RGD.L Regulatory News (RGD)

Real Good Food plc (AIM:RGD)

Final results for the year ending 31st March 2015

Highlights

· Transformational disposal of Napier Brown shortly after year end; repositioning the business away from the volatile sugar market

· Continuing Group has positive cash balances and is cash generative and profitable, creating strong financial platform to facilitate future growth

· Successful acquisition and integration of Rainbow Dust Colours

· Growth in gross profit, EBITDA and operating profit in Continuing Operations

· Continued strong growth in sales and profitability at Renshaw

· Successful turnaround at Haydens Bakery driven by operating focus and product innovation

· Three complementary business areas each with strong and established management teams and operational strategies to achieve organic growth

Financial Summary

The disposal of Napier Brown took place on 19th May, seven weeks after the year end. The reported numbers for the Group including Napier Brown for the full year to 31 March 2015 are as follows:

Following the disposal of Napier Brown for a consideration of £34 million plus working capital of £10.4 million, the Group has a net positive cash position.

Pieter Totté, Executive Chairman, comments:

"The total Group figures for last year were dominated by the market issues in sugar which impacted both Napier Brown and Garrett Ingredients. Elsewhere performance has been strong, with Renshaw and Haydens in particular growing both sales and profitability. Importantly, the Group excluding Napier Brown grew its operating profit from £2.7 million to £3.2 million. Net debt was well controlled at £30 million at the balance sheet date and following the sale of Napier Brown, the business now has significant positive net cash balances.

Trading in the early months of the new financial year within our continuing businesses has begun well and with the funds from the sale of Napier Brown being received in May we are now in a position to fast-track some of the investment opportunities. This will include spend on jam, sauce and pie-filling capability at R&W Scott; infrastructure at Haydens to support its growth; and increased capacity at the Renshaw site in Liverpool. We will also look at potential bolt-on acquisitions which will help build our presence in our chosen markets, but only where there is a sensible financial and operational investment case.

Overall, the business is in good shape and we look forward with great optimism."

Pieter Totté

Executive Chairman

About Real Good Food plc

Real Good Food plc is a diversified food business serving a number of market sectors including retail, manufacturing, wholesale, foodservice and export. The Company focuses on three main markets: cake decoration (Renshaw, Rainbow Dust Colours), food ingredients (Garrett Ingredients and R&W Scott) and premium bakery (Haydens).

ENQUIRIES:

Real Good Food plc

Pieter Totté, Executive Chairman Tel: 020 3056 1516

Andrew Brown, Marketing Director Tel: 020 3056 1517

Shore Capital & Corporate

(Nomad and Joint Broker) Tel: 020 7408 4090

Stephane Auton

Patrick Castle

Daniel Stewart and Company Plc

(Joint Broker) Tel: 020 7776 6550

Martin Lampshire

Belvedere Communications (PR) Tel: 020 3567 0510

John West

Kim van Beeck

Chairman's Statement

Overview

The sale of our Napier Brown sugar business is a transformational event for the Group. Our strategy had always been to invest more in the business to make it a strong strategic asset. Since the decision by the European Commission to end production quotas it became obvious that aligning closely with a producer would be central to a successful strategy for Napier Brown. This was reaffirmed when it became clear that the competition authorities no longer felt able to give Napier Brown any protection as a non-refining independent player in the sugar market.

The sale process took many months but there was interest from a number of parties and ultimately the sale price demonstrated the strength of the business which we had built with its strong UK route to market; the retail packing facilities at Normanton; and the investment in the new Sugar Hub import facility at Stallingborough. It is also a tribute to the knowledge and experience of all the team at Napier Brown and I am pleased that they can look forward to an exciting future as part of Europe's second largest sugar group.

The total Group figures for last year were dominated by the market issues in sugar which impacted both Napier Brown and Garrett Ingredients. The first half of the year, as previously indicated, was badly affected by the problems associated with the British Sugar dispute and while this was resolved from the start of the new sugar year (the second half of the fiscal year) the sharp fall in sugar market prices made trading conditions very tough. Despite this, Napier Brown returned to profitability. Elsewhere performance has been strong, with Renshaw and Haydens in particular growing both sales and profitability.

Importantly, the Group excluding Napier Brown grew its operating profit from £2.74m to £3.12m. Net debt was well controlled at £30m at the balance sheet date and following the sale of Napier Brown, the business now has significant positive net cash balances.

Future plans

The new Group is a smaller entity, but has a much stronger financial base to grow from and has a clear strategy for development. We are now focused on three core market sectors: cake decoration, food ingredients and premium bakery. The ongoing business is debt free, profitable and cash generative and this will enable us to invest appropriately both in our existing businesses and potentially to acquire complementary businesses in our chosen sectors.

Cake decoration is an attractive added value market both in the UK and in terms of exports. While it operates within the food sector, it also shares a number of characteristics with the growing recreational leisure and fashion markets and this insight will dictate how we continue to build our presence and market share. The acquisition of Rainbow Dust Colours Ltd earlier this year is a prime example of our strategy in action. It is a business which offers several hundred product lines to meet changing market needs and prides itself on customer service and product innovation.

Food Ingredients is a much broader sector and we will choose carefully where we can add value. At Garrett Ingredients the focus is on the SME sector for commodity ingredients (e.g. sugar and milk powders) but this service will be increasingly supplemented by higher added value products such as dairy mixes and emulsifiers. At Renshaw and R&W Scott the sale of ingredients (sugarpaste, marzipan, chocolate coatings, jams and sauces) is always accompanied by 'application' support for the customer as we recognise that it is the performance of the end product that is all important.

Finally, the recent success of Haydens has demonstrated how added value can be achieved in the bakery sector. With the bakery sector moving from commodity to premium, Haydens is well-placed to grow and we will investigate further how we can continue this without moving away from the core skills we have developed.

To support all these three sectors and ensure that we lead in our markets, we are establishing a new Development Centre in Liverpool which will house a number of Group employees, in particular resources for product innovation and a world-class training facility for cake decorating. Moving these employees away from the Renshaw site at Crown Street, as well as giving greater clarity to that operation, will enable Renshaw to configure the site to meet its growth plans. This is an exciting project which, as well as saving some costs on infrastructure at Renshaw, will enable us to develop leadership in our chosen markets.

I would like to mention one further Group initiative which has been extremely successful. We have undertaken a Leadership Development programme across all our businesses which has been met with universal approval by all those involved. I believe strongly that having the right teams of people in each business, properly trained and properly motivated, is fundamental to our success and we will continue to ensure that employee training has a high priority across all our businesses. Our performance is a tribute to the hard work and enthusiasm of all our colleagues and I would like to thank them.

Management Changes

Following the announcement that the Group Finance function is to move to the London Head Office and the subsequent resignation of Mike McDonough as Group Finance Director, a new structure for the finance team is being developed and a further announcement will be made in due course. Mike McDonough will remain available over the coming months to provide support as required. The Board would like to thank him for his contribution to the Group and wishes him every success in his future career.

Outlook

Trading in the early months of the new financial year within our continuing operations has begun well and with the funds from the sale of Napier Brown being received in May we are now in a position to fast-track some of the investment opportunities we had previously identified. This will include spend on jam, sauce and pie-filling capability at R&W Scott; infrastructure at Haydens to support its growth; and increased capacity at the Renshaw site in Liverpool. We will also look at potential bolt-on acquisitions which will help build our presence in our chosen markets, but only where there is a sensible financial and operational investment case.

Overall, the business is in great shape and we look forward with great optimism.

Pieter Totté 

Executive Chairman

Divisional Business Reviews

Renshaw

2014/15 performance

Sales revenue was up by nearly 9% on the previous year, with all trade sectors contributing. Export sales were particularly strong, with growth across the three main territories of Europe (via Real Good Food Europe), the US and Australia. Operationally the business coped well with the increased volumes. EBITDA increased to £6.3million, over £800,000 up on the previous year.

While there are some indications that overall growth in the home baking market is beginning to plateau, the interest in cake decoration continues to be buoyant, with consumers aspiring to improve their skill levels. The market is also increasingly influenced by trends in leisure and fashion - the Renshaw product offerings will reflect this going forward. A number of product initiatives were developed during the year including soft fondants and coloured marzipans.

Future plans

While growth is anticipated across all trade channels, the two major areas of growth opportunity identified for the coming year are foodservice and export. The foodservice market is large and fragmented and Renshaw has restructured its sales and marketing resource to focus on product applications. In export, Renshaw will work very closely with Real Good Food Europe to ensure that the product offering is tailored to the local market needs. In all sectors, the market is fragmenting and the product offering needs to be increasingly bespoke. This has important implications for our investment plans so a project is under way to consider the manufacturing implications to ensure that the business is geared up operationally to meet the customer needs.

Rainbow Dust Colours

2014/15 performance

The business was acquired in January so traded with the Group for less than three months in that time, contributing £760,000 of revenue with an EBITDA of £400,000. While it operates in a similar market to Renshaw, its business model is very specific, with a wide product range focused on the 'sugarcraft' sector both in the UK and Europe. The brand has a loyal following amongst expert cake decorators and the business has successfully developed its range of coloured edible decorations in a number of formats (dustings, glitters, etc.), all presented in a wide range of colours. The business also trades strongly through its trade website and makes good use of social media.

Future plans

While the owners, Gary and Carol Brown, are remaining with the business, a succession plan has been put in place with the appointment of David Grieve as Managing Director. David is well known in the 'sugarcraft' sector and is working up a plan to develop a specialist offering to these customers across both Renshaw and Rainbow Dust. Equally, with approximately 50% of sales exported there is big potential in Europe and plans are being developed with Real Good Food Europe to maximise this opportunity. The new 'Paint It!' range of opaque colours was launched earlier this year and a number of new products are planned.

In line with the growth plans, a more structured management team is being created with a Finance Manager already appointed.

Garrett Ingredients

2014/15 performance

The business was hit by dramatic deflation in both of its core commodity markets, dairy and sugar. Excess sugar stocks in Europe had a particular impact on the 'Spot' market which is Garretts' main focus, while the dairy market was also hit by price falls caused by a combination of factors including the weather and the EU sanctions against Russia. Both volumes and revenue fell significantly and while trading margins were well managed, EBITDA fell accordingly. Overheads were well controlled though ahead of the previous year given the decision to strengthen the management team.

The new management team is working well, with considerable focus being given to being able to operate on a fully stand-alone basis completely independent of Napier Brown. All distribution operations were withdrawn from the Napier Brown site in the autumn of 2014. This process was completed by the year end. The business undertook a new engagement with its customers at the Ice Cream Alliance Exhibition in February and will look to build on this.

Future plans

The business's vulnerability to significant changes in commodity prices was exposed during the last year and it is reassuring that, despite being hit with exceptional circumstances simultaneously in both dairy and sugar, it still returned a profit. The new management team is working on a strategy to support its commodity trading operation with other added value products and services, with a number of initiatives being pursued focusing on the needs of its customer base.

R&W Scott

2014/15 performance

Sales volumes were marginally ahead of the previous year though revenue was slightly down reflecting deflation in chocolate coatings. EBITDA was just below break-even and below the previous year reflecting a planned increase in overheads as management was recruited to build a sustainable stand-alone business. A major foodservice contract was gained in jam which will give the business significantly increased scale in this market, which will have beneficial consequences in terms of purchasing and manufacturing. Servicing this contract caused a number of operational cost challenges in the year but these have now been rectified and the business is now well placed to develop its jam offering to a wider customer base.

Following the strategy of turning R&W Scott from a purely manufacturing operation into a fully-fledged stand-alone business, significant investment was made in sales, technical and finance resource leading to the increase in overheads which accounts in full for the decline in EBITDA over the previous year.

Future plans

The development of the foodservice jam business has led to a new opportunity in pie fillings, sales of which began during the summer. On the retail side, listings have been achieved for a Scott's chocolate spread and a re-launch of the jam ranges, focusing on the 'no added sugar' proposition which has been well received. Inter-company sales are also increasing, with supplies to Haydens particularly strong. The business is also working closely with Renshaw on pursuing opportunities in the foodservice channel with backing from the Group development team.

Real Good Food Europe

2014/15 performance

Sales grew to £1.7 million over the year, with the business just moving into a break-even EBITDA by the end of the year. The major product focus has been on the Renshaw ranges of coloured sugarpastes and marzipans, and the main geographic focus on the Benelux, France and Spain. The main marketing effort was directed at trade and consumer cake shows across Europe, which are becoming increasingly popular.

The development of a multilingual sales team each with a country focus has worked well and the move to a warehouse on the outskirts of Brussels was successfully implemented.

Future plans

The great benefit of having a local operation is the increased market knowledge and understanding gained. It is clear that the opportunity for cake decoration products is significant but a degree of bespoke product and packaging (e.g. multilingual labels) will be required to maximise this opportunity. The Rainbow Dust Colours range also presents an enormous opportunity both with existing customers and in attracting new ones.

To this end the business moved to slightly larger premises on the same industrial estate in June and is investing in local labelling to ensure the customers receive the product and format they need. This will increase costs in the short term but will also help fast-track the growth plans. Marketing investment will again focus on trade and consumer cake shows where the two brands, Renshaw and Rainbow Dust, will be presented together.

Haydens Bakery

2014/15 performance

Haydens posted modest sales growth of 4% on last year but this masks a dramatic change in product mix following the decision to exit a number of product categories and focus on five main sectors. Sales in three of these sectors, Danish and viennoiserie, pies and crumbles and tarts all showed increases of over 20% YOY. This major strategic change has paid dividends in terms of product quality, manufacturing efficiencies and profit performance, which showed solid progress. EBITDA, at £1.25 million was up by over £300,000 on the previous year.

The parallel objective of broadening the customer base was also achieved with three new national customers being served in the year: Aldi, Caffè Nero and Asda. Considerable investment was made in training across the business from management leadership training to health and safety awareness and specific skills training, such as customer service techniques.

Future plans

With the new strategy now ingrained, the business has reviewed its vision and identity as it presents itself to a wider customer base. This new identity will be presented to customers in the autumn of 2015. There are plans in place to invest in the bakery to ensure it has the capability to manage the growth as well as continuing to develop employee skills across the business, with a particular focus on customer facing functions. The commercial team is being expanded in line with the growing number of customers and a number of new products are planned, including mini tarts and injected yum yums.

Finance Review

Overview

The current year's results to March 15 are still dominated by the dispute with British Sugar which affected the "sugar year" October 13 to September 14. The overall reduction in EBITDA from £3.3 million last year to £1.9 million this year is driven by the Napier Brown performance where a loss of (£3.4) million was incurred, a deterioration of (£1.8) million over the previous year.

EBITDA at £5.3 million for continuing operations was encouraging, up £0.4 million year on year, including three months of Rainbow Dust Colours which was acquired in January 2015.

The impact of the disposal of Napier Brown in May 15 on the Group is demonstrated by breaking out the key "Income" comparatives for continuing operations in the table below and with additional commentary on the March 15 Working Capital and Net Debt positions.

The disposal is transformational in removing the uncertainty around the future of Napier Brown as it approaches further structural change in the sugar industry in 2017. In addition, it effectively clears the Group's total debt position of approximately £30 million leaving the Group well placed to focus on the remaining more added value activities.

At the start of 2015 Rainbow Dust Colours Ltd was acquired for an initial £4.0 million with a contingent consideration of £3.5 million. Included in these accounts is Goodwill of £6.2 million based on the £1.3 million assets acquired with Sales of £0.8 million and £0.4 million Operating Profits for the 3 months to end March 15 with acquisition costs of £0.28 million included within significant items.

Revenue

Group revenue from continuing operations for the 12 months to 31 March 2015 was £104.6 million, a reduction of 5.1% on the 12 months to 31 March 2014 mainly driven by the fall in commodity prices within Garrett Ingredients.

Key Comparatives (excl. significant items)

* before significant items

Margins

Overall delivered margin for the year at £20.4 million was up £0.9 million on the prior year with extremely positive growth across continuing operations of £2.3 million over the prior year diluted by the £1.4 million reduction in Napier margins.

Loss before Tax and Interest

Overall we generated a loss before tax, finance costs and significant items for the year of £0.7 million (Operating profit before significant items), an increase in loss of £1.4 million over the previous year driven primarily by the £1.9 million reduction in Napier Brown. It was pleasing to see continuing operations increase by £0.5 million over the prior year.

Financing Costs

Financing costs for the year at £1.7 million were largely in line with the prior year.

Significant Items

During the year the Group incurred one-off costs of £0.85 million which included £0.28 million of acquisition costs for Rainbow Dust Colours and £0.57 million for changes at executive level associated with the Napier disposal.

Working Capital & Net Debt (including Napier)

Cash Flow and Debt (including Napier)

Working Capital levels reduced by £10.8 million during the year with the dominant factor the significant reduction in the cost of sugar which fell by approximately 25% year on year. Within this fixed assets were down a net £1.0 million with Capital expenditure less than the £2.7 million depreciation & amortisation level. The balance, a reduction of £9.8 million, being the movements across the more fluid stock, debtor and creditor positions all dominated by the reduction in sugar prices year on year.

Net Debt (after Cash) as at 31 March 2015 was at £30.1 million, down £1.0 million on the prior year (31 March 2014 £31.1 million) with the dip in cash generation on lower profitability offset by lower working capital levels overall.

Our ability to service the debt remained, despite the significant deterioration in the Debt ratio (Net Debt to EBITDA) from last year, especially with the subsequent disposal of Napier Brown which effectively clears the Group's debt leaving it with a cash surplus after disposal costs.

Pensions

The Group operates one defined benefits scheme which was closed to new members in 2000. A recovery plan is in place with "base" contribution levels for the year ended 31 March 2013 of £265k with annual increments of 3% for the following two years. In addition to this the Group has agreed to make an additional, one off, contribution of £166k which is payable at the rate of £11k per month starting from November 2013. The Group remains confident it continues to meet the trustees' needs and the pension regulator's guidance with contributions for the year commencing April 15 expected to be £282k in line with the recovery plan.

The latest IAS19 valuation as at March 2015 indicates a £5.7 million deficit, an increase of £2.0 million since March 2014. The scheme assets at £16.1 million increased by £0.8 million over the previous year with the increase in the deficit driven by the reduced discount rate of 3.45% v 4.65% when applied to future defined benefit obligations.

Key Performance Indicators

The Board of Directors monitors a range of financial and non-financial key performance indicators, reported on a periodic basis, to measure the Group's performance over time. The key performance indicators all based on continuing operations are set out below:

1) Revenue growth is calculated for continuing operations.

2) Operating margin is stated for continuing operations only and is calculated by dividing operating profit before tax, interest and significant items by revenue from continuing operations.

3) Debt cover is calculated by dividing total net debt by continuing EBITDA. EBITDA is defined as earnings before significant items, interest, tax, depreciation and intangible asset amortisation.

4) Interest cover is calculated by dividing continuing EBITDA by net interest payments (gross interest payable less interest receivables).

5) Health & Safety score represents the weighted average score across all sites as determined by our health and safety score index which was introduced in 2006 and is measured by an external consultant. Figures quoted refer to the calendar year and in 2014 the measures we reset at higher level effectively toughening the measures to approximately ten percentage points.

Risks and Uncertainties

The operation of a public listed company involves a series of inherent risks and uncertainties across a range of strategic, commercial, operational and financial areas. Below, the board has outlined our perception of particular risks and uncertainties facing the group. These risks and uncertainties could cause the actual results to vary from those experienced previously or described in forward looking statements within the annual report:

a) Key Customers

The group has a number of key customers, some of whom operate on contracts which are subject to annual renewals. As a consequence, the retention of particular customers may change on a year to year basis.

b) Raw Materials

Raw materials used by the group are subject to price fluctuations. The operating divisions typically purchase these items on forward contracts, providing cover for some months ahead generally and in particular to lock in commitments with sales contracts on a "back to back" basis. As during last year our most recent market experience, and current outlook, for some raw materials indicates continued pressure for sales prices to be flexed accordingly although there are some signs of the economy's slowdown having an impact in certain areas.

c) Sugar Regime

As reported in previous years the Sugar Regime and the reforms it has being going through including the next key milestone in 2017 when beet production quotas end has presented the group with a sustained period of uncertainty. Napier Brown isn't a sugar producer and is reliant on sourcing from competitive and sustainable sources which proves more challenging in a market going through structural change. Following the disposal of Napier Brown in May 2015 the Group still requires sugar for use in all its production facilities but is no longer exposed as a "re-packer and distributor." The ongoing procurement of sugar will be subject to the same risk management steps as with all other major raw materials.

d) Food Safety

As a reputable food manufacturer our operating divisions rigorously enforce our technical policies and procedures in relation to the production and storage of our products. All divisions are BRC accredited with the exception of Rainbow Dust Colours Ltd which has SALSA accreditation, which is more appropriate for a company of its size.

e) Health & Safety

The Group could be adversely impacted if it failed to manage the safety of its manufacturing facilities effectively.

The Board of Directors believes the safety of its employees, contractors and suppliers is fundamentally important. A Group compliance programme is in place ensuring that all legal obligations are adhered to. Regular third party auditing takes place to maintain a continuous improvement in standards.

Health and Safety continues to be discussed at all monthly divisional reviews and reported to the group board twice annually.

As reported elsewhere in this annual report the external audit regime has been reset with tougher benchmarks and safety criteria to ensure we maintain improvements.

f) Pensions

The group acquired a defined benefits pension scheme as part of its acquisition of Napier Brown Foods in September 2005. Whilst this scheme is closed and benefits are no longer accruing, the valuation of any defined benefits pension scheme is subject to movements in equity markets, gilt returns and life expectancy. An adverse movement in any one of these factors may require the group to increase its level of funding to the scheme. Management is increasingly proactive in managing the exposure.

g) Changing Consumer Trends

The group could be impacted by changing consumer trends, with potential risk areas including concerns over obesity and healthier eating. The Group's proactive product development and technical teams are well positioned to help mitigate these risks. The Group purchases consumer market data in order to track changes in trends in general as well as tracking performance of the Whitworths and Renshaw brands.

h) Bribery Act

As part of improving governance and to comply with the Bribery Act the Group has carried out a risk assessment and implemented a bribery policy throughout the Group. Adherence to this policy is monitored by the divisional finance directors with updates planned for the Board on progress and compliance.

Mike McDonough

Finance Director

Consolidated Statement of Comprehensive Income

Year ended 31 March 2015

Year ended 31 March 2015 Year ended 31 March 2014

Consolidated Statement of Changes in Equity

Year ended 31 March 2015

Consolidated Statement of Financial Position

Year ended 31 March 2015

These financial statements were approved by the Board of Directors and authorised for issue on 6 August 2015.

They were signed on its behalf by:

P W Totté

Executive Chairman

M J McDonough

Director

Consolidated Cash Flow Statement

Year ended 31 March 2015

Notes to the Financial Statements

Year ended 31 March 2015

1. Segment reporting

Business segments

The divisional structure reflects the management teams in place and also ensures all aspects of trading activity have the specific focus they need in order to achieve our growth plans. Real Good Food Europe (RGFE) has been added for clarity.

Sales between segments are charged at prevailing market rates.

Included in the Renshaw and Haydens segments, one single customer accounts for 18.2% of the continuing Group's external sales for the year ended 31 March 2015

Unallocated

Relates primarily to the Head Office and non-current asset additions, depreciation and amortisation which cannot be meaningfully allocated to individual operating divisions.

Geographical segments

The Group earns revenue from countries outside the United Kingdom, this amounts to 11.1% of the total revenue of the continuing group but as no individual country is considered to be material, segmental reporting of a geographical nature is not considered relevant.

Inter-segment sales are charged at prevailing market rates.

Unallocated 


Relates primarily to the Head Office and non-current asset additions, depreciation and amortisation which cannot be meaningfully allocated to individual operating divisions.

Geographical segments

The Group earns revenue from countries outside the United Kingdom, but as these only represent 3% of the total revenue of the Group, segmental reporting of a geographical nature is not considered relevant. The Renshaw division accounts for the majority of this turnover.

2. Significant items

During the year the Group incurred a number of significant costs as detailed above. The management restructuring costs reflect a number of fundamental reorganisations within Sugar division and Head Office. The acquisition costs relates to the purchase of Rainbow Dust Colours Ltd.

3. Taxation

4. Earnings per share

Basic earnings per share

Basic earnings per share is calculated on the basis of dividing the (loss)/profit attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares in issue during the year.

Diluted earnings per share

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all potential dilutive ordinary shares. Potential dilutive ordinary shares arise from share options and warrants. For these, a calculation is performed to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company's shares) based on the monetary value of the exercise price attached to outstanding share options. Thus the total potential dilutive weighted average number of shares considers the number of shares that would have been issued assuming the exercise of the share options.

Adjusted earnings per share

An adjusted earnings per share and a diluted adjusted earnings per share, which exclude significant items, have also been calculated as in the opinion of the Board this allows shareholders to gain a clearer understanding of the trading performance of the Group.

* As the group is loss making in the year under review the diluted earnings per share is the same as basic earnings per share.

5. Goodwill

Goodwill acquired on business combinations is allocated at acquisition to the Cash Generating Units that are expected to benefit from that business combination. Before any recognition of impairment losses, the carrying amount of goodwill has been allocated as follows:

The Goodwill originally arose on the acquisition of Napier Brown Foods Ltd and its subsidiary RenshawNapier Ltd (formerly Napier Brown & Company Ltd) in 2005 in which, until 17 March 2015 when Napier Brown Sugars Ltd was formed, the trading activity of Renshaw, R&W Scott, Napier Brown and Garrett Ingredients resided. On acquisition, in 2005, they were all part of one legal entity without any separate evaluation or consideration.

As previously reported the strategy in recent years has been to establish each of these as separate trading businesses, "divisions", with their own management teams leading to them all being re-established as separate Limited companies. It's expected Renshaw. R&W Scott and Garrett Ingredients will now be in separate legal entities in Oct 2015.

The goodwill on Rainbow Dust Colours Ltd arises out of the acquisition in January 2015

An assessment of the underlying cash generation, based on current EBITDA performance less ongoing maintenance capital expenditure, has been used to determine the future cash generation profile for each of the divisions. In line with the established impairment tests logic this profile has been used in establishing the Net Present Value of the individual future income streams.

The Board is keen to point out the outcome reflects the specific dynamics and nature of each division and that the respective values should not be viewed as a "judgement" on each. All the divisions have exciting growth plans that are being implemented and all will contribute to the future success of the Group.

The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill may be impaired.

The recoverable amounts of the Cash Generating Units are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding discount rates and expected changes to selling prices and direct costs.

The rate used to discount the forecast cash flows is the Group's pre-tax weighted average cost of capital of 7.07% (2014 - 6.67%). A period of 19 years has been applied to the projected cash flows, based on the logic above assuming no annual growth, as the Directors used this period to assess the viability of the acquisition when the business was acquired in 2005. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market. Using these parameters and allowing for disposal income at the end of this timescale the recoverable amounts exceed the carrying value by £36.7 million for continuing operations. This is based on our base expectations for the trading period to end March 2016 as well as the existing Net Debt levels pre the disposal of Napier Brown in order to be consistent with the prior year. Applying the estimated WACC of approximately 5% after clearing the Net Debt increases the surplus to the order of £57.8 million

For Napier Brown the key test centres around the disposal in May 2015 which post completion accounts is expected to deliver a surplus over net assets, excluding goodwill, of approximately £23 million. This effectively "doubles" the goodwill valuation we assumed in March 2014 and still reflected at March 2015

An increase in the Group's weighted average cost of capital to above 10.5% (2014 10.5%) would cause the Board to impair the carrying value of goodwill across all continuing divisions.

6. Borrowings and capital management

Features of the Group's borrowings are as follows:

The Group's financial instruments comprise cash, a term loan, hire purchase and finance leases, revolving credit facility, overdraft and various items arising directly from its operations such as trade payables and receivables. The main purpose of these financial instruments is to finance the Group's operations. The facilities with PNC Business Credit were renewed in December 2012 for a period of five years.

The main risks from the Group's financial instruments are interest rate risk and liquidity risk. The Group also has some currency exposure in relation to its sugar trade and also some currency exposure in relation to the purchase of almonds from the United States. However, this is mitigated by matching against foreign currency sales. The Board reviews and agrees policies, which have remained substantially unchanged for the year under review, for managing these risks.

The Group's policies on the management of interest rate, liquidity and currency exposure risks are set out in the Report of the Directors.

The Group operates a number of term loans and revolving credit facilities with PNC Business Credit. The property term loan currently bears interest at 3% above base rate and is repayable via monthly instalments of £37,888 and then a bullet repayment of £2,273,308 in December 2017. At the year end, £3.5 million was outstanding under this facility. Our fixed asset term loan also currently bears interest at 3% above base rate and is repayable by monthly instalments of £41,710 until December 2017. At the year end, £1.2 million was outstanding under this loan. Our final term loan currently bears interest at 3.5% above base rate and is repayable via monthly instalments of £85,720 up to December 2015. At the year end, £0.7 million was outstanding under this facility.

The Group's revolving credit facilities, which are available until December 2017, comprise sterling and euro denominated invoice discounting facilities and an inventory asset facility. The invoice discounting facilities currently bear interest at 2.65% above sterling and euro base rates respectively and are secured against the underlying trade receivables. The total amount outstanding under these facilities at the end of the period was £24.4 million, whilst the maximum permitted borrowings are £28.5 million. The inventory finance facility currently bears interest at 2.95% above base rate and at the period end £6.9 million was outstanding under this facility which has a maximum borrowing limit of £11 million and is secured upon the finished goods and certain raw material inventories of the Group.

The fixed interest rate liabilities relate to amounts payable on hire purchase agreements £0.4 million. The weighted average interest rate of these liabilities was 2% (2014 - 2%) and the weighted average period for which the interest rates are fixed was 40 months (2014 - 52 months).

The Group had outstanding loan notes amounting to £2,773,908 (2014 - £2,773,908) due to Napier Brown Ingredients Limited as disclosed in note 29. The loan note holders have previously agreed to waive the accrued interest in relation to these notes. Agreement has been reached in principle that interest will be paid from April 2014 at 10% per annum.

The financial assets of the Group are surplus funds, which are offset against borrowings under the facility, and there is no separate interest rate exposure.

PNC Business Credit has a debenture incorporating a fixed and floating charge over the undertaking and all property and assets present and future including goodwill, book debts, uncalled capital, buildings, fixtures, intangible assets, fixed plant and machinery. In addition, our banking arrangements with Lloyds TSB plc contain certain cross guarantees.

During the year the group took out a 365 day term loam loan with Lloyds Bank Plc of £3 million to finance the acquisition of Rainbow Dust Colours Ltd. This loan bears interest of 2.75% per annum above LIBOR and is repayable by 3 quarterly payments of £0.25 million and a final payment due in January 2016 of £3.25 million

Hire purchase and finance lease liabilities are secured upon the underlying assets.

Forward foreign exchange contracts

During the year the Group entered into contracts to sell sugar to customers at a fixed price in GBP. The group also enters into commodity contracts to purchase sugar and the price varies with movements in the Unofficial Sugar Conversion Rate (USCR) which is directly linked to movements in the EUR/GBP exchange rate. In order to hedge against risk of variable returns on the contract as a result of movements in the exchange rate the Group has entered into a series of forward contracts to buy euros. The contracts mature at regular intervals until 30 September 2014 when the contract ends.

The notional amount outstanding on forward exchange contracts at 31 March 2015 was £6 million (2014 - 15,576,921).

The fair value of these foreign exchange contracts at 31 March 2015 was £398k and this amount has been recorded as a loss within administration expenses and a derived financial liability on the statement of financial position. Offsetting against this, the fair value of the highly probable forecast transaction under the commodity contract was £398k and this amount has been recorded as a gain within administration expenses and a derived financial asset on the Statement of financial position.

Capital management

The Group is subject to the risk that its capital structure will not be sufficient to support the growth of the business. The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

There were no changes to the Group's approach to capital management during the year although the Group has extended its facilities with its funders in previous years, most recently in December 2012 to provide additional capacity. The Group has made several changes within the facilities over recent years to "fine tune" them to meet its capital investment plans and also to allow flexibility between the invoice discounting and stock financing elements, where most of the facilities' capacity is available, to provide a more dynamic solution particularly in its sugar business but also managing its seasonal requirements.

Liquidity risk management

The Board reviews the Group's liquidity position on a monthly basis and monitors its forecast and actual cash flows against maturing profiles of its financial assets and liabilities.

The following table details the Group's maturity profile of its financial liabilities:

The profile of the trade payables has been taken as being consistent with the Group's payment terms to suppliers.

Analysis of market risk sensitivity

Currency risks:

The Group is exposed to currency risk on purchases made of almonds from the United States. The risk associated with these purchases is mitigated by matching with sales in foreign currencies. The effect of a 10¢ strengthening of the US dollar against sterling exchange rate at the balance sheet date on the trade payables carried at that date would, with all other variables being held constant, have resulted in a decrease in pre-tax profits of £9k. The impact of a 10¢ strengthening of the US dollar against sterling at the balance sheet date on our trade receivables carried at that date would, all other variables being held constant, have resulted in an increase in pre-tax profits of £87k.

The Group is also exposed to currency risk on purchases of sugar from Europe. The risk associated with these purchases is mitigated by matching with sales in foreign currencies. These sales form part of our Invoice Discounting facilities with PNC, which generate a euro loan obligation. The effect of a €0.05 strengthening of the euro versus sterling exchange rate at the balance sheet date on our overall euro net position carried at that date would, all other variables being held constant, have resulted in a decrease in pre-tax profits of £18k.

Interest rate risks:

The Group has an exposure to interest rate risk arising from fluctuations in sterling and euro base rates. The impact of a 1% increase in the applicable interest rates at the balance sheet date on the variable rate debt carried at that date would, all other factors remaining unchanged, have resulted in a decrease in pre-tax profits of £369k.

Obligation under finance leases

It is the Group's policy to lease certain property, plant and equipment under finance leases. For the period ended 31 March 2015 the average effective borrowing rate was 4.01% (2014 - 4.01%). Interest rates are fixed at the contract dates. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. All lease obligations are denominated in sterling.

The fair value of the Group's lease obligations approximates to their carrying amount.

7. Pensions arrangements

The Group operates one defined benefits scheme which was closed to new members in 2000. As reported last year an extension to the existing recovery plan has been agreed with "base" contribution levels for the year ended 31 March 2014 of £264k with annual increases of 3% for the following two years. In addition to this, the Group has agreed to make an additional, one-off, contribution of £166k which is payable at the rate of £11k per month starting November 2013. The Group is confident this will continue to meet the trustees' needs and the pension regulator's guidance.

For the purposes of IAS 19 the data provided for the 31 March 2012 actuarial valuation has been approximately updated to reflect liabilities on the accounting basis at 31 March 2015. This has resulted in a deficit in the scheme of £5,688,000.

It is the policy of the Company to recognise all actuarial gains and losses in the year in which they occur in the statement of comprehensive income.

Present values of defined benefit obligations, fair value of assets and deficit

Reconciliation of opening and closing balances of the present value of the defined benefit obligations

Reconciliation of opening and closing balances of the fair value of plan assets

The actual return on the scheme assets over the period ended 31 March 2015 was £1,580k (2014 - £338k)

Total expense recognised in the Statement of Comprehensive Income within other finance income

Statement of recognised income and expenses

Assets

None of the fair values of the assets shown above include any of the Group's own financial instruments or any property occupied by, or other assets used by, the Group.

Assumptions

The mortality assumptions adopted at 31 March 2014 imply the following life expectancies:

The long term expected rate of return on cash is determined by reference to UK long dated government bond yields at the balance sheet date. The long term expected return on bonds is determined by reference to UK long dated government and corporate bond yields at the balance sheet date. The long term expected rate of return on equities is based on the rate of return on bonds with an allowance for outperformance.

Expected long term rates of return

The expected long term rates of return applicable at the start of each period are as follows: