REG - Finsbury Food Group - Preliminary Results
RNS Number : 9284AFinsbury Food Group PLC17 September 2018
Date:
17 September 2018
On behalf of:
Finsbury Food Group Plc ('Finsbury', 'the Company' or 'the Group')
Embargoed until: 0700hrs
Finsbury Food Group Plc
Preliminary Results
Finsbury Food Group Plc (AIM: FIF), a leading UK speciality bakery manufacturer of cake, bread and morning goods for the retail and foodservice channels, is pleased to announce its preliminary results for the financial year ended 30 June 2018.
The Company has delivered a resilient performance in an unprecedented inflationary environment with growth in like for like sales and in adjusted profit in a year where the Company closed a loss making bakery.
Adjusted operating profit, profit before tax and EBITDA exclude significant and non-recurring and other items and includes amortisation of intangibles. The adjusted operating profit has been given as in the opinion of the Board this will allow shareholders to gain a clearer understanding of the trading performance of the Group. The adjusted figures are referred to as alternative performance measures, the statutory performance measures have been given for revenue, profit before tax and EPS.
Summary
· Like for like*1 Group Revenue £290.2m - up 2.4%,
- Group Revenue £303.6m - down 3.4%
· Adjusted EBITDA £25.6m - up 2.7%
· Adjusted Operating Profit £17.8m - up 2.3%
· Adjusted Operating Profit margin 5.9% - up 40bps
· Adjusted Profit Before Tax £17.2m - up 4.0%
· Statutory Profit Before Tax, down 65.7% to £4.5m
· Adjusted Basic EPS 10.2p - up 4.1%,
· Statutory Basic EPS down 76.1% to 1.7p
· Net Debt £15.6m - down 10.5%
· Capital Investment £12.6m in line with last year
· Total Dividend 3.3p - up 10.0%
Strategic highlights
· Record capital investment of £12.6m, cumulatively £37.3m over last 3 years and £50.8m over last 5 years
- Doubling of sales on Artisan bread following investment in 2016
- Newly installed 'automated craft' sharing cake line fully commissioned and operational in the Cardiff bakery
- New business wide IT platform successfully introduced to 3 sites, with the remaining 3 sites planned for FY19
· Successful full year product launches including:
- Our own Free From bakery brand, Wiso in Europe via Lightbody Europe
- Mary Berry licence in the UK
· Successfully implemented key investment change management projects
· Developed Finsbury "Recipe for Growth" Business Model and Operating Principles to leverage future efficiency and growth across the Group
· Foodservice growth of 5.7%.
Post period highlights
· Acquisition of Ultrapharm Limited, a gluten free bakery manufacturer, for £17m cash at completion plus £3m of deferred consideration.
Like for like*1 revenue is the revenue from operations excluding the revenue from closed bakeries during the first half of the current year.
Adjusted operating profit, profit before tax and EBITDA exclude significant and non-recurring and other items as shown in the reconciliation tables below.
Adjusted EPS has been calculated using earnings, amortisation of intangibles, significant and non-recurring and other items as shown in the tables below and in Note 6. The adjusted EPS has been given as in the opinion of the Board this will allow shareholders to gain a clearer understanding of the trading performance of the Group.
Commenting on the results, John Duffy, Chief Executive of Finsbury Food Group Plc, said:
"Our performance over the period has further illustrated the Group's resilience and our ability to deliver against our strategic priorities, ultimately allowing us to grow like for like sales and profit year on year, reduce our debt further after significant investment, and continue to grow the dividend. The ongoing capital investment programme and relentless efficiency focus of recent years has enabled us to not only cope with this challenging market environment but also maintain our margin.
Throughout this period, we have continued to drive product innovation with the launch of both our Mary Berry cake brand with a number of product formats across a broad customer base and also our own Free From brand in Europe, Wiso. Complementing this, and in line with our strategy to diversify the Group by category, channel and geography, we were delighted to complete the acquisition of Ultrapharm, which will provide the Group with a significant opportunity to access the exciting and high growth marketplace, Free From, and broadens the Group's manufacturing capabilities into Europe.
We are confident that we are well positioned to deliver on our strategic objectives and capitalise on growth opportunities both organically and through future M&A."
For further information:
Finsbury Food Group Plc
John Duffy (Chief Executive)
029 20 357 500
Stephen Boyd (Finance Director)
Cenkos Securities plc
Max Hartley (Corporate Finance)
Alma PR
Rebecca Sanders-Hewett
020 8004 4217
Sam Modlin
Susie Hudson
Notes to editors:
· Finsbury Food Group Plc (AIM: FIF) is a leading UK manufacturer of cake and bread bakery goods, supplying a broad range of blue chip customers within both the grocery retail and 'out of home eating' foodservice sectors including major multiples and leading foodservice providers.
· The Company is one of the largest speciality bakery groups in the UK and, with its Overseas division, has sales in the financial year ending 30 June 2018 exceeding £300m.
· The Company's bakery product range is comprehensive and includes:
o Large premium and celebration cakes.
o Small snacking cake formats such as cake slices and bites.
o Artisan, healthy lifestyle and organic breads through to rolls, muffins (sweet and savoury) and morning pastries, all of which are available both fresh and frozen dependent on customer channel requirements.
· The Company is one of the largest ambient cake manufacturers in the UK, a market valued at over £950 million (source: IRI, 52 w/e 23rd June 2018). The annual retail bread and morning goods market has a value of £4.3 billion (source: Kantar Worldpanel 52 weeks to 17th June 2018). The UK foodservice bread and savoury morning goods bakery sector is worth approximately £691 million per annum (source: derived from MCA data for 52 weeks to 31st March 2018). The UK foodservice cake and sweet morning goods bakery sector is worth approximately £807 million per annum (UK foodservice data derived from MCA data for 52 weeks to 31st March 2018).
· The Company comprises a UK Bakery division and an Overseas division:
o The UK Bakery division has manufacturing sites in Cardiff, East Kilbride, Hamilton, Salisbury, Sheffield, and Manchester.
· The Overseas division comprises the Company's 50% owned company, Lightbody Stretz Ltd, which supplies and distributes the Group's UK-manufactured products and third party products, primarily to Europe.
· Since the year end date of 30th June 2018, the Company completed the acquisition of Free From baker Ultrapharm, giving the Group a significant opportunity to access an exciting and high growth marketplace and manufacturing facilities in Pontypool in the UK and in Zywiec, Poland.
Adjusted Operating Profit reconciliation statutory to adjusted
2018
£000
2017
£000
Results from operating activities
5,237
13,564
Significant and non-recurring items - SNR (refer to Note 3 for detail)
13,067
4,000
Difference between defined benefit pension scheme charges and cash cost
(411)
(200)
Movement in the fair value of foreign exchange contracts
(49)
71
Adjustments SNR and other items
12,607
3,871
Adjusted results from operating activities
17,844
17,435
Adjusted Profit Before Tax reconciliation statutory to adjusted
2018
£000
2017
£000
Profit before tax
4,475
13,038
Significant and non-recurring items - SNR (refer to Note 3 for detail)
13,067
4,000
Difference between defined benefit pension scheme charges and cash cost
(134)
4
Movement in the fair value of interest rate swaps
(143)
(555)
Movement in the fair value of foreign exchange contracts
(49)
71
Adjustments SNR and other items
12,741
3,520
Adjusted profit before tax
17,216
16,558
The Financial Review section within the Strategic Report provides further details on the adjusted profits.
Chairman's statement
The overall story from the year is one of a stable trading performance by the Group, delivered in the face of unprecedented cost inflation of commodity inputs, especially butter. We have achieved a like for like top-line and underlying bottom-line growth despite this cost pressure, and in a rapidly changing market. This not only demonstrates our resilience, but also that we have the operational abilities to adjust, keep our strategy on track, and achieve the financial performance expected by our investors.
Revenues were up 2.4%, which excludes revenues from our closed loss-making Grain D'Or factory. Including this, Group revenues are down 3.4%. Profit before tax is £4.5m, reflecting significant one-off closure costs, but is 4.0% up on last year on an adjusted basis. Cash generated from operations increased by 19.8% to £26.9m, due to the strong underlying performance, and net debt is further reduced to 0.6 times EBITDA. We have also announced a growth in the dividend. The final dividend per share of 2.2p will take the total dividend for the year to 3.3p per share, up 10% from last year's dividend of 3.0p per share.
There were no changes to the Board of Directors during the year. The Board has adopted the Quoted Companies Alliance Code.
The vision remains the same
Our vision is to be a leading speciality bakery group, producing a broad range of high-quality products that deliver growth and differentiation for our customers, while fulfilling the needs of end consumers, both in the UK and into Europe.
We continue to build a group of scale, but one that can deal with the manufacturing complexity and flexibility required for premium and higher-margin products. For ten years we've been doing this while improving margins and efficiency, reducing debt and improving diversification. We believe scale will become increasingly important in the food manufacturing sector as we see our main customers getting larger.
