Premier Foods Regulatory News (PFD)

16 May 2017

Premier Foods plc

Headlines

· Full year Group underlying sales (1.4%) lower; Q4 Group underlying sales down (1.0%)

· Market share growth in six of eight largest brands

· International sales increased +18%

· Underlying Trading profit £117.0m compared to £129.1m in FY15/16

· Adjusted profit before tax £74.2m; Statutory profit before tax £12.0m

· Net debt13 reduced to £523.2m from £534.2m

· Pensions combined surplus £104.8m; Net present value of deficit contribution schedule £300-£320m

Strategic update

· A balanced approach across revenue growth, cost efficiencies and cash generation

· UK to grow ahead of category levels through continued brand investment and innovation

· International business unit to continue delivering strong double-digit sales growth

· Exciting Cadbury and Nissin strategic partnerships significantly enhance growth ambitions

· Substantial cost savings programmes to deliver £20m benefits over next two years

· Extended revolving credit facility and launched offering of new £210m 5 year Senior Secured floating rate notes

· Significant focus on reducing Net debt/EBITDA7 ratio to below 3.0x in the next 3-4 years

"This financial year has been a challenging one for the industry, with the return of food inflation and changing retailer promotional strategies. Despite this, we have grown market share in six of our eight largest brands, outperformed many of our peers in the latter part of the year and accelerated International sales growth to 18%. We have continued to invest in brand innovation and marketing, our customer relationships remain strong and we recently agreed a £32m reduction in cash payments to our pension schemes over the next three years."

"With the industry changing rapidly, we have updated our strategy to give an equal focus to revenue growth, cost efficiencies and cash generation. In the UK, growing ahead of our categories continues to be a core objective for us and our plans for International are for further strong growth. We are excited by our global strategic relationships with Cadbury and Nissin and our recently announced cost savings programme is expected to deliver £20m over the next two years. We are focused on reducing our leverage ratio through profit improvement and debt reduction."

"This year has started on a solid footing; we are very pleased to announce an extension of our bank facilities and the proposed issue of a new bond. We plan to deliver progress in FY17/18, while noting this progress is expected to be weighted more to the second half of the year."

Non-GAAP measures above are defined in the appendices and reconciled to statutory measures throughout

Net debt/EBITDA is EBITDA on an adjusted basis as defined in the appendices

A presentation to investors and analysts will take place today, 16 May 2017, at 9:00am BST. The presentation will be webcast at www.premierfoods.co.uk/investors/investor-centre. A recording of the webcast will be available on the Company's website later in the day.

A conference call for bond investors and analysts will take place today, 16 May 2017, at 1:30pm BST. Dial in details are outlined below:

A factsheet of the Preliminary results is available at:

www.premierfoods.co.uk/investors/results-centre 

A Premier Foods image gallery is available using the following link:

www.premierfoods.co.uk/media/image-gallery/

For further information, please contact:

- Ends -

THIS ANNOUNCEMENT IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE A PROSPECTUS OR ANY OFFER OF SECURITIES FOR SALE OR A SOLICITATION OF AN OFFER TO PURCHASE ANY SECURITIES IN THE UNITED STATES (AS DEFINED IN THE U.S. SECURITIES ACT OF 1933, AS AMENDED (the "SECURITIES ACT")), OR IN ANY OTHER JURISDICTION.

Any securities referred to in this announcement have not been and will not be registered under the Securities Act, or with any securities regulatory authority of any state or other jurisdiction of the United States, and may not be offered, sold, resold, pledged, taken up, delivered, distributed or transferred, directly or indirectly, into or within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States. No public offering of any securities is being made in the United States.

