Goodman Fielder: reported mixed results for H1/2013

Sydney / AU. (gfl) Goodman Fielder Limited reported its financial results for the first half 2013 (H1/2013), ended 31 December 2012. Reported earnings and net profit were significantly ahead of the previous corresponding period.

Reported Net Profit After Tax for the six months increased by 137 percent to 51,0 million AUD with Earnings Per Share up 86 percent from 1,4 cents per share to 2,6 cents per share in the previous corresponding period. Reported net profit included significant items of 9,8 million AUD (after tax), comprising the gain on sale of non-core businesses including Integro, less restructuring costs and provisions for asset sale costs.

Reported Ebitda increased by 17 percent to 138,2 million AUD while Reported Ebit increased by 25 percent to 105,1 million AUD compared to the six months ending 31 December 2011. Normalised Ebit (excluding significant items) declined by 17 percent to 95,3 million AUD reflecting lower volumes in Baking and increased mix pressure from private label and competitors in Grocery, which required further investment in price and promotion.

Results Overview

  • Reported Net Profit After Tax of 51,0 million AUD – up 137 percent
    • includes gain on Integro sale and significantly lower restructure costs compared to previous corresponding period
    • reflects lower net interest expense from strengthened balance sheet
    • earnings per share up 86 percent to 2,6 cents per share
    • further increase in Asia Pacific earnings, improvement in NZ Dairy result demonstrates diversity of group earnings
  • Normalised Net Profit After Tax 41,2 million AUD – down four percent
    • reflects lower normalised Ebit partially offset by reduced net interest expense
    • revenue down nine percent; normalised Ebit down 17 percent reflecting lower volumes and pricing, primarily Baking/Grocery Australia – note first half of FY13 included three months´ contribution from Integro (which was sold on two October 2012) compared to six months in the prior corresponding period
    • first half Ebit includes ten million AUD increased reinvestment in DME/provisions for staff incentives (subject to financial performance) to create sustainable earnings growth
  • Group financial position strengthened further
    • net debt reduced by 35 percent to 498 million AUD
    • improved credit metrics
    • Leverage Ratio (Net debt / Ebitda) 1,85 times versus 2,58
    • Interest cover (Ebitda/Net Interest expense) 3,73 times versus 3,09
    • strong focus on working capital management assists in significant improvement in free cash flow by all operating divisions – Group net free cash flow up 81 percent to 150 million AUD
  • Continued delivery of key milestones of Strategic Plan
    • improved alignment with retail partners results in price increases related to ‘cost to serve’ model in Baking, recovery of input costs in Baking/Grocery
    • project Renaissance ahead of schedule to achieve 100 million AUD in annualised cost savings by FY15
    • successful completion of non-core divestments provides greater focus of funding and resources on core categories
    • commenced reinvestment in branded core category innovation to drive top line growth
  • Board has revisited the company´s dividend policy at the half year
    • In light of the significant progress already made to strengthen the group´s financial position and the achievements being delivered in the strategic plan to provide more sustainable earnings outlook for the group, it is the Board´s current intention to resume the payment of dividends at the full year, subject to trading conditions and market outlook
    • Going forward, the Board expects to pay 50 to 80 percent of Net Profit After Tax as dividends

Commentary

Goodman Fielder CEO, Chris Delaney, said he was pleased with the continued progress the company had made in the first half in delivering the group´s strategic plan. «This interim result is in line with our expectations in delivering our strategic objectives and also demonstrates the growing diversity of our earnings in our three core markets across the region. We have delivered improved earnings in our Asia Pacific business, while a strong increase from our Dairy business resulted in earnings from our New Zealand operations being in line with the previous corresponding period».

«Retail trading conditions in Australia continue to be very challenging, resulting in lower volume and pricing which impacted our first half performance. However, the progress we are making, particularly in securing price increases in our Baking and Grocery divisions, is expected to result in improved performance in the second half of the year».

«We improved the alignment with our key retail partners which resulted in the successful agreement to implement meaningful price increases related to the ‘cost to serve´ model in Baking in Australia and also price increases to recover input cost inflation in our Baking and Grocery divisions in Australia and New Zealand».

«We also continue to deliver on the key strategic milestones we have set for ourselves and communicated to the market».

«This includes the necessary reinvestment in our brands and our people to grow our revenue and support our medium term growth objectives. That has resulted in a 38 percent increase in direct marketing expenditure (DME) and also a provision for staff incentives in the first half».

«While this increase in DME has impacted our earnings result relative to the previous corresponding period, we believe this is a prudent reinvestment of the cost savings we are generating across the business to support our strategic planning agenda».

«We have also further strengthened our financial position, with net debt 35 percent lower than the previous corresponding period. Each of our operating divisions also reported a significant increase in net free cash flow through a strong focus on working capital management».

