Interim Results

Finsbury Food Group plc

Interim 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 unaudited interim results for the six months ended 27 December 2014. The interim results includes two months of trading from the Fletchers Group which was acquired on 30 October 2014.

Summary

· Group revenue of £107.6m up 24.1% (H1 2013: £86.6m) and up 5.6% on a like-for-like basis

· Operating profit of £4.5m up 74% (H1 2013: £2.6m) and up 57% on a like-for-like basis

· Group operating profit margin of 4.2% (H1 2013: 3.0%)

· Profit before tax of £4.1m up 95% (H1 2013: £2.1m) and up 77% on a like-for-like basis,

· Strong growth in adjusted diluted EPS, up 78% to 3.2p per share (H1 2013: 1.8p per share)

· Interim dividend per share of 0.83p (H1 2013: 0.25p per share)

· Net debt of £25.0m equates to 1.3 times pro forma annualised EBITDA of the Group

Strategic highlights

· Acquired the Fletchers Bakery Group for £56m in October 2014

· The Group is now one of the largest speciality bakery groups in the UK with annualised revenues of approximately £270m

· The acquisition of Fletchers Bakery Group gives Finsbury a broader spread of customers across food retail and food service channels in cake, bread and morning goods businesses

· Successful delivery of targeted cost cutting initiatives through continuous improvement programmes

Operational highlights

· Increase in operating profit margin showing the benefits of ongoing capex investment and overhead management

· Organic sales growth of 5.6% versus prior year, driven by market share growth in the UK Cake business

· Food service sales growth ahead of market growth with 12 new products launched across three ranges

· Food Manufacturer's Bakery Manufacturing Company of the year award 2014 and winner of 1st, 2nd and 3rd place in the Q awards

Commenting on the results, John Duffy, Chief Executive of Finsbury Food Group plc, said:

"I am pleased to report the significant progress of the Group. Over the period we have seen a strategic shift, becoming more diversified in terms of products and customers, as well as evolving into one of the largest speciality bakery groups in the UK.

"We have seen notable growth, both organically and through the Fletchers acquisition, which is integrating well. We look forward to the remainder of the year with confidence and, despite a tough trading environment, we believe the Group is in a strong position to deliver on our growth strategy."

Publication quality photographs are available via Redleaf Polhill on the numbers shown above 

 STRATEGY

Finsbury's core strategy has remained consistent, being:

• to build a speciality, craft bakery group focused on quality products and on relevant consumer trends such as premium, celebration and well-being;

• to continue to develop a licensed brand portfolio to complement our core retailer and brand relationships;

• to focus on delivering what customers and consumers want in both retail and out of home channels;

• to improve efficiency and productivity via capital investment and continuous operational improvement; and

• to generate returns for shareholders.

The success in the delivery of our core strategy is evidenced by the like-for-like revenue growth of 5.6% and by the like-for-like growth in operating profits of 57%, with operating profit margins growing to 4.2% from 3.0%. There are a number of varied factors behind this improvement which together have delivered a step change in performance. Factors include:

• growth in our share of the Cake market on the back of our licensed brand portfolio (such as the Disney Frozen celebration cake) and through our own label round cake offering,

• improvement in production efficiency, leading to lower cost of production and the ability to support customers through more effective promotional activity to the benefit of consumers, customers and ourselves,

• the benefits of increased automation from capital investment.

This core strategy is complemented by a focus on driving the Group into its next phase of growth and key to this is taking part in industry consolidation and appropriate M&A. The acquisition of Fletchers Bakeries on 30 October 2014 was a significant step in this direction, increasing annualised Group revenues to approximately £270 million.

Net debt of £25 million at half year, equating to 1.3 times annualised EBITDA results in a healthy post acquisition balance sheet and the ability to continue in our efforts to take part in industry consolidation and appropriate M&A.

Our core strategy is centred around generating returns for shareholders. Adjusted diluted earnings per share are 78% higher at 3.2p per share, a result of the growth in operating profit.

A final dividend for the year to 28 June 2014 of 0.75p per share was paid on 10 December 2014 to shareholders on the register at the close of business on 24 October 2014. This brings the total dividend for the year to 28 June 2014 to 1.00p per share. The Board of Directors is announcing an interim dividend of 0.83p per share (H1 2013: 0.25p per share), an increase of 232%. This increase is in line with our progressive dividend policy which is predicated on strong cash generation from operations and a healthy balance sheet.

