Finsbury Food Group: Record sales boost profits

London / UK. (ffg) British Finsbury Food Group PLC, a leading manufacturer of cake, bread and gluten free bakery goods, is pleased to announce its preliminary results for the 52 weeks ended 30 June 2012.

Highlights:

  • Group revenue up 9,4 percent to 207,4 million GBP (2011: 189,6 million GBP)
  • Adjusted profit before tax up 11,6 percent to 6,5 million GBP (2011: 5,8 million GBP)
  • Cake division continues to grow, up 9,2 percent to 152,4 million GBP (2011: 139,6 million GBP) from both UK and export markets
  • Bread and Free From division sales growth of ten percent to 54,9 million GBP (2011: 50,0 million GBP) driven by strong growth in the fresh gluten free market, Vogel´s brand growth and fresh Free From own label in the speciality bread market.
  • Adjusted diluted EPS 7,8 GBPence (2011: 7,1 GBPence)
  • Total net debt including deferred consideration reduced by 8,6 percent to 33,9 million GBP (2011: 37,1 million GBP)

Operational Highlights:

  • Significant organic growth across all divisions, notwithstanding the impact of commodity and cost inflation
  • Continued expansion of our 50 percent owned subsidiary Lightbody Europe
  • Creation of fresh Free From own-branding opportunities with major supermarket retailers
  • Launch of Heston´s Hot Cross buns with Waitrose, supported by Easter TV marketing campaign

Commenting on the results, John Duffy, Chief Executive of the Food Group said: «I am delighted to report such a noteworthy set of results, both due to the significant revenue milestone accomplished this year and the increase in both top and bottom line growth in the period, despite continued market pressures. The formula we have pursued has and will continue to remain steadfast, to maintain the pattern of growth in profitability, underpinned by a commitment to meeting the needs of our customers and consumers. I am confident that the pragmatic foundations so carefully laid down in recent years are set to produce enduring benefits for both the business and our shareholders».

Business Review

Strategy: Our business strategy is to generate returns for shareholders by building a crafted bakery group within the cake and bread + free from markets which is focused on premium, celebration and well being that delivers for customers and consumers. We will continue to develop our licensed brand portfolio to complement our core retailer brand relationships.

We are still a modest manufacturer in the total Bakery markets in which we operate and see exciting organic growth opportunities in all our businesses. Whilst our short term focus is on integrating and growing our existing businesses, we aim to take advantage of the right bolt on acquisitions to drive longer term value as opportunities, financing and circumstance allow.

Markets: The total annual UK ambient cake market (including pre-packed cake and in-store bakery) is valued at 1,07 billion GBP (source: Kantar Worldpanel). The past twelve months has seen value growth of 3,4 percent due principally to growth in average price with a decline in volume of minus 0,5 percent. We continue to be the second largest supplier of cake to the UK´s multiple grocers, with an 18,2 percent share of the total pre-packed cake market (Source: IRI Infoscan) and have maintained our leading position in the niche areas on which we focus.

Annual bread and morning goods sales are in excess of three billion GBP (source: Mintel). We are a smaller player in this market, with a focus on speciality and organic bread products and we have continued to benefit from growth in demand, despite the tough economic climate and a general decline in organic bread sales.

Moving to the free from part of this segment, the total gluten free market is around 231 million GBP (source: Kantar), with growth of about 15 percent in the last year. The area of this market in which we operate in expample bread, cake and other bakery products, accounts for about 48 million GBP of these sales, with growth of eleven percent year on year. The bakery sector growth significantly outstrips the total gluten free market growth due to the continued growth of branded + own label fresh bread. With the bread category growing at 20 percent, this growth is being driven by increased frequency of purchase and new customers coming into the market.

The Group consists broadly of the following businesses:

Cake: Lightbody of Hamilton Limited, based in Hamilton, employs around 1’100 people and is the UK´s largest supplier of celebration cake with Disney, Nestle and Thorntons product within its portfolio. It also produces a wide range of small cakes, slices and in store bakery (ISB) bites, a number of which are under our licensed brands including Thorntons, and WeightWatchers.

Memory Lane Cakes Limited, based in Cardiff, employs around 800 people and is the leading manufacturer of the UK retailers´ premium own label cake ranges. It also produces under a number of brands notably Nestle, WeightWatchers and Thorntons. The last financial year has been one of continued new product development and launches, factory efficiency improvements, and some inevitable price rises to mitigate the relentless rise in commodity price inflation seen over recent years.

Sales within the integrated cake businesses were up 9,2 percent compared with the prior year to 152,4 million GBP. Growth came from both the UK and export markets through Lightbody Europe our 50 percent owned business, with half of the cake growth coming from Lightbody Europe.

Bread + Free From: United Central Bakeries Limited, based in Bathgate near Edinburgh, employs around 180 people and manufactures a range of gluten free bakery products and morning goods. The year saw significant growth from the branded free from fresh bread brand including new lines to enhance the range.

Livwell Limited, based in Hull, employs around 90 people. It continues to deliver new products into the free from market. This business operates under a combined commercial team with UCB.

Nicholas + Harris Limited, based in Salisbury, employs around 270 people and produces a range of speciality bread products to UK retailers. Its focus is on clean label breads, rolls and buns. This position has been strengthened following its acquisition of Goswell Enterprises Limited in June 2009 and with it a number of licensed brands including Vogels and Cranks. These were relaunched in October 2010 and sales on each have grown in excess of 30 percent.

Brands and Licences: The Group remains primarily a retailer branded business with sales of retailer own label products accounting for around 58 percent of our total revenue compared to 56 percent a year ago. The balance represents the strength of the licensed brands under our control.

WeightWatchers: WeightWatchers is one of the largest food brands in the UK and we hold the licence to manufacture and distribute low fat cake to the UK and Ireland´s multiple grocers under this brand. Since the acquisition of Anthony Alan in 2007, the brand has been developed through utilisation of the broad production capability within the Group and our skills in developing new products that adhere to brand guidelines. WeightWatchers now accounts for 83 percent of the low fat cake market in terms of value up from 81 percent. The brand continues to perform better than the total Low Fat category which declined by minus 10,8 percent in value terms in the latest year (Source: IRI Infoscan).

Thorntons: The Group continues to develop its branded offering within the premium cake sector via its licensing arrangement with the Thorntons confectionery business. Through a combination of new product development, pack formats and targeted promotional activity, we continue to invest in the Thorntons brand to increase awareness and drive further profitable growth for both us and our customers. Our best selling Thorntons product, caramel shortcake, continues to dominate the pre-packed Bites market with a 44 percent value share of this market (source: IRI Infoscan).

Nestle Confectionery: We continue to benefit from the rights to manufacture and distribute cake products under Nestle confectionery brands such as Smarties and Jelly Tots.

Disney: Our successful range of Disney Celebration cakes continues to evolve. Properties within the portfolio include Toy Story, Disney Princess, Cars, Winnie The Pooh, Fairies and Avengers. The Disney portfolio is a key part of our overall Celebration cake business and plays an important role in retaining our position as the largest supplier of Celebration cake to the UK´s multiple grocers.

Other Celebration Cake Licences: These four major brands are complemented by a range of other licences which are particularly focused on driving celebration cake sales. Properties such as Peppa Pig, Hello Kitty and Spiderman have their own target market and offer excellent additions to the range. Moshi Monsters has proved a very successful recent addition to this portfolio registering sales in excess of 1 million GBP since its launch in late 2011. In the niche adult premium celebration sector Little Venice Cake Company has performed particularly well recording 25 percent value sales growth in the last year (Source IRI Infoscan).