This announcement may contain "forward-looking statements" that are based on estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements are all statements other than statements of historical fact or statements in the present tense, and can be identified by words such as "targets", "aims", "aspires", "assumes", "believes", "estimates", "anticipates", "expects", "intends", "hopes", "may", "would", "should", "could", "will", "plans", "predicts" and "potential", as well as the negatives of these terms and other words of similar meaning. Any forward-looking statements in this announcement are made based upon Premier Foods' estimates, expectations and beliefs concerning future events affecting the Group and subject to a number of known and unknown risks and uncertainties. Such forward-looking statements are based on numerous assumptions regarding the Premier Foods Group's present and future business strategies and the environment in which it will operate, which may prove not to be accurate. Premier Foods cautions that these forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in these forward-looking statements. Undue reliance should, therefore, not be placed on such forward-looking statements. Any forward-looking statements contained in this announcement apply only as at the date of this announcement and are not intended to give any assurance as to future results. Premier Foods will update this announcement as required by applicable law, including the Prospectus Rules, the Listing Rules, the Disclosure and Transparency Rules, London Stock Exchange and any other applicable law or regulations, but otherwise expressly disclaims any obligation or undertaking to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Recent developments in the external environment have adversely affected the Group's performance. As a result, the Board has reviewed its strategy and decided to adjust the balance of priorities between existing strategic objectives. Previously this balance was weighted towards delivering category (and hence sales) growth. Going forward the Board will pursue a strategy which is more evenly balanced between the three objectives of delivering sales growth, achieving cost and efficiency savings and reducing net debt. The following summary outlines this balanced approach:

1. Protect and drive revenues

(a) UK

(i) Continuing to invest in innovation and marketing to drive growth ahead of category levels, using the Group's UK focused consumer insights, launching relevant and innovative products to market.

(ii) Continue to build on the Group's strong customer relationships through collaboration, category management expertise and UK based shopper insights.

(b) International

Deliver double-digit sales growth in the medium term, building on strong progress in key geographies such as Australasia and the USA and extending more widely to the Middle East, Canada and South Africa.

(c) Strategic partnerships

The Group has recently signed non-binding Heads of Terms to be a Strategic Global Partner with Mondelez International for Cadbury cake. Once finalised, this agreement will extend the Group's long standing partnership for another five years with the option to the Group of extending this for an additional three years. Additionally, the licence will cover a total of 46 countries with the potential to use the full list of brands in the Cadbury family including Flake, Caramel, Crunchie and Marvellous Creations in addition to the Oreo brand.

Nissin Foods ("Nissin"), the Group's largest shareholder and one of the global leaders in the instant Noodles market provides the Group with access to significant knowledge and expertise in food technology. Nissin has a global presence in many markets which the Group expects to access in fulfilling its international ambitions.

2. Cost and efficiency

The Group will increase its focus on cost and efficiency programmes, and expects to deliver aggregate cost efficiency savings of £20m over the next two years.

(a) Logistics restructuring

The Group is establishing a centralised warehousing and distribution operation, combining previously separate Grocery and Sweet Treats logistics operations. The benefits of this restructuring are expected to significantly reduce annual transport miles and pallet transfers.

(b) SG&A restructuring

The Group has reviewed its SG&A overhead cost base and decided to reduce its Executive leadership team from ten to seven and also reduce the number of roles at its head office by over 50. This aims to reduce duplication and complexity in some functional areas.

(c) Manufacturing and procurement

Continuous improvement programmes in manufacturing consist of both capital and non-capital cost reduction projects with objectives including improving manufacturing line efficiencies and reducing process loss.

3. Cash generation

(a) Lower pension cash payments

In March 2017, the Group announced it had agreed with the Trustees of the Group pension schemes a reduction of £32m in payments to the schemes over the next three years.

(b) Maintain diversified sources of financing

Extended maturity of the Group's revolving credit facilities and new issuance of 5 year Senior Secured Floating rate notes to 2022

(c) Tightly focused capital expenditure

The Group plans to maintain a tight focus on capital expenditure in the range of £20-£25m over the medium term. The capital projects it invests in are expected to be split in broadly equal parts between growth, cost reduction and infrastructure & maintenance.

4. Leverage target

Combining all three strategic pillars outlined above, the Group aims to lower its Net debt / EBITDA ratio to below 3.0x in the next 3-4 years.

Sales

Note: FY15/16 statutory revenue excludes Knighton Foods revenue of £29.6m. Knighton is consolidated in the results for the Grocery business in FY16/17.

Group underlying sales for the 52 weeks ended 1 April 2017 were £790.4m, a decrease of (1.4%) on the prior year. Branded sales were (3.5%) lower in the year while Non-branded underlying sales increased by 11.1% to £130.9m.

On a statutory basis, revenue grew from £771.7m in the year to £790.4m, an increase of 2.4%, reflecting the inclusion of results from Knighton Foods in FY16/17.