THE ACQUISITION OF FLETCHERS BAKERIES

The headline acquisition price for Fletchers Bakeries was £56 million, funded in part by an oversubscribed equity raise of £35 million. The remainder was funded through debt. Fletchers Bakeries is a UK-based business manufacturing, bread and morning good bakery products. The acquisition brings opportunities in new food service channels, retail customer diversification and complimentary product ranges. Fletchers Bakeries fits well within our UK bakery business and the Group is expecting significant operational and commercial synergies. Furthermore, the core strategy set out above remains appropriate and continues to apply to the enlarged Group.

OUTLOOK

The Group delivered a strong performance over the first half. This was due to the successful delivery of our twin organic growth and efficiency led capital investment strategy, which together resulted in improved operating margins. This strong core performance was complemented by two months of additional sales and profit growth from the acquisition of Fletchers.

Whilst the UK grocery market continues to be challenging, the wider economic environment is slowly improving. The broader channel, customer and product diversification achieved recently within the Group will continue to benefit us given the higher growth opportunity in some of these areas such as foodservice.

The Group has laid strong foundations and delivered a good first half performance, we expect this to continue into the second half of the financial year as we complete the integration of Fletchers into the Group and deliver the planned scale and efficiency synergy benefits. Our balance sheet remains strong and we will continue to invest to deliver our stated growth strategy.

OPERATING REVIEW

UK Bakery

UK Bakery comprises the Cake business and the Bread and Morning Goods business. Revenue in the period has increased by 28% to £96.3 million. On a like-for-like basis revenue growth is 6.4%. Revenue growth arises primarily in the Cake business. Operating profit in the period has increased by 94% to £3.8 million. On a like-for-like basis, operating profit growth is 72%. Again, operating profit growth arises primarily in the Cake business. Operating profit margins of 3.9% are below expectation and the Group continues to invest through automation and through continuous operational improvement to improve these margins further.

Cake

The Cake business operates in a mature market with value decline of 1.4% and volume decline of 3% (Source: IRI Infoscan w/e 03 January 2015). Revenue growth has been driven by a successful Christmas trading period as well as the success of the Frozen Disney licensed celebration cake and our own label round cake offering. Operating profit margin growth arises from operational efficiency within our factories and includes the benefit of significant capital expenditure over the last two years. The intention is to continue investing in capital expenditure within the Cake business to improve margins further and also to increase product capability e.g. food service.

Bread and Morning Goods

The acquisition of Fletchers bakeries has significantly expanded our existing bread and morning goods business (Nicholas & Harris). The half year results include two months trading of the acquired business which totalled £16.0 million of revenue and £0.4 million of operating profit. It is still early in the integration process of Fletchers into the UK bakery business but early indications and expectations are positive. As is the case for the Cake business intention is to invest in capital expenditure to improve productivity and increase product capability.

Overseas

The Overseas business represents Lightbody Europe, trading primarily in France. The business specialises in the importing and sale of premium UK manufactured food products. It holds many of the licences held by the UK Bakery business for Europe and is an important channel for UK manufactured celebration cake and bite products.

The business is heavily exposed to the Euro and recent exchange rate performance. Within this context we are pleased with the operating profit performance of Overseas.

FINANCIAL REVIEW

Revenue and Operating Profit

Group revenue H1 2014 was up 24% to £107.6 million (H1 2013: £86.6 million), on a like-for-like organic growth was 5.6%, an increase of £4.9 million.

Profit from operations before interest, tax and significant non-recurring and other items was up by 74% or £1.9 million to £4.5 million. On a like-for-like basis profit from operations was up 57% to £4.1 million (H1 2013: £2.6 million).

Interest Payable

Interest payable and charges on related interest rate swaps on the group's bank debt in H1 2014 is £447,000 (H1 2013: £509,000), a decrease of £62,000. The reduction in charges on interest rate swaps of £173,000 is a consequence of the expiry of an expensive 4 year interest rate swap of £10 million (fixed) at 4.9% this reduction has been partially offset by an increase in interest payable of £111,000 resulting primarily from the additional debt arising on the acquisition of Fletchers.

Taxation

The Group's effective tax rate in H1 2014 is 23.1%, which compares to 26.5% in H1 2013. The effective rates represents a blend of the UK and French corporation tax rates. The reduction in the effective rates when comparing half years arises from a 1.75% reduction in the annual hybrid UK corporation tax rates and from a lower blend of profits charged at the higher French corporation tax rate

Significant non-recurring and other items

The Group incurred costs of £1,328,000 in the acquisition of Fletchers Bakeries. Related taxation relief is £276,000.

Earnings per share.

The Group considers adjusted diluted earnings per share to be the most appropriate EPS measure. The adjusted diluted earnings per share were 3.2p, which includes earnings from the acquired Fletchers business and compares to 1.8p H1 2013.

Cash flow and net debt.

Cash inflow from operating profit before changes in working capital is £5.3 million, which compares with £3.6 million in H1 2013. The increase arises from the growth in revenue as well as the growth in operating margins.

Net debt at 27 December 2014 is £25.0 million which compares to £11.8 million at H1 2013, an increase of £13.2 million. The increase in net debt as a result of the Fletchers acquisition is £14.8 million.

Capital expenditure of £1.7 million was incurred in H1 2014 which is £2 million lower than H1 2013. This reduction is down to phasing with the level of capital expenditure in the full-year expected to be similar to the year to June 2014.

Pensions

The group has one defined benefit pension scheme within its Memory Lane Cake business in Cardiff. All remaining group companies have defined contribution schemes.

The Memory Lane Cake pension scheme has been closed to future accruals and new members since 31 May 2010. The net pension deficit (before related deferred tax) is £3,630,000 at 28 June 2014, which is an increase of £787,000 since 29 June 2013. The net pension deficit after related deferred tax was £2,904,000, an increase of £715,000 from 29 June 2013.

The fair value of total plan assets relating to the Memory Lane Pension scheme is £19,741,000 at 28 June 2014, which compares to £18,728,000 at 29 June 2013. The present value of the defined benefit obligations relating to the Memory Lane Pension scheme is £23,371,000 at 28 June 2014, which compares to £21,571,000 at 29 June 2013.

Principal risks and uncertainties

A number of risks and uncertainties have been identified that would potentially have a material impact on the financial position of the Group. These are set out on pages 10 and 13 of the Annual Report for the year to 28 June 2014 and which the Board considers to remain applicable.

Forward looking statements

Throughout this report certain statements have been made which are forward looking. These statements have been made based on latest knowledge and expectations of the future. The Board considers the statements to be reasonable. Inevitably there are risks associated with these forward looking statements which are usually outside the control of Group. Actual results or performance may therefore differ from the outcome implied by these forward looking statements.

Consolidated Statement of Comprehensive Income (unaudited)

Consolidated Statement of Financial Position (unaudited)

Consolidated Statement of Changes in Equity (unaudited)

Consolidated Cash Flow Statement (unaudited)

NOTES TO THE FINANCIAL STATEMENTS

1) BASIS OF PREPARATION

The interim report, which is unaudited, does not constitute statutory accounts within the meaning of section 434(3) of the Companies Act 2006. The comparative figures for the financial year ended 28 June 2014 have been extracted from the statutory accounts for that year. Those accounts, which were prepared in accordance with International Financial Reporting Standards as adopted by the EU ("adopted IFRSs"), have been reported on by the company's auditor and delivered to the registrar of companies. The report of the auditor was (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.

It should be noted that current liabilities continue to exceed current assets. Having reviewed the Group's plans the Board has reasonable expectations that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group has strong asset backing and strong debtor book. Accordingly, the Board continues to adopt the going concern basis in preparing the financial statements.

2) ACQUISITION

On 30 October 2014 the Group acquired the entire share capital of the Fletchers Group (Fletchers) for £56.4 million less £2.6 million working capital adjustment. Fletchers produces morning goods and specialist bread products for leading UK grocery retailers and foodservice customers. Strategic and financial benefits of the acquisition include, complementary product ranges and new food service channels, retail customer diversification, the benefits of significant capital investment within Fletchers manufacturing and a multi-channel platform for further acquisitions in due course.

The cash outflow under 'purchase of a subsidiary' of £53,834,000 on the face of the Consolidated Cash Flow Statement in the 26 weeks to 27 December 2014 relates to the following:

The acquisition had the following effect on the Group's assets and liabilities:

The Group is in the process of establishing fair values for the acquired identifiable assets. Goodwill and intangibles are shown as one amount in the table above as the Group is working through an exercise to correctly identify and value any intangible assets acquired.

3) SEGMENT 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 they are 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:

Ø net financing expense

Ø share option charges

Ø significant non-recurring items

Ø fair value adjustments relating to acquisitions

Ø pension charges or credits in relation to the difference between the expected return on pension assets and interest cost on pension liabilities and

Ø 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 food service sectors. This segment primarily comprises the operations of Memory Lane Cakes Ltd, Lightbody Group Ltd, Campbells Cake Company Ltd, Fletchers Group and Nicholas & Harris Ltd. These subsidiaries are aggregated into a single segment after considering the following criteria:

Ø the nature of the products - products are similar in nature and are classed as manufactured bakery products

Ø the production process - the production processes have the same or similar characteristics

Ø the economic characteristics - the average gross margins are expected to be similar

The core operation of the Overseas segment is the distribution of the Group's UK manufactured product along with the sale of third party products primarily to Europe.

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. Operating profit levels have been chosen as the basis, as this reflects the underlying performance of the segment and is also the return the Group expects from those segments.

A purchasing premium of 2% is charged from Group operations, and is calculated on materials and packaging spends 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 profit from continuing operations of £0.1 million (H1 2013: £0.2 million) being presented within the Group operations segment.

The Group's finance income and costs cannot be meaningfully allocated to the individual operating segments.

3) SEGMENT INFORMATION (continued)

Analysis of unallocated assets and liabilities:

Certain operating costs have been incurred centrally, these costs have been allocated to the reporting segments on an appropriate basis.

3) SEGMENT INFORMATION (continued)

Analysis of unallocated assets and liabilities:

Certain operating costs have been incurred centrally, these costs have been allocated to the reporting segments on an appropriate basis.

3) SEGMENT INFORMATION (continued)

Analysis of unallocated assets and liabilities:

Five customers with sales of £35m, £35m, £26m, £17m and £16m account for 73% of revenue, which is attributable to the 'UK Bakery' and 'Overseas' segments above.

4) SIGNIFICANT NON-RECURRING ITEMS

The Group presents certain items as non-recurring and significant. These relate 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.

Costs of £1,328,000 relate to acquisition transaction costs during the period. In the 26 weeks to 28 December 2013 £297,000 relate to restructuring and reorganisation costs.

In the 52 weeks to 28 June 2014 £643,000 relate to restructuring and reorganisation costs and £116,000 relate to due diligence and consultancy expenses associated with an aborted acquisition.

5) SHARE BASED PAYMENTS

The Group operates both approved and unapproved share option schemes. Following the adoption of IFRS2 'Share-based payments' charges have been made to the Income Statement to reflect the calculated fair value of employee share options. The cost is calculated at the date of grant and is charged equally over the vesting period. The corresponding adjustment is made to reserves.

During the 26 weeks to 27 December 2014 155,172 options were granted (H1 2013: nil). The estimated fair values of options granted for the 26 weeks to 27 December 2014 was £13,000 (H1 2013: nil).

Significant non-recurring and other items include a charge of £11,000 in relation to the fair value of share options for the 26 weeks ended 27 December 2014. The comparative charges for the 26 weeks to 28 December 2013 and for the year ended 28 June 2014 were £11,000 and £9,000 respectively.

6) FINANCE INCOME AND EXPENSES

The Group has entered into three interest rate swap arrangements to hedge its risks associated with interest rate fluctuations:

£5.0 million for five years from 1 July 2011 (fixed) at 3.6% maturing 30 June 2016

£3.0 million for four years from 22 May 2013 at 1.7% maturing 24 May 2017

£6.0 million for three years from 2 June 2014 at 1.9% maturing 1 June 2017

One four year interest rate swap of £10.0 million (fixed) at 4.9% matured 31 May 2014.

These arrangements do not meet the conditions necessary for hedge accounting to be applied and, therefore, changes in their fair value are recognised immediately in the income statement resulting in a charge of £94,000 (H1 2013: credit £396,000).

7) EARNINGS PER ORDINARY SHARE

Basic earnings per share for the period is calculated on the basis of profit for the period after tax, divided by the weighted average number of shares in issue 86,149,000 (28 December 2013: 64,967,000).

Basic diluted earnings per share for the period is calculated by adjusting the weighted average number of shares in issue to assume conversion of all potential dilutive ordinary shares, which for 27 December 2014 is 90,606,000 (28 December 2013: 70,688,000).

An adjusted earnings per share has also been calculated as, in the opinion of the Board, this will allow shareholders to gain a clearer understanding of the trading performance of the Group. These adjusted earnings per share exclude amounts shown under significant and non-recurring items in the Consolidated Statement of Comprehensive Income.

8) ANALYSIS OF NET DEBT