The bakery sector, outside of sliced bread, is reasonably unconsolidated. Over the years we have made major acquisitions and investments, targeting or evolving opportunities based on consumer trends, market niches, growing channels and added-value products that retail and foodservice customers are trying to develop.
Through a combination of organic growth and targeted acquisitions, we will continue to invest to consolidate and grow in existing areas, such as round cake and artisan bread, and expand into new areas. To this end, our successful investment programme will continue. We will invest to expand our capabilities in new product formats, and to diversify into new channels such as foodservice cake, and into healthier style products, particularly 'Free From'. We have further strengthened our capabilities, with acquisition of Free From baker Ultrapharm after the year end.
The Group has increased in scale, and the individual businesses benefit from this. A lot of work has gone into creating a structure that enables Group-wide cost-effectiveness and allows innovation, common process and best practice to flourish.
Stability in a changing market
Markets, channels and customers are consolidating rapidly in response to changing consumer shopping and 'on-the-move' consumption behaviour - Tesco and Booker, Amazon and Whole Foods, Coop and Nisa, the plans of Sainsbury's and Asda - each pairing demonstrates a changing market environment, to which we can add discounter and online shopping growth. In addition to adapting to these changes, bakers and other food producers have faced commodity price increases, with the weaker pound and the cost of butter rocketing.
We believe Finsbury is increasingly well positioned to respond to this fast-changing environment, due to our continuing focus on operating excellence, quality and innovation, and cost effectiveness, combined with our sustainable approach and our commitment to our partners, all underpinned by people who care. We have and continue to invest to manage the risks and grasp the opportunities available for scale manufacturers.
Operational highlights
Some years ago, we may have struggled to cope with the degree of volatility and unexpected cost increases we have seen of late. However, our diversification over prior years has ensured we are in a healthy position, and able to capitalise on opportunities available to us.
We continued to invest heavily in capital this year, at 1.7 times depreciation, which has enabled us to implement key projects such as our 'automated craft' cake line, now fully commissioned and operational in Cardiff, and introduce our new business-wide IT platform. These sorts of change management projects, often Group-wide, do add a lot of pressure to the workload of our employees. As does new operational equipment, or worries over, for example, the decision to close our loss-making Grain D'Or factory. Much of this added pressure is often on top of the commitment people already put in to simply doing their jobs well. For this I would like to thank all employees once again for their sterling efforts and commitment during the year.
P Baker
Chairman 14 September 2018
Chief Executive's Report
Performance review
Finsbury Food Group has grown like for like sales and adjusted profit year on year, reduced our debt further after significant investment, and grown the dividend payable. This has been achieved despite the volatile retail environment and unprecedented input cost inflation we have seen over the period. The relentless investment and efficiency focus of recent years has enabled us to not only cope with this market environment but also maintain our margin. At the same time, we have also ensured we are not over-dependent on any one customer or product area. The true measure of success is that we have achieved underlying growth ahead of our market and have demonstrated the growth available from premium, healthy and authentic on-trend innovation.
Illustrating this, we've introduced our own Free From brand in Europe, Wiso which capitalises on the fact that making the choice to avoid gluten is also now a lifestyle and health choice across North America, Europe and UK.
In concurrence, our Mary Berry cake brand launched in the final quarter of last year with a number of product formats across a broad customer base. It's been hugely successful, with a significant level of sales for the Group, illustrating the potential of a licence with good consumer recognition and emotional engagement, plus of course, some very good products - all traditional, with an artisanal finish, and very much in keeping with Mary's credentials.
In addition, there are artisan breads, which may be hand-crafted, require long fermentation, and baking in stone ovens. It was a slight trend we noticed a few years ago and we decided it could have a big impact, so we invested in capacity in 2016. We have now filled that capacity and are looking to invest further to meet growing demand.
These all show that on top of productivity and efficiency, we're very good at craft and innovation, and consumers are prepared to pay for great products that have a lot of craft. These examples are meaningful opportunities for Finsbury to achieve growth and sales, and are what we're good at.
These successes, alongside hard work and ongoing investment have delivered a resilient result for the year, one which we are proud of.
Maintaining margins
Inflationary costs, larger customers and competitive markets all present a margin challenge to manufacturers across the market. Improving margins, or even maintaining them, is difficult in the short term. But strong, innovative, well-invested manufacturers of scale are an essential ingredient in helping our consolidating customers achieve their own strategies. Finsbury is striving to be exactly that - the leading speciality baker, providing our customers with brilliant bakery products at affordable prices.
Whilst continuing to deliver on this ambition, the shock butter price increase at the end of last year came on top of broader input price inflation in everything from labour and commodities to energy. We had to offset these increased costs with efficiency improvements, reformulation and cost recovery, to protect margins. We also had to take some big decisions at the same time, such as the decision to close Grain D'Or.
Grain D'Or closure
The escalating butter price - triple what it was just a few years ago - ultimately led to uncompetitive pricing, lost contracts and widening financial losses at our London bakery, Grain D'Or. With the losses caused by the butter increase, we had to change our commercial plans. This precipitated the difficult decision to close the business in the first half, following extensive employee consultation. Thanks to the hard work of the Grain D'Or and wider Finsbury team, we were able to maintain good customer relationships, and we went out of our way with unions and employees to help them find alternative local employment. All in all, it was a necessary step back to take stronger steps forward.
Capital investment for efficiency
We've had another year of record capital investment at £12.6 million. The aim is to continue our strategy of establishing efficient, cost-effective scale bakeries in our chosen product areas. This brings the total capital spend over the last five years to £50.8 million.
Our new IT platform is a sizeable investment for us. We have successfully rolled it out to three of our six manufacturing sites, with the remaining three sites due in the first half of the new financial year. IT and management information goes to the heart of all businesses, so this project is to define our business processes, and get them up and running in each of the sites, to provide managers with really good quality information. At the businesses where we've done that, we are seeing much better understanding of labour and waste costs by product, which allows us to gain further insight into the true efficiency of our manufacturing operations and make informed commercial decisions.
We also commissioned the new £8 million cake line at our Cardiff bakery and began continuous seven-day operations. Our new line is completely up to date in oven and process technology, and much faster. So, we're future-proofing an area where we are number one in the marketplace, with around 50% share - making sure we gain the process and quality benefits, as well as improve our cost effectiveness.
Strength in a Group structure
In recent years, we have acquired a collection of very good, but varied and historically independent businesses, making many different products for many different markets. It pays to diversify. But the truth is, they all have baking in common, and this is where being a Group is important.
We've moved in recent years to a Group divisional structure and brought in strong expertise in Group functional directors with the aim to derive scale benefits from a common approach across the Group. There's a lot of opportunity to define a way of working across the Group, which won't take away from the individual independence of our companies, but it means they can do their day job, and do it well, without having to worry about say, IT change, or Group purchasing of insurance, and the like. It also means we benefit from common insights into consumer trends, or common approaches to maintenance and safety, for example. It's really a way of looking to improve the sum of the parts and gain some leverage from being a larger Group.
We believe brilliant baking makes every day special, so are applying brilliance to the entire process. To be brilliant we have to constantly raise standards, inspire innovation and work effectively as a Group. We've developed the Finsbury 'Recipe for Growth' and Operating Principles, which allow all our businesses to understand and use the strengths of the Group, and benefit from common approaches such as the Group-wide IT platform mentioned above, and our new Group-wide people strategy.
Our people
Our people strategy is now entering into its third year. It includes talent management and leadership development programmes, with increased investment in training. We've also conducted our second employee engagement survey. It all underpins our belief that maximising the potential and contribution of our people is essential to unlocking the longer-term potential of the business.
I must also say the scale of change management we've undertaken this year is unprecedented. I travel around meeting people, who are often also travelling around the Group. Our work is putting additional demands on teams across the Group, over and above their normal day jobs. And the jobs themselves, using craft skills to develop and make craft products, for demanding customers, day in, day out. Our people still take time to put the effort in. They have responded brilliantly, and I'm very grateful for that.
Acquisition opportunities
With further acquisitions we can introduce new product, customer or channel diversification, or accelerate market consolidation in our main product areas. This year, we continued to explore several acquisition opportunities without finding the right balance of risk and reward but were delighted to have completed the acquisition of Free From baker Ultrapharm shortly after the year end, giving the Group a significant opportunity to access an exciting and high growth marketplace. We remain committed to future acquisition-led growth as part of our strategy.
Outlook
We are looking ahead at steady organic growth, which is no bad thing in the market we're in, but the desire remains to be a strong competitor within our bakery markets. The Free From growth opportunity unlocked in the UK and Europe by the post year end acquisition of Ultrapharm is a good example of the opportunity ahead to increase scale via acquisition. This follows three years where we've benefited from optimising the growth platform we've built and are now capable of taking the next steps competently. Three years which I think we've put to good use.
