Performance review
We have successfully adapted the business to the current retail environment, responding quickly to the recession with new value products and discount ranges alongside our core market and premium heartland
Northern Foods has delivered a resilient performance this year, in challenging economic conditions. We have successfully adapted the business to the current retail environment, responding quickly to the recession with new value products and discount ranges alongside our core market and premium heartland. Our business with the discount retailers, or based around value products, is now around a fifth of the Group’s sales.
We have continued to drive performance improvements right across the Group, growing sales, exiting low margin business, investing in the future, improving operational efficiencies and ensuring that we are cash focused and cost conscious. We remain focused on the key markets of Ready Meals; Sandwiches & Salads; Pizza; Biscuits and Puddings. This year also saw Northern Foods secure a prestigious contract to serve British Airways.
Total revenue increased by 4.6% to £975.2m and profit from operations* by 8.9% to £52.7m over the prior year. Group profit before tax* at £47.5m, was lower than the prior year, primarily reflecting a reduced pension credit. However, underlying profit before tax4 (PBT) grew by 13.4%, despite headwinds from the strong Euro, increased investment in our brands and business start-ups. Return on invested capital5 (ROIC) improved from 11.0% to 11.7%.
Profit before taxation* reduced by 5.2% to £47.5m (2007/08: £50.1m) reflecting £4.2m of incremental investment in marketing and start-up costs for our acquisitions made in the prior year. Profit for the period1 was £2.5m (2007/08: £34.5m), as we absorbed restructuring items before taxation of £35.4m (2007/08: £4.7m), relating primarily to the mothballing of the Fenland facility; and £12.5m following the withdrawal of Industrial Buildings Allowances (IBAs).
A stronger underlying performance in Chilled and margin improvement in Bakery emphasised the benefits we are starting to see from the strategy put in place during 2007. Whilst profitability declined in Frozen, which is the division most impacted by the Euro, Frozen retains a strong market position and we are working hard to enhance its profit performance through cost reduction, simplification and innovation.
Over the course of the year, material costs were around 12% higher than the prior year whilst energy costs were approximately 64% higher. We, and other manufacturers, see continued inflation looking ahead, with many key commodity prices still up year on year. We continued to recover higher input costs fully through the year.
The integration of the prior year acquisitions – Ethnic Cuisine; chilled soup at Grimsby; and McDougalls frozen pastry – was completed during the period. We also remained focused on reducing our cost base across the divisions; and we continued the evaluation of the proposed investment in a world class biscuits factory to deliver a step change in efficiency.
We have a key focus on driving cash generation, with pre-restructuring free cash flow8 of £35.4m in the year (2007/08: £48.3m). Net capital expenditure to enhance our manufacturing infrastructure saw investment increase to 80% of depreciation (2007/08: 42%); whilst working capital continues to be tightly managed with an increase of only £10.0m (2007/08: £11.6m) driven by input inflation and increased sales.
Our balance sheet remains robust and year end debt was £206.7m (2007/08: £200.2m). Alongside our US Private Placement of £143m, which matures between 2012-2017, in March 2009 we completed a new £250m Forward Start banking facility to July 2012, which will replace the existing £460m facility in July 2010. In this unprecedented economic environment and with weakness elsewhere in the food manufacturing sector, our strong balance sheet provides us with the capacity to support our future investment plans. We are actively managing the Group’s retirement benefit obligations to maintain a manageable service cost, whilst reducing risk and volatility.
Outlook
Northern Foods has delivered a resilient performance in challenging economic conditions. We anticipate that next year will be equally challenging, with the continuation of food inflation and competitive pressures. Our operational and financial strengths position us well to benefit when markets recover.
Financial performance and dividend
Revenue increased by 4.6% to £975.2m (2007/08: £931.9m), with underlying revenue7 5.0% ahead. Profit from operations* improved to £52.7m (2007/08: £48.4m) and operating margin* increased by 20 basis points to 5.4%. Group profit before tax* declined 5.2% to £47.5m (2007/08: £50.1m) reflecting a reduced net pensions financing credit. Underlying PBT4, increased 13.4% to £39.0m (2007/08: £34.4m). After restructuring items including the mothballing of the Fenland facility, asset impairments in relation to the Hull site, and an increased tax charge of £12.5m due to the phasing out of Industrial Buildings Allowances, the statutory profit for the period1 was £2.5m (2007/08: £34.5m).
Underlying earnings per share (EPS)2 increased 14.8% to 6.45p (2007/08: 5.62p), whilst adjusted EPS6 declined 1.5% to 7.76p (2007/08: 7.88p). Basic EPS was 0.54p (2007/08: 7.08p).
The underlying full year effective tax rate (excluding the release of a prior year tax liability) is 23.8% (2007/08: 23.4%), reflecting the lower Irish tax rate. Following a change in UK corporate tax legislation in the Finance Act 2008, there is a one-off non-cash charge of £12.5m in the current year to reflect the phasing out of IBAs. This phasing out was offset by a reduction in the headline rate of UK Corporation Tax from 30% to 28% in the current year.