In the fourth quarter of the year, Group underlying sales declined by (1.0%) to £191.0m compared to the equivalent quarter a year ago. While Branded sales were (2.9%) lower, six of the Group's eight largest brands gained value market share in the quarter, with Batchelors a particularly strong performer.

The Grocery business unit reported full year underlying sales of £563.1m, which were (2.6%) lower than a year ago. The year started strongly, with the first quarter of the year displaying both Branded and Non-branded sales growth, however a particularly warm end to the second quarter in the UK resulted in a sharp slowdown in some of the key Grocery categories such as gravy, stocks and soups, which resulted in lower sales.

Additionally, the Grocery business has been impacted by changing retailer promotional strategies during the course of the year, and particularly in the second half. A variety of different promotional deals for products sold in major retailers have long been a feature of the grocery landscape in the UK. In FY16/17, the number of multi-buy promotional deals, by aggregate sales value, reduced by 24% across the Group's categories, according to Kantar Worldpanel. In categories which are considered to be expandable, this has resulted in lower sales volumes compared to the comparative period. The Group expects this effect to continue into the first half of FY17/18, and then stabilise thereafter. The Group is introducing multipack formats such as Ambrosia custard 4-packs to mitigate the adverse effect of this change in retailer promotional strategies.

The Group's strategy of bringing new innovative products to market continued during the course of the year, with Oxo Stock Pots, Ambrosia Deluxe custard and Batchelors Super Noodles in a pot format all contributing to market share gains for their respective brands. In particular, Batchelors delivered volume growth in the year due to both the Super Noodles pot product launched in the fourth quarter and a refreshed range of Pasta 'n' Sauce products with new contemporary flavours such as Smoky Cheese and Pancetta.

The Batchelors Super Noodles Pot product, which launched to market earlier than expected, was the first product which demonstrates the benefits of working closely with the Group's strategic partner and major shareholder, Nissin. Specifically, the access to Nissin's research & development teams and their manufacturing base in Hungary was pivotal in launching this exciting, convenient new product which has already delivered over £1m retail sales value in a short period of time.

Grocery Non-branded underlying sales increased by £7.8m in the year to £81.1m. Business to business sales performance at Knighton Foods was a key contributor to this growth, with volumes increasing as this business transitioned through its recovery phase.

Sweet Treats delivered sales growth of 1.9% in the year to £227.3m, and grew sales in the first three quarters of the year. Branded sales were £1.0m or (0.5%) lower at £177.5m and Non-branded sales grew by 11.6% to £49.8m. Cadbury cake performed very strongly in the year, with volumes, sales and market share all ahead of the prior year, while Mr Kipling experienced lower sales due to lower levels of promotional activity. Cadbury Amaze Bites, a convenient tub of bite sized chocolate brownies, is now worth approximately £5m in terms of retail sales value (Source: IRI, 31 December 2016).

Growth in Sweet Treats Non-branded sales reflected new contract wins across a broad range of retail customers and in both seasonal and all year round ranges. In particular, the business unit was successful in gaining some premium Mince Pie contracts for the first time.

The Group's International business unit continues to demonstrate excellent progress and has now delivered ten successive quarters of sales growth. In the year, sales were 18% ahead and up 11% on a constant currency basis12. This was largely due to a very strong performance in Australasia where sales increased nearly 70% reflecting growth in Sharwood's cooking sauces and Mr Kipling and Cadbury cakes. The Group launched a digital marketing campaign for Sharwood's cooking sauces in Australia during the year which has received over 21 million impressions and over 1 million video views to date.

Underlying Trading profit

The Group's underlying Trading profit in FY16/17 was £117.0m compared to £129.1m in the prior year. Divisional contribution was £149.7m in the year, of which £129.9m was generated from the Grocery business and £19.8m from Sweet Treats.

Group & corporate costs were £3.4m lower in the year. Following a weaker trading performance by the Group during the year, no provisions were made for management incentive scheme payments to colleagues.

The decline in Underlying Trading profit performance was impacted by a time lag in recovering input cost inflation; the impact of changing retailer promotional strategies and category declines in the Grocery business following a warmer than usual second quarter. Partly offsetting these impacts were SG&A savings, manufacturing cost efficiencies and slightly lower marketing investment in the year.

