29th Jun 2006 07:02
RHM plc29 June 2006 RHM plc Preliminary Results for the 52 Weeks ended 29 April 2006 Significant Improvement in Second Half Financial Highlights Underlying Results* 52 Weeks Ended 52 Weeks Ended Change 29 April 2006 30 April 2005 Turnover - continuing operations £1,559m £1,528m +2.1%Operating profit before restructuring £173.5m £158.2m +9.7%costsPro forma profit before taxation and £131.9m £112.0m +17.8%restructuring costs**Pro forma earnings per share before 26.9p 22.6p +19.1%restructuring costs***Proposed final 10.6p N/Adividend per share Statutory Results 52 Weeks Ended 52 Weeks Ended 29 April 2006 30 April 2005 Operating profit £140.6m £182.2mProfit before taxation £7.4m £63.7mBasic earnings per share 4.1p 110.3p • Branded turnover up 3.1 per cent. in year - up 5.4 per cent. in second half with good growth in Hovis and Bisto sales • Much improved second half Cakes performance • £53m of benefits from cost reduction initiatives • Underlying operating margin up from 10.4 to 11.1 per cent. • Maiden final dividend of 10.6p per share, making 15.9p for the year • Strong pipeline of new products Jan du Plessis, Chairman of RHM plc, said: "We know that the new year will not be without its challenges - in particularfrom a competitive market place and further inflationary cost pressures.However, we will continue to invest behind our brands, accelerate new productdevelopment and capitalise on opportunities to reduce costs across all of ourbusinesses. "The Board is heartened by the significantly improved trading performancedelivered in the second half of the year and is confident that RHM will deliverfurther progress in the year ahead." Ian McMahon, Chief Executive Officer of RHM plc, said: "We have made a sound start to our new financial year. Although we are still atan early stage, we are encouraged by the initial consumer response to ourbranded Cakes initiatives. "We are increasing investment behind our brands. We have a wide range of newproducts under development across all business areas, with Hovis, Bisto,Sharwood's and Cadbury's Cake products all due to appear in store in the firsthalf of the financial year. "We are confident that by maintaining our focus on profitable top line growthand cost saving opportunities we will create significant shareholder value." ENQUIRIES RHM plc +44 (0) 1628 478 484Ian McMahon, Chief Executive OfficerAndrew Allner, Group Finance DirectorJohn McIvor, Director of Investor Relations andIndustry Strategy Financial Dynamics +44 (0)20 7269 7121Andrew LorenzRichard MountainSally Lewis * Underlying results are the results from continuing operations beforerestructuring costs on the IFRS basis of accounting. These are considered andused by management to be the most relevant measure of Group performance **Pro forma profit before tax is defined as the underlying profit before tax forthe Group, assuming that the current capital structuring and correspondingfinancing costs have been in place from the start of both reported accountingperiods. *** Pro forma earnings per share is based on the pro forma profit after tax andthe number of shares in issue with the current financing structure assumed fromthe start of both accounting periods. All references to turnover, underlying operating profit and underlying operatingmargin relate to continuing operations excluding restructuring costs, unlessexplicitly otherwise stated. CHAIRMAN'S COMMENTS We are pleased to present our first set of full year results since RHM rejoinedthe stock market in July 2005. The Group's return to public ownership marked animportant step and was made possible by the significant progress that has beenmade in recent years as we seek to transform RHM into the leading UK-focusedfood group. Since flotation the transformation has continued apace and, for the most part,according to plan. We have delivered overall sales growth of 2.1 per cent.,within our long-term target of two to four per cent annual sales growth. Secondhalf sales growth was 3.7 per cent. Strong sales of Hovis, which has reachedrecord market shares, in part due to the launch of Hovis Invisible Crust, and ofBisto, which benefited from an extremely effective advertising campaign, helpedcompensate for lower branded Cakes sales, particularly in the first half of theyear. As I stated at the time of our interim results, we have taken decisiveaction to improve Cakes performance, and, following a better result in thesecond half of the year, the Board is confident that our Cakes business willdemonstrate further progress in the coming year. Maintaining a constant attack on costs is vital to our success. Cost reductionprogrammes have this year delivered total savings of £53m across all areas ofour business, an excellent performance and ahead of our own expectations at thetime of flotation. We have also been able broadly to offset £11m of increasedenergy costs through price increases and non-branded volume growth. These initiatives have made a key contribution to a 9.7 per cent. improvement inunderlying operating profit from £158.2m to £173.5m. Pro forma earnings pershare increased by 19 per cent. from 22.6p to 26.9p. This reflects asignificantly improved trading performance, particularly in the second half ofthe year, and the benefit of reduced interest payments. The Group is a strong cash generator, with cash flow from operations for theyear amounting to £124m. This has led to a reduction in year end net debt to£676m from a pro forma £711m at the time of flotation and provides us withfinancial flexibility in the event that attractive bolt-on acquisitionopportunities arise. The Board is pleased that, following the completion of the triennial pensionreview earlier in the year, we have clarity on the Group's pension obligationsand funding requirements. These are explained in more detail in our FinanceDirector's Report. The steps taken during the year have contributed to areduction in our UK pension deficit under IFRS as at 29 April 2006 to £160m, or£112m net of a deferred tax credit of £48m. This represents an equitable outcomefor employees, pensioners and shareholders and creates a solid basis from whichto move forward. We will continue to monitor our pension position carefully. We have also announced today the appointment of Brian Buchan to the RHM board asa non-executive director. He brings invaluable operational experience andconsumer insight from over 30 years spent at the forefront of the consumer goodsindustry, including most recently from his role as Chief Executive Officer ofSSL International Plc. The Directors have proposed the payment of a final dividend of 10.6p per share,which, together with the interim