John Duffy
Chief Executive Officer 14 September 2018
Our Business
Manufacturing
Finsbury Food Group includes six manufacturing facilities and bakery companies, and one distribution company, plus the newly acquired Ultrapharm Group:
1. Salisbury
Nicholas and Harris
2. Cardiff
Memory Lane Cakes
3. Manchester
Kara Foodservice
4. Sheffield
Fletchers Bakeries
5. East Kilbride
Johnstone's Food Service
6. Hamilton
Lightbody of Hamilton
7. Rennes, France
Lightbody Europe (distribution company)
Acquired after year end:
8. Pontypool
Ultrapharm UK
9. Zywiec, Poland
Ultrapharm Poland
Our products
Our bakery division serves a UK bread and cake retail market of over £6 billion and produces for our UK foodservice channel serving a UK market of a further £1.5 billion.
Bread, morning goods and cakes
• Artisan loaves
• Buns and rolls
• Celebration cakes
• Sharing cakes
• Snacking cakes
• Retailer own-label bakery products
• Memory Lane, our own cake brand
Foodservice
Kara
Kara is our own foodservice brand. The range covers an ever-growing portfolio of sweet and savoury baked goods, including floured baps, artisan breads, brioche buns, traybakes and large premium cakes, focusing on the latest consumer trends.
Licensed brands
We have a long-standing relationship with many licensed brands, manufacturing quality bread and cakes for some of the biggest names in the market.
Thorntons
A partnership spanning two decades, with continuing innovation in celebration.
Mary Berry
Loaf, sharing and celebration cakes, all true to Mary Berry's original recipes, appealing to a broad customer base.
Disney
A long-term partner, we continue to help consumers enjoy the Disney brand in cake.
Mars
Collaborating on an innovative cake range for classic confectionery brands such as Galaxy, M&M and Malteser.
Baileys
New brand launches include a milkshake-shaped cake with an Irish cream filling and topping.
Character licensed portfolio
Developing products to meet consumer trends and occasions, and to bring popular characters to life across different cake formats. Successful licences this year include Batman, Pokemon, Paw Patrol, Peppa, Jurassic World 2 and JoJo Siwa.
Vogel's
Alfred Vogel was a pioneering Swiss nutritionist who used natural ingredients. Vogel's loaves are baked without added sugar, emulsifiers, enzymes, or artificial preservatives or flavourings, and are bursting with seeds and grains.
Village Bakery
The range of organic fresh rye bread brands for those looking to avoid wheat. All made with no added yeast, emulsifiers or enzymes.
Cranks
Wholesome, simple, nutritious bread baked with organic stoneground wholemeal flour and fermented for longer, made without any additives such as emulsifiers and enzymes.
Our Customers
Our bakery segment covers the following.
UK retail
• UK retailers, supermarkets, discounters and convenience.
UK foodservice
• Hotels
• Pubs
• Restaurants
• High-street chains
• Fast-food outlets
• Contract caterers
International markets
• France
• Belgium
• Netherlands
• Ireland
Market Overview
Our markets
UK Bakery is a large market valued at over £6.2 billion. In its broadest sense, UK Bakery comprises the cake market and the bread and morning goods market. Both these markets straddle the grocery retail market and foodservice market, often also known as out-of-home (OOH) eating.
We can break the whole market down further into smaller sub categories:
• Cake: sharing, bites, celebration and seasonal
• Bread and morning goods: 'plant' (packaged or factory) bread, artisan bread, buns and rolls, seasonal hot cross buns, pastry, muffins, doughnuts, Italian and many more.
Both markets also have a wide range of ingredients that can be allergens - including wheat, dairy, eggs and nuts - in which there are growing sub markets such as Free From.
Cake
The total UK ambient cake market (including prepacked cake and in-store bakery is valued at over £950 million (source: IRI, 52 weeks to 23rd June 2018). We trade across all categories, with large presences in celebration, sharing and seasonal.
Bread
The annual retail bread and morning goods market has a value of over £4 billion (source: Cantor World panel 52 weeks to 17th June 2018). This market is further divided as plant bread (£1.8 billion) and the rest, Bread and morning goods (B&MG) (£2.2 billion). We trade only in B&MG, with sizeable presences in buns and rolls, hot cross buns and artisan bread.
Foodservice
UK foodservice spans many sub-sectors including coffee chains, restaurants, pubs, hotels and the non-profit sector such as the prison service or education. Each has different routes to market.
The UK foodservice cake and sweet treat bakery sector is worth approximately £807 million per annum (source: derived from MCA data 52 weeks to 31 March 2018). Our presence is primarily within the coffee chains and, through the larger wholesalers, restaurants and pubs. The UK foodservice B&MG sector is worth £691 million per annum (source: derived from MCA data 52 weeks to 31 March 2018). We have a significant presence primarily with our buns and rolls business.
Overseas
Our overseas markets are primarily Europe, principally France and Ireland, with a smaller presence in the Benelux countries and some of eastern Europe. The size of these markets is significant, and their structure is similar to the UK.
Broad consumer trends
Innovation and product development are essential to the Group's strategy, helping our customers differentiate themselves and meet the needs of their end customers. Our challenge is to maintain a dynamic product portfolio that matches and satisfies macro consumer trends and niches. We show some of these current trends below.
Economic
Consumer confidence has been weak for some time, and price and value will remain important. Although consumers will remain cautious and price-conscious, they will continue to want affordable treats, so pricing policies need to reflect household economics.
Grocery
Consolidation has started to reshape the grocery market in recent times and this will continue. Online and discount will be the two fastest growing grocery channels, and will account for 22% share of grocery expenditure by 2023 (IGD). The convenience channel is also forecast to see strong growth.
Out-of-home
In the out-of-home (OOH) market, volume growth is forecast to be negative as weakening consumer confidence and general consumer caution mean people will eat out less. The casual dining restaurant sector is likely to struggle, but fast-food outlets, coffee shops, supermarket cafés and food-to-go offers will see better growth.
Healthy eating
Consumers continue to pursue more healthy eating options generally, though indulgence is also a key trend in 'sweet-treating'. Media focus and regulatory pressure will continue to drive recipe reformulation and portion size. The 'Better for you' market is proliferating rapidly, with protein, gut health, low sugar, vegetarian, plant health, grains and seeds, and slow energy release all growing in popularity over recent years.
Free From
The overall 'Free From' market continues to grow, doubling in size in the past five years. Mintel forecasts it to grow by an additional 25% to £899m by 2022. It's boosted by consumers who don't cite a specific allergy or intolerance, but choose to avoid certain ingredients as part of a general healthy lifestyle. Dairy free and gluten free are the biggest sub-sectors. The 'Free From' bakery market is valued at £129m and has grown 14.5% year on year.
Artisan bread
The market has grown due to the perceived health benefits, the wider trend of provenance and the 'craft' movement. Consumers respond well to products they perceive to be less mass-manufactured.
Fragmentation
Social and demographic trends have a major bearing on the food sector. These include smaller households, single-person mealtimes, an ageing UK population, urbanisation, and an increasingly mobile population with less time to eat. These are fuelling the growth of convenience, online and out-of-home channels. But the growing fragmentation of consumers, channels, eating moments and needs will also translate into increasing demand for personalised products to meet individual needs. Thus single-serve and individually wrapped products are becoming more prevalent and important.
Technology
Technology is fundamentally changing the relationship between businesses and customers, who are increasingly using mobile devices to make purchases. Demand for anytime, anywhere purchasing and access to information will accelerate. Online ordering is not just for the weekly shop, it is also for top-up and 'dinner tonight' shopping.
Our Purpose and Strategy
Our purpose
People love the high-quality products we make. They are essential parts of their daily lives and enjoyable treats and choices for every occasion. So, we are committed to building the leading speciality bakery group - because baking brilliance makes every day special.
Our Vision and Strategy
Our strategic objective is to create sustainable value for our shareholders, customers and other stakeholders by building the leading speciality bakery group. We produce a broad range of high-quality bread, cake and bakery snacking products targeted at growing channels and market niches. These offer growth potential and differentiation for our major customers, while fulfilling the changing needs and desires of end consumers.
To achieve this our strategy is to:
• Invest in our people and our manufacturing sites to form a strong foundation for our strategy
• Create innovative, high-quality bakery products that anticipate key market trends
• Ensure customer and consumer needs are at the heart of our decision making
• Develop a strong licensed brand portfolio to complement our core retailer brand relationships
• Aim to succeed in both the retail grocery and out-of-home channels
• Grow through a combination of organic growth and targeted acquisitions.
Operating Principles in action
Operating excellence
· Sustained strategy to invest in the capability and capacity of our manufacturing assets:
o £8 million new cake line with scale and automation.
o New IT platform across all sites - 50% complete.
· Group manufacturing process blueprint leading to specific product design framework and improved efficiency and quality.
Sustainable approach
· Most Finsbury sites are sending zero waste to landfill already. All will have achieved this by 2020.
· All sites have a nominated energy champion responsible for identifying and reducing consumption. Heat recovery projects are underway at several sites, and all lighting will be converted to LED by 2020. The asset investment strategy includes a focus on energy consumption.
· All sites are involved in the reducing and eliminating single-use plastics. With good progress already, we are targeting a 50% reduction by 2020.
Quality and innovation
· Extensive insight capabilities mean new product development is in line with market trends.
· Over 60 employees are engaged in developing new products.
· Leading organic bakery in the UK.
