Premier Foods: releases half year 2016 results

London / UK. (pf) British Premier Foods PLC announced our half year results for the 26 weeks ended 01 October 2016. The Company announces continued strategic progress despite weaker second quarter sales for Grocery as follows:

H1 Group underlying sales2 down (1.8 percent) due to weak Grocery sales (4.0 percent); partly offset by good performance in Sweet Treats +4.1 percent
Q2 Grocery underlying sales2 down (9.5 percent) due to warmer weather after good Q1
Sweet Treats and International delivering consistently strong quarter on quarter growth
Total reported sales up +2.0 percent reflecting Knighton Foods consolidation
Underlying Trading profit4 48.0 million GBP, 2.0 million GBP lower partly due to increased marketing investment
Net debt 556.0 million GBP at H1; 29 million GBP lower than prior year H1
Combined IAS 19 pensions deficit 228.8 million GBP due to fall in discount rates
Net present value of pension deficit recovery schedule expected to reduce by about 100 million GBP
Profit and Net debt expectations for the year unchanged

Gavin Darby, Chief Executive Officer: «Following a good first quarter where we saw a number of our brands in growth, the second quarter was much weaker in our Grocery business due to warmer weather which resulted in lower sales in the first half overall. However, our Sweet Treats and International businesses continued to demonstrate their strong momentum, delivering against our strategic priorities and growing over 4 percent and 9 percent respectively».

«We remain very confident in our strategic progress, our customer relationships are strong and we have an extensive new product innovation programme planned for the balance of the year. We are pleased with the progress that we have made on the 2016 triennial pension scheme valuations, which has resulted in the NPV of the pension deficit recovery plan expected to reduce by about 100 million GBP. We expect Group sales to grow between 2-4 percent in the second half of the year and our profit and Net debt expectations for the full year remain unchanged».

Continuing operations

	FY16/17 H1	FY15/16 H1
Revenue (million GBP)	348.0	341.2
Loss before taxation (million GBP)	(8.7)	(5.1)
Basic (loss)/earnings per share (pence)	(6.7)	2.6

Underlying results

	FY16/17 H1	FY15/16 H1	Change (%)
Group sales (million GBP)	348.0	354.5	(1.8%)
Trading profit (million GBP)4	48.0	50.0	(4.0%)
Adjusted profit before tax (million GBP)6	26.3	27.5	(4.4%)
Adjusted earnings per share (pence)7	2.54	2.66	(4.6%)

Operating Review

The following commentary unless otherwise stated is prepared for the 26 weeks ended 1 October 2016 with comparative results for the 26 weeks ended 3 October 2015. Results are stated on an ‘Underlying business’ basis which are unaudited, include results of Knighton and exclude all disposals and joint ventures transactions previously completed. All references to the ‘Half year’, unless otherwise stated, are for the 26 weeks ended 1 October 2016 and the comparative period, 26 weeks ended 3 October 2015. All references to the ‘quarter’, unless otherwise stated, are for the 13 weeks ended 1 October 2016 and the comparative period, 13 weeks ended 3 October 2015.

Introduction

Group sales for the 26 weeks ended 1 October 2016 were 348.0 million GBP, a (1.8 percent) decrease on the prior year. In the second quarter of the year, total sales were (5.4 percent) lower at 172.5 million GBP. Branded sales were 295.4 million GBP in the first half of the year, down (3.7 percent) while non-branded sales grew 9.8 percent. While Trading profit for the 26 weeks ended 1 October 2016 was 48.0 million GBP compared to 50.0 million GBP reported in the prior period, the group invested nearly 1 million GBP more in consumer marketing in the first half compared to the prior year and a similar amount in its Cake on the go initiative.

Market overview

In overall terms, the UK Grocery market continues to display evidence of volume growth. Price deflation continued to be a feature of the market while consumer disposable incomes have steadily increased. Consequently, overall purchasing power for UK consumers has arguably been robust in recent months. As previously commented, the Group recognises the broader macroeconomic uncertainty created by the UK electorate voting to the leave the European Union. Initial indications show that there has been little if any impact on consumer spending patterns; the main impact is expected to be the resultant effects of Sterling weakness over recent months. The Group’s main direct foreign currency exposure is with respect to Euros of which it is a net purchaser of over 50 million EUR per annum. The Group has a broadly neutral position with respect to buying and selling of US dollars. All the Group’s manufacturing and distribution sites are located in the United Kingdom and 89 percent of its expenditure is with UK based suppliers. While the Group uses forward cover contracts for certain commodities and currencies, it expects to employ a range of mitigating actions to recover the effects on any input cost inflation in the coming months. Input cost inflation, where it occurs, may be direct or indirect in form; the former reflects direct purchases from the Group’s suppliers; the latter originating further down the supply chain.