The Group has experienced material input cost inflation in the past year, notably in commodities such as sugar, chocolate, dairy, wheat and palm oil. Input costs have also been driven up by currency devaluation. The Group takes a blended approach to managing these cost increases, managing its own efficiencies, adjusting promotional mechanics and formats where appropriate and finally looking at limited price increases where these cannot be avoided. The Group has worked collaboratively with customers to agree these changes and appropriate settlements were concluded. This collaborative approach, while the most beneficial approach in the long term, took longer than originally foreseen.

During the course of the year, and particularly in the second half, the Group's Grocery categories have been affected by changing retailer promotional strategies, notably a reduction in multi-buy promotions which has the effect of reducing category volumes. In the short term the Group offset this adverse volume impact by upweighting other promotional mechanics such as reduced price deals. However, these mechanics are more costly than multi-buys and resulted in reduced sales per unit.

In the second quarter of the year, a number of the Grocery business's categories were adversely impacted by warmer weather compared to the prior year. In this quarter, categories such as Gravy and Stocks and Soup declined in volume terms by (13.0%) and (16.3%) respectively, while Chilled Salads and Ice Cream, which the Group has no major presence in, grew by 13.7% and 17.3% respectively (Source: IRI, 12 weeks ended 24 September 2016). As a result, and after a strong first quarter when six Grocery brands grew sales, none of the major Grocery brands grew in the second quarter.

Manufacturing overhead costs were lower in the year following the completion of a programme to improve labour flexibility at some of the Group's Grocery manufacturing sites.

During the year, the Group announced a substantial two year cost reduction and efficiency programme. One part of this programme is a significant logistics restructuring which will combine the warehousing and distribution operations of both the Grocery and Sweet Treats businesses into one centralised location. This programme is expected to reduce transport miles by 15% and reduce pallet transfers by 43,000 per annum.

Additionally, the Group has concluded a process which will deliver significant cost savings across its SG&A cost base and has involved its Group Executive team reducing from ten to seven and over 50 roles removed from the Group's head office. This programme is expected to deliver incremental cost savings of £10m, of which approximately 60% relate directly to colleague headcount. The total cash restructuring costs associated with the logistics and SG&A programmes are expected to be £8-£10m in FY17/18.

Operating profit

Underlying adjusted EBITDA for FY16/17 was £133.2m and depreciation in the year of £16.2m was £1.2m lower than the comparative period.

Operating profit was £61.5m in the year, an increase of £7.0m on the prior year. Amortisation of intangible assets was broadly in line with the comparative year at £37.9m. Intangible assets amortisation included £25.7m relating to brands, trademarks and licences and £12.2m relating to software. Restructuring costs in the year were £15.8m, £4.6m higher than FY15/16, and which relate to corporate activity costs in April 2016 and restructuring charges associated with the Group's logistics restructuring and overhead cost reduction programmes.

Net interest on pensions and administrative expenses were £0.8m in the year, a £13.7m reduction compared to the prior year. This was composed of administrative expenses incurred of £6.3m, partly offset by a net interest credit of £5.6m owing to an opening combined pension schemes surplus. In the prior year an impairment charge of £13.6m due to the write down of associate investments was reported; there were no impairments in FY16/17.

Finance costs

Net regular interest for FY16/17 was £42.8m, a little ahead of the Group's expectations and £2.1m lower than the prior year. The largest component of net regular interest was £30.6m of interest due to holders of the Group's senior secured notes. Bank debt interest of £8.1m was £1.6m lower in the year due to lower levels of average debt and slightly lower LIBOR levels.

Net finance cost was £49.5m in the year, £4.6m higher than FY15/16. The main driver of the change was a decrease in the discount rate used to value long term property provisions the Group holds, which is disclosed in Other interest, and increased from £0.3m in FY15/16 to £7.2m in the year. This increase in the discount unwind, which has no cash effect, is a result of changes in gilt yields over the last twelve months.

Associate investments

The Group holds a 49% interest in Hovis Limited ("Hovis"). In the prior year, the Group wrote down its investment in Hovis to £nil. On 1 April 2016, the Group gained control (as defined under IFRS 10) of Knighton, in which the Group already held 49% of the ordinary share capital and associated voting rights, and hence the results of Knighton were consolidated in the Group's financial statements for the period ended 2 April 2016. On 24 May 2016, the Group acquired the remaining 51% of the ordinary share capital of Knighton.

