the period related to the write off of Knighton Foods goodwill.
Net interest on pensions and administrative expenses was 1.0 million GBP in the period, slightly higher than the comparative period. This comprised administrative expenses incurred of 2.5 million GBP, partly offset by a net interest credit of 1.5 million GBP owing to an opening combined pension schemes surplus.
Net regular interest for the Half year was 21.6 million GBP, a decrease of 0.1 million GBP compared to the prior period. As expected, the largest element of finance costs was interest due to holders of the Group’s senior secured notes of 15.9 million GBP. Bank debt interest of 3.6 million GBP was 0.8 million GBP lower in the period due to lower levels of average debt and slightly lower LIBOR levels compared to the prior period.
Net finance cost was 23.7 million GBP for the Half year; 7.0 million GBP lower than the comparative period. In the prior year, a 8.6 million GBP discount unwind charge relating to long term property provisions held by the Group due to a reduction in gilt yields was reflected in the reported Net finance cost of 30.7 million GBP. In the current period, an increase in gilt yields resulted in a benefit of 2.0 million GBP. Write-off of financing costs of 4.0 million GBP in the Half year related to the write off of transaction costs associated with the issue in 2014 of six year senior secured floating rate notes due March 2020, which were repaid during the period.
Finance costs
The taxation credit on continuing operations for the period ended 30 September 2017 of 1.5 million GBP compares to a charge of 46.9 million GBP in FY16/17 H1 and included a deferred tax movement of 0.9 million GBP based upon management’s best estimate of the effective annual income tax rate expected for the full financial year and a credit largely relating to the repayment of Irish taxation paid in prior years.
Deferred tax assets at 30 September 2017 were 30.8 million GBP compared to 32.4 million GBP at 1 April 2017. Deferred tax assets relating to brought forward losses were approximately 54 million GBP which equate to around 320 million GBP of future taxable profits.
The corporation tax rate and deferred tax rate applied in calculations are 19.0 percent and 17.0 percent respectively.
Taxation
A loss before tax of (1.2 million GBP) was reported in the first half of the year, compared to a loss before tax in the comparative period of (8.7 million GBP). After a taxation credit of 1.5 million GBP in the period, profit after taxation was 0.3 million GBP, which resulted in a neutral basic earnings per share in pence.
Adjusted profit before tax for the Half year was 26.4 million GBP, +0.1 million GBP ahead of the comparative period. This was due to a slightly lower net regular interest charge compared to the previous period. Adjusted profit after tax was 21.4 million GBP after deducting a notional 19.0 percent tax charge, an increase of 0.4 million GBP compared to FY16/17 H1. Based on average shares in issue of 834.2 million shares, adjusted earnings per share in the period was 2.56 pence, +0.9 percent higher than the 2.54 pence reported in the previous Half year.
Free cash flow
Free cash flow in the Half year was an outflow of 12.8 million GBP. Trading profit and Depreciation, at 48.0 million GBP and 8.1 million GBP respectively, were in line with the prior year period. Interest paid in the period was 3.0 million GBP lower than the comparative period at 17.2 million GBP due to timing differences. A taxation credit of 1.0 million GBP was received in the period from Irish tax authorities in respect of tax paid on previous period losses. Pension contributions in the Half year were 19.8 million GBP, a reduction of 12.3 million GBP from the comparative period principally due to the re-negotiation of deficit contributions to the Group’s pension schemes announced in March this year. Capital expenditure was 2.4 million GBP higher in the period at 8.6 million GBP and the Group’s expectations for the Full year are unchanged at 20 to 22 million GBP. Working capital and other items was an outflow of 12.9 million GBP. Restructuring costs associated with redundancies relating to the Group’s cost reduction and efficiency programmes and implementation costs associated with the Group’s logistics transformation programme together amounted to 6.9 million GBP. The Group now expects restructuring costs to be between 10 to 12 million GBP in this financial year. Financing fees of 6.8 million GBP relate to costs associated with the extension of the Group’s revolving credit facility and the issue of new 210 million GBP Senior secured floating rate notes in the period.
On a statutory basis, cash generated from operations was 17.4 million GBP compared to 7.0 million GBP in FY16/17 H1. This was primarily due to lower pension deficit contributions, as commented and identified in the table above. Cash generated from operating activities was 1.2 million GBP in the period, compared with cash used in operating activities in the comparative period of (13.2 million GBP). Cash used in investing activities was (7.3 million GBP) in the Half year compared to (6.0 million GBP) in FY16/17 H1. Cash generated from financing activities was 22.3 million GBP in the period. This was principally due to proceeds from borrowings of 210.0 million GBP which reflected the issue of new Senior secured floating rate notes, the repayment of the 2014 175.0 million GBP Senior secured floating rate notes and the associated reduction in the Group’s revolving credit facility.