dividend of 5.3p paid to shareholders inFebruary 2006, makes a total of 15.9p per share for the year. This amounts to atotal payment of £55m and is in line with the commitment made by the Board atthe time of the IPO. We know that the new year will not be without its challenges - in particularfrom a competitive market place and further inflationary cost pressures.However, we will continue to invest behind our brands, accelerate new productdevelopment and capitalise on opportunities to reduce costs across all of ourbusinesses. The Board is heartened by the significantly improved trading performancedelivered in the second half of the year and is confident that RHM will deliverfurther progress in the year ahead. Jan du PlessisChairman CHIEF EXECUTIVE'S BUSINESS REVIEW Total Group 52 Weeks Ended 52 Weeks Ended Change 29 April 2006 30 April 2005 Turnover £1,559m £1,528m 2.1%Underlying operating profit £173.5m £158.2m 9.7%Underlying operating profit margin 11.1 % 10.4% +70bps Turnover for the year increased by 2.1 per cent to £1,559m, following animproved performance in the second half of the year. This reflected both ahigher volume of sales and the impact of price increases successfully introducedto counter £11m of energy cost increases incurred during the year, most of whichoccurred in the second half. Branded turnover increased by £24m or 3.1 per cent. to £788m, largely as aresult of higher Hovis, Bisto and Granary sales and new product launches acrossall business areas, which more than offset a decline in Mr Kipling sales.Excluding branded Cakes turnover, which declined by 7.7 per cent. (£13.7m),branded turnover rose by 6.4 per cent. Non-branded turnover increased by £7m or1.0 per cent. to £764m, principally as a result of higher third party flour andchilled ready meal sales. Underlying operating profit increased by 9.7 per cent. to £173.5m. Costreduction initiatives delivered in aggregate £53m of benefits. These savings,together with the benefit of higher total turnover, more than offset the impactof the decline in Cakes trading and were key to the delivery of a improvement inunderlying operating profit margin, which rose from 10.4 to 11.1 per cent. Consistent with our long term strategy of building investment in our brands,advertising and marketing expenditure increased by £2.6m in Bread Bakeries andCulinary Brands. In Cakes, £3m was tactically reallocated in the second half ofthe year from advertising to in-store and other promotional activity, this beingthe most effective way to encourage consumers to trial our refreshed Mr Kiplingrange following significant product quality and packaging improvements. Weintend to increase above the line Cakes investment during the new financialyear. Total Group promotional expenditure increased significantly as aconsequence of the challenging market environment that prevailed all year. Bread Bakeries 52 Weeks Ended 52 Weeks Ended Change 29 April 2006 30 April 2005 Turnover £786m £755m 4.1%Underlying operating profit £81.4m £64.4m 26.4%Underlying operating profit margin 10.4% 8.5% +190bps Turnover increased by 4.1 per cent. to £786m. Higher bread turnover wasprincipally due to increased sales of Hovis, reflecting both volume gains andprice increases. The success of Hovis has been driven by the effectivetargeting of the premium branded market as well as increased consumer demand forhealthier products. Hovis market share has risen from 29.1 per cent. to 31.6 percent. during the year, a gain of 250 basis points1. Initiatives such asHealthiest Ever Hovis, the new Granary range, Hovis Best of Both and HovisInvisible Crust have been significant in helping to position Hovis as a premiumbrand with strong health credentials in the minds of consumers. Volume hasalso been increased through customer wins and we have increased Hovis capacitywith the acquisition of an additional bakery in Leicester. Third party flour turnover increased from £134m to £140m. During the period theimpact of the closure of three older mills was more than offset by increasedsales from our Wellingborough mill, purchased in July 2005. This acquisition,together with the mill closures, has significantly improved the effectiveness ofthe Group's milling asset base. Underlying divisional operating profit increased by 26.4 per cent. to £81.4m,with underlying operating profit margin rising by 190 basis points from 8.5 percent. to 10.4 per cent. mainly due to better pricing, favourable overridersettlements and successful procurement, logistics, restructuring and pensioncost savings. These gains have been offset in part by anticipated higherdistribution costs associated with serving new convenience store customers andthe impact of higher energy costs. 1 Source: IRI Multiples & Co-Ops: 52 weeks ended 22 April 2006 Culinary Brands 52 Weeks Ended 52 Weeks Ended Change 29 April 2006 30 April 2005 Turnover £271m £266m 1.8%Underlying operating profit £69.4m £64.9m 6.9%Underlying operating profit margin 25.6% 24.4% +120bps Culinary Brands turnover increased by £5m, or 1.8 per cent. to £271m, reflectinghigher branded sales, particularly of Bisto, in the seasonally more importantsecond half of the year. Branded turnover accounted for 91 per cent. ofdivisional sales, up from 89 per cent. last year. Branded growth was driven by increased advertising and promotional investment.New advertising campaigns were launched for the division's two biggest brandsand were well received. The Bisto "Aah! Night" advertising theme encouragedfamilies to spend one night a week eating together with "proper food and propergravy", whilst the Sharwood's "Go East" advertising celebrated the vibrancy andexcitement of the Sharwood's range of Asian foods. Many new products werelaunched; Sharwood's noodle boxes and squeezable variants of the brand's mangochutney met with considerable success whilst Bisto launched chilled, ready-madegravy and new variants of chilled and frozen yorkshire puddings, under licence.Bisto achieved its highest ever share of the gravy market in April 2006, 67.8per cent., up 600 basis points2 on the same period last year. Price increases were achieved across the Bisto, Sharwood's, Paxo, Rombouts,Robertson's and Atora ranges, which helped offset increases in energy costs. Performance was also aided by the delivery of further procurement and other costsaving initiatives, including the outsourcing of the majority of the division'scentral warehousing and transport requirements and a number of projects thathave resulted in improved production efficiency. In addition, during the secondhalf of the year, administration of the four business units that made up thedivision (Centura Foods, RHM Foodservice, McDougalls