Premier Foods Regulatory News (PFD)

17 May 2016

Premier Foods plc

Quarter 4 and Full Year sales trajectory provides strong platform to accelerate growth

· Full Year Group sales +0.6%; Branded sales flat

· Q4 Group sales up +1.4%; Branded sales up +1.0%

· Trading profit3 £131.0m, in line with last year

· Adjusted profit before tax5 increased +£2.9m to £86.1m

· Adjusted earnings per share5 increased +4.6% to 8.3 pence

· Net debt reduced to £534.2m from £584.9m - includes consolidation of Knighton

· Improved overall IAS 19 pension schemes position

· FY16/17 sales growth guidance raised to 2-4%

Premier Foods today announces its Preliminary results for the 52 weeks ended 2 April 2016.

"We are very pleased to report sales growth both in the year and the fourth quarter in what continues to be a deflationary market. Our strategy of investing behind our brands and bringing new innovative products to market continues to deliver very positive results, with six of our major brands growing on average +3.4% in the year. The Sweet Treats business reported sales growth in every quarter of the year while the International business also displayed excellent progress during the year with sales up +18%6."

"Our adjusted earnings per share increased by +4.6% in the year, we reduced Net debt by over £50m and on an accounting basis our pension schemes have an improved financial position."

"We recently set out some additional strategic initiatives which we believe will further accelerate our growth and now expect to deliver sales growth of 2-4% in both FY16/17 and the medium term. The potential opportunities presented by our partnership with Nissin are also very exciting. The Board is focused on delivering shareholder value and we see a strong future for Premier Foods with its leading category positions, great brands and strong operational cash flows."

Measures above are reconciled to statutory measures in the appendices, where necessary

A presentation to investors and analysts will take place today, 17 May 2016, at 9:30am 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, 17 May 2016, 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 

For further information, please contact:

- Ends -

Notes to editors:

1. The statutory accounting period is the 52 weeks from 5 April 2015 to 2 April 2016.

2. Comparative pro forma results are prepared for the 52 weeks ended 4 April 2015 and are unaudited.

3. Trading profit for the underlying business is reconciled to continuing operations Trading profit in the appendices and is defined as Operating profit before 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 administration costs.

4. EBITDA is Trading profit excluding depreciation.

5. Adjusted profit before tax is defined as Trading profit for the underlying business less net regular interest. 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. Adjusted earnings per share is defined as Adjusted profit before tax less a notional tax charge of 20.0% (2014/15: 21.0%) divided by the weighted average of the number of shares of 826.0million (52 weeks ended 4 April 2015: 824.4million). The weighted average of the number of shares and notional tax charge for the financial period from 1 January 2014 to 4 April 2015 was 731.4 million and 21.4% respectively.

6. International sales growth is stated excluding the impact of foreign currency movements.

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

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

The following commentary unless otherwise stated is prepared for the 52 weeks ended 2 April 2016 with comparative results for the 52 weeks ended 4 April 2015. Results are stated on an 'Underlying business' basis which are unaudited and exclude all disposals and joint ventures transactions previously completed. The comparative results are stated on a 'Pro forma' basis. Trading results of Knighton Foods Limited ("Knighton") which was consolidated on 1 April 2016 are not reflected in the Sales and Trading profit results and associated commentary of the Operating review. All references to the 'year', unless otherwise stated, are for the 52 weeks ended 2 April 2016 and the comparative period, 52 weeks ended 4 April 2015. All references to the 'quarter', unless otherwise stated, are for the 13 weeks ended 2 April 2016 and the comparative period, 13 weeks ended 4 April 2015.

Quarter 4 sales results

Introduction

Group sales for the 52 weeks ended 2 April 2016 were £771.7m, an increase of 0.6% on the prior year. In the fourth quarter of the year, total sales grew by 1.4% to £185.5m compared to the equivalent quarter a year ago. While branded sales were flat, six of the Group's eight largest brands delivered average sales growth of 3.4% during the year. These six brands have received more focus on innovation and marketing investment over the last two years and this result clearly demonstrates that the Group's innovation and brand marketing strategy is working.