Brand investment and innovation

The Group expects to spend approximately 36 million GBP on consumer marketing investment in this financial year. This is in line with the prior year and is the equal highest amount of annual marketing spend the Group has ever made. During the course of FY16/17, seven brands will benefit from TV advertising, with the peak of media spend planned to be in the third quarter of the year, aligning to the Group’s highest quarter sales.

The largest element of consumer marketing investment involves advertising some of the Group’s main brands on television. While the quantum of actual expenditure can be a general proxy for total investment, a more accurate measure for assessing how much consumer marketing will, or has been spent, is through the measurement of Television Viewer Ratings (TVRs). TVRs are measured by the number of people watching an individual television advertisement as a percentage of the total population. The more times an individual advertisement is shown, the higher the aggregate TVRs recorded. In the first half of this year, the Group’s TVRs increased by 57 percent.

Over the last two years, the Group has invested significantly in ensuring it has the right size and calibre of teams in place to deliver on its strategy. In line with this, the Company has increased the number of its marketing colleagues across its three business units, particularly in the areas of consumer insights and research + development. Recruitment of new marketing colleagues has typically come from those with backgrounds and experience in major FMCG or consumer facing organisations.

Customer relationships

The Group has made demonstrable progress over recent years with its retail customers. In the last few months it has concluded category range reviews in partnership with a number of major customers. Every year, an independent survey of consumer goods companies who supply major retailers is undertaken. Each company is assessed on a core range of KPIs and a league table of results is compiled. In its Grocery categories, the Group has made significant improvement, climbing from 17th position (from 18 suppliers) three years ago to 7th (from 20 suppliers) in 2016. This excellent progress reflects improved ratings in areas such as category management, commitment to consumer marketing, promotional activity practices, personnel and customer service.

As part of building ever stronger relationships with its customers, the Group has launched certain new innovative products with many of its customers on an exclusive basis for an agreed period of time. The Group has also been successful in winning a number of awards in areas such as product innovation and supplier collaboration. The Group believes it is well placed to continue to develop these relationships.

Cost reduction and efficiency programmes

In logistics, the Group has continued to review 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 from FY17/18. The National Living Wage (NLW) for all employees above the age of 25 was introduced by HM Government, with effect from April 2016. The Company expects there will be a relatively small increase in labour costs in FY16/17 as a result of this legislation. The impact is expected to be greater at some of the Group’s manufacturing sites than others. 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. The Group continues to simplify its processes and ways of working across the organisation. This involves streamlining certain processes to ensure the business remains agile and empowering its colleagues to work even more effectively and efficiently.

Grocery

Total sales in the Grocery business were 250.3 million GBP in the first half of the year, (4.0 percent) lower than the prior year as growth in non-branded sales was offset by a decline in branded sales to 212.8 million GBP. A good sales performance in the first quarter of +1.9 percent was offset by lower sales in the second quarter. Divisional contribution was 4.0 million GBP lower in the period at 56.2 million GBP due to lower Q2 volumes and higher consumer marketing.

In the second quarter of the period, a number of the Grocery business unit’s categories were adversely impacted by warmer weather compared to the prior year. In this quarter, categories such as Gravy and Stocks and Soup declined in volume terms by (13.0 percent) and (16.3 percent) respectively, while Chilled Salads and Ice Cream, which the Group has no major presence in, grew by 13.7 percent and 17.3 percent respectively. As a result, and after a strong first quarter when six Grocery brands grew sales, none of the major Grocery brands grew in the second quarter.

In the Flavourings + Seasonings category, Bisto and Oxo grew share in the period, with Oxo Stock Pots in particular performing well, taking share from the market leader. In the second half of the year, a new television advertising campaign featuring a modern day Oxo family will support the momentum of the Stock Pots range. Additionally, new products for the remainder of the year include Oxo Ready to Use stock in pouches, Bisto ready to serve pouches and Bisto Best sauces in pouches, all aligned to consumer trends such as convenience and foodieness.

Ambrosia benefitted from share gains in custard, driven by the new range of Ambrosia Deluxe products, with flavours such as Salted Caramel and Creamy Toffee. The Ambrosia brand saw a new advertising campaign, the ‘Taste of Happy’ to support this new range. This campaign will be repeated in the third quarter to align with one of the peak sales volumes periods for the Ambrosia brand.

Batchelors broadly held share in soup as it launched a new range of high protein soup products during the half. In the second half of the year, new products to market will include a range of filling, tasty and healthy snack pots which align strongly to consumer trends. High Protein pots, High Veg pots and Soup Dippers are the new product ranges which are expected to achieve a good range of distribution in major customers.