· Manufacturing process blueprint embraces the production of high-quality premium product.
· All sites hold BRC A-grade or above.
· Health agenda embedded into development process, with over 90% of products achieving FSA salt targets. Good progress made across all categories in reducing sugar in line with PHE targets, and further research underway to achieve their 2020 objectives.
· Acquisition of Ultrapharm after year end gives us scale in Free From.
Cost effectiveness
· Centralised Group Buying focused on high-quality and cost effective ingredients.
· Operational excellence initiatives focused on achieving lowest-cost-producer status in areas where we have niche strength e.g. artisan breads or round sharing cake.
· Group logistics leverages our scale to achieve lowest cost route to customers.
Growth with partners
· Our scale and diversity of products across UK bakery means the relationship with grocery retail customers is a partnership.
· Our business with discounters is growing in line with their growth within UK grocery.
· Our channel diversification into foodservice, our Kara foodservice brand, and our broad frozen foodservice range of products, sees us as the leading foodservice partner to the industry, growing at 6% in the year
People who care
· A health and safety risk management team with a mantra of 'Home Safe Everyday', supported by resources and a common Group-wide strategy and programme.
· Values of teamwork, honesty, ownership, respect and communication:
- New workplace Facebook communication tool to facilitate communication between all employees.
· A people strategy for all employees, embracing courses in basic English, an engineering apprenticeship programme, a graduate recruitment programme and leadership development programmes.
· Annual employee survey to obtain our employees' views.
Risk Report
Principal Risks and Uncertainties
The Board recognises the need for a robust system of internal controls and risk management. 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. Risk management is integral to the ability of the Group to deliver on its strategic objectives.
The Directors have identified the following as the principal risks and uncertainties that face the Group currently:
Strategic Risks:
Retailer Consolidation
There have been a number of high profile mergers and prospective mergers reported in the press in the past year including the merger of Tesco and Booker and the current proposed merger of Asda and JS Sainsbury's. There is always a risk in these situations that as the newly merged entities seek to offer the best prices to the consumer through economies of scale, the supplier base is rationalised.
Furthermore, the buying power of such a this newly created entity would be exceptional which poses a risk to suppliers who could
be pressured to lower prices to ensure that current and future trade is preserved.
As a supplier to all parties of the aforementioned mergers, the Group is not immune to this risk. However, we continue to strive to be the highest quality, most innovative and lowest cost supplier and believe this, along with our robust relationships with our customers, will ensure that we are strongly placed to continue to supply our current and future customer base.
Competitive environment and Customer requirements
The environment remains competitive within 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. Providing quality products, investing in innovation and competing on value helps to strengthen customer relations and support growth initiatives. The Group invests heavily in category management, new product development and marketing skills. This investment has helped create an insight into customers and consumer demands.
Consumer Trends
Post EU referendum, consumer optimism and spending has remained resilient. However, trends now suggest that as we move closer to the exit deadline, uncertainty over what Brexit deal will be implemented is having an impact on sentiment. British consumers have stopped taking on more debt and started saving their money again in a reversal to the trends that have upheld economic growth over the last year. The risk to the Group in that spending on non-essential goods and treats will fall, impacting on the demand for our key products The Group will continue to focus on quality and value and will explore new channels, new products and new formats to gain competitive advantage.
Health continues to be a major focus for the business. Dedicated resource continues to work on sugar and salt reduction targets as part of the Government Obesity Strategy and Public Health England recommendations. Our development teams work closely with our customers to ensure we meet or exceed all guidelines for health and nutrition, and work continuously with suppliers to reduce salt, fat and sugar in our products. We are committed to meet the FSA 2017 salt targets and are already over 90% compliant. Good progress has been made across all categories in reducing sugar in line with PHE targets.
Operational Risks:
Health & Safety
The importance of Health and Safety is widely recognised amongst the Group. Failure to adhere to health and safety regulations within the workplace not only puts our employees at risk, it could also carry serious financial, reputational and legal risk. A Group Head of Health and Safety has been appointed to create a largely uniform H&S system across all business units and to drive forward the "Home Safe Every Day" strategy. The Group's technical function is responsible for the implementation and maintenance of high standards for food safety, striving for best practice. Quality assurance procedures are managed at site level, are reviewed continuously with improvements made as appropriate and are audited by internal teams. All manufacturing sites are registered under the British Retail Consortium ('BRC') Unannounced Scheme. The sites are subject to regular internal and independent food safety and quality control audits, both announced and unannounced including those carried out by, or on behalf of, our customers. The Group maintains appropriate insurance cover, including product recall insurance, to mitigate the potential financial impact of a breach in food safety compliance.
External Risks:
Brexit
There is significant uncertainty over the type of Brexit deal the UK will agree with its European neighbours. Whatever the structure of the final deal, anything different from the current status quo is likely to have an impact on both the Food Manufacturing industry and on the Group.
The majority of the Group's trading is in the UK but there are sales into Europe which includes to Lightbody Europe, our 50% subsidiary. A material proportion of bakery commodities such as dairy and egg are sourced in Europe. Any tariffs on trade therefore will have a bearing on the UK Bakery market, the UK manufacturing industry and the Group. Contingency planning is already in place looking at alternative UK sources of products.
The Group is also likely to face higher logistic costs and administration costs due to increased custom border checks and will require higher stock levels due to lengthening delivery times for ingredients.
Equally, the Food Manufacturing industry, including Finsbury is typically reliant on low skilled labour. Labour strategies are being developed to retain and develop existing workers, attracting and hiring new workers and reducing labour whilst boosting productivity with its capital investment program.
Finsbury is not being complacent in its response to likely Brexit scenarios and has a cross functional team preparing a number of strategies in order to minimise the impact of Brexit.
Cyber Security
The Group is exposed to potential random and malicious attacks from Cyber criminals. The maintenance of protections software is one tool in the fight to protect our data. In addition, the Group is investing to implement common information systems across all companies with standardised protection operating requirements and security protection. Real time back-up, training and regular communication pulls the Group's defences together.
During 2017-18, the Audit Committee formally reviewed cyber security in four areas: Network security, hardware and software maintenance / updates, disaster recovery and related controls and governance. Where recommendations for improvements were made these are being implemented. An annual security review will be implemented including penetration testing, auditing of all software and hardware, and testing of disaster recovery plans.
Financial Risks:
Commodity & labour pressures
Bakery entails the use of commodities whose price is determined by worldwide demand and macro-economic factors. Commodity pressures have increased as a consequence of a number of factors; 1) A step change in the value of Sterling against both the Euro and Dollar following the EU Referendum. 2) The commodity cycle which, in the recent past has been relatively low. The cycle has seen significant increases in the price of a number of commodities which are over and above any exchange rate deterioration. Finally, 3) European policies particularly in the areas of butter and sugar.
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 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.
The National Living Wage is driving forward the cost of labour ahead of inflation and demand related adjustments. More recently the future availability of labour has become a concern. Ongoing capital investment and improvements in operational efficiency help reduce the impacts of both labour availability and cost as well as material inflation.
Pension Fund Deficit
The Group has one defined benefit pension scheme within its Memory Lane Cakes Limited business in Cardiff. The Scheme was closed to new members in 2010 to reduce the funding risk to Memory Lane Cakes. The valuation of the Scheme on a technical provision basis as well as the underlying performance of the invested assets can cause large fluctuations in valuations. There is an agreed deficit recovery plan fixed until September 2023 or until a new schedule is agreed based on the next valuation which will be at 31 December 2018.
Foreign Exchange
The Group supplies UK manufactured products to Lightbody Stretz Ltd, its 50% owned selling and distribution business trading in Mainland Europe. The Group also purchases a small amount of commodities and capital equipment in foreign currency. As a consequence, the Group is exposed to fluctuations in foreign currency rates. This risk is managed by the continual monitoring of the exposure to foreign currency transactions. Forward currency contracts are used when required and the Group procurement team work hard to ensure the best prices for commodities and equipment, giving special consideration to the benefits of those contracts denominated in foreign currency.
Financial Review
Group revenue for the 52 week period to 30 June 2018, including the revenues for the bakeries closed during the year, is £303.6m, 3.4% lower than last year. Continuing Group revenue (i.e. excluding the revenues of the bakeries closed) is, at £290.2m up 2.4% or £6.8m. Growth in continuing revenues is within markets which are seeing value growth with slight volumes decline.
Significant and non-recurring costs of £13,067,000 which primarily relate to the closure of the bakeries have been stripped out of operating profit to give adjusted operating profit, which provides a clearer presentation of the underlying trading performance of the Group. Adjusted operating profit at £17.8m is up 2.3% on last year. Adjusted operating profit margins are 5.9% (2017: 5.5%), a consequence of removing the losses of the bakeries closed. The Group's performance is seen as resilient in the face of severe commodity and labour inflation. This resilience is underpinned by capital investment, a focus on operational efficiency and removing low profit business to optimise product mix.
Dividend
Subject to Shareholder approval at the Company's AGM on 21 November 2018, the final dividend of 2.2 pence per share will be paid on 21 December 2018 to all shareholders on the register at 23 November 2018 and will be recognised in the year ending 29 June 2019.