Foods and RGB Coffee) wasbrought together in a single location. Underlying operating profit increased by 6.9 per cent. to £69.4m, reflecting thebranded sales increase, and successful cost-saving initiatives, offset in partby the impact of higher advertising and promotional spend throughout the yearand the decline in own label sales. Underlying operating profit margin increasedby 120 basis points to 25.6 per cent. 2 Source: IRI All Outlets 4 weeks ended 22 April 2006 Cakes 52 Weeks Ended 52 Weeks Ended Change 29 April 2006 30 April 2005 Turnover £241m £264m -8.7%Underlying operating profit £13.7m £18.9m -27.5%Underlying operating profit margin 5.7 % 7.2% -150bps Cakes' turnover declined by 8.7 per cent. to £241m. Avana Bakeries, RHM's whole cakes business, which represents approximately 20per cent. of Cakes turnover, performed well throughout the year due to acombination of successful innovation, increased consumer demand and improvedoperational efficiency. As previously reported, trading at Manor Bakeries, RHM's small cake and slicesbusiness, was disappointing in the first half of the year, with sales of MrKipling cakes and slices falling below expectations. Actions taken to improveprofitability in Manor Bakeries resulted in an improved year on year financialperformance in the second half of the year. The closure of the Eastleigh bakeryand transfer of production to our Carlton site was completed on time inDecember, with £2.9m of consequent cost savings being achieved in the remainderof the year. All Mr Kipling cakes are now free of artificial colours andflavours, many recipes have been upgraded and new packaging has been introducedacross the range. The Mr Kipling "Delightful" range of lower fat, lower caloriecakes was introduced as planned in January and has received a positive consumerresponse. A new Mr Kipling promotional strategy has been implemented and anationwide tasting campaign has been successfully completed. We are heartened by reasonable Christmas and Easter trading periods as well asby a slow down in the rate of Mr Kipling year on year net sales decline, from14.1 per cent. in the first half of the year to 8.0 per cent. in the second, asthe steps taken to improve our consumer offering began to deliver theanticipated level of benefit. Encouragingly, Mr Kipling net sales in the lasttwo months of the financial year were at a similar level to those achieved inthe same months of the prior year. We anticipate that Mr Kipling sales in thecurrent year will at least match last year's level. There remains however muchto be done to realise the full potential of the Mr Kipling brand. £3m of marketing spend was tactically reallocated from advertising to in-storeand other promotional activity on a short term basis, this being a moreeffective way to encourage consumers to trial the improved Mr Kipling range.Manor Bakeries' promotional spend increased during 2006 by £5m, of which £4.2mwas incurred during the first half of the year. Our new promotional strategy,which incentivises consumers to purchase multiple rather than single packs, wassuccessfully implemented in the second half with a year on year increase inpromotional spend of less than £1m. Cakes operating profit for the full year reduced from £18.9m to £13.7m, with theimpact of the lower level of turnover, adverse volume mix and increasedinvestment in promotional activity offsetting the benefit of a total of £18m ofrestructuring and rationalisation, procurement and other cost savings. Cakes'operating profit in the second half of the year increased from £11.0m to £12.7m. Customer Partnerships 52 Weeks Ended 52 Weeks Ended Change 29 April 2006 30 April 2005 Turnover £262m £243m 8.0%Underlying operating profit £29.4m £23.6m 24.6%Underlying operating profit margin 11.2% 9.7% +150bps Customer Partnerships' turnover from continuing operations increased by 8.0 percent. to £262m. Our chilled and frozen businesses achieved strong sales growththrough a combination of innovation and contract gains. Ledbury Preserves,Charnwood Foods and RHM Ireland also made satisfactory progress in line with ourexpectations. Customer Partnerships benefited not only from the higher level of activity butalso from procurement and other cost saving initiatives across all businesses.Consequently underlying operating profit increased by 24.6 per cent. to £29.4m. Outlook We have made a satisfactory start to our new financial year in the seasonallyquiet trading months of May and June. Although we are still at an early stage ofour branded Cakes recovery plan, we are encouraged by the initial consumerresponse to the actions we have taken. We are increasing investment behind our brands. We have a wide range of newproducts under development across all business areas, with Hovis, Bisto,Sharwood's and Cadbury's Cake products all due to appear in store in the firsthalf of the financial year. Advertising and marketing spend is anticipated toincrease by more than £5m this year as we support both our existing portfolioand our new launches. Assiduously pursuing opportunities to reduce our cost base remains a fundamentalpart of our strategy. Cost reduction initiatives are anticipated to deliver atotal of £30m of benefits to the Group in the coming year, with £14m beingderived from rationalisation and restructuring projects. A proportion of thesesavings will inevitably be used to offset inflationary and other pressures,given the extremely competitive environment in which we are currently operating.Group energy costs are expected to rise by a further £11m during the year; as in2006, we will seek broadly to offset this cost inflation through priceincreases. We are confident that by maintaining our focus on profitable top line growth andcost saving opportunities we will create significant shareholder value. Ian McMahonChief Executive Officer GROUP FINANCE DIRECTOR'S FINANCIAL REVIEW Basis of reporting The results for the year ended 29 April 2006 have been prepared in accordancewith IFRS. The comparative results have been restated to demonstrate how theywould have been reported had IFRS been adopted for that period. Pro forma results The comparison of performance year-on-year has been made more complex by theimpact of the change of capital structure and costs incurred as a consequence ofthe Group's flotation on the London Stock Exchange. Accordingly, pro formanumbers are set out below to demonstrate how RHM's performance would have beencalculated had RHM's current capital structure been in place from the start ofboth accounting periods. The changes principally reduce the interest charge, asthe Group pays a lower rate of interest on a lower level of borrowings postflotation, and increase the number of shares in issue to reflect the number ofshares currently in issue from the beginning of both periods. Restructuring,flotation and refinancing costs have also been excluded. 