Taxation

A tax charge of £6.5m in the year compared to a £47.0m credit in the prior period. The £6.5m charge included a current period charge of £6.4m, an adjustment to restate opening deferred tax of £1.2m, partly offset by a prior period credit of £1.1m. The current period charge included a tax charge at 20.0% on profit before tax of £2.4m, non-deductible items of £1.0m, an adjustment for share based payments of £0.9m and a credit due to a current period deferred tax adjustment of £0.3m.

Deferred tax assets at 1 April 2017 were £32.4m compared to £25.9m at 2 April 2016.

Earnings per share

Profit before tax was £12.0m in the year, compared to a loss before tax in the comparative period of £13.0m. After a taxation charge of £6.5m in FY16/17, Profit after taxation was £5.5m, which resulted in basic earnings per share of 0.7 pence.

Adjusted profit before tax was £74.2m in the year, compared to £84.2m in FY15/16. This reflects the Underlying Trading profit performance in the year, partly offset by a lower net regular interest charge compared to the prior year. Adjusted profit after tax was £59.4m after deducting a notional 20.0% tax charge, a decrease of £8.0m compared to the prior year. Based on average shares in issue of 830.1 million shares, adjusted earnings per share in the year was 7.2 pence, a 0.9 pence reduction on FY15/16.

Free cash flow

Free cash flow in the year was an inflow of £15.1m. Depreciation, at £16.2m, was £1.2m lower than the prior year, and non-cash items of £4.3m principally comprised the addition of share based payments. Interest paid in the year was £39.8m; £1.9m lower than the comparative period due to lower average levels of debt. Capital expenditure was £4.5m lower at £20.9m and pension contributions (including pension administration costs) increased from £12.9m to £51.7m. An inflow of £4.8m from working capital was reported and restructuring costs increased from £7.5m to £13.7m. This was due to cash costs associated with corporate activity in April 2016 and redundancy costs relating to the cost reduction and efficiency programmes, the majority of which were incurred in the first half of the year.

On a statutory basis, cash generated from operations was £76.8m compared to £137.1m in the comparative period. This was largely due to increased pension deficit contributions, as identified in the table above, and lower Operating profit before (non-cash) impairment charges. Cash generated from operating activities was £37.0m, after deducting net interest paid of £39.8m. Repayment of borrowings was £34.6m in the year, £33.0m of which related to lower drawings against the Group's revolving credit facility.

At 1 April 2017, the Group held cash and bank deposits of £3.1m and bank overdrafts of £21.2m.

Net debt and sources of finance

Net debt at 1 April 2017 was £523.2m; an £11.0m reduction in Net debt compared to the prior year. The movement in debt issuance costs was £4.1m.

The Group has extended the term of its revolving credit facility with its lending syndicate from March 2019 to December 2020. The £272m facility, which was £22m drawn at 1 April 2017, is expected to reduce by £55m to £217m, subject to the issue of new £210m Senior Secured floating rate notes outlined below. The facility will further reduce to approximately £184m in March 2019. The interest margin under the revolving credit facility is unchanged and covenants under the facility, which are tested bi-annually, have been updated to ensure appropriate headroom against future reporting periods.

The Group has also announced the proposed issue of new five year £210m Senior Secured floating rate notes due 2022, to replace its £175m Senior Secured floating rate notes, due to mature March 2020, and to make a prepayment under the revolving credit facility. Pricing of the new £210m Senior Secured floating rate notes is to be confirmed and the notes are expected to be callable at 101% after one year. The Group's £325m Senior Secured fixed notes which attract a coupon of 6.5%, mature in March 2021, and there are no immediate plans to call or refinance these notes.

Pensions

The IAS 19 pension schemes valuation reported a surplus for the combined RHM and Premier Foods' pension schemes at 1 April 2017 of £104.8m, equivalent to £87.0m net of a deferred tax charge of 17.0%. This compares to a combined RHM and Premier Foods' schemes surplus at 2 April 2016 of £130.9m and £107.3m net of deferred tax. A deferred tax rate of 17.0% (18.0%) is deducted from the IAS19 retirement benefit valuation of the Group's schemes to reflect the fact that pension deficit contributions made to the Group's pension schemes are allowable for tax.