Trading profit3 for the 52 weeks ended 2 April 2016 was £131.0m; in line with both the prior year and the Company's expectations. Within this, the group has invested approximately £3m more consumer marketing compared to the prior year, while depreciation was £2.2m higher following recent increased levels of capital investment in the Group's cake bakeries.

Market overview

During the past year, the UK grocery market has continued to display volume growth alongside a consistently deflationary environment. The rate of UK food deflation has remained broadly constant at 1.5%-2.0% over the last twelve months and as previously commented, reflects a combination of benign input costs and price competition across the wider grocery market.

The significant growth channels of discounters and online have continued their respective progress over the last year with the Group displaying growth broadly in line with both these growth sectors of the market. This reflects commitments to deliver growth in the discounters channel, principally but not exclusively through our non-branded offering, while dedicated resource has been recruited to realise the opportunities in online through a more focused and tailored approach.

During the year the Group continued to expand its offering of products with a nutritional benefit in response to a growing consumer demand for healthy choices. This included the launch of the 'Exceedingly Good' range of Mr Kipling Snack Pack slices containing wholesome ingredients such as oats, cranberry and coconut, the launch of Bisto Best Reduced Salt which has been a strong seller since its introduction in 2015 and increased vegetable content of its Loyd Grossman, Sharwood's and Homepride cooking sauces so that around 70% contain 'one of your five a day'. Building on existing achievements, the Group has recently refreshed its nutrition strategy for the next three years including plans to reduce calories and levels of added sugar in a number of product categories through reformulation initiatives, the introduction of calorie caps for individual cakes and the expansion of single portion packs of cake as a percentage of the portfolio. The Company also plans further salt reductions throughout its portfolio and will expand the number of new products launched into market with added nutritional benefits or calorie reductions.

Brand investment and innovation

The Group increased its investment in consumer marketing in the year to approximately £36m, an increase of nearly 10% on the prior year. The Group is committed to progressively increasing its consumer marketing investment over the medium term. In FY16/17 the Group plans to spend £42-£44m on consumer marketing, increasing its expenditure on media advertising and preparing the foundations for the launch of certain Grocery brands in the chilled arena. Consequently, nine of the Group's brands are planned to benefit from TV advertising in FY16/17.

Where the Group has invested in marketing its brands and introducing new products to market, it has demonstrated positive results. During the past year, six of the Group's largest eight brands; Bisto, Oxo, Loyd Grossman, Sharwood's, Mr Kipling and Cadbury cake all grew sales and on average, by +3.4%. Ambrosia and Batchelors, the other two major brands, saw sales decline by (2.9%) in the year. In aggregate, the former six benefitted from both higher level levels of marketing investment as a proportion of sales and more product launches. In FY16/17, the Ambrosia and Batchelors brands will receive higher levels of marketing investment and are also expected to benefit from new products which align to current consumer trends such as Ambrosia Deluxe custard, Ambrosia Frozen Custard ice cream and Batchelors High Protein and High Veg pots.

Customer relationships

The Group counts all of the major food retailers in the UK as key customers of its products. In the ordinary course of business, it is customary for the food retailers to regularly review their product categories to ensure they offer their customers the best value and choice in their stores through category range reviews. Some of the Group's major customers have undertaken category range reviews over the past year and in overall terms, the outcome of these reviews is that they have concluded in line with the Company's expectations. While the Company has lost some slower selling product codes in some areas, it has also gained increased availability of some higher selling product codes in other areas; both changes were as expected. With its category based strategy, the Company continues to enjoy good relationships across its customer portfolio.

Grocery

Grocery sales were £548.6m in the year, slightly behind the prior year as growth in non-branded sales was offset by a small decline in branded sales to £504.9m. Sales in the fourth quarter increased by 0.5%, with both branded and non-branded delivering growth compared to the prior year. These results are set against the backdrop of deflation in the wider UK Grocery market. Divisional contribution was £3.1m lower at £142.1m due to increased consumer marketing investment in the year.

In the Flavourings & Seasonings category, Bisto and Oxo recorded strong performances, growing both sales and volumes during the year. For Bisto, the Group's second largest brand, new products launched into market contributed to over half the sales growth, with the new reduced salt Bisto Best product proving particularly popular among consumers. Oxo sales benefitted from the launch of Stock Pots using gel pot technology, aligned to key consumer trends and which accounted for approximately half the brand's sales growth in the year. This category has received a significant level of investment and focus over the last two years and clearly demonstrates that the Group's category led strategy is delivering results.

In the Cooking Sauces and Accompaniments category, sales of Loyd Grossman and Sharwood's continued their positive trajectory from the first half of the year, with both delivering full year sales growth. Loyd Grossman sales benefitted from the rollout of its 'Gastro' and 'Classic' pouches range and the gel pot Pan Melts product, while Sharwood's Stir fry Melts were supported by a major TV advertising campaign.

Sales of Ambrosia were down slightly in the year, however they returned to healthy growth in the fourth quarter, assisted by two new product ranges. These comprised a range of premium Deluxe custard including clotted cream, toffee and contemporary salted caramel flavours and a significant extension of the brand into the ice cream market with a range of frozen custard ice cream. Elsewhere in the Desserts category, Mr. Kipling and Cadbury sponge puddings and Cadbury desserts pots have all performed strongly in the year.

As previously highlighted, while sales and volumes of Batchelors have experienced significant declines in the past, this declining trend has materially reduced. New premium cup-a-soup products were launched in the first half of the year, with flavours including Thai Inspired Chicken & Sweet Potato and Southern Style Pulled Pork. Additional new products to be launched in FY16/17 include High Protein pots, High Veg pots and Soup Dippers.

In the fourth quarter, the Group entered into a partnership with renowned baker, Paul Hollywood and launched a unique range of premium artisanal home-baking products which are now available in a number of the Group's major retail customers.

Sweet Treats

Sweet Treats total sales increased by 3.4% in the full year and by 3.8% in the fourth quarter. This marks a consistently strong trajectory for the business unit which has delivered sales growth in all four quarters of the year. Both branded and non-branded sales grew in the year; up 1.9% and 10.0% respectively, with similar trends recorded for the fourth quarter. Volumes, measured in cases and packets of products, also displayed healthy increases in the year. As expected, the business unit achieved its target of delivering double-digit Divisional contribution margins in the year, increasing from 8.3% in the prior year to 11.2% for FY15/16.

Cadbury cake enjoyed an excellent year, with sales and volumes growing in double-digit percentage terms in both the year and the fourth quarter. While new products such as Amaze Bites and Hot Cakes have provided nearly half of the brand's growth in the year, the core range has also performed very well. Cadbury cake benefitted from its first television advertising for eight years during the year and this will be repeated in FY16/17.

Mr Kipling launched a number of new products in the year including Deluxe Viennese Whirls, Fabulous Fancy, Victoria Sponge and Coffee cakes, Exceedingly Good slices and premium cup cakes. Mr Kipling grew sales in the year and up to the third quarter this year, had delivered six quarters of consistent growth. Sales were lower in the fourth quarter due to an exceptionally strong comparative quarter in FY14/15. Both Mr Kipling and Cadbury have been instrumental in driving category growth during the year with a number of the new product launches supporting the Group's premiumisation strategy.

Over half of the business unit's non-branded sales are generated in the third quarter of the year, and the strong performance in this area reflected mince pie contract gains across both multiple retail and discounter channels. In 2015, the Company sold 185 million mince pies, an 8% increase on the prior year. Other non-branded contract wins in the year which contributed to this sales and volume growth included fruit pies.

The strong Divisional contribution margin delivery in the year reflects improved asset utilisation through increased branded and non-branded volumes, improving the product profitability mix and efficiency benefits from capital projects.

International

Sales in the International business increased by approximately 15% in the year, and excluding the impact of adverse foreign currency movements, were ahead approximately 18%.

The Australian business performed very well, up 47% during the year as a result of new listings of both Sharwood's and Mr Kipling and Cadbury cakes in certain retailers. Market share of Indian cooking sauces increased by +4.6 percentage points reflecting improved distribution levels.

Sales in the USA grew by 23%, with the fourth quarter particularly strong, reflecting a very good Sharwood's performance with market share in Indian cooking sauces up +2.2 percentage points in the year. The Company also undertook a new trial of Mr. Kipling Apple, Fruit and Mississippi Mud Pies across 250 stores of a major US retailer in the third quarter of the year which delivered some encouraging results. Ireland sales grew in constant currency, supported by Bisto and Oxo TV advertising in the second half of the year.

The International business unit has significantly increased the size of the team during the year to reflect the growth aspirations of the Group. The business unit now employs 28 people, an increase from just 9 a year ago, across a range of key functions to support the Group's growth plans.

Efficiency and cost control

Over the coming financial year, the Group will be looking more closely at improving the quality and product consistency across certain lines within its Grocery business. Expertise will be used to review current manufacturing processes to identify areas for improvement which are expected to deliver increased line efficiencies. Additionally, and following a review of its Grocery plant line management operations, teams will become more streamlined, delivering greater flexibility within manufacturing sites and resulting in overhead cost reductions.

In logistics, the Group is reviewing options in both its transport and warehousing operations which may lead to changes in the configuration of its network. While these reviews are ongoing, the majority of these changes are likely to take place late in the year and into FY17/18.

The Group maintains a continual focus on improving the returns on investment from promotional activity in which it participates with major customers. In the third quarter of the year, the Group's key trading period of the year, the Grocery business delivered improved returns on investment on promotional activity and also executed 27% more off shelf instore shipper displays compared to the prior year.

HM Government has recently implemented a National Living Wage (NLW) for all employees above the age of 25 which was effective from April 2016. The Company expects there will be a relatively small increase in labour costs in FY16/17 as a result of this legislation. The impact is expected to be greater at some of the Group's manufacturing sites than others. While the NLW is expected to rise to at least £9.00 an hour by 2020, this level represents the bottom of current government forecasts. Additionally, HM Government have also proposed to implement an Apprenticeship Levy, effective from April 2017. The Group will look to offset the impact of this levy through its continued investment in training and apprenticeships and create a more flexible workforce.

Net regular interest

Net regular interest for FY15/16 was £44.9m, in line with the Group's expectations and £2.9m lower than the prior year. The Group's sources of financing were largely unchanged in the year, except for the previously announced closure of its £80m debtors securitisation programme. As a result of the low utilisation and subsequent closure of this securitisation programme, interest charges attributable to it more than halved to £1.2m in the year. As expected, the largest component of financing was interest due to holders of the senior secured notes and was £30.8m in the year. Bank debt interest was £1.7m lower in the year due to approximately one month's term loan debt from the previous financing structure included in the comparative period.

The Company expects net regular interest for the 2016/17 financial year to be marginally lower than FY15/16.

Associate investments

As at 4 April 2015, the Company held a 49% interest in both Hovis Limited ("Hovis") and Knighton. On 1 April 2016, the Company gained control of Knighton for reporting purposes under IFRS 10 and consequently this business is consolidated in the financial statements for the year from that date.

For the financial period ended 2 April 2016, the Company recognised a share of loss from associates of (£22.6m), of which (£14.1m) is due to the share of loss from its investment in Hovis. This loss reflects the highly competitive UK Bread market. The share of loss from the Company's investment in Knighton was (£8.5m) during the period due to ​challenging market conditions, an unsatisfactory systems implementation and following a review of the carrying value of certain assets. 

Additionally, the Group wrote off its remaining investment in Hovis which is reflected in the impairment charge of £9.3m. The remaining £4.3m investment in Knighton was written off reflecting the challenging market conditions faced by the business. Consequently, associate investments had a nil value as at 2 April 2016.

Cash flow

Total cash inflows in the year were £55.7m. Trading profit was £131.0m, while depreciation of £16.1m was in line with the Company's expectations, although this is expected to be slightly higher in FY16/17 at £17-18m. Interest paid was £41.7m and capital expenditure was £25.4m. Pension contributions of £12.9m were broadly in line with the previously agreed schedule of pension deficit contributions and costs associated with administering the pension schemes. Other non-cash items principally relate to the add-back of share based payments. Cash restructuring costs relating to a major re-organisation of the Group's IT function is one of the main elements of the £7.5m outflow in the year.

Net debt

Net debt at 2 April 2016 was £534.2m. This represents a £50.7m reduction in Net debt compared to the prior year and also includes the impact of consolidating Knighton.

The Company's Net debt / EBITDA ratio reduced to 3.6x at the year end, down from 4.0x as at the end of 2014/15 and reflects the Group's focus on debt reduction. The Group expects deleveraging will progress at a slower rate from FY16/17 due to the increase in the previously agreed annual deficit cash contributions to the pension schemes.

Pensions

The IAS 19 pension schemes valuation reported a surplus for the combined RHM and Premier Foods' pension schemes at 2 April 2016 of £130.9m, equivalent to £104.7m net of notional tax charge. This compares to a deficit at 4 April 2015 of £211.8m and £166.5m after tax.

The valuation at 2 April 2016 comprised a £550.9m surplus in respect of the RHM schemes and a deficit of £420.0m in relation to the Premier Foods schemes.

One of the key reasons for the £248.3m reduction in combined liabilities in the schemes, from £4,460.3m to £4,212.0m is the 25 basis points increase in the discount rate from 3.30% at 4 April 2015 to 3.55% at 2 April 2016. One of the largest movements in the asset classes is in the swaps classification; this reflects the impact of the RHM schemes hedging strategy.

The reduction in the pension valuation between these dates has no impact on the previously agreed pension deficit cash contributions which are fixed until December 2019. As previously highlighted, one approach in valuing the pension liabilities as part of the Enterprise value of the Company is to discount the post tax future cash flows of the agreed deficit contribution payment schedule. On this basis, the pension schemes deficit could be valued between £400m-420m.

Pension sensitivities

The above table intends to provide assistance in understanding the sensitivity of the valuation of pension assets and liabilities to market movements of government gilts, credit spreads and the retail price index (RPI). The asset movement caused by a change in government gilts is predominantly driven by hedging in the RHM pension scheme. It is stressed that these sensitivities are indicative only and may change over time as the schemes' execution of their investment strategies may evolve to maximise asset performance.

Accelerating growth strategy

On 23 March 2016, the Group announced a number of strategic initiatives to help accelerate growth across its three business units of Grocery, Sweet Treats and International. Together with the Group's existing plans, these new initiatives are expected to support the Group to deliver its medium term sales growth guidance of 2-4%.

The new initiatives will leverage the Company's existing platforms, infrastructure and brand presence to expand further into new formats, channels and markets:

· In Sweet Treats, we plan to build on the successful trial of our Cake-On-The-Go range of Mr Kipling twin pack slices and Cadbury mini roll twin pack by accelerating growth of our brands in broader convenience channels through capitalising on our manufacturing investments, innovation expertise and dedicated new team.

· In Grocery, we intend to extend our strong brands into premium areas within the chilled grocery sector in both the sweet and savoury segments, to meet consumers' growing health-consciousness. 

· In International, we plan to leverage the investment we have already made in hiring an experienced team to step-change the size of our International business. Our focus will be on accelerating the expansion of our cake brands in the US and other geographies using our differentiated offering, unique formats and packaging. Initial store trials have demonstrated the potential for future growth in these markets.

The Group also announced on 23 March 2016 that it had entered into a co-operation agreement with Nissin Foods Holdings Co., Ltd. ("Nissin") and subsequently a Relationship agreement was entered into.

Over recent years, the Group has discussed a number of potential strategic opportunities with Nissin. This new strategic partnership has the potential to create significant long-term value for both organisations through strategic co-operation in the following areas:

· Providing Premier with access to Nissin's innovative products and formats to distribute in the UK market under either Nissin's or Premier's brands, such as Batchelors.

· Enabling Premier to benefit from Nissin's international scale to accelerate the distribution of Premier's products in key overseas markets.

· Sharing of Nissin's significant intellectual property, innovation and technical know-how to develop new products.

· Creating opportunities for both companies to leverage their joint manufacturing capabilities and infrastructure.

· Facilitating sharing of expertise and best practice through appropriate secondments of personnel.

Further to the Relationship agreement dated 22 April 2016, the Group is today announcing that Mr. Kijima, Managing Director of Nissin, is appointed a non-executive director of the Board of Premier Foods with effect from 21 July 2016.

Outlook

The Group's strategy of investing behind its brands and bringing new innovative products to market delivered positive results in FY15/16. In FY16/17 consumer marketing investment is expected to increase again, to £42-£44m, with nine brands planned to benefit from television advertising. Building on this trajectory, the Group now expects to deliver sales growth of 2-4% in both FY16/17 and the medium term, and together with its supply chain efficiency programme, anticipates good progress to be delivered in FY16/17.

Future prospects for the Group are reinforced by the recently announced initiatives to accelerate growth in each of its business units in addition to the potential opportunities presented by the partnership with Nissin. The Board are focused on delivering shareholder value and see a strong future for Premier Foods with its leading category positions, great brands and strong operational cash flows.

Within this financial review, the Company presents its results for the 52 weeks ended 2 April 2016 (364 days) with comparative information for the financial period from 1 January 2014 to 4 April 2015 (459 days). All commentary on the performance of the Company included below refers to continuing operations unless otherwise stated and therefore reflects the respective periods that the Company maintained ownership of previously completed disposals.

Income statement

Revenue from continuing operations in the year was £771.7m compared to £964.3m in the prior year. Revenue in the comparative period benefitted from an additional 95 days due to the transition to the Company's new financial year end. As commented on in the Operating review, revenues on a pro forma basis grew slightly in the year with revenues of branded goods flat and non-branded goods higher. Grocery revenues for the 52 weeks ended 2 April 2016 were £548.6m compared to £699.6m in the comparative period, while Sweet Treats revenues were £223.1m compared to the prior period of £264.7m.

Gross profit was £295.5m in the year, a decrease of £38.0m compared to the prior period, primarily due to the fewer days in the accounting period. Within this, good progress was made in the Sweet Treats business unit in the year, reflecting improved asset utilisation through increased branded and non-branded volumes, improving the product profitability mix and efficiency benefits from capital projects. Gross margins increased by 3.7 percentage points to 38.3% for the year to 2 April 2016.

Divisional contribution for the Group was £167.1m in the year compared to £196.4m for the period ended 4 April 2015. Grocery Divisional contribution was £142.1m, a decrease of £37.5m compared to the prior period, while Sweet Treats Divisional contribution was £25.0m, an increase of £8.2m, reflecting the points identified above despite being a shorter time period.

Operating profit

The Group reported an Operating profit for the year of £54.5m, set against an Operating loss of (£44.1m) for the comparative period. Before impairment and loss on disposal of operations, the Group delivered an Operating profit of £68.1m in the year, compared to £45.8m for the period ended 4 April 2015; an increase of £22.3m.

The main driver of the improved Operating performance in the period was due to lower impairment charges in the year and lower net interest on pensions and administrative expenses.

In the prior period impairments relating substantially to the Sweet Treats business unit goodwill resulted in charges for the period of £83.9m, while in FY15/16, impairment charges in the Group were significantly lower at £13.6m reflecting the write down of associate investments. Net interest on pensions and administrative expenses in the year were £14.5m; £33.5m lower than the prior period, due to a lower opening pension deficit (£211.8m compared with £603.3m) and fewer reporting days in the 52 weeks ended 2 April 2016.

Amortisation of intangible assets was £37.6m in the year, compared to £47.6m, although this entirely reflects the longer comparative reporting period. The Group continues to expect the annual run rate for intangible asset amortisation to be approximately £38-40m.

Restructuring costs were £11.2m in the year, largely due to costs associated with restructuring the Group's IT function and corporate activity fees.

Trading profit on this statutory reporting basis was £128.8m in the year compared to £150.2m in the prior reporting period. This is largely due to the longer comparative reporting period, and also includes £2.2m of costs predominantly relating to the write off of legacy fixed assets. The Group also invested approximately £3m more in consumer marketing in the year on a pro forma basis, reflecting its strategy of investing behind its brands.

Finance costs

Net finance cost for the year ended 2 April 2016 was £44.9m compared to £81.9m in the comparative period, in overall terms due to lower levels of Group net debt following the re-financing completed in April 2014. The Group's sources of financing were largely unchanged in the year, except for the previously announced closure of its £80m debtors securitisation programme. The largest component of financing costs in the year was interest payable on the senior secured notes issued by the Group in March 2014 and amounted to £30.8m.

The higher financing costs in the prior period were due to costs associated with previous financing facilities, and included interest payable on term facility (£7.2m); deferred fees associated with previous arrangements (£6.7m) and the write off of financing costs associated with previous arrangements (£14.6m). None of these costs relating to the Group's previous financing facilities, as described above, were repeated in the 52 weeks ended 2 April 2016.

Write off costs associated with the closure of the Group's securitisation programme in January 2016 amounted to £0.4m in the year.

Associate investments

The Group reported a share of loss from associates of £22.6m in the year, compared to a loss of £9.6m in the comparative period. The share of loss associated with Hovis was £14.1m and reflects competitive market conditions in the UK bread market. The share of loss from Knighton for the year was £8.5m and was due to a combination of challenging market conditions, costs associated with an unsatisfactory systems implementation and following a review of the carrying value of certain assets.

As a result of the losses in the year and challenging market conditions, the Group wrote off its remaining investment in Hovis which is reflected in the impairment charge of £9.3m. The remaining £4.3m investment in Knighton was written off reflecting the challenging market conditions faced by the Knighton business. Consequently, associate investments had a nil value as at 2 April 2016.

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 as a result, the Group has consolidated Net debt of £8.3m relating to this business. The securitisation facility drawn of £6.4m at 2 April 2016 relates to Knighton. In anticipation of acquiring 100% of the Knighton business, the Group has arranged a new debtor finance facility which was undrawn at the year end and is expected to accommodate any additional working capital requirements from Knighton.

Profit before taxation

The Group made a loss before tax of £13.0m for the year ended 2 April 2016 compared to a prior period loss of £135.6m. Operating profit of £54.5m was offset by net finance costs of £44.9m and a share of loss from associates of £22.6m as outlined above.

Taxation

A taxation credit of £47.0m is reported for the 52 weeks ended 2 April 2016, due to movements in deferred tax. This compares to a prior period credit of £42.9m, which largely reflects the loss incurred in the comparative period. The applicable rate of corporation tax for the year was 20.0% (4 April 2015: 21.4%). 

The Group's deferred tax net asset as at 2 April 2016 was £25.9m. Within this deferred tax net asset of £25.9m, the Group recognises a deferred tax liability of £23.8m associated with retirement benefit obligations reflecting the combined pension schemes surplus at 2 April 2016. Additionally, the Group has recognised an asset reflecting prior year tax losses of £70.5m which equate to approximately £400m of losses which can be used to offset taxable profits in future periods. These losses can generally be carried forward indefinitely. Detailed proposals announced in the Chancellor of the Exchequer's 2016 budget regarding limits on interest charge deductions and the utilisation of prior year losses are yet to be announced and hence any potential implications on the Group's current or future tax position will be disclosed in due course.

The corporation tax rate for 2016/17 is expected to be 20.0% and the deferred tax rate is 18.0%.

Earnings per share

The Group reports a basic earnings per share on continuing operations for the 52 weeks ended 2 April 2016 of 4.1 pence, compared to a basic loss per share on continuing operations in the prior period of 12.7 pence. Earnings/(loss) per share is calculated by dividing the earnings/(loss) attributed to ordinary shareholders of £34.0m (4 April 2015: (£92.7m)) by the weighted number of shares in issue during the period. The weighted number of shares in the comparative period reflects the issue of new shares on 24 March 2014 and is adjusted for the relevant bonus factor.

Adjusted earnings per share for continuing operations were 8.1 pence (4 April 2015: 9.0 pence). Adjusted earnings per share on continuing operations has been calculated by dividing the adjusted earnings (defined as Trading profit less net regular interest and notional taxation) attributed to ordinary shareholders of £67.1m (4 April 2015: £65.9m) by the weighted number of ordinary shares in issue during each period. These earnings have been calculated by reflecting tax at a notional rate of 20.0% (4 April 2015: 21.4%). The weighted average number of shares in issue for the 52 weeks ended 2 April 2016 was 826.0m and the comparative period ended 4 April 2015 was 731.4m.

Cash flow and borrowings

The Group's net borrowings as at 2 April 2016 were £534.2m, a decrease of £50.7m since 4 April 2015. The cash inflow from operations to 4 April 2015 was £137.1m, compared to an inflow of £62.5m in the comparative period.

Net cash interest paid was £41.7m in the year (4 April 2015: £59.1m), of which £30.8m related to cash payments to holders of the Group's senior secured notes. The purchase of property, plant and equipment was £23.0m in the period, a reduction of £11.1m from the prior period and intangible asset purchases were £6.9m which relate to certain IT systems implementation to provide improved analysis in areas such as commercial reporting. No cash tax was payable in the year due to the availability of relief for capital expenditure and pension deficit contribution payments.

The Group repaid £58.0m of borrowings related to its revolving credit facility in the year and closed its debtors securitisation programme, resulting in a movement of £19.7m in the year.

In the comparative period, the Group received £500.0m proceeds from the issue of its senior secured fixed and floating notes and £353.4m gross proceeds from the issue of new equity following the completion of the Capital Refinancing Plan in 2014. These proceeds were used to repay term facilities under the previous financing arrangements of £679.5m. Financing fees and other costs of finance amounted to £58.3m which included fees associated with the raising of new equity, issuing senior secured notes, new revolving credit facilities, advisory fees and other fees arising from previous re-financing arrangements.

Retirement benefit schemes

At 2 April 2016, the Company's pension schemes under the IAS 19 accounting valuation showed a combined gross surplus of £130.9m, compared to a combined deficit of £211.8m at 4 April 2015. The valuation at 2 April 2016 comprised a £550.9m surplus in respect of the RHM schemes (4 April 2015: £241.6m) and a deficit of £420.0m (4 April 2015: £453.4m) in relation to the Premier Foods schemes. Further commentary on the Group's pension schemes is provided in the Operating review.

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.

Alastair Murray

Chief Financial Officer

The Company's results are presented for the 52 weeks ended 2 April 2016. Results are stated on an 'Underlying business' basis which exclude all disposals and joint ventures transactions previously completed and are unaudited. The comparative results are stated on a 'Pro forma' basis, are unaudited and are presented to illustrate the performance of the Company on the new reporting calendar methodology.

'Continuing operations' includes the respective periods that the Company maintained ownership of previously completed disposals and joint ventures entered into. The results of the 52 weeks ended 2 April 2016 and its comparative period for statutory reporting purposes, the financial period from 1 January 2014 to 4 April 2015, are commented on in the financial review.

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 business' Trading profit.

Continuing operations earnings per share is calculated as set out below:

Adjusted earnings per share is calculated as set out below:

Pro forma results for 52 weeks to 2 April 2016 (Includes effect of Knighton consolidation)

The table below is presented to show the pro forma trading results of the Group as if it controlled Knighton for the duration of the 52 weeks ended 2 April 2016 and are unaudited.

These results will form the basis on which the Group will report its pro forma results for the 52 weeks ending 1 April 2017.

· The Company reports its Full Year results on a 52 week ended basis.

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

· 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.

Pension deficit contribution schedule

The table below shows the phasing of previously agreed deficit contributions in the context of the Company's new financial calendar.

1. Basis of preparation

The financial information included in this preliminary announcement does not constitute the company's statutory accounts for the periods ended 02 April 2016 and 04 April 2015 but is derived from those accounts. Statutory accounts for the period ended 04 April 2015 have been delivered to the registrar of companies, and those for the period ended 02 April 2016 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 2 October 2015 and 2 April 2016. The Group's forecasts, taking into account reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current facilities including covenant tests. 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.

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 12.

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. 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 impairment tests of the CGUs carrying values.

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.

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 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.

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:

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.

Associates

Associates are all entities over which the Group has significant influence but not control.

Judgement is sometimes required when assessing whether the Group has significant influence or control. Control is illustrated by the power over relevant activities and the exposure to the variability of returns. In determining whether the Group has the practical ability to direct relevant activities, factors such as voting rights, financial and operational dependency and any special relationships are taken into consideration.

In addition, the carrying value of investments is assessed for impairment with reference to current and future projections of profitability and cash generation.

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" and "International". The Grocery segment primarily sells savoury ambient food products and the Sweet Treats segment sells sweet ambient food products. The International segment has been aggregated within the Grocery segment for reporting purposes, 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.