«We continued to focus our portfolio through the successful divestments of the Integro and Copperpot businesses and have also announced the sale of the NZ Milling business which is expected to be completed later this month. The proceeds of these divestments are being used to further strengthen our capital position and also for reinvestment in our core categories and brands under our strategic plan».

«Finally, we have completed the senior appointments to strengthen the group executive team and have also improved our engagement with our people».

«While we still have significant work to do, I remain confident that the improvements we continue to make will enable the company to restore acceptable levels of returns to shareholders in the medium term», Delaney said.

Baking – Divisional Performance

The Baking category, particularly in Australia, remains challenging from the continued impact of private label pricing and in-store baking on proprietary brands, in addition to the pressure of rising input costs.

Revenue declined by two percent to 480,6 million AUD, impacted by lower pricing in Australia for the first five months of the period and reduced volumes. However, volumes in New Zealand were steady on the previous corresponding period.

Price pressure from supermarket private label bread in Australia continued to place negative price and volume pressure on proprietary branded bread.

Normalised Ebitda for the Baking division declined by eleven percent to 38,4 million AUD. This result also includes the three million AUD impact of the Mission Foods wraps contract which was not renewed in 2013 as Goodman Fielder decided to concentrate on the development of its proprietary branded wraps range.

The restructuring initiatives in the division to create a more sustainable cost base resulted in fixed overhead costs declining by 23 percent in Australia in the first half.

However, rising input costs impacted margins in the first half in Australia, with price increases implemented towards the end of the period to recover input cost inflation. Price increases were also implemented in New Zealand at the end of the first half.

Gross margin in the New Zealand Baking business improved on the previous corresponding period, however increased distribution costs and higher marketing investment resulted in slightly lower earnings.

Free cash flow more than doubled to 33,6 million AUD through effective working capital management and lower restructuring costs.

The turnaround of the Baking business is a significant component of the company´s strategic plan with several milestones achieved in the first half.

One of the most critical achievements was the improved alignment with retail partners in Australia relating to the costs incurred by Goodman Fielder in continuing to deliver fresh bread on a daily basis throughout Australia.

Goodman Fielder has worked collaboratively with its customers to implement a more cost efficient service delivery model. Price increases for proprietary baking products were also implemented in December 2012 recognising the costs involved in providing a daily fresh delivery service and also relating to the recovery of input cost inflation (ex commodities) which are expected to reflect improved margins in the second half.

Additional elements in the Baking division turnaround include generating further manufacturing efficiencies and improving asset utilisation through a more streamlined manufacturing footprint and optimising the product portfolio.

As part of these initiatives, bakeries in Rockhampton and Whiteside were closed during the period with the bakery at Cairns scheduled to close in February 2013. Lower value products such as bread rolls have been outsourced to third parties to create further manufacturing efficiencies. A specific project to individually review the company´s 180 regional distribution routes has commenced.

Approximately 90 routes have been reviewed to date with around 30 routes either eliminated or restructured to improve distribution efficiency.

Meanwhile, the project to rationalise and optimise the product range has resulted in 160 individual product items (SKUs) being deleted – a reduction of approximately 30 percent.

Collectively, these initiatives are expected to deliver cost savings and margin improvement in the second half of the year in line with the strategic plan.

Other Divisions

Information about Goodman fielder´s «Grocery» division (formerly Home Ingredients), «Dairy» and «Asia Pacific» divisions is available on the company´s web server.

Outlook

Retail market conditions in the company´s core markets of Australia and New Zealand are expected to remain challenging for the remainder of FY13, with competitive pressures continuing to put pressure on product volumes.

In response, Goodman Fielder will continue its strong focus on operational cost control and disciplined capital management. However, in line with its strategic plan, the company is reinvesting in its core categories through increased marketing investment focused on new product and innovation to leverage its market-leading brands.

In Asia Pacific, the business remains well placed to capitalise on its leading market positions in its core markets, while developing further export opportunities into key Asian markets over the medium term.

Delaney said he expected the company to benefit from the key strategic initiatives undertaken in the first half, particularly relating to price increases in the Baking and Grocery divisions. «We previously indicated to the market that our earnings for FY13 will be weighted towards the second half as a result of these price increases being implemented towards the end of the first half. We also expect to continue to generate further cost savings under Project Renaissance which will assist in earnings improvement in the second half».

«In the meantime, our financial position continues to be strengthened through strong cash generation and further reduction in net debt. We will continue the work on prioritising our portfolio and using the proceeds from divestments to further strengthen the balance sheet».

«As we have also indicated previously, the current financial year represents a period of rebuilding and reinvesting in our core categories in line with our strategic plan to deliver more sustainable earnings improvement over the medium term», he said.

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