The valuation at 1 April 2017 comprised a £593.9m surplus in respect of the RHM schemes and a deficit of £489.1m in relation to the Premier Foods schemes. Assets in the combined schemes increased by £521.7m in the year from £4,342.9m to £4,864.6m. RHM scheme assets increased by £432.2m mainly due to an increase in interest rate swaps and equities, while the Premier Foods' schemes assets increased by £89.5m. The increase in asset movements in the year have been offset by an increase in the combined schemes liabilities of £547.8m. This is principally due to a reduction in the discount rate from 3.55% at 2 April 2016 to 2.65% at 1 April 2017.

The Accounting Standards Board under IFRIC 14, are currently reviewing the recognition of a pensions surplus in the financial statements of an entity. Dependent upon the final published standard, there is potential that any future defined benefit surplus may not be recognised in the financial statements of the Group and additionally, the deficit valuation methodology may also change.

During the year, the Group finalised the 2016 combined pension schemes' triennial actuarial valuation, displayed in the table below, which confirms a combined schemes' deficit of £421m. This is a £641m reduction compared to the previous triennial valuation in 2013.

On 28 March 2017, and following the finalisation of the triennial actuarial valuation, the Group announced it had agreed a revised schedule of pension payments with the Trustees of the pension schemes. Overall, the total cash payments for the three financial years from FY17/18 to FY19/20, to the RHM and Premier Foods Pension Schemes will be approximately £32m lower than outlined in our Interim Results on 15 November 2016. A full schedule of the scheduled payments for the next six financial years are set out in the table below.

As part of these overall reductions, the Group has also agreed with the Premier Foods schemes a mechanism (including limited changes to the existing dividend matching agreement) to allow the schemes limited further cash contributions in the event the Group outperforms certain agreed profit targets. These targets are materially ahead of current market expectations for the Group.

The net present value of future deficit payments, to the end of the respective recovery periods remains at c.£300-320m.

1 - Assumes mid-point of respective administration cost ranges

The industry in which the Group operates has undergone recent and rapid change. Reflecting these changes, the Board has updated the Group's strategy to give an equal focus to revenue growth, cost efficiencies and cash generation. In the UK, growing ahead of its categories continues to be a core objective for the Group and its plans for International are for further strong double-digit growth. The global strategic relationships presented by the Cadbury and Nissin partnerships are exciting and the recently announced cost savings programme is expected to deliver £20m over the next two years. The Group is focused on reducing its leverage ratio to below 3.0x in the next 3-4 years through profit improvement and debt reduction.

The FY17/18 financial year has started on a solid footing. The Group expects the effect of changing retailer promotional strategies to reduce through the first half of the year and then stabilise thereafter. Accordingly, quarter 2 sales are expected to deliver an improved year on year sales trend relative to quarter 1. In the full year, the Group plans to deliver progress which is expected to be weighted more to the second half.

Alastair Murray

Chief Financial Officer

The Company's results are presented for the 52 weeks ended 1 April 2017 and the comparative period, 52 weeks ended 2 April 2016. All references to the 'year', unless otherwise stated, are for the 52 weeks ended 1 April 2017 and the comparative period, 52 weeks ended 2 April 2016. All references to the 'quarter', unless otherwise stated, are for the 13 weeks ended 1 April 2017 and the comparative period, 13 weeks ended 2 April 2016.

The Company uses a number of non-GAAP measures to measure and assess the financial performance of the business. The Directors believe that these non-GAAP measures assist in providing additional useful information on the underlying trends, performance and position of the Group. These non-GAAP measures are used by the Group for reporting and planning purposes and it considers them to be helpful indicators for investors to assist them in assessing the strategic progress of the Group.

1. Underlying results are defined as continuing operations excluding the results of previously disposed businesses and includes results of acquired businesses in comparative reporting periods.

2. Trading profit is defined as profit/(loss) before tax before net finance costs, profits and losses from share of associates, amortisation of intangible assets, impairment, fair value movements on foreign exchange and other derivative contracts, restructuring costs, and net interest on pensions and administration expenses.

3. Underlying Sales is revenue excluding the results of previously disposed businesses and includes results of acquired businesses in comparative reporting periods.