The tables below show what the Directors consider to be the underlying performance of the Group, the adjustments eliminate the impact of significant and non-recurring items and other accounting items.
52 week period ended 30 June 2018
Adjusted Operating performance
Significant and non-recurring items
Defined benefit pension scheme
Fair value of interest rate swaps/ foreign exchange contracts
As per Consolidated Statement of Comp-rehensive Income
£000
£000
£000
£000
£000
Revenue
303,600
-
-
-
303,600
Cost of sales
(211,511)
-
-
-
(211,511)
Gross profit
92,089
-
-
-
92,089
Other costs excluding depreciation & amortisation
(66,489)
(13,067)
411
49
(79,096)
EBITDA
25,600
(13,067)
411
49
12,993
Depreciation & amortisation
(7,756)
-
-
-
(7,756)
Results from operating activities
17,844
(13,067)
411
49
5,237
Finance income
24
-
-
143
167
Finance costs
(652)
-
(277)
-
(929)
Profit before tax
17,216
(13,067)
134
192
4,475
Taxation
(3,708)
2,452
(23)
(32)
(1,311)
Profit for the year
13,508
(10,615)
111
160
3,164
52 week period ended 1 July 2017
Adjusted Operating performance
Significant and non-recurring items
Defined benefit pension scheme
Fair value of interest rate swaps/ foreign exchange contracts
As per Consolidated Statement of Comp-rehensive Income
£000
£000
£000
£000
£000
Revenue
314,296
-
-
-
314,296
Cost of sales
(216,493)
-
-
-
(216,493)
Gross profit
97,803
-
-
-
97,803
Other costs excluding depreciation & amortisation
(72,883)
(4,000)
200
(71)
(76,754)
EBITDA
24,920
(4,000)
200
(71)
21,049
Depreciation & amortisation
(7,485)
-
-
-
(7,485)
Results from operating activities
17,435
(4,000)
200
(71)
13,564
Finance income
-
-
-
555
555
Finance costs
(877)
-
(204)
-
(1,081)
Profit before tax
16,558
(4,000)
(4)
484
13,038
Share of losses of equity accounted investees after tax
(22)
-
-
-
(22)
Taxation
(3,578)
680
1
(62)
(2,959)
Profit for the year
12,958
(3,320)
(3)
422
10,057
Earnings Per Share (EPS)
EPS comparatives to the prior year can be distorted by significant and non-recurring items and other items highlighted in the tables above. The Board is focused on growing adjusted diluted EPS, which is calculated by eliminating the impact of the items highlighted above as well as amortisation of intangibles and incorporates the dilutive effect of share options. Adjusted diluted EPS is 9.8p (2017: 9.5p).
2018
2017
Basic EPS
1.7p
7.1p
Adjusted basic EPS
10.2p
9.8p
Diluted basic EPS
1.6p
6.9p
Adjusted* diluted** EPS
9.8p
9.5p
Further details can be found in Note 6.
Diluted EPS takes basic EPS and incorporates the dilutive effect of share options.
Cash Flow
There was a decrease in our working capital requirement of £1.3 million (2017: £2.5 million increase) in the financial year, corporation tax payments made in the financial year totalled £3.3 million (2017: £2.7 million), the payments in the current and prior year took account of the research and development tax relief due to the Group, tax losses being utilised and a higher tax rate charged on overseas profits. Capital expenditure in the year amounted to £12.6 million (2017: £12.5 million).
Debt and Bank Facilities
The Group's total net debt is £15.6 million (2017: £17.5 million) down £1.9 million from the prior year. During the year the Group refinanced its debt facilities. The new facility is a £45m revolving credit facility provided by a club of three banks - HSBC, Rabobank and RBS. The facility is on improved terms, is available for five years and also includes scope for the facility to be increased by up to a further £45m.
The Group is able to offer strong asset backing to secure its borrowings. The Group owns freehold sites at Memory Lane in Cardiff, Fletchers' site at Sheffield and Lightbody in Scotland. In addition, the Group has a strong trade debtor book, made up primarily of the UK's major multiple retailers. This debtor book stood at £40.0 million (2017: £45.2 million) at the period end date.
The Group recognises the inherent risk from interest rate rises, and uses interest rate swaps to mitigate these risks. The Group entered into a swap for £20.0m for five years from 3 July 2017 (fixed) at 0.455%. The total balance of swaps at 30 June 2018 is £20 million (2017: £nil). The counterparty to these transactions is HSBC Bank Plc.
The effective interest rate for the Group at the year end, taking account of the interest rate swap in place with base rate at 0.5% and LIBOR at 0.501%, was 1.66% (2017: 2.15%).
Financial Covenants
The Board reviews the Group's cash flow forecasts and key covenants on a regular basis to ensure that it has adequate facilities to cover its trading and banking requirements with an appropriate level of headroom. The forecasts are based on management's best estimates of future trading. There has been no breach of covenants during the year.
Interest cover (based on adjusted earnings before interest, tax, depreciation and amortisation - EBITDA) for the 52 weeks to 30 June 2018 was 40.7 (2017: 28.4). Net bank debt to EBITDA (based on adjusted EBITDA) for the year to 30 June 2018 was 0.6 (2017: 0.7).
Taxation
The Group taxation charge for the year was £1.3 million (2017: £3.0 million). This represents an effective rate of 21.5% on profits before significant and non-recurring and other items (2017: 21.6%) as shown in the tables above. Further details on the tax charge can be found in Note 5.
Financial and Non-Financial Key Performance Indicators
A range of financial and non-financial key performance indicators are monitored at site level covering, amongst others, customer service, quality and health and safety. The Group board receives a regular overview of these.
Stephen Boyd
Director 14 September 2018
Consolidated Statement of Profit and Loss and Other Comprehensive Income
for the 52 weeks ended 30 June 2018 and 52 weeks ended 1 July 2017
2018
2017
Note
£000
£000
Revenue
1
303,600
314,296
Cost of sales
(211,511)
(216,493)
Gross profit
92,089
97,803
Administrative expenses – underlying
(73,785)
(80,239)
Administrative expenses – significant and non-recurring
(13,067)
(4,000)
Administrative expenses
2
(86,852)
(84,239)
Results from operating activities
5,237
13,564
Finance income
4
167
555
Finance cost
4
(929)
(1,081)
Net finance cost
(762)
(526)
Profit before tax and share of losses of equity-accounted investees
4,475
13,038
Share of losses of equity accounted investees
-
(22)
Profit before tax
4,475
13,016
Taxation
5
(1,311)
(2,959)
Profit for the financial year
3,164
10,057
Other comprehensive (expense)/income
Items that will not be reclassified to profit and loss
Remeasurement on defined benefit pension scheme
(172)
(4,031)
Movement in deferred taxation on pension scheme liability
29
621
Other comprehensive expense for the financial year, net of tax
(143)
(3,410)
Total comprehensive income for the financial year
3,021
6,647
Profit attributable to:
Equity holders of the parent
2,180
9,048
Non-controlling interest
984
1,009
Profit for the financial year
3,164
10,057
Total comprehensive income attributable to:
Equity holders of the parent
2,037
5,638
Non-controlling interest
984
1,009
Total comprehensive income for the financial year
3,021
6,647
Earnings per ordinary shares
Basic
6
1.7
7.1
Diluted
6
1.6
6.9
The Notes on pages 20 to 28 form an integral part of these Financial Statements
Consolidated Statement of Financial Position
at 30 June 2018 and 1 July 2017
Note
2018
2017
£000
£000
Non-current assets
Intangibles
7
83,313
80,302
Property, plant and equipment
49,922
48,857
Investments in equity accounted investees
-
269
Other financial assets
28
28
Deferred tax assets
3,890
4,063
137,153
133,519
Current assets
Inventories
13,456
12,684
Trade and other receivables
44,575
50,018
Cash and cash equivalents
9,363
3,024
Other financial assets – fair value of derivatives
558
560
67,952
66,286
Total assets
205,105
199,805
Current liabilities
Other interest-bearing loans and borrowings
8
(24,685)
(14,586)
Trade and other payables
(55,598)
(60,461)
Provisions
(3,798)
(18)
Other financial liabilities - fair value of derivatives
(40)
(234)
Current tax liabilities
-
(1,650)
(84,121)
(76,949)
Non-current liabilities
Other interest-bearing loans and borrowings
8
-
(5,800)
Provisions and other liabilities
(4,623)
(221)
Deferred tax liabilities
(1,243)
(1,335)
Pension fund liability
(10,536)
(10,498)
(16,402)
(17,854)
Total liabilities
(100,523)
(94,803)
Net assets
104,582
105,002
Equity attributable to equity holders of the parent
Share capital
1,304
1,304
Share premium account
64,956
64,956
Capital redemption reserve
578
578
Employee share reserve
(3,282)
(3,585)
Retained earnings
38,954
39,862
102,510
103,115
Non-controlling interest
2,072
1,887
Total equity
104,582
105,002
These Financial Statements were approved by the Board of Directors on 14 September 20018 and were signed on its behalf by:
Stephen Boyd (Director)
Registered Number 00204368
The Notes on pages 20 to 28 form an integral part of these Financial Statements
Consolidated Statement of Changes in Equity
for the 52 weeks ended 30 June 2018 and 1 July 2017
Share
Capital
Share
premium
Capital redemption reserve
Employee share reserve
Retained
Earnings
Non-controlling
interest
Total
equity
£000
£000
£000
£000
£000
£000
£000
Balance at 2 July 2016
1,304
64,956
578
(3,920)
36,569
1,583
101,070
Profit for the financial year
-
-
-
-
9,048
1,009
10,057
Other comprehensive (expense)/ income:
Remeasurement on defined benefit pension
-
-
-
-
(4,031)
-
(4,031)
Deferred tax movement on pension scheme remeasurement
-
-
-
-
621
-
621
Total other comprehensive expense
-
-
-
-
(3,410)
-
(3,410)
Total comprehensive income for the period
-
-
-
-
5,638
1,009
6,647
Transactions with owners, recorded directly in equity:
Shares issued from EBT
-
-
-
335
(158)
-
177
Impact of share based payments
-
-
-
-
1,240
-
1,240
Deferred tax on share options
-
-
-
-
47
-
47
Foreign exchange translation
differences
-
-
-
-
171
-
171
Dividend paid
-
-
-
-
(3,645)
(705)
(4,350)
Balance at 1 July 2017
1,304
64,956
578
(3,585)
39,862
1,887
105,002
Balance at 1 July 2017
1,304
64,956
578
(3,585)
39,862
1,887
105,002
Profit for the financial year
-
-
-
-
2,180
984
3,164
Other comprehensive (expense)/ income:
Remeasurement on defined benefit pension
-
-
-
-
(172)
-
(172)
Deferred tax movement on pension scheme remeasurement
-
-
-
-
29
-
29
Total other comprehensive expense
-
-
-
-
(143)
-
(143)
Total comprehensive income for the period
-
-
-
-
2,037
984
3,021
Transactions with owners, recorded directly in equity:
Shares issued from EBT
-
-
-
303
(217)
-
86
Impact of share based payments
-
-
-
-
1,138
-
1,138
Deferred tax on share options
-
-
-
-
58
-
58
Foreign exchange translation differences
-
-
-
-
34
-
34
Dividend paid
-
-
-
-
(3,958)
(799)
(4,757)
Balance at 30 June 2018
1,304
64,956
578
(3,282)
38,954
2,072
104,582
The notes on pages 20 to 28 form an integral part of these Financial Statements.
Consolidated Cash Flow Statement
for the 52 weeks ended 30 June 2018 and 1 July 2017
Note
2018
2017
£000
£000
Cash flows from operating activities
Profit for the financial year
3,164
10,057
Adjustments for:
Taxation
5
1,311
2,959
Net finance costs
4
762
526
Depreciation
7,041
6,948
Amortisation of intangibles
7
715
537
Significant and non-recurring items
13,067
4,000
Share of losses of equity accounted investees after tax
-
22
Contributions by employer to pension scheme
(411)
(200)
Change in fair value of foreign exchange contracts
(49)
71
Operating profit before changes in working capital
25,600
24,920
Changes in working capital:
Increase in inventories
(757)
(39)
Decrease in trade and other receivables
6,235
153
Decrease in trade and other payables
(4,160)
(2,566)
Cash generated from operations before costs of disposals and acquisitions
26,918
22,468
Costs relating to closure of bakeries and acquisitions
(4,594)
-
Interest paid
(634)
(892)
Tax paid
(3,338)
(2,650)
Net cash from operating activities
18,352
18,926
Cash flows from investing/divesting activities
Purchase of property, plant and equipment
(12,606)
(12,542)
Disposal of property, plant and equipment
768
-
Purchase of companies/investments
-
(80)
Net cash used in investing activities
(11,838)
(12,622)
Cash flows from financing activities
(Repayment)/drawdown of invoice discounting
9
(11,646)
822
Drawdown of revolving credit
9
25,000
-
Repayment of mortgage and bank loans
9
(8,794)
(2,937)
Repayment of asset finance liabilities
9
(57)
(133)
Options exercised
86
177
Dividend paid to non-controlling interest
(799)
(705)
Dividend paid to shareholders
(3,958)
(3,645)
Net cash from financing activities
(168)
(6,421)
Net increase/(decrease) in cash and cash equivalents
6,346
(117)
Opening cash and cash equivalents
3,024
3,024
Effect of exchange rate fluctuations on cash held
(7)
117
Cash and cash equivalents at end of period
9,363
3,024
The Notes on pages 20 to 28 form an integral part of these Financial Statements.
Presentation of Financial Statements
Basis of Preparation
The financial information set out above does not constitute the company's statutory accounts for the 52 week period ended 30 June 2018 or the 52 week period ended 1 July 2017, but is derived from those accounts. Statutory accounts for 2017 have been delivered to the registrar of companies, and those for 2018 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
1. Revenue and Segmental Information
Operating segments are identified on the basis of internal reporting and decision making. The Group's Chief Operating Decision Maker is considered to be the Board as it is primarily responsible for the allocation of resources to segments and the assessment of performance by segment.
The Board uses adjusted operating profit, reviewed on a regular basis, as the key measure of the segments' performance. Operating profit in this instance is defined as profit before the following:
- Net financing expense
- Significant and non-recurring items
- Pension charges or credits in relation to the net pension position
- Revaluation of interest rate swaps and forward foreign currency contracts.
The UK Bakery segment manufactures and sells bakery products to the UK's multiple grocers and foodservice sectors. This segment primarily comprises the operations of Memory Lane Cakes Ltd, Lightbody Group Ltd, Johnstone's Food Service Ltd, Fletchers Bakeries Ltd and Nicholas & Harris Ltd. These subsidiaries are aggregated into a single UK Bakery segment as they share similar characteristics. The characteristics considered are:
- The nature of the products - products are similar in nature and are classed as manufactured bakery products
- The production process - the production processes have the same or similar characteristics
- The economic characteristics - the average gross margins are expected to be similar
- The type and class of customer - customers are the same grocery retailers and foodservice customers
- The method of distribution - method is the same or similar throughout the segment
- The regulatory environment - the environment is the same.
Costs of Group operations plus a 10% premium have been allocated across the segments on the basis of their operating profit. The premium has been charged to reflect the synergies achieved from obtaining resources centrally giving benefits across the operating segments
A purchasing premium of 2% is charged from Group operations, and is calculated on materials and packaging spend at segmental level. This charge is based on the rationale that Group operations, through its Group buyers, optimises the Group's procurement spend through leveraging its purchasing power. This has resulted in a loss from continuing operations of £0.1m (2017: £0.2m loss) being presented within the Group Operations segment. The Group's finance income and expenses cannot be meaningfully allocated to the individual operating segments.
52 week period ended 30 June 2018
UK Bakery
£000
Overseas
£000
Group Operations
£000
Total Group
£000
External revenue continuing
271,127
32,473
-
303,600
Adjusted operating profit
15,607
2,348
(111)
17,844
Fair value foreign exchange contracts
(145)
194
-
49
Defined benefit pension scheme
411
-
-
411
Significant and non-recurring items
(13,067)
-
-
(13,067)
Results from operating activities
2,806
2,542
(111)
5,237
Finance income
167
Finance cost
(929)
Net finance cost
(762)
Share of losses of equity accounted investees after tax
-
Profit before taxation
4,475
Taxation
(1,311)
Profit for the financial year
3,164
At 30 June 2018
Segment assets
187,260
7,138
752
195,150
Unallocated assets
9,955
Consolidated total assets
205,105
Segment liabilities
(64,358)
(4,684)
(6,661)
(75,703)
Unallocated liabilities
(24,820)
Consolidated total liabilities
(100,523)
Other segment information
Capital expenditure
12,354
173
-
12,527
Depreciation included in segment profit
6,979
62
-
7,041
Amortisation
715
-
-
715
Impairment of assets
987
-
-
987
Inter-segmental sale / (purchases)
9,538
(9,538)
-
-
Analysis of unallocated assets and liabilities:
Assets
Liabilities
£000
£000
Investments
28
Loans and borrowings
(24,685)
Financial instruments
558
Financial instruments
(40)
Cash and cash equivalents
9,363
Cash and cash equivalents
-
Taxation balances
6
Taxation balances
(95)
Unallocated assets
9,955
Unallocated liabilities
(24,820)
With regard to revenue, five customers with sales of £60m, £40m, £31m, £24m and £18m account for 57% of revenue, which is attributable to the UK Bakery and Overseas segments above.