52 weeks 52 weeks to 29 to 30 April 2006 April 2005 Growth £m £m % Turnover 1,559 1,528 2.1Underlying operating profit * 173.5 158.2 9.7Pro forma finance costs (41.6) (46.2) (10.0)Pro forma profit before tax 131.9 112.0 17.8Pro forma tax at 29.2 per cent. (2005: 30 per (38.5) (33.6) 14.6cent.)Pro forma profit after tax 93.4 78.4 19.1Pro forma number of shares in issue 346.9m 346.9m -Pro forma earnings per share 26.9p 22.6p 19.1 * Underlying operating profit is defined as operating profit from continuing operations before restructuring costs and is considered and used by management as the underlying measure of operating profit within the Group This analysis shows that pro forma earnings per share have increased by 19 percent. from 22.6p to 26.9p for the year. We believe that the pro forma increasein earnings per share provides a more meaningful measure of comparativeperformance than the level of adjusted earnings per share shown in the table ofreported results below. Summary of reported results 52 weeks 52 weeks to 29 to 30 April 2006 April 2005 £m £m Turnover 1,559 1,528 Underlying operating profit 173.5 158.2Net restructuring (costs)/income (32.9) 24.0Finance costs (55.2) (113.7)Debt redemption costs (78.1) (4.8)Associates 0.1 - Profit before tax 7.4 63.7Taxation (1.6) 107.7 Profit after tax 5.8 171.4 Weighted average number of shares in issue 307.2m 173.2mAdjusted EPS 27.3p 24.7p Turnover Turnover for the year was £1,559m, an increase of 2.1 per cent. compared with2005 and within our long-term target of two to four per cent annual salesgrowth. After only a marginal improvement in turnover in the first half,turnover increased by 3.7 per cent. in the second half of the year as a resultof better trading and the impact of price increases introduced to recoup higherenergy costs. Branded sales increased by £24m, or 3.1 per cent. in the year to £788m,principally driven by higher Hovis and Bisto sales. Excluding Cakes, brandedsales increased by 6.4 per cent. Non-branded sales increased by £7m or one percent to £764m. Operating profit Underlying operating profit for the year was £173.5m (2005: £158.2m), a 9.7 percent. improvement. The Group's underlying operating profit margin increased from10.4 per cent. to 11.1 per cent. Cost reduction initiatives An important contributor to performance in the current year has been the Group'ssuccess in delivering further cost savings across all areas of the business. Cost reduction initiatives delivered £53m of benefits to the Group during 2006,a higher figure than anticipated at the time of flotation, principally as aresult of £5m of additional restructuring and rationalisation savings.Significant savings have come from each of the areas of procurement, logistics,pensions, restructuring and rationalisation. Net procurement savings across RHM, excluding wheat buying and the impact ofunavoidably higher energy costs but including all other purchase cost inflation,amounted to over £18m. Significant savings were made in key ingredientpurchases, including fruit, eggs, sugar and starches. Our central logistics team was established during the year and is now fullyoperational. £7m of logistics savings have been realised from a Group-widefocus on simplifying and improving the efficiency of our logistics operations.Logistics savings exclude the impact on costs from increased deliveries and agreater share of convenience store business within Bread Bakeries, which havecontributed to an overall net increase in logistics costs of £8m. Restructuring and rationalisation initiatives, predominantly in the BreadBakeries and Cakes divisions, generated savings of £19m. Major restructuringinitiatives include the completion of the Eastleigh bakery closure, headcountreductions and the closure of three mills in Rank Hovis. RHM's pension service charge declined by £8m compared with the previousfinancial year, reflecting the benefit of changes to the RHM UK pension schemeagreed with our employees and implemented in September 2005. As referred to above, energy costs increased by £11m, reflecting the impact ofsignificant rises in global oil and gas prices. This cost inflation was broadlyrecouped through price increases during the year. Advertising and marketing spend in the year was £27m, the same level as in 2005. Head office costs increased by £7m compared with 2005 due both to the highercosts associated with operating as a public company and the increase in scopeand scale of the Group's centralised procurement and logistics teams. Exceptional items Exceptional costs recorded in the profit and loss account total £32.9m,comprising redundancy and restructuring costs of £31.1m and flotation costs of£2.4m, offset in part by the profit on sale of properties of £0.6m. The £24mcredit in the prior year relates to gains on the pension curtailment (£47.3m)and property disposals (£21.7m) less restructuring costs (£43.9m) and flotationcosts (£1.1m). Total flotation costs were £37.3m, of which £25.5m has been charged to the sharepremium account, £8.3m relating to the new financing has been capitalised andwill be amortised over the life of the debt, and £3.5m has been charged toexceptional items. As noted above, £2.4m of flotation costs were charged toexceptional items in the current year, and £1.1m in the previous financial year. Consistent with previous guidance, we expect exceptional items to be £10-20m in2007 principally relating to redundancy and restructuring projects, offset inpart by profits on property disposals. Finance costs The finance costs for the year were £55.2m, a £58.5m reduction on last year, dueto the repayment of the unsecured loan stock and the new lower cost financingstructure put in place at the time of the flotation. Debt redemption costs relating to the previous financing structure of £78.1mwere incurred in the year, being early redemption costs of £75.2m andaccelerated amortisation of debt issuance fees of £2.9m. The cash paid tosettle early redemption costs was £80.8m, of which £5.6m in relation to the swaphad already been recognised at the start of the year. In the previous financialyear £4.8m of accelerated amortisation of debt issuance fees were recognised inadvance of the refinancing. Taxation The underlying tax rate on profit before restructuring costs for the year ended29 April 2006 is 29.2 per cent. The resulting tax charge has been adjusted forthe tax credit at 30 per cent. on deductible restructuring and debt redemptioncosts. This results