Principal Operating Risks

The Group operates in an environment which is continually changing and as a result the risks it faces will also change over time. The assessment of risks and the development of strategies for dealing with these risks are achieved on an ongoing basis through the way in which the Group is controlled and managed internally. A formal review of these risks is carried out by the Group on an annual basis. The review process involves the identification of risks, assessment to determine the relative likelihood of them impacting the business and the potential severity of the impact, and determination of what needs to be done to manage them effectively.

The Directors have identified the following principal risks and uncertainties that could have the most significant impact on the Group´s value generation:

Competitive Environment and Customer Requirements: There is strong competition between manufacturers in the Bakery sector. The monitoring of key performance indicators at customer level such as service levels and customer complaints is part of the risk management process associated with this specific risk. Strong customer service, quality products, low costs and innovative new product development are areas of focus to satisfy customer needs and remain strong in a competitive environment.

The Group has invested heavily in category management, new product development and marketing skills. This investment has helped create an insight into customers and consumer demands.

Continual monitoring of customer KPI´s and production quality measures take place to ensure customer requirements are being met and issues are identified in a timely manner to limit their impact.

Product quality: Product quality is a key strength of the Group and failure to maintain a high standard of food quality and safety would have a severe impact on service levels and customer relationships.

The Group´s quality assurance procedures, managed at site level, are reviewed continuously with improvements made as appropriate. The Group´s Technical Director helps provide focus to ensure there is continuous improvement across all sites to meet the increasingly high expectations of our customers. The operating subsidiaries are subject to regular internal and independent food safety and quality control audits including those carried out by, or on behalf of, their customers. The Group maintains product recall insurance cover to mitigate the potential impact of such an occurrence.

Raw Materials – Prices and Supply: Increases in the price of raw materials can adversely impact the core profitability of the business and any related shortage in supply will impact the business´ ability to maintain its service levels to customers – another of its key performance indicators. The prices of certain key commodities (in example sugar) are tied to the Euro – the relative strength of sterling and future volatility within the Eurozone will, therefore, have an impact on the cost of these commodities.

Affordability for consumers is essential and the Group will focus on internal efficiencies and productivity initiatives to lessen the rising commodity price impact on consumers. The Group maintains a high level of expertise in its buying team and will consider long term contracts where appropriate to reduce uncertainty in input prices. The team also cultivates strong relationships with its major suppliers to ensure continuity of supply at competitive prices. Regular renovation and innovation in our product range can help to manage margin pressures in an effective manner as far as the competitive environment allows. The Group also purchases forward foreign currency in order to minimise the fluctuation of input costs linked to future currency conversion rates.

Economic Environment: Whilst the price sensitivity of our products is relatively low, there have been some particular trends in the premium and health sectors of the cake market that have impacted the demand for products within these sectors. The value-focused recessionary environment has resulted in demand from customers for increased levels of support via promotional activity as they compete with each other to offer consumers greater value for money. The Group will continue to focus on quality and value for money in periods of reduced spending.

Interest Rates: Group funding is linked to either base rate or LIBOR, any increase in interest rate will increase the funding costs. The Group has interest rate swap arrangements in place to hedge its risks associated with interest rate fluctuations.

Bank Covenants: There is potential for the bank to withdraw funding should there be a breach of covenants. Bank covenants are reviewed monthly for. There are regular and open communications with the bank to ensure they are fully aware of the Group´s position.

Trading Results

Group revenue for the 52 week period to 30 June 2012 was 207,4 million GBP (52 week period to 02 July 2011: 189,6 million GBP), an increase of 17,8 million GBP (9,4 percent) year on year.

Gross margin for the financial year was 26,5 percent representing a decrease of 0,5 percent year on year. Key core ingredient inflation on items such as sugar and egg has inevitably impacted on operating margins.

Administrative expenses have increased year on year. A significant proportion of administration costs is directly linked to activity levels. In addition there has been an ongoing investment in marketing and range support activities. Wage costs and new product development have increased year on year. The Group continues to invest heavily in category management, new product development personnel and marketing skills.