52 week period ended 1 July 2017
UK Bakery
£000
Overseas
£000
Group Operations
£000
Total Group
£000
External revenue continuing
281,580
32,716
-
314,296
Adjusted operating profit
15,369
2,219
(153)
17,435
Fair value foreign exchange contracts
(350)
279
-
(71)
Defined benefit pension scheme
200
-
-
200
Significant and non-recurring items
(4,000)
-
-
(4,000)
Results from operating activities
11,219
2,498
(153)
13,564
Finance income
555
Finance cost
(1,081)
Net finance cost
(526)
Share of losses of equity accounted investees after tax
(22)
Profit before taxation
13,016
Taxation
(2,959)
Profit for the financial year
10,057
At 1 July 2017
Segment assets
188,628
6,543
712
195,883
Unallocated assets
3,922
Consolidated total assets
199,805
Segment liabilities
(62,483)
(5,041)
(6,564)
(74,088)
Unallocated liabilities
(20,715)
Consolidated total liabilities
(94,803)
Other segment information
Capital expenditure
12,430
112
-
12,542
Depreciation included in segment profit
6,906
42
-
6,948
Amortisation
537
-
-
537
Impairment of assets
4,000
-
-
4,000
Inter-segmental sale / (purchases)
8,710
(8,710)
-
-
Analysis of unallocated assets and liabilities:
Assets
Liabilities
£000
£000
Investments
297
Loans and borrowings
(20,386)
Financial instruments
560
Financial instruments
(234)
Cash and cash equivalents
3,024
Cash and cash equivalents
-
Taxation balances
41
Taxation balances
(95)
Unallocated assets
3,922
Unallocated liabilities
(20,715)
With regard to revenue, five customers with sales of £64m, £39m, £31m, £22m and £22m account for 57% of revenue, which is attributable to the UK Bakery and Overseas segments above.
Impairment relates to the assets held in Grain D'Or, which fall under the UK Bakery segment.
An analysis by geographical segment is shown below:
Geographical split of revenue by destination
2018
2017
£000
£000
Continuing:
United Kingdom
257,701
276,177
Europe
45,899
38,119
Total continuing
303,600
314,296
Capital expenditure on segment assets is detailed in Note 1.
Geographical split by country of origin
United Kingdom
Europe
Total
£000
£000
£000
2018
Continuing Revenue
271,127
32,473
303,600
Adjusted operating profit
15,496
2,348
17,844
Unadjusted operating profit
2,695
2,542
5,237
Total assets
197,874
7,231
205,105
Total liabilities
(95,748)
(4,775)
(100,523)
Net assets
102,126
2,456
104,852
United Kingdom
Europe
Total
£000
£000
£000
2017
Continuing Revenue
281,580
32,716
314,296
Adjusted operating profit
15,216
2,219
17,435
Unadjusted operating profit
11,066
2,498
13,564
Total assets
193,262
6,543
199,805
Total liabilities
(89,762)
(5,041)
(94,803)
Net assets
103,500
1,502
105,002
The net assets shown under Europe comprises Lightbody Stretz Ltd, being the 50% owned parent company of Lightbody Europe SAS, the French based selling and distribution business.
2. Expenses and Auditor's Remuneration
Included in profit are the following:
2018
2017
£000
£000
Amortisation of intangibles
715
537
Depreciation of owned tangible assets
6,859
6,715
Depreciation on assets under finance leases and hire purchase contracts
182
233
Impairment of assets & goodwill
987
4,000
Loss on foreign exchange
260
1,360
Hire of plant and machinery – operating leases
797
1,006
Hire of other assets – operating leases
1,302
1,833
Movement on fair value of foreign exchange contracts
(49)
71
Research and development
1,567
2,328
Share option charges
1,138
1,240
Government grants
25
-
Amortisation of intangibles for the year was £715,000 (2017: £537,000) relating to the Fletchers acquisition in October 2014.
Auditor's remuneration:
2018
2017
£000
£000
Audit of these Financial Statements
60
50
Amounts receivable by the auditor and its associates in respect of:
Audit of the Financial Statements of subsidiaries of the Company
120
123
Taxation compliance services
24
35
Other tax advisory
10
7
Other services
173
100
The auditor’s remuneration is in respect of KPMG LLP. Fees for other services relates to corporate finance transactions, pension advisory services and services relating to information technology.
3. Significant and Non-Recurring Items
The Group presents certain items as non-recurring and significant. These relates to items which, in management's judgement, need to be disclosed by virtue of their size or incidence in order to obtain a more meaningful understanding of the financial information. They reflect costs that will not be repeated and therefore do not reflect ongoing trading of business which is most meaningful to users.
Included within significant and non-recurring items shown in the table in the Financial Review section are the following costs:
2018
2017
£000
£000
Site closures - reorganisation people costs
2,266
-
Site closures – property, leases and contract costs
9,604
-
Site closures – Legal and professional costs
121
-
Impairment of assets and investments
373
4,000
Acquisition related costs
703
-
13,067
4,000
The site closure provision relates primarily to the closure of the Grain D'Or site during the year, the provision is based on best estimates of the outcome of negotiations. Whilst site exit negotiations are still ongoing, the expectation is that these will conclude within the new financial year.
4. Finance Income and Expenses
Recognised in the Consolidated Statement of Profit and Loss
2018
2017
£000
£000
Finance income
Change in fair value of interest rate swaps
143
555
Interest on interest rate swap agreements
18
-
Bank interest receivable
6
-
Total finance income
167
555
Finance cost
Interest on net pension position
(277)
(204)
Bank interest payable
(638)
(752)
Interest on interest rate swap agreements
(14)
(125)
Total finance cost
(929)
(1,081)
5. Taxation
Recognised in the Consolidated Statement of Profit and Loss
2018
£000
2017
£000
Current tax
Current year
1,236
3,270
Adjustments for prior years
(93)
(196)
Total current tax
1,143
3,074
Deferred tax
Origination and reversal of temporary differences
328
(222)
Retirement benefit deferred tax charge
-
1
Adjustments for prior years
(160)
106
Total deferred tax
168
(115)
Total tax expense
1,311
2,959
Reconciliation of effective tax rate
The weighted average hybrid rate of UK and French tax is 22.5% (2017: 22.2%). The tax assessed for the period is lower (2017: lower) than the hybrid rate of UK and French tax. The UK corporation tax rate for the period is 19% (2017: 20.00 %). The differences are explained below:
2018
2017
£000
£000
Profit before taxation before losses from equity accounted investees
4,475
13,038
Tax using the UK corporation tax rate of 19.00%, (2017: 19.76%)
850
2,577
Overseas profits charged at different taxation rate
277
344
Non-deductible expenses
586
160
Restatement of opening net deferred tax due to rate change and differences in rates
(49)
68
R&D uplift current year
(100)
(100)
Adjustments to tax charge in respect of prior periods
(253)
(90)
Tax expense (excluding prior year disallowable impairment)
1,311
2,959
The UK corporation tax rate reductions from 20% to 19% from 1 April 2017 and 18% from 1 April 2020 were substantively enacted on 26 October 2015. An additional reduction to 17% from 1 April 2020 was substantively enacted on 6 September 2016. The deferred tax assets and liabilities at 30 June 2018 have been calculated based on these rates.
The adjustment of £253,000 for prior year includes, ineligible capital spends and disallowable expenses being different to the assumed levels at the time of preparation of the Annual Report.
The Company has an unrecognised deferred tax asset of £162,605 (2017: £162,605) relating to capital losses carried forward. This asset has not been recognised in the financial statements as it is not expected that suitable gains will arise in the future in order to utilise the underlying capital losses.
6. Earnings Per Ordinary Share
Basic earnings per share for the period is calculated on the basis of profit for the year after tax, divided by the weighted average number of shares in issue being 127,611,000 (2017: 126,979,000).
Basic diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue to assume conversion of all potential dilutive ordinary shares. At 30 June 2018, the diluted weighted average number of shares in issue was 132,162,000 (2017: 130,992,000).
An adjusted earnings per share has been calculated to show the trading performance of the Group. These adjusted earnings per share exclude:
· Reorganisation and other significant and non-recurring items
· IAS 39 'Financial Instruments: Recognition and Measurement' fair value adjustment relating to the Group's interest rate swaps and foreign exchange contracts
· IAS 19 (revised) 'Accounting for retirement benefits' relating to net income
· The taxation effect at the appropriate rate on adjustments
· Amortisation of intangible assets
52 weeks to
30 June 2018
52 weeks to
1 Jul 2017
Profit
£000
£000
Profit attributable to equity holders of Company (basic)
2,180
9,048
Significant and non-recurring and other items as per strategic Report
10,344
2,901
Intangible amortisation net of deferred tax
446
446
Numerator for adjusted earnings per share calculation (adjusted basic)
12,970
12,395
Basic
‘000
Diluted
‘000
Basic
‘000
Diluted
‘000
Shares
Weighted average number of ordinary shares in issue during the period
127,611
127,611
126,979
126,979
Dilutive effect of share options
-
4,551
-
4,013
127,611
132,162
126,979
130,992
Earnings per share (pence per share)
Basic
pence
Diluted
pence
Basic
pence
Diluted
pence
Basic and diluted
1.7
1.6
7.1
6.9
Adjusted basic and adjusted diluted
10.2
9.8
9.8
9.5
Significant and non-recurring and other items are tabled in the Strategic Report and comprise: significant and non-recurring charges (£10,615,000), defined benefit pension scheme £111,000 and fair value of interest rate swaps and foreign exchange contracts £160,000.