in an overall tax charge of £1.6m. Earnings per share Basic earnings per share for the year ended 29 April 2006 was 4.1p afterrestructuring costs, debt redemption costs and the part year cost of the oldfinancing structure. A more meaningful measure of underlying performance is thepro forma earnings per share, which rose 19 per cent. to 26.9p. Dividend per share The Board has recommended that a maiden final dividend of 10.6p be paid on 29September 2006 to shareholders on the register on 1 September 2006. An interimdividend of 5.3p was paid to shareholders on 24 February 2006. Pro formaunderlying earnings per share covered the total proposed dividend for the year1.7 times. Cash flow Underlying net operating cash flow for the year of £124.1m is derived from thefinancial statements as follows: 52 weeks to 29 April 2006 £m Operating cash flow 143.9Capital expenditure (63.4)Proceeds from sale of assets 9.0Exclude: Exceptional spend 34.1 Discontinued spend 0.5 Underlying net operating cash flow 124.1 The underlying net operating cash flow of £124.1m reflects profits fromoperations of £173.5m, reduced by £20m of pension contributions in excess of theservice charge, capital investment £9m higher than depreciation and an increasein working capital requirements of £20m. This increase in working capitalprincipally reflects an increase in year end trade receivables due to acombination of Easter falling later in the year and stronger underlying sales inthe final quarter. Borrowings and refinancing Over the year, the Group's net debt reduced by £253m from £929m to £676m. TheGroup's pro forma level of net debt was £711m at the time of flotation, when£475m of new equity and £750m of new term bank facilities were raised. Thesefunds were utilised to repay outstanding senior and secured debt of £556m,unsecured loan notes of £472m, pay a contribution of £125m into the Group UKpension scheme and pay debt redemption and flotation costs of £117m. The Group's facilities comprise of £900m unsecured bank debt repayable between2008 and 2010 of which £750m is fully drawn term debt. Year end cash balanceswere £72m. Pro forma interest cover is 4.2x and net debt/ EBITDA as at 29 April2006 was 3.0x. The Group also has a revolving credit facility of £150m, whichwas undrawn at the year end. This financing structure provides us with financialflexibility in the event that attractive bolt-on acquisition opportunitiesarise. Pensions During the year, RHM's pension fund trustees completed a triennial fundingvaluation of the Group's UK defined benefit pension scheme. The primary purposeof the valuation was to provide a basis for computing company contributions forcurrent service and deficit repayment. This gave rise to an increase in thegross deficit of £89m as at 30 April 2005. Following flotation, RHM made the£125m contribution referred to above. After taking account of these changes, theUK pension scheme pro forma deficit as at 30 April 2005 was £281m gross, or£197m net of deferred tax. The reported UK gross pension scheme deficit at 30April 2005 was £317m, or £222m net of deferred tax. After reflecting the market movements in the year and the ongoing cashcontributions in excess of the service cost, the UK gross pension scheme deficitas at 29 April 2006 was £160m, or £112m net of deferred tax. Including theimpact of the overseas pension schemes, the RHM Group total gross pensiondeficit as at 29th April 2006 was £163m, or £114m net of deferred tax. As a result of the review, the cash contributions made to the RHM pension fundby the Group will increase to £40m in 2007. This is £9m more than thecontributions for 2006 and is the minimum increase anticipated at the time offlotation. The contribution level has been set to ensure that the currentpension fund deficit is repaid over the next nine years. As previously agreedwith the scheme's trustees, increased contributions as a result of changes tomortality assumptions will be phased in over the next five years, and will riseby approximately £5-7m per annum. Most of the increase in contributions will beapplied to reducing the Group's pension deficit. RHM's annual pension servicecharge will increase by approximately £1m in 2007 from £11m to £12m. Balance sheet Year-end net assets of £131m have increased by £448m from the previous year-end,principally due to the share issue proceeds net of issue costs of £450m. TheGroup's new financing structure and the impact of the triennial pension fundreview are reflected in the balance sheet as at 29 April 2006. Andrew AllnerGroup Finance Director 28 June 2006 Consolidated Income Statement Year ended Year ended Note 29 April 2006 30 April 2005 £m £mContinuing operationsRevenue 4 1,559.3 1,527.5Cost of sales (987.5) (989.3) Gross profit 571.8 538.2 Distribution costs (294.4) (283.8)Administrative expenses (104.0) (98.1)Other operating income 0.1 1.9 Operating profit before restructuring costs 173.5 158.2Gain on pension curtailment 5 - 47.3Gain on sale of properties 5 0.6 21.7Other restructuring costs 5 (31.1) (43.9)Flotation costs (2.4) (1.1) Operating profit 140.6 182.2 Finance costs 6 (55.2) (113.7)Debt redemption costs (78.1) (4.8) Share of results of associates 0.1 - Profit on ordinary activities before taxation 7.4 63.7 Income tax (charge)/credit on profit on ordinary 7 (1.6) 11.9activitiesIncome tax credit on pension liability 7 - 95.8 Profit for the year from continuing operations 5.8 171.4 Discontinued operations 6.7 19.5 Profit for the year 12.5 190.9 Attributable to:Equity holders 12.5 191.0Minority interests - (0.1) 12.5 190.9 Earnings per share for the profit attributable to the equityholders of the Company during the year (expressed in pence) Basic Continuing operations 9 1.9 99.0Discontinued operations 9 2.2 11.3 Total 9 4.1 110.3 DilutedContinuing operations 9 1.9 97.9Discontinued operations 9 2.2 11.2 Total 9 4.1 109.1 Consolidated Balance Sheet At 29 April At 30 April Note 2006 2005 £m £mNon-current assetsProperty, plant & equipment 428.8 425.3Goodwill 151.8 150.2Other intangible assets 328.3 328.3Investment in associates 0.5 0.4Other receivables 0.6 0.9Deferred tax asset 75.2 76.4 985.2 981.5 Current assetsInventories 70.2 69.4Trade and other receivables 216.9 205.5Financial assets 0.8 -Cash & cash equivalents 71.9 87.8 359.8 362.7Assets classified as held for sale 1.2 5.6 361.0 368.3 Current liabilitiesTrade & other payables 257.8 276.0Current income tax liabilities 3.1 2.1Financial liabilities 0.3 -Borrowings 18.0 29.1Provisions 6.3 22.1 285.6 329.3 Net current assets 75.5 39.0 Total assets less current liabilities 1,060.7 1,020.5 Non-current liabilitiesBorrowings 743.1 998.5Other payables 4.4 5.0Pension