FIF.L Regulatory News (FIF)

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 26 weeks ended 31 December 2016.

Summary

· Group revenue of £156.6m (H1 2015: £156.6m)

· Operating profit of £8.3m up 4.0% (H1 2015: £8.0m)

· Group operating profit margin of 5.3% (H1 2015: 5.1%)

· Profit before tax of £7.9m up 5.3% (H1 2015: £7.5m)

· Adjusted*1 diluted EPS, up 4.5% at 4.6p per share (H1 2015: 4.4p per share)

· Interim dividend per share increased 7.5% to 1.00p (H1 2015: 0.93p per share)

· Net debt of £21.0m equates to 0.8 (H1 2015: 0.9) times pro forma annualised EBITDA of the Group

Strategic highlights

· New artisan bread facility opened, baking for retail and foodservice customers.

· Continued investment in whole cake capacity and capability, plus new cupcake innovation.

· 6 out of 8 sites now supplying into the Foodservice channel providing a significantly broader speciality bakery range, from artisan and free from breads to snacking and sharing cakes.

Operational highlights

· Employee engagement programme commences following on from successful roll out of vision and values throughout the Group.

· Investment in exciting new cupcake capability to augment our licensed product range.

· Mary Berry cake license secured with a range of cakes launching in the second half.

· Winner of Celebration Cake Business of the year for 2016 at the Bakery Industry Awards.

· Winner of Quality Food Awards for a number of products.

*1 adjusted diluted EPS has been calculated using earnings excluding the impact of amortisation of intangibles and significant non-recurring and other items as shown on the face of the Statement of Comprehensive Income. The adjusted diluted EPS has been given as in the opinion of the Board this will allow shareholders to gain a clearer understanding of the trading performance of the Group.

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

"The latest set of results reflect a business that has transformed into a diverse, multi-channel speciality bakery group. We have delivered a strong first half performance and this demonstrates the benefits of the Group's investment and strategy implemented over prior years and reinforces our approach to innovation and diversification across our channels, customers and products. Our balance sheet remains solid, positioning the business well for future investment and the resulting benefits.

"Well documented market challenges persist, however the Group has prepared well and is continuing to work hard to mitigate against these. Furthermore, the Group's track record of exceptional growth and diversification over the prior years illustrates that it has the right strategy in place to continue to deliver growth and improved shareholder value over the coming years." 

STRATEGY

Our strategic objective is to create sustainable value for our shareholders, customers and other stakeholders, through our vision to build the leading speciality bakery group in the UK. We produce a broad range of high-quality bread, cake and bakery snacking products targeted at growing channels and market niches. These deliver growth and differentiation for our major customers and fulfil the needs of end consumers.

Our strategy to achieve our vision is as follows:

· Invest in our people and our manufacturing sites to form a strong foundation for us to deliver our strategy.

· Create innovative, high-quality bakery products that anticipate key market trends.

· Ensure customer and consumer needs are at the heart of our decision making.

· Develop a strong licensed brand portfolio to complement our core retailer brand relationships.

· Aim to succeed in both the retail grocery and out-of-home channels.

· Grow through a combination of organic growth and targeted acquisitions.

Our growth strategy will continue to be delivered through a combination of organic growth and targeted acquisitions. Future acquisitions will typically consolidate our market share in existing product areas or introduce further diversification into additional specialist product areas, customers and channels. The acquisitions of Fletchers Bakeries in October 2014 and Johnstone's Food Service in June 2015 reflects the Board's acquisition experience and capabilities.

Net debt of £21.0 million at half year, equating to 0.8 times annualised EBITDA, results in a healthy balance sheet and considerable scope to invest further, develop site capabilities and participate in industry consolidation and appropriate M&A.

Our core strategy is centred on generating returns for shareholders. Adjusted diluted earnings per share are up year on year at 4.6p per share.

A final dividend for the year to 2 July 2016 of 1.87p per share was paid on 16 December 2016 to shareholders on the register at the close of business on 18 November 2016. This brought the total dividend for the year to 2 July 2016 to 2.80p per share.

The Board of Directors is announcing an interim dividend for the year ending 1 July 2017 of 1.00p per share (H1 2015: 0.93p per share), an increase of 7.5%. This increase is in line with trading performance. The interim dividend will be paid on 21 April 2017 to shareholders on the register at the close of business on 31 March 2017. The election deadline for participants in the Company's Dividend Re-investment Plan will be 31 March 2017.

OUTLOOK

The Group has delivered a strong first half performance and the business is demonstrating the benefits of the investment and strategy implemented over prior years. Our balance sheet remains strong allowing us to continue to invest in our businesses in order to deliver our stated growth strategy. The broader channel, customer and product diversification achieved has created a solid platform for the business and will continue to benefit us given our access to higher growth opportunities such as the faster growing foodservice channel.

The UK grocery market continues to be challenging even though the wider economic environment is improving slowly. As previously noted, increasing commodity prices, the adverse impact on USD and Euro exchange rates and the National Living wage means the Group is working hard to mitigate input cost inflation through continued operational efficiency, investment in automation and, inevitably, price increases; all of which are ongoing.

Whilst we are cognisant of the price recovery process, we expect the Group's steady performance to continue into the second half of the financial year.

OPERATING REVIEW

UK Bakery

UK Bakery comprises the supply of cake, bread and morning goods in the Grocery and Foodservice channels. Revenue in the period has decreased by 2.9% to £139.0 million. Operating profit in the period has increased by 2.2% to £7.4 million.

The grocery cake and the bread and morning goods markets are both large mature markets. The grocery Cake market sees year on year volume decline of -4.8% and value decline of -1.5% (Source: IRI Infoscan for 26 weeks ending 31 December 2016) and the bread and morning goods grocery market sees year on year volume growth of +0.6% and value decline of -0.2% (source: Kantar Worldpanel bread and morning goods data 24 weeks ended w/e 01 January 2017). In Cake, Finsbury has followed the market. Celebration continues to perform but round cake has seen decline on the back of lower promotional activity, a common response to higher input prices. In bread our focus is on more niche style bakery products as opposed to traditional bread and therefore revenue exceeds market performance.

UK Bakery Operating profit margin has increased to 5.3% due to operational efficiencies within our factories and includes the benefit of significant capital expenditure over the last two years. The Group will continue to invest in automation and operational improvements to increase product capabilities and maintain margins.

Overseas

The Overseas business comprises Lightbody Europe which trades primarily in France. The business specialises in the import and sale of premium UK manufactured food products. It is an important channel into Europe for Group UK manufactured licensed celebration cake and bite products.

The business is heavily exposed to the Euro which has had a favourable impact on translation of Euro denominated sales and profit. In Euro terms the business has performed well too and we are pleased with the operating profit performance of Overseas business.

FINANCIAL REVIEW

Revenue and Operating Profit

Group revenue in H1 2016 was flat year on year at £156.6 million. Profit from operations before interest, tax and significant non-recurring and other items was up by 4.0% or £0.3 million to £8.3 million.

Interest Payable

Interest payable and charges on related interest rate swaps on the Group's bank debt in H1 2016 was £433,000 (H1 2015: £517,000), a decrease of £84,000. The decrease in charges is a consequence of the lower average debt balance over the period.

Taxation

The Group's effective tax rate in H1 2016 was 21.2%, which compares to 21.9% in H1 2015. The effective rates represent a blend of the UK and French corporation tax rates. The reduction in the effective rates when comparing half years arises from a 0.25% reduction in the annual hybrid UK corporation tax rates offset slightly by a higher proportion of profits charged at the higher French corporation tax rate.

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 up 4.5% to 4.6p, (H1 2015: 4.4p).

Cash flow and net debt

Cash inflow from operating profit before changes in working capital is £12.0 million, which compares with £11.6 million in H1 2015. The increase arises from the organic growth in profit. Net debt at 31 December 2016 is £21.0 million which compares to £21.1 million at H1 2015, flat year on year. Growth in working capital is £3.8m (H1 2015: +£3.8m) which is a cyclical trend driven primarily by higher stocks within our Bread Foodservice business. Capital expenditure of £5.3 million was incurred in H1 2016 which is £1.6 million higher than H1 2015.

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 £6,463,000 at 2 July 2016, the next valuation update will be carried out at 1 July 2017. Annual cash contributions (including the PPF levy) were £366,000 in the year to 31 December 2016.

Principal risks and uncertainties

A number of risks and uncertainties have been identified that could potentially have a material impact on the financial position of the Group. These are set out on page 13 of the Annual Report for the year to 2 July 2016 and the Board considers these remain applicable.

Commodity price inflation and the National Living Wage legislation presents a challenge that the Group is preparing for through a number of initiatives. Adjusting and mitigating the impact will take time and will require ever-greater focus on efficiency improvements and cost reduction programmes and, ultimately, price recovery.

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 the 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

This 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 2 July 2016 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 exceed current assets. Having reviewed the Group's short and medium term plans and available financial facilities, the Board has reasonable expectations that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group has stayed within its banking facilities during the year, meeting covenant requirements. The Group has the continued support of its banks with facilities of £50.9m. In addition, the Group has a strong asset backing and strong trade debtor book. Accordingly, the Board continues to adopt the going concern basis in preparing the Financial Statements.

2) 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 it is primarily responsible for the allocation of resources to segments and the assessment of performance by segment.

The Board uses adjusted operating profit, reviewed on a regular basis, as the key measure of the segments' performance. Operating profit in this instance is defined as profit before the following:

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 foodservice sectors. This segment primarily comprises the operations of Memory Lane Cakes Ltd, Lightbody Group Ltd, Campbells Cake Company Ltd, Johnstone's Food Service Ltd, Fletchers Bakeries Ltd 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 products 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 Group buyers, optimise the Group's procurement spend through leveraging its purchasing power.

This has resulted in Group Operations Segment showing a break even result for the current and prior half year periods.

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 and 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 and 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 and have been allocated to the reporting segments on an appropriate basis.

Impairment loss relates to the Anthony Alan Foods Ltd acquisition in 2007 which falls under UK Bakery segment.

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.

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 fair value is based on the best available estimate of the number of options expected to vest. The corresponding adjustment is made to reserves.

During the 26 weeks to 31 December 2016 1,462,095 options were granted (H1 2015: 1,624,126).

Administration costs include a charge in the first six months of £137,000 (H1 2015: £11,000) in relation to the fair value of share options.

6) FINANCE INCOME AND EXPENSES

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

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

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

£20.0 million for five years from 3 July 2017 at 0.455% maturing 3 July 2022

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 credit of £461,000 (H1 2015: credit £98,000).

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 of 126,874,000 (26 December 2015: 127,090,000).

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 31 December 2016 is 130,497,000 (26 December 2015: 132,285,000).

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.

The adjusted earnings per share exclude amounts shown under significant and non-recurring items in the Consolidated Statement of Comprehensive Income and exclude amortisation of intangibles.

8) ANALYSIS OF NET DEBT