7. Intangibles
Intangible assets comprise business system, customer relationships, brands and goodwill.
Goodwill
Business
systems
Brands and licences
Customer relationships
Total
£000
£000
£000
£000
£000
Cost at 2 July 2016
73,458
600
3,683
5,909
83,650
Transfer from tangible assets
-
548
-
-
548
Additions
-
2,695
-
-
2,695
Cost at 1 July 2017
73,458
3,843
3,683
5,909
86,893
Transfer from tangible assets
-
-
-
-
-
Additions
-
3,726
-
-
3,726
Cost at 30 June 2018
73,458
7,569
3,683
5,909
90,619
Amortisation/impairment at 2 July 2016
(4,290)
-
(1,073)
(691)
(6,054)
Charge for the year 1 July 2017
-
-
(143)
(394)
(537)
Amortisation/impairment at 1 July 2017
(4,290)
-
(1,216)
(1,085)
(6,591)
Charge for the year 30 June 2018
-
(178)
(143)
(394)
(715)
Amortisation/impairment at 30 June 2018
(4,290)
(178)
(1,359)
(1,479)
(7,306)
Net book value at 2 July 2016
69,168
600
2,610
5,218
77,596
Net book value at 1 July 2017
69,168
3,843
2,467
4,824
80,302
Net book value at 30 June 2018
69,168
7,391
2,324
4,430
83,313
The brand and customer relationships recognised were purchased as part of the acquisition of Fletchers Group of Bakeries in October 2014. They are considered to have finite useful lives and are amortised on a straight line basis over their estimated useful lives of twenty years for the brand and fifteen years for customer relationships. The intangibles were valued using an income approach, using Multi-Period excess earnings Method for customer relationships and Relief from Royalty Method for brand valuation. The amortisation of intangibles has been charged to administrative expenses in the Income Statement. Amortisation on business systems commenced during the year as the systems are brought into use.
Goodwill has arisen on acquisitions and reflects the future economic benefits arising from assets that are not capable of being identified individually and recognised as separate assets. The goodwill reflects the anticipated profitability and synergistic benefits arising from the enlarged Group structure. The goodwill is the balance of the total consideration less fair value of assets acquired and identified. The carrying value of the goodwill is reviewed annually for impairment. The carrying value of all goodwill has been assessed during the year.
The Group tests goodwill for impairment on an annual basis, or more frequently if there are indications that the goodwill may be impaired. The recoverable amounts of the cash generating units are determined from value in use calculations. The key assumptions for the value in use calculations are the discount rate used for future cash flows and the anticipated future changes in revenue, direct costs and indirect costs. The assumptions used reflect the past experience of management and future expectations.
The Group prepares cash flow forecasts covering a five year period based on the detailed financial forecasts approved by management for the next three years with estimated growth and inflation of 3% (2017: 3%) and 3% (2017: 3%) respectively thereafter. The cashflows beyond this forecast are extrapolated to perpetuity using a nil growth rate on a prudent basis, to reflect the uncertainties of forecasting further than five years. Changes in revenue and direct costs are based on past experience and expectations of future changes in the market.
The revenue growth rate combines volume, mix and price of products. An inflation factor has been applied to costs of sales, variable costs and indirect costs and takes into consideration the general rate of inflation, movements in commodities, improvement in efficiencies from capital investment and operations and purchasing initiatives.
A pre-tax discount rate of 10% (2017: 10%) has been used in these calculations. The Group has considered the economic environment and higher level of return expected by equity holders due to the perceived risk in equity markets when selecting the discount rate. The discount rate used for each cash generating unit has been kept constant as the market risk is deemed not to be materially different between the different segments of the bakery sector, nor over time.
Sensitivity analyses have been carried out by the Directors on the carrying value of all remaining goodwill using discount rates ranging between 6.4% and 15.0% which would not result in an impairment of any cash generating units. Management believe any increase in discount rates above 15% to be remote.
The carrying amount of goodwill has been allocated to cash generating units or groups of cash generating units as follows:
2018
£000
2017
£000
Nicholas & Harris
2,980
2,980
Lightbody of Hamilton
45,698
45,698
Fletchers Bakeries
20,118
20,118
Johnstone’s Food Service
372
372
69,168
69,168
8. Other Interest-Bearing Loans and Borrowings
This note provides information about the contractual terms and repayment terms of the Group's interest-bearing loans and borrowings, which are measured at amortised cost, using the effective interest rate method.
2018
Margin
Frequency of
Repayments
Year of maturity
Facility
£000
Drawn
£000
Current
£000
Non-Current
£000
Revolving credit
1.30%/LIBOR
Varies
2023
45,000
25,000
25,000
-
Unamortised transaction costs
(315)
(315)
-
24,685
24,685
-
2017
Margin
Frequency of
Repayments
Year of maturity
Facility
£000
Drawn
£000
Current
£000
Non-Current
£000
Invoice Discounting
1.50%/base
On demand
Revolving*
22,000
11,646
11,646
-
Term loan
2.00%/LIBOR
Quarterly
2019
13,400
6,337
2,568
3,769
Revolving credit
2.00%/LIBOR
Varies
2019
8,000
-
-
-
Mortgage
1.75%/LIBOR
Quarterly
2022
3,470
2,457
369
2,088
Finance lease liabilities
1.76%/base
Monthly
various
2,000
57
57
-
Overdraft
2.00%/base
On demand
-
2,000
-
-
-
50,870
20,497
14,640
5,857
Unamortised transaction costs
(111)
(54)
(57)
20,386
14,586
5,800
Secured bank loans and mortgages over one year
5,857
Unamortised transaction costs
(57)
5,800
Repayments are as follows:
Between one and two years
2,894
Between two and five years
2,292
Between five and ten years
614
5,800
* Revolving maturity above relates to the payment terms on the invoice discounting which is up to 90 days from the date of invoice.
Finance lease liabilities are payable as follows:
2018
2017
Minimum lease payments
Interest
Principal
Minimum lease payments
Interest
Principal
£000
£000
£000
£000
£000
£000
Less than one year
-
-
-
58
1
57
-
-
-
58
1
57
All of the above loans are denoted in pounds Sterling, with various interest rates and maturity dates. The main purpose of the above facilities is to finance the Group's operations.
As part of the bank borrowing facility the Group needs to meet certain covenants every six months. There were no breaches of covenants during the year. The covenant tests required are Net bank debt : EBITDA, Interest cover, debt service cover and capital expenditure.
The bank facilities available for drawdown are £45 million plus a further £45 million accordion facility (2017: £48.9 million). At the period end date, the facility utilised was £25 million (2017: £20.5 million), giving £20 million (2017: £28.4 million) headroom, a further £45 million of unutilised accordion facility is available for drawdown.
9. Analysis of net debt
At year ended
1 July
2017
£000
Cash flow
£000
At year ended
30 June
2018
£000
Cash at bank
3,024
6,339
9,363
Debt due within one year
(2,937)
(22,063)
(25,000)
Debt due after one year
(5,857)
5,857
-
Invoice discounting due within one year
(11,646)
11,646
-
Hire purchase obligations due within one year
(57)
57
-
Total net bank debt
(17,473)
1,836
15,637
Debt
(20,386)
(4,229)
(24,685)
Cash at bank
3,024
6,339
9,363
Unamortised transaction costs
(111)
(204)
(315)
Total net bank debt
(17,473)
1,836
(15,637)
Cash at bank
3,024
6,339
9,363
Total debt payable excluding cash
(20,497)
(4,503)
(25,000)
10. Post Balance Sheet Events
On 3rd September 2018, the Company acquired 100% of the share capital of Ultrapharm Limited, a Free From bakery manufacturer, supplying an extensive product range including bread, buns and rolls and other morning goods to a diverse blue chip customer base.
The acquisition of Ultrapharm supports the Group's ongoing strategy to further diversify its product capability into high growth areas and to expand the Group's existing facilities to manufacture Free From products, a category of which the Group has previous expertise.
Ultrapharm employs more than 240 people across manufacturing sites in the UK and in Poland, for the year ended 31 December 2017, Ultrapharm generated EBITDA of £1.6 million and a profit before tax of £0.8 million on revenues of £19.5 million. As at the 31 December 2017, gross assets were £10.8 million.
The total consideration is split between £17.0 million payable in cash on completion, up to £3.0 million in annual instalments to the period to 30 June 2021 subject to the continued employment of key management and a final incentive payment subject to performance criteria over the period to 30 June 2021 estimated at approximately £1.0 million. The consideration will be funded from the Group's existing cash and debt facilities. The professional costs associated with the acquisition included with significant and non-recurring items under administrative expenses in the Group's Profit and Loss for the 52 weeks ended 30 June 2018 is £432,500.
Given the timing of the acquisition, the initial accounting for the business combination including the associated fair value exercise has not been completed at the time the Annual Report is authorised.
Therefore, it is impracticable to provide certain related information required by IFRS 3.B64 at this time.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDFR GGUQGBUPRPGQ
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