obligations 11 162.5 321.1Provisions 19.8 12.7 929.8 1,337.3 Net assets/(liabilities) 130.9 (316.8) EquityCalled-up share capital 10 0.4 0.2Share premium account 10 466.7 17.2Own shares 10 (1.3) (0.1)Other reserves 10 3.9 -Retained earnings 10 (338.9) (334.2) Capital & reserves attributable to the Company's 130.8 (316.9)equity holdersMinority interests 10 0.1 0.1 Total equity 130.9 (316.8) Consolidated Cash Flow Statement Year ended Year ended 29 April 2006 30 April 2005 Note £m £m Cash flows from operating activitiesCash generated from operations 12 143.9 117.2Interest paid (53.9) (66.9)Income tax paid - net (1.3) (5.9) Net cash generated from operating activities 88.7 44.4 Cash flows from investing activitiesPurchases of property, plant and equipment (PPE) (60.1) (60.8)Purchase of intangibles (3.3) (1.7)Proceeds from sale of PPE 9.0 37.0Pension contribution on sale of subsidiary (1.0) (10.6)Cash disposed of with subsidiary - (6.7)Proceeds on disposal of subsidiary 0.9 78.7Interest received 0.6 2.2 Net cash generated from investing activities (53.9) 38.1 Cash flows from financing activitiesIssue of shares 3,10 475.2 -Share issue costs 3,10 (25.5) -Investment in subsidiary - -Pension contributions 11 (126.7) -Purchase of treasury shares 10 (1.2) -Increase in short term borrowings - 0.8Capital element of finance leases (1.3) (0.8)Repayment of secured loan 3,13 (1,013.7) (203.3)Refinancing costs 3 (80.8) -Proceeds from new loans issued 3,13 741.7 74.5Decrease in intercompany funding - -Dividends received - -Dividends paid to shareholders 8 (18.4) -Dividends paid to minority interests - (0.2) Net cash used in financing activities (50.7) (129.0) Net decrease in cash and bank overdrafts (15.9) (46.5)Cash and bank overdrafts at the beginning of the year 87.8 134.3 Cash and bank overdrafts at the end of the year 71.9 87.8 1. General information RHM plc (the "Company") is a company incorporated in the United Kingdom underthe Companies Act 1985. RHM plc (formerly RHM Group One Limited) re-registered as a public limitedcompany and changed its name to RHM plc on 1 July 2005. On 22 July 2005 RHMplc's shares were admitted to the Official List of the UK Listing Authority andto trading on the London Stock Exchange (see note 3). RHM plc and itssubsidiaries (together the "Group") operate in the food manufacturing anddistribution industry, principally in the United Kingdom. 2a Basis of preparation The financial information included within the preliminary announcement has beenprepared in accordance with the accounting policies the Group has adopted in the2006 financial statements. These are consistent with International FinancialReporting Standards and International Financial Reporting InterpretationsCommittee (IFRIC) interpretations as adopted for use in the EU. The financial statements of the Group prior to this financial year have beenprepared under Generally Accepted Accounting Principals in the United Kingdom(UK GAAP). Comparative financial information under IFRS reconciled to thatformerly presented under UK GAAP has been published on 22 July 2005 by the Groupwithin the Price Range Prospectus document which is available on the Group'swebsite www.rhm.com. The accounting policies followed are the same as those published in the PriceRange Prospectus document, except for the treatment of financial instruments.The Group has utilised the exemption under IFRS 1, 'First time adoption of IFRS'which permits the application of the hedge accounting rules of UK GAAP forcomparative figures. Therefore the accounting policy change does not have animpact on the prior year comparatives. The financial information presented for the year ending 30 April 2005 does notconstitute the statutory financial statements for that year. Those financialstatements prepared under UK GAAP received an unqualified audit report and acopy has been delivered to the Registrar of Companies. The financialinformation presented for the year ending 29 April 2006 does not comply with allthe disclosure requirements of IFRS and therefore does not constitute thestatutory financial statements for that year. Those financial statements havenot yet been delivered to the registrar or approved by shareholders. 2b Segmental reporting A business segment is a distinguishable component of the group engaged inproviding products and services that are subject to risks and returns that aredifferent from those of other business segments. Primary segment reportingreflects the internal management structure and the way the businesses aremanaged. Inter-segment transfers or transactions are entered into under the normalcommercial terms and conditions that would also be available to unrelated thirdparties. 2c Restructuring costs and other non-trading items Restructuring costs include the restructuring of existing businesses, anyrelated impairments and the integration of new businesses in the Group. Othernon-trading items include the disposal of land and buildings, pensioncurtailments, and the re-financing of the Group. These activities give rise tosignificant incremental one-off items that distort the underlying operatingprofit of the Group and therefore the ability to measure financial performance.As a result, restructuring costs and other significant non-trading items areincluded as a separate line item on the face of the Income Statement. 3 Refinancing On 30 June 2005 each of the ordinary shares of £0.01 were subdivided into 10ordinary shares of £0.001 each. On 22 July 2005 the group issued 172,727,273 new ordinary shares listed on theLondon Stock Exchange at a price of £2.75, giving total proceeds of £475.0m. Inaddition 1,875,000 ordinary shares were issued for 10p, giving total proceeds of£187,500, in order to satisfy the exercise of an option by a former director. On 1 July 2005, the Company and RHM Group Holding Limited entered into amulticurrency term and revolving facilities agreement arranged and underwrittenby Credit Suisse First Boston and The Royal Bank of Scotland plc whereby thelenders have agreed to provide up to £900m in four facilities: - Facility A, a term loan of £250m repayable on 31 July 2008 with an interest charge 70 basis points above LIBOR; - Facility B1, a term loan of £250m repayable by instalments by 30 July 2010 with an interest charge 90 basis points above LIBOR; - Facility B2, a term loan of £250m repayable on 30 July 2010 with an interest charge 90 basis points above LIBOR; - Facility C, a multicurrency revolving credit facility of up to £150m. Facilities A, B1 and B2 were fully drawn down between 22 July 2005 and 30 August2005. The group used the net proceeds from the issue of new shares and funds availableunder the new