Historically, some of the Group’s smaller brands have been encumbered by a lack of innovation and investment. With intent to redress this, the Group has two new product launches planned for the second half of the year from some of the smaller brands in its portfolio. First will be the launch of a premium stuffing offering under the Paxo brand. Launched in time for the run up to Christmas, Paxo Sensational Stuffing will be available in four exciting variants. Additionally, the Group will also be launching ready to eat Angel Delight pots. This convenient range of individual portion size pots will have no artificial flavours, colours or preservatives.

Non-branded sales grew by 8.6 percent in the period to 37.5 million GBP owing to increased business to business volumes, notably in the Knighton business, but also due to a new contract win in retailer branded flour with a major customer.

Sweet Treats

Total sales in the Sweet Treats business increased by 4.1 percent in the first half of the year and by 6.4 percent in the second quarter; this being the sixth successive quarter of sales growth. Branded sales grew by 2.7 percent while non-branded sales were strongly ahead of the prior year; up 12.5 percent.

Divisional contribution was 6.6 million GBP in the half, 0.8 million GBP lower than the prior year. This reflects increased investment in instore marketing and enhanced organisational capability to deliver a successful Cake on the go operation.

Cadbury cake again enjoyed an excellent period, continuing its strong trajectory from the prior year. The Amaze Bites product was a standout performer, with retail sales now in the region of 6 million GBP on an annual basis and helping to deliver double-digit sales growth for Cadbury cake. The Double Choc and Chocolate Orange Amaze Bites products are the top two performing new cake products in the total category over the last year. In the second half of the year, Cadbury cake is expected to benefit from launches of Cadbury Choc Tarts and brand new variants of Mini Rolls, Caramel and Crunchie whole cakes.

Mr Kipling sales were lower in the period, primarily as a result of lower promotional activity. A range of premium Cupcakes exclusive in one major customer has been performing well and there is an exciting range of new seasonal lines including Mr. Kipling Stollen Slices launched for the Christmas period. The Group’s Cake on the go initiative is building distribution well, with business won in new channels; particularly in key travel locations.

Non-branded sales growth reflected new contract wins across a broad range of retail customers and in both seasonal and all year round ranges. In particular, the business unit has been successful in gaining some premium Mince Pie contracts for the first time.

International

Sales in the International business increased by over 9 percent in the first half of the year driven by strong performances in Australia and the USA. On a constant currency basis, sales were up approximately 4 percent reflecting weaker sales in Ireland.

The Group’s cake business in Australia has delivered positive growth, year on year, for the last two years. The Group is now the branded market leader in the Australian cake market. Sharwood’s also continues to grow share in Australia and in the second half of the year, is expected to benefit from an integrated marketing campaign. This marks the business unit’s evolution from a sales and distribution model to a strategy including marketing directly to its consumers.

At the beginning of the second half, the International business launched a comprehensive range of Cadbury cakes in the United Arab Emirates where the cake market is worth 120 million GBP. This launch is supported by a very strong instore marketing campaign with distribution expected to build to over 200 stores during the third quarter of the year.

Nissin Opportunities

Work streams established for the co-operation agreement with Nissin are now well underway. Dedicated project teams in the UK, Europe and Japan are working at pace to deliver the first products to market under these still relatively new arrangements.

There are three major areas which the partnership is focusing its efforts. First is the distribution of existing Nissin branded products such as Soba noodles in the UK by the Company which are expected to build distribution across major retailers in the fourth quarter of this financial year.

Secondly, an exciting range of innovative new products under the Batchelors brand are currently under development at Nissin’s manufacturing facility in Hungary and are expected to come to market in the first half of 2017.

Thirdly, the Group will leverage Nissin’s presence and relationships in the USA market to substantially extend the distribution of its Sharwood’s range of cooking sauces. This arrangement is expected to double the availability of Sharwood’s in the USA and extend the brand into more states; particularly in the western half of the USA.

Outlook

The Group remains confident that it is making good progress on its strategic priorities. It has an extensive new product innovation programme, its customer relationships are strong and it has demonstrated an ability to deliver cost efficiencies. Sales growth in the second half of FY16/17 is expected to be weighted to the fourth quarter and in the range of 2-4 percent, noting that as always, the outturn will be partly dependent on average seasonal temperatures. In the full year, sales are now expected to grow 1-2 percent and the Group’s medium term target of 2-4 percent sales growth is unchanged. Profit expectations for the full year are unchanged, with this year’s consumer marketing costs now expected to be broadly in line with last year’s. The Group’s expectation for Net debt at the full year is also unchanged, with cash generation weighted to the second half of the year reflecting the business’s seasonality. 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.