At 30 September 2017, the Group held cash and bank deposits of 9.5 million GBP and bank overdrafts of 11.4 million GBP.
Net debt and sources of finance
Net debt at 30 September 2017 was 535.3 million GBP; a 20.7 million GBP reduction compared to the same point a year ago. The movement in Net debt compared to the previous year end was an outflow of 12.1 million GBP. The Group generally observes an increase in Net debt in the first half of the financial year, reflecting the natural working capital cycle of the business. The movement in debt issuance costs in the period was 0.7 million GBP.
In the first half of the year, the Group extended the term of its revolving credit facility with its lending syndicate from March 2019 to December 2020. The total facility, which was 16.0 million GBP drawn at 30 September 2017, reduced from 272 million GBP to 217 million GBP in June 2017 and reduces further to 184 million GBP in March 2019. The interest margin under the revolving credit facility is unchanged and covenants under the facility, which are tested bi-annually, were updated to ensure appropriate headroom in future reporting periods.
The Group also completed the issuance of new five year 210 million GBP Senior Secured floating rate notes due July 2022. This new note replaced the Group’s 175 million GBP Senior Secured floating rate notes, previously due to mature March 2020, and reduced the revolving credit facility by a total of 55 million GBP. As previously announced, the pricing of the new 210 million GBP Senior Secured floating rate notes was confirmed at 5.00 percent +LIBOR, which is in line with the retired 175 million GBP Senior Secured floating rate notes.
Pensions
The IAS 19 pension schemes valuation reported a surplus for the combined RHM and Premier Foods’ pension schemes at 30 September 2017 of 126.9 million GBP, equivalent to 105.3 million GBP net of a deferred tax charge of 17.0 percent. This compares to a combined RHM and Premier Foods’ schemes surplus at 1 April 2017 of 104.8 million GBP and 87.0 million GBP net of deferred tax. A deferred tax rate of 17.0 percent is deducted from the IAS19 retirement benefit valuation of the Group’s schemes to reflect the fact that pension deficit contributions made to the Group’s pension schemes are allowable for tax.
The valuation at 30 September 2017 comprised a 588.1 million GBP surplus in respect of the RHM schemes and a deficit of 461.2 million GBP in relation to the Premier Foods schemes. Assets in the combined schemes decreased by 142.5 million GBP in the period from 4’864.6 million GBP to 4’722.1 million GBP. RHM scheme assets decreased by 129.9 million GBP and the Premier Foods’ schemes assets decreased by 12.6 million GBP.
Liabilities in the combined schemes decreased by 164.6 million GBP in the period to 4’595.2 million GBP. The value of liabilities associated with the RHM scheme were 3’472.9 million GBP, a reduction of 124.1 million GBP while liabilities in the Premier Foods schemes were 40.5 million GBP lower at 1’122.3 million GBP. The reduction in the value of liabilities in both schemes is due to a slight increase in the discount rate assumption, from 2.65 percent to 2.70 percent and a reduction in the inflation rate assumption; from 3.3 percent to 3.2 percent.
The net present value of future deficit payments, to the end of the respective recovery periods remains at c.300 to 320 million GBP.
Principal risks and uncertainties
The Group’s principal risks and uncertainties were disclosed on page 20 to 23 of the annual report and accounts for the financial period ended 1 April 2017 and these remain relevant for the current period. The major strategic and operational risks are summarised under the headings of Delivery of strategy, Corporate risks, Commodity prices / Foreign exchange, Weather, Commercial arrangements, Business restructuring, Operational continuity and Legal compliance.
Outlook
The Group’s strategy is to give an equal focus and weight to growing revenue, delivering cost efficiencies and generating cash. In the UK, a core objective for the Group continues to be to grow ahead of its categories and for International to deliver strong double-digit growth. The global strategic relationships presented by the Cadbury and Nissin partnerships are already delivering tangible benefits and the Group’s cost savings programme is on track to deliver expected benefits. The Group is focused on reducing its leverage ratio to below 3.0x in approximately 3-4 years through profit improvement and debt reduction.
The Group is encouraged by the volume and revenue growth performance in the second quarter of the year. Additionally, Trading profit for the first half of this financial year was in line with the Group’s expectations. Assuming average UK temperature trends, especially in the key third quarter trading period, the Group anticipates progress in the second half of the year and its expectations for the full year remain unchanged.
