13th Dec 2006 07:01
RHM plc13 December 2006 RHM plc A resilient performance in the face of cost pressures Interim results for the 26 weeks ended 28 October 2006 Financial Highlights 26 weeks ended 28 26 weeks ended 29 Change October 2006 October 2005 (unaudited) (unaudited) Turnover - continuing operations £757.2m £739.3m +2.4%Operating profit before restructuring costs £71.1m £70.3m +1.1%Operating profit £61.8m £55.6m +11.2% Profit/(loss) before taxation £47.7m £(58.3)m n/a Basic earnings/(loss) 9.8p (13.8)p n/aper shareInterim dividend per share 5.5p 5.3p +3.8% • Good growth in Hovis and Mr Kipling sales • Significant improvement in Cakes' operating and financial performance • Culinary Brands' autumn trading back on track following soft summer sales affected by exceptionally hot weather • Over £16m of benefits delivered from cost reduction initiatives • Underlying Group operating profit* maintained despite higher energy and wheat costs and increased marketing investment Jan du Plessis, Chairman of RHM plc, said: "RHM's financial performance in the first half of the year demonstrates theresilience of our businesses and brands. We will continue to increase investment behind our brands in the second half ofthe year. Equally, we will seek to mitigate our cost pressures and aggressivelypursue further cost saving opportunities. While critical winter months are stillahead of us, the Board is confident that we will make further progress in theyear as a whole." Ian McMahon, Chief Executive Officer of RHM plc, said: "Culinary Brands is on track to deliver a much stronger second half performance.The turnaround in Cakes is expected to continue. Customer Partnerships shouldcontinue to perform satisfactorily. Bread Bakeries' performance will depend uponany further movements in the wheat price and the timing of bread priceincreases. Our group-wide cost reduction programmes are on track to deliver thefull-year savings anticipated at the start of the year. We therefore expect tomaintain our business momentum." ENQUIRIES RHM plc +44 (0)1628 478 484Ian McMahon, Chief Executive OfficerAndrew Allner, Group Finance DirectorJohn McIvor, Director of Investor Relationsand Industry Strategy Financial Dynamics +44 (0)20 7269 7121Andrew LorenzRichard Mountain *All references to turnover, underlying operating profit and underlying operating margin relate to continuing operations excluding restructuring costs, unless explicitly otherwise stated. Chairman's Comments RHM's financial performance in the first half of the year demonstrates theresilience of our businesses and brands. Notwithstanding the impact ofsignificant rises in energy and wheat prices, an exceptionally hot summer andhigher investment in our brand portfolio, underlying operating profit increasedby 1.1 per cent. to £71.1m, on turnover which rose 2.4 per cent. to £757.2m. I am particularly pleased to report that the improvement in Cakes trading thatwas demonstrated towards the end of our last financial year has continued, withthe Mr Kipling brand delivering encouraging like for like growth in both salesand market share. Our largest division, Bread Bakeries, has performed satisfactorily, despite theimpact of a poor global wheat harvest and consequently higher wheat prices; thiswill be a continuing factor in the second half of the year. As previously announced, our Culinary Brands division was affected by theexceptionally hot summer. I am however pleased to report that sales of our keybrands returned to normal seasonal levels in September and our market sharesremain strong. Customer Partnerships has traded in line with the Board's expectations,reflecting the benefit of both higher turnover and greater efficiency savings. Our ability to drive performance through cost savings as well as top line growthis one of RHM's fundamental strengths. Our cost reduction initiatives havedelivered over £16m of benefits during the first half of the year, in line withprevious guidance. The Board has approved the payment of an interim dividend of 5.5p (2005: 5.3p)to shareholders on the Company's register on 22 December 2006, to be paid on 23February 2007. This represents an increase of 3.8 per cent. over the dividendpaid in respect of the first half of the last financial year. We will continue to increase investment behind our brands in the second half ofthe year. Equally, we will seek to mitigate our cost pressures and aggressivelypursue further cost saving opportunities. While critical winter months are stillahead of us, the Board is confident that we will make further progress in theyear as a whole. Jan du Plessis Chairman Chief Executive's Review Total Group 26 weeks ended 28 26 weeks ended 29 October 2006 October 2005 (unaudited) (unaudited) Change Turnover £757.2m £739.3m 2.4% Underlying operating profit £71.1m £70.3m 1.1% Underlying operating profit margin 9.4 % 9.5% -10bps Turnover for the first half of the year increased by 2.4 per cent. to £757.2m.This growth reflected a strong trading performance in the seasonally mostimportant last two months of the period, the contribution made by new productlaunches and the successful introduction of price increases to recoup higherinput costs. Branded turnover increased by £6m or 1.6 per cent. to £377.1m, with higher Hovisand Mr Kipling branded turnover more than offsetting lower Culinary Brandsturnover. Non-branded turnover increased by £12.5m or 3.4 per cent. to £380.1m,principally as a result of higher chilled ready meal sales. Underlying operating profit increased by 1.1 per cent. to £71.1m. Thesignificant improvement in performance in Cakes, reflecting both higher brandedturnover and the benefit of cost savings, together with progress at CustomerPartnerships more than offset the summer softness in Culinary Brands. Cost saving initiatives delivered over £16m of benefit to the Group. This hasmitigated the impact on operating profit of an aggregate £10m of higher energyand wheat costs and the non-recurrence of the one-off overrider settlementswhich benefited the first half of the previous year. Advertising spend increasedby approximately £2m as a result of increased investment behind the Hovis,Bisto, Sharwood's and Nimble brands. Our new product pipeline continues to deliver benefits. During the first halfof the year we have launched new Hovis loaves, Bisto casserole sauces,Sharwood's chilled sauces and snacks, Frank Cooper condiments and extended ourCadbury's cake bar range. These have received a positive early consumer responseand provide an excellent platform from which to trial further new productsduring the second half of the year. Bread Bakeries 26 weeks ended 28 26 weeks ended 29 October 2006 October 2005 (unaudited) (unaudited) Change Turnover £395.8m £385.8m 2.6% Underlying operating profit £34.4m £34.7m -0.9% Underlying operating profit margin 8.7% 9.0% -30bps Turnover increased by 2.6 per cent. to £395.8m, principally as a result of theimpact of price increases and customer distribution wins. Bread Bakeries' higherturnover also reflects the contribution of third party flour price increasesintroduced in September 2006 to help counter the impact of the very sharp risein wheat prices. During the period the entire Hovis bread range was relaunched with newpackaging, recipes, pricing and products. This has received a positive consumerresponse, as has the accompanying "Hovis Is For Life" advertising campaign. Thesuccess of Hovis Invisible Crust has continued, and a second plant has recentlybecome operational. A maiden advertising campaign will be launched early in 2007now that we have sufficient production capacity to service the anticipatedincrease in demand. Underlying divisional operating profit declined by £0.3m to £34.4m. A strongsales performance in Bread Bakeries in both the UK and France has helpedmitigate the impact on operating profit of higher energy and wheat costs and thenon-recurrence of the one-off overrider settlements which benefited the firsthalf of the previous financial year. The lag in recovery of higher wheat costsis estimated to have had a £2m impact in the first half of the year. The fullyear impact will depend upon further movements in the wheat price and the timingof bread price increases. Culinary Brands 26 weeks ended 28 26 weeks ended 29 October 2006 October 2005 (unaudited) (unaudited) Change Turnover £116.9m £122.8m -4.8% Underlying operating profit £23.3m £31.1m -25.1% Underlying operating profit margin 19.9% 25.3% -540bps As previously announced, Culinary Brands' turnover and margins in the first fourmonths of the year were affected by the exceptionally hot summer, some retailerdestocking and an increasingly competitive environment. In contrast, trading inSeptember and October was good, with higher sales of key brands including Bistoand Sharwood's. Market shares remain strong, new product launches areprogressing to plan and advertising and promotional campaigns have been wellreceived. As a result, Culinary Brands' turnover declined by £5.9m to £116.9m. Underlying operating profit reduced by £7.8m to £23.3m. This decline reflectslower sales of relatively high margin products, an increased level of marketinginvestment, the cost of new product launches and the impact of higherpromotional spend to stimulate demand during the quiet summer months. Cakes 26 weeks ended 28 26 weeks ended 29 October 2006 October 2005 (unaudited) (unaudited) Change Turnover £118.8m £108.0m 10.0% Underlying operating profit £9.0m £1.0m 800% Underlying operating profit margin 7.6 % 0.9% +670bps Cakes' turnover increased by 10.0 per cent. to £118.8m as a result of strongsales growth at both Manor Bakeries, our branded small cake and slices businessand Avana, our whole cake and chilled dessert operation. Most encouragingly, the Mr Kipling brand has delivered both encouraging like forlike sales growth and market share gains, as the actions taken to improveperformance continue to build momentum. Sales of Mr Kipling products increased by over 16 per cent. in the first halfcompared with the same period last year, demonstrating the success of theactions taken to re-engage consumers through better product quality, attractivepricing and new product innovation, including the launch of the lower fat MrKipling Delightfuls range. Market share in the four weeks ended 7 October 2006increased by 2.2 percentage points year on year to 15.5 per cent. Market shareon a 52 week moving annual basis increased year on year by 0.5 percentage pointsto 15.5 per cent. 1 Cakes' restructuring benefits, including those from the closure of the Eastleighbakery last December, delivered over £5m of savings in the first half of theyear. This, together with the higher level of turnover, helped drive underlyingoperating profit from £1.0m to £9.0m. 1 IRI All Outlets, 4 Weeks, 52 Weeks Ended 7 October 2006 Customer Partnerships 26 weeks ended 28 26 weeks ended 29 October 2006 October 2005 (unaudited) (unaudited) Change Turnover £125.7m £122.7m 2.4% Underlying operating profit £11.4m £10.5m 8.6% Underlying operating profit margin 9.1 % 8.6% +50bps Customer Partnerships' turnover increased by 2.4 per cent. to £125.7m,reflecting the benefit of successful new product development and volumeincreases, particularly in chilled ready meals. Underlying operating profit increased by 8.6 per cent. to £11.4m, reflecting thebenefit of higher volumes and efficiency gains, offset in part by a rise inenergy costs. Outlook Culinary Brands is on track to deliver a much stronger second half performance.The turnaround in Cakes is expected to continue. Customer Partnerships shouldcontinue to perform satisfactorily. Bread Bakeries' performance will dependupon any further movements in the wheat price and the timing of bread priceincreases. Our group-wide cost reduction programmes are on track to deliver thefull-year savings anticipated at the start of the year. We therefore expect tomaintain our business momentum. Ian McMahon Chief Executive Officer Group Finance Director's Financial Review Basis of reporting The results for the six months ended 28 October 2006 have been prepared inaccordance with the IFRS accounting policies as set out in the Group's 2006Annual Report. Summary of results 26 weeks ended 28 26 weeks ended 29 Change October 2006 October 2005 £m £m % (unaudited) (unaudited) Turnover 757.2 739.3 2.4 Underlying operating profit 71.1 70.3 1.1Net restructuring costs (9.3) (12.3) 24.4Flotation costs - (2.4) -Operating profit 61.8 55.6 11.2Net interest expense (22.6) (35.9) 37.0Pension financing income 8.5 0.1 -Debt redemption costs - (78.1) -Profit/(loss) before tax 47.7 (58.3) -Taxation (13.8) 16.6 -Profit/(loss) after tax 33.9 (41.7) - Weighted average number of shares in issue 346.8m 267.5m 29.6 Basic earnings/(loss) per share 9.8p (13.8)p - Turnover Turnover for the first half was £757.2m, an increase of 2.4 per cent. and inline with our long-term target of two to four per cent. annual sales growth.Turnover increased in all operating divisions except Culinary Brands whereturnover was 4.8 per cent. lower due to an unusually hot summer, customerde-stocking and an increasingly competitive environment. Branded turnover increased by £6m, or 1.6 per cent. in the year to £377.1m,principally driven by higher sales of Mr. Kipling and Hovis brands. Operating profit Underlying operating profit for the first half was £71.1m (2006: £70.3m), a 1.1per cent. improvement. The Group's operating profit margin was broadly unchangedat 9.4 per cent. as the benefits of cost saving initiatives and lower pensioncosts were offset by higher product costs, increased advertising spend and thenon-recurrence of one-off overrider settlements from the first half of theprevious year. The key factors affecting product costs have been energy and wheat prices.Energy cost increases of £8m have been broadly passed on to customers throughprice increases during the half year. Wheat cost increases, which have not yetfully been passed on to customers, impacted operating profits by £2m during theperiod. Advertising and marketing spend in the six months was £14.4m, an increase of£1.9m or 15.3 per cent. This was primarily in support of increased investment inCulinary Brands. RHM's pension service charge declined by £2.8m compared with the previousfinancial year, principally due to the impact of the fall in the number ofemployees in the pension scheme as a consequence of restructuring programmes. Head office costs were flat year on year at £7.0m as cost control initiativesmitigated the impact of inflation. Cost reduction initiatives An important contributor to offsetting higher energy and wheat prices in thelast six months has been the Group's success in delivering further cost savingsacross all areas of the business. Cost reduction initiatives delivered £16m ofbenefits to the Group during the period. Net procurement and logistics savings, excluding wheat buying and the impact ofunavoidably higher energy costs but including all other purchase cost inflation,amounted to £9m, in line with our expectations. Significant savings wereachieved in facilities management, packaging materials, sugar and dairyproducts. Restructuring and rationalisation initiatives delivered a benefit of £7m in theperiod, primarily driven by the closure of the Eastleigh bakery together withheadcount reductions in our Cakes and Customer Partnerships. Restructuring costs Restructuring costs recorded in the income statement total £9.3m, comprisingredundancy and restructuring costs of £11.3m, offset in part by the profit onsale of properties of £2.0m. The £14.7m charge in the prior year comprisedredundancy and restructuring costs of £12.3m and £2.4m related to the cost ofthe flotation. Net interest expense Net interest expense reduced from £35.9m to £22.6m, principally reflecting theimpact of the repayment of the unsecured loan stock and the new lower costfinancing structure put in place at the time of the Group's flotation. In the previous period debt redemption costs relating to the previous financingstructure of £78.1m were incurred, being early redemption costs of £75.2m andaccelerated amortisation of debt issuance fees of £2.9m. Pension financing income Pension financing income increased from £0.1m to £8.5m, in part due to thebenefit of cash contributions made by the Group at the time of, and subsequentto, flotation, and in part due to the financing impact of changes in Grouppension fund assets and liabilities, together with market movements in thediscount rate. Taxation The underlying tax rate on profit before restructuring costs for the periodended 28 October 2006 is 30.0 per cent. compared to 31.1 per cent. for the priorperiod. The Group recorded an overall tax charge of £13.8m. Earnings per share Basic earnings per share rose to 9.8p from a loss of (13.8)p last year. Dividend The Board has approved an interim dividend of 5.5p per share to be paid on 23February 2007 to shareholders on the register on 22 December 2006. Cash flow and borrowings Cash flows from operations in the period were £38.7m (2006: £37.1m); thisincludes the seasonal build up of working capital in the run up to the busierwinter and Christmas period. Capital expenditure net of the proceeds from saleof assets totalled £22.1m (2006: £37.8m). Exceptional cash spend comprised £12.7m on restructuring projects offset in partby £0.3m proceeds on property disposals. Tax paid for the period was £1.7m (2006: £0.2m). For the next few years weexpect tax paid to be lower than recorded in the income statement due to theimpact of pension cash contributions and utilisation of tax losses. The Group's net debt as at 28 October 2006 was £722.9m, an increase of £9.6mcompared with 29 October 2005. The Group's facilities comprise £900m of unsecured bank debt, repayable between2008 and 2010, of which £750m is fully drawn term debt. The balance is arevolving credit facility of £150m, which was un-drawn at the period end. Pensions The UK gross pension scheme deficit at 28 October 2006 was £195m, an increase of£35m during the period. This increase was primarily due to a reduction in thediscount rate used to calculate the current value of the pension liabilities,partially offset by higher employer pension contributions and the benefit ofinterest rate swaps. The Group's gross pension deficit at the end of the period,including overseas pension schemes, was £196.1m, equivalent to £137.3m net ofdeferred tax. As previously announced the cash contributions made to the RHM pension fund bythe Group will amount to £40m in the full year. This is £9m more than thecontributions for the prior year as agreed with the pension fund trustees. Thiscontribution level has been set to ensure that the current pension fund deficitis repaid over a nine year period with increased contributions being phased inover a five year period, this being the first year. Most of the increase incontributions will be applied to reducing the Group's pension deficit. Andrew Allner Group Finance Director 12 December 2006 Financial Statements Consolidated Income Statement for the 26 weeks ended 28 October 2006 26 weeks to 28 26 weeks to 29 52 weeks to 29 October 2006 October 2005 April 2006 (Unaudited) (Unaudited) Note £m £m £mContinuing operationsRevenue 4 757.2 739.3 1,559.3Cost of sales (489.2) (474.3) (987.5) Gross profit 268.0 265.0 571.8 Distribution costs (148.8) (146.4) (294.4)Administrative expenses (47.8) (48.2) (104.0)Other operating (expense)/income (0.3) (0.1) 0.1Operating profit before restructuring costs 71.1 70.3 173.5Gain on sale of properties 5 2.0 - 0.6Other restructuring costs 5 (11.3) (12.3) (31.1)Flotation costs 5 - (2.4) (2.4) Operating profit 61.8 55.6 140.6 Interest expense 6 (22.8) (36.8) (60.1)Interest income 6 0.2 0.9 1.3Other financing income 6 8.5 0.1 3.6Debt redemption costs 6 - (78.1) (78.1)Share of results of associates - - 0.1Profit/(loss) on ordinary activities beforetaxation 47.7 (58.3) 7.4 Tax (charge)/credit on profit on ordinary 7 (13.8) 16.6 (1.6)activities Profit/(loss) for the period from continuingoperations 33.9 (41.7) 5.8 Discontinued operations 8Profit attributable to discontinued operations - 4.8 6.7 33.9 (36.9) 12.5 The profit/(loss) for the period is attributable to the equity holders of the Company. Earnings per share (expressed in pence)BasicContinuing operations 9.8 (15.6) 1.9Discontinued operations - 1.8 2.2Total 10 9.8 (13.8) 4.1DilutedContinuing operations 9.7 (15.5) 1.9Discontinued operations - 1.8 2.2Total 10 9.7 (13.7) 4.1 Dividends 9Dividends (£m) 36.8 - 18.4Declared dividend per shares (pence) 10.6 - 5.3 Financial Statements Statement of recognised income and expense for the 26 weeks ended 28 October 2006 26 weeks to 28 26 weeks to 29 52 weeks to 29 October 2006 October 2005 April 2006 (Unaudited) (Unaudited) Note £m £m £m Profit/(loss) for the financial period 33.9 (36.9) 12.5 Gains on cash flow hedges 1.2 - 2.9Deferred tax on gains on cash flow hedges (0.4) - (0.9)Exchange (loss)/gain (0.8) 0.2 0.5Actuarial (loss)/gain 12 (57.5) (16.4) 104.9Pension mortality 12 - (96.0) (96.0)Deferred tax on pension mortality - 28.8 28.8Deferred tax on actuarial gains 17.3 4.9 (31.5)Net gains not recognised in income statement (40.2) (78.5) 8.7 Total recognised (loss)/income for the period (6.3) (115.4) 21.2 IAS 39 opening balance adjustment - (5.8) (5.8)Deferred tax on opening balance adjustment - 1.7 1.7 The total recognised (loss)/income for the period is attributable to the equityholders of the Company. Financial Statements Consolidated Balance Sheet as at 28 October 2006 26 weeks to 28 26 weeks to 29 52 weeks to 29 October 2006 October 2005 April 2006 (Unaudited) (Unaudited) Note £m £m £mNon-current assetsProperty, plant & equipment 421.7 433.2 428.8Goodwill 151.8 151.8 151.8Other intangible assets 328.3 326.9 328.3Investment in associates 0.5 0.5 0.5Other receivables 1.0 1.2 0.6Deferred tax asset 79.8 129.7 75.2 983.1 1,043.3 985.2Current assetsInventories 91.6 84.6 70.2Trade and other receivables 247.2 235.3 216.9Financial assets 0.5 0.7 0.8Cash & cash equivalents 11 25.3 33.9 71.9 364.6 354.5 359.8Assets classified as held for sale 1.1 4.6 1.2 365.7 359.1 361.0Current liabilitiesTrade & other payables 276.9 289.5 257.8Current income tax liabilities 2.9 3.3 3.1Financial liabilities 1.2 0.1 0.3Borrowings 11 16.9 8.9 18.0Provisions 4.8 12.1 6.3 302.7 313.9 285.5 Net current assets 63.0 45.2 75.5 Total assets less current liabilities 1,046.1 1,088.5 1,060.7 Non-current liabilitiesBorrowings 11 742.8 745.2 743.1Other payables 4.0 4.9 4.4Pension obligations 12 196.1 314.1 162.5Provisions 17.3 11.9 19.8 960.2 1,076.1 929.8 Net assets 13 85.9 12.4 130.9 Financial Statements Consolidated Balance Sheet as at 28 October 2006 26 weeks to 28 26 weeks to 29 52 weeks to 29 October 2006 October 2005 April 2006 (Unaudited) (Unaudited) Note £m £m £mEquityCalled-up share capital 0.4 0.4 0.4Share premium account 466.7 466.7 466.7Other reserves 4.8 0.4 3.9Retained earnings (386.1) (455.2) (340.2)Capital & reserves attributable to the Company's 13 85.8 12.3 130.8equity holdersMinority interests 0.1 0.1 0.1Total equity 85.9 12.4 130.9 Approved by the Board of Directors on 12 December 2006. Financial Statements Consolidated Cash Flow Statement for the 26 weeks ended 28 October 2006 26 weeks to 28 26 weeks to 29 52 weeks to 29 October 2006 October 2005 April 2006 (Unaudited) (Unaudited) Note £m £m £mCash flows from operating activitiesCash generated from operations 14 38.7 37.1 143.9Interest paid (21.2) (40.7) (53.9)Income tax paid - net (1.7) (0.2) (1.3)Net cash from operating activities 15.8 (3.8) 88.7 Cash flows from investing activitiesPurchase of property, plant and equipment (22.0) (36.8) (60.1)Purchase of intangibles (0.6) (1.9) (3.3)Proceeds from sale of property, plant andequipment 0.5 0.9 9.0Proceeds on disposal of subsidiary - 1.1 0.9Pension contribution on sale of subsidiary - (1.0) (1.0)Interest received 0.2 0.3 0.6Net cash generated from investing activities (21.9) (37.4) (53.9) Cash flows from financing activitiesIssue of shares 3,13 - 475.2 475.2Share issue costs - (23.3) (25.5)Pension contribution (0.7) (110.0) (126.7)Purchase of own shares (2.4) (1.2) (1.2)Capital element of finance leases (0.5) (0.6) (1.3)Loan repayments (0.1) (1,013.7) (1,013.7)Refinancing costs 3 - (80.8) (80.8)Proceeds from new loans - 741.7 741.7Dividends paid to shareholders (36.8) - (18.4)Net cash used in financing activities (40.5) (12.7) (50.7) Net decrease in cash and cash equivalents (46.6) (53.9) (15.9)Cash and cash equivalents at the beginning of theperiod 71.9 87.8 87.8Cash and cash equivalents at the end of the 25.3 33.9 71.9period Financial Statements Notes to the accounts for the 26 weeks ended 28 October 2006 1. General information RHM plc (the 'Company') is a company incorporated within the United Kingdomunder the Companies Act 1985. RHM plc and its subsidiaries (together the 'Group') operate in the food manufacturing and distribution industry, principally in the United Kingdom. 2. Basis of preparation and general accounting policies (a) These interim financial statements have been prepared in accordancewith the Listing Rules of the Financial Services Authority and accountingpolicies set out in the Group's 2006 Annual Report which are in accordance withInternational Financial Reporting Standards (IFRS), as adopted by the EU. Theaccounting policies detailed in Note 1 of the 2006 Annual Report are availableon the Group's website www.rhm.com. The Group has considered new standards andIFRICs applicable to the financial period and has determined that there is noimpact on the interim financial statements. The Group has chosen not to adopt IAS 34, 'Interim Financial Statements' inpreparing its 2007 interim report and therefore these interim financialstatements are not in full compliance with IFRS. The accompanying interimfinancial statements should be read in conjunction with the 2006 Annual Report. (b) These interim results are unaudited, but have been reviewed byGroup auditors and have been approved by the Board of Directors on 12 December2006. The consolidated interim financial statements do not constitute statutoryaccounts as defined by Section 240 of the Companies Act 1985. The results for the fifty-two weeks ended 29 April 2006 prepared on an IFRSbasis received an unqualified audit report from the auditors and did not containa statement under section 237 (2) or (3) of the Companies Act 1985. A copy ofthese accounts has been delivered to the Registrar of Companies. (c) Basis of Consolidation The consolidated financial information incorporates the financial information ofthe Company and the entities controlled by the Company (its subsidiaries).Control is achieved where the Company has the power to govern the financial andoperating policies of an investee entity so as to obtain benefits from itsactivities. On acquisition, the assets and liabilities and contingent liabilities of asubsidiary are measured at their fair values at the date of acquisition. Anyexcess of the cost of acquisition over the fair values of the identifiable netassets acquired is recognised as goodwill. Any deficiency of the cost ofacquisition below the fair values of the identifiable net assets acquired(discount on acquisition) is credited to income statement in the period ofacquisition. The interest of minority shareholders is stated at the minority'sproportion of the fair values of the assets and liabilities and contingentliabilities recognised. Subsequently, any losses applicable to the minorityinterest in excess of the minority interest are allocated against the interestsof the parent, unless the minority interests have an obligation to make goodthese losses. The results of subsidiaries acquired or disposed of during the period areincluded in the consolidated income statement from the effective date ofacquisition or up to the effective date of disposal, as appropriate. 2. Basis of preparation and general accounting policies (continued) Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring the accounting policies into line with those used by theGroup. All intra-group transactions, balances, income and expenses are eliminated onconsolidation (d) Foreign currencies Foreign currency transactions are translated into the functional currency usingthe exchange rates prevailing at the dates of the transactions. Foreign exchangegains and losses resulting from the settlement of such transactions and from thetranslation at period-end exchange rates of monetary assets and liabilitiesdenominated in foreign currencies are recognised in the income statement. (e) 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. 3. Refinancing (continued) 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 gave rise to a £75.2m charge to the income statementfor the period ended 29 April 2006, as the £80.8m cash costs were offset by therelease of a £5.6m liability already recognised as the fair value of theinterest rate swap. This liability arose from the recognition of the fair valueof the interest rate swap at 30 April 2005 as part of the IFRS transitionadjustment resulting from the adoption of IAS 32 and IAS 39 on financialinstruments. 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 ended 29 April 2006. The costs of the flotation in the period ended 29 April 2006 were £37.3m, ofwhich costs incurred in issuing the shares amounting to £25.5m were chargedagainst the share premium account. Costs of £8.3m incurred in raising the debtwere capitalised and set against the gross value of the debt. A further £3.5mof costs incurred as a result of the listing exercise, but not eligible to beset against the share premium, were reflected in restructuring costs, of which£1.1m was recognised in the period ended 30 April 2005, and £2.4m in the periodended 29 April 2006. 4. Segmental analysis For management reporting purposes, the Group is organised into four operatingdivisions - Bread Bakeries, Culinary Brands Division, Cakes and CustomerPartnerships. These four segments are the basis on which the Group reports itsprimary segment information. 26 weeks to 28 October 2006 (Unaudited) Bread Culinary Customer Bakeries Brands Cakes Partnerships Corporate Continuing Discontinued GroupRevenue £m £m £m £m £m £m £m £m Total sales 408.4 120.4 121.7 130.9 - 781.4 - 781.4Inter-segment sales (12.6) (3.5) (2.9) (5.2) - (24.2) - (24.2)Sales to third 395.8 116.9 118.8 125.7 - 757.2 - 757.2parties ResultOperating profit / 34.4 23.3 9.0 11.4 (7.0) 71.1 - 71.1(loss) beforerestructuring costsGain on sale of 1.9 - 0.1 - - 2.0 - 2.0propertiesOther restructuring (3.5) (3.0) (1.2) - (3.6) (11.3) - (11.3)costsOperating profit/ 32.8 20.3 7.9 11.4 (10.6) 61.8 - 61.8(loss)Finance costs (14.1)Profit before 47.7income taxationTax charge (13.8)Profit for the 33.9period 26 weeks to 29 October 2005 (Unaudited) Bread Culinary Customer Bakeries Brands Cakes Partnerships Corporate Continuing Discontinued GroupRevenue £m £m £m £m £m £m £m £m Total sales 398.0 126.4 111.0 126.9 - 762.3 - 762.3Inter-segment sales (12.2) (3.6) (3.0) (4.2) - (23.0) - (23.0)Sales to third 385.8 122.8 108.0 122.7 - 739.3 - 739.3parties ResultOperating profit / 34.7 31.1 1.0 10.5 (7.0) 70.3 - 70.3(loss) beforerestructuring costsGain on sale of - - - - - - 4.8 4.8subsidiariesOther restructuring (3.1) (2.6) (4.8) (0.1) (4.1) (14.7) - (14.7)costsOperating profit/ 31.6 28.5 (3.8) 10.4 (11.1) 55.6 4.8 60.4(loss)Finance costs (35.8) - (35.8)Refinancing costs (78.1) - (78.1)(Loss)/profit (58.3) 4.8 (53.5)before incometaxationTax credit 16.6 - 16.6(Loss)/profit for (41.7) 4.8 (36.9)the period 5. Restructuring costs 26 weeks to 28 26 weeks to 29 52 weeks to 29 October 2006 October 2005 April 2006 (Unaudited) (Unaudited) £m £m £m Gain on sale of properties 2.0 - 0.6Other restructuring costs: Flotation costs (see note 3) - (2.4) (2.4) Redundancy costs (5.1) (2.5) (9.8) Operational restructuring costs (5.8) (6.1) (16.7) Impairment of tangible fixed assets (0.4) (3.7) (4.6) (9.3) (14.7) (32.9) Redundancy and operational restructuring costs were incurred as a result of thecontinued implementation of a range of cost reduction initiatives. 6. Financing costs 26 weeks to 28 26 weeks to 29 52 weeks to 29 October 2006 October 2005 April 2006 (Unaudited) (Unaudited) £m £m £mInterest expense:- bank borrowings (21.4) (11.0) (32.7)- secured bond interest - (14.6) (14.6)- loan note interest - (10.4) (10.4)- finance lease interest expense (0.1) (0.2) (0.4)- amortisation of debt issuance costs (1.1) (0.4) (1.5)- other (0.2) (0.2) (0.5) (22.8) (36.8) (60.1)Interest receivable:- bank interest 0.2 0.4 0.6- fair value gains on financial instruments - 0.5 0.7 0.2 0.9 1.3 Other financing income:Pension financing income (see note 12) 8.5 0.1 3.6 8.5 0.1 3.6 Debt redemption costs (see note 3) - (75.2) (75.2)Accelerated amortisation of debt issuance costs - (2.9) (2.9) - (78.1) (78.1) (14.1) (113.9) (133.3) The pension finance credit attributable to the 26 weeks ended 28 October 2006arose from the unwinding of the discount rate of 5.2% on the total liabilitiesas at 29 April 2006 of £2,118.7m and the expected return of 6.5% on the totalassets as at 29 April 2006 of £1,956.2m. The closing assets included theinjection of £125m paid into the pension scheme in the prior year (see note 12). 6. Financing costs (continued) Accelerated amortisation of debt issuance costs is a one-off charge of £nil (26weeks to 29 October 2005: £2.9m) due to the capital restructuring undertaken inthe previous period (see note 3). Debt redemption costs related to early redemption of certain classes of securedloan notes and associated closing out of an interest rate swap (see note 3). 7. Taxation 26 weeks to 28 26 weeks to 29 52 weeks to 29 October 2006 October 2005 April 2006 (Unaudited) (Unaudited) £m £m £m UK corporation tax - - -Overseas tax 1.5 1.4 2.3Total current tax 1.5 1.4 2.3 Deferred tax 12.3 (18.0) (0.7) Total tax charge/(credit) 13.8 (16.6) 1.6 Continuing operations 13.8 (16.6) 1.6Discontinued operations - - - 13.8 (16.6) 1.6 The tax for the 26 weeks to 28 October 2006 is based on the anticipatedeffective rate for the period of 30.0% (26 weeks to 29 October 2005: 31.1%)applied to profit on ordinary activities before restructuring costs. Theresulting tax charge is then adjusted for the expected tax credits on deductiblerestructuring costs. 8. Discontinued operations 26 weeks to 28 26 weeks to 29 52 weeks to 29 October 2006 October 2005 April 2006 (Unaudited) (Unaudited) £m £m £m Profit on disposal of discontinued operations - 4.8 6.7Profit before tax - 4.8 6.7Attributable tax charge - - -Net profit attributable to discontinued - 4.8 6.7operations During the six months ended 29 October 2005, completion accounts for the GoldenWest Group, previously disposed of during the period ended 30 April 2005, werefinalised. These gave rise to an additional £1.1m proceeds, and the unresolvedliabilities were settled with a net release of provisions of £3.7m, giving totaladditional disposal profits of £4.8m. 9. Dividends 26 weeks to 28 26 weeks to 29 52 weeks to 29 October 2006 October 2005 April 2006 (Unaudited) (Unaudited) Amounts recognised as distributions to equityholders in the period:Dividends paid (£m) 36.8 - 18.4Dividends per share (pence) 10.6 - 5.3 The proposed £19.0m interim dividend for the 52 weeks ending 28 April 2007 of5.5p per share was approved by the board of directors on 3 December 2006 and assuch has not been included as a liability as at 28 October 2006. Theex-dividend date for the interim dividend is 20 December 2006, with payment on23 February 2007. 10. Earnings per share 26 weeks to 28 26 weeks to 29 52 weeks to October 2006 October 2005 29 April 2006 (Unaudited) (Unaudited) £m £m £m Profit/(loss) for the period from continuing 33.9 (41.7) 5.8operations Discontinued operations:Profit on sale of subsidiaries - 4.8 6.7Profit for the period from discontinued operations - 4.8 6.7 million million million Average shares used in Basic EPS calculation 346.8 267.5 307.2Dilutive share schemes and options 3.3 1.8 1.8Shares used in Diluted EPS calculation 350.1 269.3 309.0 pence pence penceBasic EPSContinuing 9.8 (15.6) 1.9Discontinued - 1.8 2.2 9.8 (13.8) 4.1 Diluted EPSContinuing 9.7 (15.5) 1.9Discontinued - 1.8 2.2 9.7 (13.7) 4.1 11. Net borrowings 26 weeks to 28 26 weeks to 29 52 weeks to 29 October 2006 October 2005 April 2006 (Unaudited) (Unaudited) £m £m £mDebt:Bank loans (744.3) (742.1) (743.2)Other loans (0.5) (0.6) (0.6)Obligations under finance leases (3.4) (4.5) (3.9)Total debt (748.2) (747.2) (747.7) Cash at bank 25.3 33.9 71.9 Net debt (722.9) (713.3) (675.8) Borrowings - fair value adjustments(1):Total debt (748.2) (747.2) (747.7)Interest accrual (17.2) (7.3) (16.8)Fair value of interest rate swaps 5.7 0.4 3.4Total borrowings per balance sheet (759.7) (754.1) (761.1) Capitalised fees (5.7) (7.9) (6.8)Total borrowings excluding capitalised fees (765.4) (762.0) (767.9) 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. 12. Pension obligations 26 weeks to 28 26 weeks to 29 52 weeks to 29 October 2006 October 2005 April 2006 (Unaudited) (Unaudited) £m £m £mChanges in the schemes' net deficit Deficit in schemes at the beginning of the period (162.5) (321.1) (321.1) Movement in the period:Current service cost - continuing operations (4.6) (7.4) (10.9)Increase in liabilities due to redundancy during the (0.5) (0.3) (1.5)periodOther financing income 8.5 0.1 3.6Employer contributions 19.8 16.4 31.2Special contribution following issue of shares - 110.0 126.7Contribution in respect of PPF levy 0.7 0.6 0.6Increase in liabilities due to revised mortality - (96.0) (96.0)assumptionsOther actuarial (loss)/gain (57.5) (16.4) 104.9 Deficit in schemes at the end of the period (196.1) (314.1) (162.5) The major assumptions used by the actuaries were:Long term rate of increase in pensionable salaries 3.1% 3.3% 3.0%Rate of increase in benefits in payment(1),(2) 3.4%/2.3% 3.3% 3.4%/2.3%Discount rate 5.1% 5.1% 5.2%Inflation assumption 3.1% 2.8% 3.0%Expected return on assets 6.5% 6.5% 6.5% 1) In respect of pensions earned between April 1997 and April 2005 whereincreases are linked to RPI with a 3 per cent minimum and 5% maximum andpensions earned after September 2005 where increases are also linked to RPI, butwith a maximum of 2.5%. Other levels of increase are largely fixed and arevalued accordingly. Deferred benefits are revalued in a similar way andconsistent assumptions are used. The assumptions are expressed as appropriatelyweighted averages. 2) The rate of increase in benefits in payment in the period ended 29 April 2006was 3.4 per cent. up to 1 September 2005 and 2.3 per cent. thereafter. On 18 August 2005 a special contribution of £110m was made to the UK schemefollowing the issue of shares and listing of the company on the London StockExchange, in accordance with an agreement with the scheme trustees. Under theterms of this agreement a further payment of £15m was paid on 24 March 2006. An actuarial review of the UK scheme was conducted by the actuary to the Trusteeas at 5 April 2005 to determine funding requirements for current service andrepayment of past service deficits. Using similar assumptions for mortality tothose used in this review gives rise to an increase in scheme liabilities of£96.0m. This increase, together with an associated increase in deferred taxassets of £28.8m, has been reflected as an actuarial loss within movements onreserves. 13. Reconciliation of movements in shareholders' equity 26 weeks to 28 October 2006 (Unaudited) Share Share Other Retained Total Minority Total Capital premium reserves earnings interest account £m £m £m £m £m £m £m At 29 April 2006 0.4 466.7 3.9 (340.2) 130.8 0.1 130.9 -Profit for the period - - - 33.9 33.9 - 33.9Dividends (see note 9) - - - (36.8) (36.8) - (36.8)Exchange differences - - (0.8) - (0.8) - (0.8)Actuarial loss - - - (40.2) (40.2) - (40.2)Purchase of own shares - - - (2.4) (2.4) - (2.4)Fair value gain on - - 1.2 (0.4) 0.8 - 0.8financial instrumentsShare based incentive plan - - 0.5 - 0.5 - 0.5At 28 October 2006 0.4 466.7 4.8 (386.1) 85.8 0.1 85.9 26 weeks to 29 October 2005 (Unaudited) Share Share Other Retained Total Minority Total Capital premium reserves earnings interest account £m £m £m £m £m £m £m At 30 April 2005 0.2 17.2 - (334.3) (316.9) 0.1 (316.8)IAS 32/39 restatement (see - - - (4.1) (4.1) - (4.1)note 15) 0.2 17.2 - (338.4) (321.0) 0.1 (320.9)Share issue (see note 3)* 0.2 475.0 - - 475.2 - 475.2Share issue costs (see note - (25.5) - - (25.5) - (25.5)3)Loss for the period - - - (36.9) (36.9) - (36.9)Exchange differences - - 0.2 - 0.2 - 0.2Pension mortality (see note - - - (67.2) (67.2) - (67.2)12)Actuarial loss - - - (11.5) (11.5) - (11.5)Purchase of own shares - - - (1.2) (1.2) - (1.2)Share based incentive plan - - 0.2 - 0.2 - 0.2At 29 October 2005 0.4 466.7 0.4 (455.2) 12.3 0.1 12.4 Other reserves comprises of the share-based incentive plan, hedge reserves andthe exchange reserve. * 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. Total shares of 348,227,273 are in issue as at 28 October 2006. 14. Reconciliation of cash flow from operating activities 26 weeks to 28 26 weeks to 29 52 weeks to 29 October 2006 October 2005 April 2006 (Unaudited) (Unaudited) £m £m £m Profit for the period 33.9 (36.9) 12.5 Adjustments for:Tax charge/(credit) 13.8 (16.6) 1.6Depreciation and impairment of property, plant and 24.0 29.1 52.9equipmentAmortisation of intangibles 0.7 0.7 1.4(Profit)/loss on disposal of property, plant and (1.2) 0.5 0.2equipmentProfit on disposal of subsidiaries - (4.8) (6.1)Net pension charge less contributions (14.8) (8.4) (18.8)Finance costs 14.1 113.9 133.3Other non-cash movements (0.5) 0.2 0.5Operating cash flow before working capital movements 70.0 77.7 177.5 Increase in inventories (21.4) (15.2) (0.8)Increase in trade and other receivables (28.0) (30.6) (11.6)Increase/(decrease) in trade and other payables 22.2 16.1 (12.2)Decrease in provisions for liabilities and charges (4.1) (10.9) (9.0) Cash generated from operations 38.7 37.1 143.9 Financial Statements Independent review report to RHM plc We have been instructed by the Group to review the financial information for the26 weeks ended 28 October 2006 which comprises the consolidated incomestatement, consolidated statement of recognised income and expenditure,consolidated balance sheet, consolidated cash flow statement and the relatednotes. We have read the other information contained in the interim report andconsidered whether it contains any apparent misstatements or materialinconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the directors. The Listing Rulesof the Financial Services Authority require that the accounting policies andpresentation applied to the interim figures should be consistent with thoseapplied in preparing the preceding annual accounts except where any changes, andthe reasons for them, are disclosed. This interim report has been prepared in accordance with the basis set out innote 2. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the disclosed accounting policies havebeen applied. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit and therefore provides a lower level of assurance.Accordingly we do not express an audit opinion on the financial information.This report, including the conclusion, has been prepared for and only for thecompany for the purpose of the Listing Rules of the Financial Services Authorityand for no other purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the 26 weeks ended28 October 2006. PricewaterhouseCoopers LLPChartered AccountantsLondon12 December 2006 The maintenance and integrity of RHM plc web site is the responsibility of thedirectors; the work carried out by the auditors does not involve considerationof these matters and, accordingly, the auditors accept no responsibility for anychanges that may have occurred to the interim report since it was initiallypresented on the web site. Legislation in the United Kingdom governing the preparation and dissemination offinancial information may differ from legislation in other jurisdictions. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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