facilities to: - Purchase the unsecured subordinated loan notes (£457.4m) and repay associated accrued interest (£14.3m) totalling £471.7m on 22 July 2005. - Repay outstanding debt under the senior credit agreement of £98.0m on 22 July 2005. - Redeem all outstanding secured loan notes amounting to £458.3m on 30 August 2005. - Settle prepayment cost of £80.8m on early redemption of certain classes of secured loan notes (£75.1m) and closing out of an interest rate swap (£5.7m) in relation thereto on 30 August 2005. - Make a payment of £110.0m to the trustee of the RHM pension scheme on 19 August 2005 and a further payment of £15.0m was made on 24 March 2006. The debt redemption costs give rise to a £75.2m charge to the income statement,as the £80.8m cash costs are offset by the release of a £5.6m liability alreadyrecognised as the fair value of the interest rate swap. This liability arosefrom the recognition of the fair value of the interest rate swap at 30 April2005 as part of the transition adjustment resulting from the adoption of IAS 32and IAS 39 on financial instruments. The early redemption of senior credit debt and secured loan notes gave rise toaccelerated amortisation of associated capitalised debt issuance costs of £2.9min the period (year ended 30 April 2005: £4.8m) The costs of the flotation were £37.3m, of which costs incurred in issuing theshares amounting to £25.5m have been charged against the share premium account.Costs of £8.3m incurred in raising the debt have been capitalised and setagainst the gross value of the debt. A further £3.5m of costs incurred as aresult of the listing exercise, but not eligible to be set against the sharepremium, have been reflected in restructuring costs, of which £1.1m wasrecognised in the year ended 30 April 2005, and £2.4m in the year ended 29 April2006. 4 Business segments For management reporting purposes, the Group is organised into four operatingdivisions - Bread Bakeries, Culinary Brands, Cakes and Customer Partnerships.These four segments are the basis on which the Group reports its primary segmentinformation. Segmental income statement For the year ending 29 April 2006 Bread Culinary Customer Bakeries Brands Cakes Partnerships Corporate Continuing Discontinued GroupRevenue £m £m £m £m £m £m £m £m Total sales 811.7 278.3 247.0 271.7 - 1,608.7 - 1,608.7Inter-segment (26.2) (7.3) (6.0) (9.9) - (49.4) - (49.4)sales Sales to third 785.5 271.0 241.0 261.8 - 1,559.3 - 1,559.3parties ResultOperating profit / 81.4 69.4 13.7 29.4 (20.4) 173.5 - 173.5(loss) beforerestructuringcostsGain on sale of 0.3 0.1 0.3 (0.1) 0.6 0.6 1.2propertiesGain on sale of - - - - - - 6.1 6.1subsidiaryOther (8.5) (3.3) (16.0) (1.5) (1.8) (31.1) - (31.1)restructuringcostsFlotation costs - - - - (2.4) (2.4) - (2.4) Operating profit/ 73.2 66.1 (2.2) 28.2 (24.7) 140.6 6.7 147.3(loss) Share of results 0.1 0.1of associatesFinance costs (55.2) - (55.2)Debt redemption (78.1) - (78.1) Profit before 7.4 6.7 14.1taxationTax charge (1.6) - (1.6) Profit for the 5.8 6.7 12.5year The share of results of associates relates to Bread Bakeries. 4 Business segments (continued) For the year ending 30 April 2005 Bread Culinary Customer Bakeries Brands Cakes Partnerships Corporate Continuing Discontinued GroupRevenue £m £m £m £m £m £m £m £m Total sales 788.3 274.8 270.2 252.9 0.1 1,586.3 115.7 1,702.0Inter-segment (33.4) (8.7) (6.2) (10.4) (0.1) (58.8) (0.9) (59.7)sales Sales to third 754.9 266.1 264.0 242.5 - 1,527.5 114.8 1,642.3parties ResultOperating profit 64.4 64.9 18.9 23.6 (13.6) 158.2 14.5 172.7beforerestructuringcostsGain on sale of 6.3 - (0.6) 0.1 15.9 21.7 - 21.7propertiesGain on sale of - - - - - - 4.2 4.2subsidiariesGain on pension 25.4 5.7 12.0 5.2 (1.0) 47.3 4.1 51.4curtailmentOther (7.0) (4.7) (26.1) (1.2) (6.0) (45.0) - (45.0)restructuringcosts Operating profit 89.1 65.9 4.2 27.7 (4.7) 182.2 22.8 205.0 Finance costs (118.5) - (118.5) Profit before 63.7 22.8 86.5taxation Tax credit 107.7 (3.3) 104.4 Profit for the 171.4 19.5 190.9year 5 Restructuring costs Year ended Year ended 29 April 2006 30 April 2005 £m £m Gain on pension curtailment - 47.3Gain on sale of properties 0.6 21.7Other restructuring costs: Flotation costs (see note 3) (2.4) (1.1) Redundancy costs (9.8) (27.3) Operational restructuring costs (16.7) (10.6) Impairment of tangible fixed assets (4.6) (6.0) (32.9) 24.0 Redundancy and operational restructuring costs were incurred as a result of thecontinued implementation of a range of cost reduction initiatives. During the financial year ended 30 April 2005 a gain on pension curtailmentarose due to a change in the level of benefits available through the pensionscheme of £49.9m which was offset by the £2.6m cost of performing the review. Afurther £4.1m gain on curtailment was included within the result fordiscontinued operations. 5 Restructuring costs (continued) Exceptional cash spend of £(34.1)m relating to restructuring costs was incurredin the year (2005: £7.1m). 6 Finance costs Year ended Year ended 29 April 2006 30 April 2005 £m £mInterest expense:- bank borrowings (32.7) (12.9)- secured bond interest (14.6) (51.2)- loan note interest (10.4) (42.8)- finance lease interest expense (0.4) (0.4)- amortisation of current debt issuance costs (1.5) (4.7)- other financing income/(charge) 3.4 (3.7)- other (0.3) (0.1)Interest receivable:Bank interest 0.6 2.1Fair value movements arising from derivatives designated as fair valuethrough profit or loss:Gains 0.7 (55.2) (113.7) Debt redemption costs (see note 3) (75.2) -Accelerated amortisation of debt issuance costs (see note 3) (2.9) (4.8) (133.3) (118.5) Debt redemption costs relate to early redemption of certain classes of securedloan notes and associated closing out of an interest rate swap (see note 3). Accelerated amortisation of debt issuance costs is a one-off charge of £2.9m (52weeks to 30 April 2005: £4.8m) due to the capital restructuring undertaken inthe period (see note 3). 7 Income tax expense Year ended Year ended 29 April 2006 30 April 2005 £m £mCurrent tax:UK corporation tax - -Foreign tax 2.3 1.4 1.4Deferred tax:Current year 0.8 (13.3)Prior year adjustment (1.5) -Deferred tax on pension liability - (95.8) Total deferred tax (0.7) (109.1) Income tax charge/(credit) on profit on ordinary activities 1.6 (107.7) Income tax charge/(credit) on continuing operations 1.6 (11.9)Deferred tax asset on pension scheme deficit - (95.8) Total income tax charge/(credit) 1.6 (107.7) 8 Dividends Year ended Year ended 29 April 2006 30 April 2005 £m £m Amounts recognised as distributions to equity holders in the period:Interim paid: 5.3p per share 18.4 - The directors are proposing a final dividend in respect of the financial yearending 29 April 2006 of 10.6p per share which will absorb £36.6m ofshareholders' funds. It will be paid on 29 September 2006 with an ex-dividenddate of 30 August 2006. 9 Earnings per share The reconciliation between Basic and Adjusted EPS, and between the earningsfigures used in calculating them, is as follows: Year ended Year ended 29 April 2006 30 April 2005 £m £m Profit for the year from continuing operations 5.8 171.4Gain on pension curtailment - (47.3)Flotation costs 2.4 1.1Other restructuring costs 31.1 43.9Gain on sale of properties (0.6) (21.7)Debt redemption costs 75.2 -Accelerated amortisation of debt issuance costs 2.9 4.8Tax credit on adjusting items (33.0) (13.6)Tax credit on pension liability - (95.8) Profit for the year from continuing operations - adjusted 83.8 42.8 Discontinued operations:Profit on sale of subsidiaries 6.7 4.2Tax credit on sale of subsidiaries - 5.4Pre tax profits from discontinued operations - 18.6Tax charge relating to discontinued operations - (8.7)Minority interest on discontinued operations - 0.1 Profit for the year from discontinued operations 6.7 19.6 million million Average shares used in Basic EPS calculation 307.2 173.2Dilutive share schemes and options 1.8 1.8 Shares used in Diluted EPS calculation 309.0 175.0 Basic earnings per share has been calculated by dividing earnings attributableto ordinary shareholders by the weighted average number of ordinary shares ofthe Company excluding shares held by the Employee Benefit Trust . Diluted earnings per share has been calculated using the basic earnings pershare adjusted to assume conversion of all potentially dilutive ordinary shares. 9 Earnings per share (continued) Year ended Year ended 29 April 2006 30 April 2005 pence penceBasic EPSContinuing 1.9 99.0Discontinued 2.2 11.3 4.1 110.3 Basic Adjusted EPS 27.3 24.7 Diluted Basic EPSContinuing 1.9 97.9Discontinued 2.2 11.2 4.1 109.1 Diluted Adjusted EPS 27.1 24.4 10 Shareholders' funds and statement of changes in shareholders' equity Group Share Share Own Other Retained Total Minority Total Capital premium shares reserves earnings Interest account £m £m £m £m £m £m £m £m At 30 April 2005 0.2 17.2 (0.1) - (334.2) (316.9) 0.1 (316.8)IAS 32/39 restatement - - - - (4.1) (4.1) - (4.1) At 30 April 2005 as 0.2 17.2 (0.1) - (338.3) (321.0) 0.1 (320.9)restatedShare issue (see note 3)* 0.2 475.0 - - - 475.2 - 475.2Share issue costs (see - (25.5) - - - (25.5) - (25.5)note 3)Profit/(loss) for the - - - - 12.5 12.5 - 12.5periodDividends (see note 8) - - - - (18.4) (18.4) - (18.4)Exchange differences - - - 0.5 - 0.5 - 0.5Pension mortality - - - - (67.2) (67.2) - (67.2)Other actuarial gain - - - - 73.4 73.4 - 73.4Fair value gain on - - - 2.9 (0.9) 2.0 - 2.0financial instrumentsPurchase of own shares - - (1.2) - - (1.2) - (1.2)Share based incentive - - - 0.5 - 0.5 - 0.5plan At 29 April 2006 0.4 466.7 (1.3) 3.9 (338.9) 130.8 0.1 130.9 11 Pension obligations Year ended Year ended 29 April 2006 30 April 2005 £m £mChanges in the schemes' net deficit Deficit in schemes at the beginning of the period (321.1) (538.4) Movement in the period:Current service cost - continuing operations (10.9) (19.3)Current service cost - discontinued operations - (1.7)Curtailment due to benefit change - 54.0Curtailment due to disposal of subsidiaries - (3.5)Increase in liabilities due to redundancy during the year (2.5) (2.2)Other financing income/(charge) 3.6 (3.1)Employer contributions 31.2 48.0Special contribution following issue of shares 126.7 -Contribution in respect of PPF levy 0.6 -Contribution in respect of disposal of subsidiaries - 11.6Contribution in respect of enhanced benefits on redundancy 1.0 1.0Increase in liabilities due to revised mortality assumptions (96.0) -Other actuarial gain 104.9 132.5 Deficit in schemes at the end of the period (162.5) (321.1) AssumptionsThe major assumptions used by the actuaries were:Long term rate of increase in pensionable salaries(1) 3.0% 3.2%Rate of increase in benefits in payment(2)/(3) 3.4% / 2.3% 3.25%Discount rate 5.2% 5.4%Inflation assumption 3.0% 2.7%Expected return on assets 6.5% 6.5% 1) Pensionable salary increases are assumed to be nil for the 4 years commencing 5 April 2005 and the rates shown thereafter. 2) In respect of pensions earned between April 1997 and April 2005 where increases are linked to RPI with a 3% minimum and 5% maximum and pensions earned after September 2005 where increases are also linked to RPI, but with a maximum of 2.5%. Other levels of increase are largely fixed and are valued accordingly. Deferred benefits are revalued in a similar way and consistent assumptions are used. The assumptions are expressed as appropriately weighted averages. 3) The rate of increase in benefits in payment in the year ended 29 April 2006 was 3.4 per cent. up to 1 September 2005 and 2.3 per cent. thereafter. 12 Cash flows from operating activities Reconciliation of operating profit to net cash inflow from operating activities Year ended Year ended 29 April 2006 30 April 2005 £m £m Profit for the year 12.5 190.9 Adjustments for:Tax charge/(credit) 1.6 (104.4)Dividends received - -Depreciation and impairment of property, plant and equipment 52.9 61.2Amortisation of intangibles 1.4 2.4Profit on disposal of property, plant and equipment 0.2 (21.0)Profit on disposal of subsidiaries (6.1) (4.2)Net pension charge less contributions (18.8) (80.8)Interest 133.3 118.5Other non-cash movements 0.5 - Operating cash flows before movements in working capital 177.5 162.6 (Increase)/decrease in inventories (0.8) 8.5Increase in trade and other receivables (11.6) (24.4)Decrease in trade and other payables (12.2) (41.9)(Decrease)/increase in provisions for liabilities and (9.0) 12.4charges Cash generated from operations 143.9 117.2 13 Net borrowings At At 29 April 2006 30 April 2005 £ m £ mDebt:Secured senior credit agreement - (97.1)Unsecured subordinated loan notes - (457.4)Secured loan notes - (456.1)Bank loans (743.2) -Other loans (0.6) (0.8)Obligations under finance leases (see note 25) (3.9) (5.0) Total debt (747.7) (1,016.4) Cash at bank 71.9 87.8 Net debt (675.8) (928.6) Borrowings - fair value adjustments(1):Total debt (747.7) (1,016.4)Interest accrual (16.8) (11.2)Fair value of interest rate swaps (see note 22) 3.4 - Total borrowings per balance sheet (761.1) (1,027.6) Capitalised fees (6.8) (2.9) Total borrowings excluding capitalised fees (767.9) (1,030.5) Note 1 - IAS 39 requires the carrying value of borrowings to be shown at fairvalue, which includes accrued interest and the fair value of any interest rateswap held to hedge the borrowings. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
RHM.L