4. Underlying Trading profit is Trading profit as defined in (2) above and excludes the results of previously disposed businesses and includes results of acquired businesses in comparative reporting periods.

5. Divisional contribution refers to Gross Profit less selling, distribution and marketing expenses directly attributable to the relevant business unit.

6. Underlying Divisional contribution is Divisional contribution as defined in (5) above and excludes the results of previously disposed businesses and includes results of acquired businesses in comparative reporting periods.

7. Adjusted EBITDA is Trading profit as defined in (2) above excluding depreciation.

8. Underlying adjusted EBITDA is adjusted EBITDA defined in (7) above and excludes the results of previously disposed businesses and includes results of acquired businesses in comparative reporting periods.

9. Adjusted profit before tax is Underlying Trading profit as defined in (4) above less net regular interest.

10. Net regular interest is defined as net finance cost after excluding write-off of financing costs, fair value movements on interest rate financial instruments and other interest.

11. Adjusted earnings per share is Adjusted profit before tax as defined in (9) above less a notional tax charge of 20.0% (2015/16: 20.0%) divided by the weighted average of the number of shares of 830.1million (52 weeks ended 2 April 2016: 826.0million).

12. Constant currency sales are referred to with reference to the International business unit and remove the impact of foreign currency fluctuations when comparing sales between two reporting periods.

13. Net debt is defined as total borrowings, less cash and cash equivalents and less capitalised debt issuance costs.

14. Free cash flow is defined as the change in Net debt as defined in (13) above before the movement in debt issuance costs.

Continuing operations Trading profit of £128.8m in FY15/16 above includes £2.2m of non-cash costs predominantly relating to the write off of legacy fixed assets in the year and is excluded from 'Underlying' Trading profit.

· Group & corporate costs refer to group and corporate expenses which are not directly attributable to a business unit and are reported at total Group level.

· The International business unit is currently too small for separate disclosure and in line with accounting standards is aggregated within the Grocery business unit for reporting purposes.

Premier Foods plc

Notes to the financial statements

1. General information

The financial information included in this preliminary announcement does not constitute the Company's statutory accounts for the periods ended 1 April 2017 and 2 April 2016 but is derived from those accounts. Statutory accounts for the period ended 2 April 2016 have been delivered to the registrar of companies, and those for the period ended 1 April 2017 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union (EU) ("adopted IFRS") in response to IAS regulation (EC1606/2002), related interpretations and the Companies Act 2006 applicable to companies reporting under IFRS, and on the historical cost basis, with the exception of derivative financial instruments which are incorporated using fair value.

Basis for preparation of financial statements on a going concern basis

The Group's revolving credit facility includes net debt/EBITDA and EBITDA/interest covenants. In the event these covenants are not met then the Group would be in breach of its financing agreement and, as would be the case in any covenant breach, the banking syndicate could withdraw funding to the Group. The Group was in compliance with its covenant tests as at 1 October 2016 and 1 April 2017. The Group's forecasts, taking into account reasonably possible changes in trading performance, show that the Group expects to be able to operate within the level of its current facilities including covenant tests. Notwithstanding the net current liabilities position of the Group, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the next 12 months. The Group therefore continues to adopt the going concern basis in preparing its consolidated financial statements.

2. Critical accounting policies, estimates and judgements

The following are areas of particular significance to the Group's financial statements and include the use of estimates and the application of judgement, which is fundamental to the compilation of a set of financial statements. Results may differ from actual amounts.

2.1 Employee benefits

The present value of the Group's defined benefit pension obligations depends on a number of actuarial assumptions. The primary assumptions used include the discount rate applicable to scheme liabilities, the long-term rate of inflation and estimates of the mortality applicable to scheme members.

At each reporting date, and on a continuous basis, the Group reviews the macro-economic, Company and scheme specific factors influencing each of these assumptions, using professional advice, in order to record the Group's ongoing commitment and obligation to defined benefit schemes in accordance with IAS 19 (Revised). Key assumptions used are mortality rates, discount rates and inflation set with reference to bond yields. Each of the underlying assumptions is set out in more detail in note 10.

Plan assets of the defined benefit schemes include a number of assets for which quoted prices are not available. At each reporting date, the group determines the fair value of these assets with reference to most recently available asset statements from fund managers.

To the extent a surplus arises under IAS 19, the Group ensures that it can recognise the associated asset in line with IFRIC 14.

2.2 Goodwill and other intangible assets

Impairment reviews in respect of goodwill are performed annually unless an event indicates that an impairment review is necessary. Impairment reviews in respect of intangible assets are performed when an event indicates that an impairment review is necessary. Examples of such triggering events include a significant planned restructuring, a major change in market conditions or technology, expectations of future operating losses, or a significant reduction in cash flows. In performing its impairment analysis, the Group takes into consideration these indicators including the difference between its market capitalisation and net assets.

The Group reviews its identified Cash Generating Units ("CGUs") for the purposes of testing goodwill on an annual basis, taking into consideration whether assets generate independent cash inflows. The recoverable amounts of CGUs are determined based on the higher of net realisable value and value in use calculations. These calculations require the use of estimates.

The Group has considered the impact of the assumptions used on the calculations and has conducted sensitivity analysis on the value in use calculations of the CGUs carrying values for the purposes of testing goodwill.

Acquired brands, trademarks and licences are considered to have finite lives that range from 20 to 40 years for brands and trademarks and 10 years for licences. The determination of the useful lives takes into account certain quantitative factors such as sales expectations and growth prospects, and also many qualitative factors such as history and heritage, and market positioning, hence the determination of useful lives are subject to estimates and judgement. The brands, trademarks and licences are deemed to be individual CGUs.

2.3 Advertising and promotion costs

Sales rebates and discounts are accrued on each relevant promotion or customer agreement and are charged to the statement of profit or loss at the time of the relevant promotional buy-in as a deduction from revenue. Accruals for each individual promotion or rebate arrangement are based on the type and length of promotion and nature of customer agreement. At the time an accrual is made the nature and timing of the promotion is typically known. Areas of estimation are sales volume/activity, phasing and the amount of product sold on promotion.

For short term promotions, the Group performs a true up of estimates where necessary on a monthly basis, using real time sales information where possible and finally on receipt of a customer claim which typically follows 1-2 months after the end of a promotion. For longer term discounts and rebates the Group uses actual and forecast sales to estimate the level of rebate. These accruals are updated monthly based on latest actual and forecast sales.

Expenditure on advertising is charged to the statement of profit or loss when incurred, except in the case of airtime costs when a particular campaign is used more than once. In this case they are charged in line with the airtime profile.

2.4 Deferred tax assets

When assessing whether the recognition of a deferred tax asset can be justified, and if so at what level, the directors take into account the following:

- Historic business performance

- Projected profits or losses included in the latest board approved forecast and other relevant information that allow profits chargeable to corporation tax to be derived

- The total level of recognised and unrecognised losses that can be used to reduce future forecast taxable profits

- The period over which there is sufficient certainty that profits can be made that would support the recognition of an asset

Further disclosures of the amounts recognised (and unrecognised) are contained within note 5.

3. Segmental analysis

IFRS 8 requires operating segments to be determined based on the Group's internal reporting to the Chief Operating Decision Maker ("CODM"). The CODM has been determined to be the Executive Leadership Team as it is primarily responsible for the allocation of resources to segments and the assessment of performance of the segments.

The Group's operating segments are defined as "Grocery", "Sweet Treats", "International" and "Knighton". The Grocery segment primarily sells savoury ambient food products and the Sweet Treats segment sells sweet ambient food products. The International and Knighton segments have been aggregated within the Grocery segment for reporting purposes as revenue is below 10 percent of the Group's total revenue and the segments are considered to have similar characteristics to that of Grocery. This is in accordance with the criteria set out in IFRS 8.

The CODM uses Divisional contribution as the key measure of the segments' results. Divisional contribution is defined as gross profit after selling, marketing and distribution costs. Divisional contribution is a consistent measure within the Group and reflects the segments' underlying trading performance for the period under evaluation.

The Group uses trading profit to review overall group profitability. Trading profit is defined as profit/loss before tax before net finance costs, amortisation of intangible assets, impairment, fair value movements on foreign exchange and other derivative contracts, restructuring costs, profits and losses associated with divestment activity and net interest on pensions and administrative costs.

The segment results for the period ended 1 April 2017 and for the period ended 2 April 2016 and the reconciliation of the segment measures to the respective statutory items included in the consolidated financial statements are as follows: